<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-15767
-------------------------
THE SPORTSMAN'S GUIDE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MINNESOTA 41-1293081
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
411 FARWELL AVENUE, SOUTH ST. PAUL, MINNESOTA 55075
(Address of principal executive offices)
(651) 451-3030
(Registrant's telephone number, including area code)
-------------------------
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 20, 2000, the aggregate market value of the registrant's Common
Stock held by non-affiliates was approximately $14,234,434 based on the last
reported sale price of the Common Stock on such date on the NASDAQ National
Market.
As of March 20, 2000, there were 4,748,810 shares of the registrant's Common
Stock outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I.
ITEM 1. BUSINESS
We are a leading marketer of value priced outdoor gear and general
merchandise, with a special emphasis on outdoor clothing, equipment and
footwear. We market and sell our merchandise through two primary channels:
- main and specialty catalogs; and
- a network of e-commerce Web sites.
Our main and specialty catalogs offer high quality products at low prices
and are advertised as The "Fun-to-Read" Catalog(R). Our network of Web sites
includes www.sportsmansguide.com, our online retail store modeled on our print
catalogs; www.bargainoutfitters.com, our new online liquidation outlet; and
www.guideoutdoors.com, our soon to be launched community/destination portal for
the outdoor enthusiast.
INDUSTRY OVERVIEW
The Outdoor Sports Industry. Statistics from the National Sporting Goods
Association and USDA Forest Survey estimate the 1998 outdoors market at $6.5
billion. In terms of sports, camping is the leading individual category at $1.8
billion, followed by hiking and hunting at $1 billion each, biking at $900
million and fishing at $800 million. In terms of participation, fishing is the
leader appealing to 29.1% of Americans 16 years of age and older, biking draws
28.6% of this population, and camping and hiking draw 26.8% and 23.8%,
respectively. In addition, 17% of men age 16 and older hunt.
The Catalog Industry. The catalog shopping industry has experienced
substantial growth over the past several years. The U.S. consumer catalog
industry is expected to reach sales of approximately $119 billion by 2003.
Between 1993 and 1998, U.S. consumer catalog sales growth outpaced that of the
retail industry. An industry source estimates the size of the adult catalog
shopper market will reach 158 million by 2001, up 44% from 1996. The majority of
our sales fall within two large product segments of the U.S. catalog market:
apparel and sporting goods. Together, the apparel and sporting goods segments
represent approximately 27% of the total dollar volume of catalog sales in the
United States. Since most direct mail catalogs are targeted to women, we believe
the male catalog customer is an underserved segment of the market that
represents a significant opportunity. We believe that our niche marketing focus
on the value-oriented outdoor enthusiast, together with our product offerings
and growing sales of general merchandise, have positioned us to continue to take
advantage of opportunities within this large and expanding market.
Growth of the Internet and E-Commerce. The Internet has emerged as a global
medium, enabling millions of people to share information, communicate and
conduct business electronically. International Data Corporation estimates that
the number of worldwide Web users will grow from approximately 159 million
worldwide in 1998 to approximately 410 million worldwide by the end of 2002.
This rapid growth represents a significant opportunity for businesses to
advertise and sell products online to both consumers and businesses.
Business-to-consumer online transactions were approximately $8.0 billion in 1998
and it is anticipated that online consumer transactions will increase to
approximately $60.2 billion by 2003.
2
<PAGE> 3
OUR CATALOGS
We publish main and specialty editions of The Sportsman's Guide catalog. We
mailed approximately 80 million catalogs to existing and prospective customers
in 1999.
Format. Our catalogs are designed to be fun and entertaining. Every
merchandise offering uses a highly promotional format that features various
items at sale prices. Unique to us is our product description, or copy. The
catalogs make creative and expansive use of art and copy to extensively describe
products with humorous text, call-outs, photos, photo captions and caricatures.
Copy is written in the first person from Gary Olen to the reader. The catalogs
are perceived by customers as having entertainment value and are advertised as
The "Fun-to-Read" Catalog(R). Excerpts from the catalogs have been featured in
Jay Leno's "Headlines" segment on The Tonight Show. The copy has also been
singled out for its excellence by various publications within the direct mail
industry.
Types and Purposes. Main catalog editions are mailed monthly and offer
selections of our best selling products in a variety of product categories. We
also use our main catalog as our primary prospecting catalog to test new names
and new products. Response data from main catalog mailings is used to create
specialty catalogs. New customers continue to receive monthly main catalogs in
addition to specialty catalogs featuring the product categories in which they
have shown an interest through past purchases.
Specialty catalogs contain wide selections of products from a single
product category. We identify the product categories for our specialty catalogs
based on demand generated for certain categories in our main catalogs. During
1999, we published 39 specialty catalogs targeting buyers of footwear and
apparel, deer hunting equipment, ammunition and shooting supplies, military
surplus, camping equipment and holiday gifts.
The specialty titles allow us to utilize a customized marketing plan for
individual consumer groups thereby maximizing response rates and minimizing
advertising costs as a percentage of sales. We believe that our specialty
catalog titles have been an important component in our sales growth and have
allowed us to expand our sales to existing customers and to broaden sales to new
customers beyond our historical customer profile.
Creative. All catalogs are created and designed in-house by our creative
services department which produces the advertising copy and layouts for each
catalog. Substantially all of the photographs used in the catalogs are taken at
our in-house photo studio. Artwork and copy for the catalog are transmitted in
digital format from our desktop publishing systems to a pre-press vendor and
then to the printer, which prints and mails the catalogs. These capabilities
allow us to preserve the catalog's distinctive character and allow us greater
control of the catalog production schedule, which reduces the lead time
necessary to produce catalogs. We are able to prepare and mail a catalog in
approximately 75 days. This allows us to offer new merchandise quickly to our
customers, thereby maximizing pricing opportunities while minimizing inventory
carrying costs. Because we use a value-oriented sales approach, we are able to
use a lower weight and grade of paper than our competitors to reduce our catalog
production costs.
MERCHANDISING
Our products originally were limited to a small selection of merchandise
targeted to the deer hunter. Our product offerings have gradually evolved to a
broader range of merchandise intended to appeal to the value-oriented
outdoorsman. We offer a changing mix of products.
3
<PAGE> 4
Products. We offer a large selection of high value products at low prices.
These products include clothing, footwear, hunting and shooting accessories,
camping and outdoor recreation equipment, optics, collectibles, gift items and a
diverse range of additional offerings. In the last five years, we have
aggressively pursued a strategy to provide manufacturers' close-outs of name
brand shoes, boots, apparel and general merchandise, as well as government
surplus from around the world. Over time, our product offerings and marketing
efforts have broadened to include those interested in pursuing and living the
outdoor lifestyle in general and the value-oriented outdoorsman in particular.
The table below indicates our percentage of sales by product category for 1999.
<TABLE>
<CAPTION>
PRODUCT CATEGORY % OF SALES
---------------- ----------
<S> <C>
Clothing and Accessories..... 21.6%
Footwear..................... 21.5%
Hunting and Shooting
Accessories................ 14.5%
Camping and Outdoor
Recreation................. 9.8%
</TABLE>
<TABLE>
<CAPTION>
PRODUCT CATEGORY % OF SALES
---------------- ----------
<S> <C>
Optics....................... 5.4%
Domestics.................... 5.4%
Electronics.................. 5.2%
Novelty and Collectibles..... 3.1%
Personal Accessories......... 3.0%
Other........................ 10.5%
</TABLE>
Merchandise Mix. We historically offered a changing mix of in-line
products. In-line products are those products regularly available from
manufacturers. As a complement to our value pricing approach, in 1996 we began
aggressively pursuing manufacturers' close-outs of name brand shoes, boots,
clothing, watches and other merchandise, which we offer to our customers at
savings of 25% to 60% from original retail prices. We also offer military
surplus from around the world, providing customers a low-cost alternative for
items such as wool coats and pants, shirts, gloves, underwear, blankets, boots,
sleeping bags, jackets, backpacks, skis and snowshoes.
Our merchandising strategy has been to shift our merchandise mix to a
larger percentage of manufacturers' close-outs, military surplus and other
higher margin product categories including apparel and footwear, and to reduce
the number of lower price point items, while maintaining a broad selection of
products. This strategy has added to our customer base value-oriented customers
who may not otherwise be identified as pure outdoorsmen. This strategy has also
contributed to significant increases in our overall gross profit margins.
Sourcing. Our buyers actively seek sources for products they believe will
interest our targeted customers. We seek to maintain existing and develop new
relationships with vendors to provide ongoing access to manufacturers'
close-outs, military surplus, direct imports and other items. Buyers regularly
attend trade shows, meet with vendors and make mass mailings and cold calls to
locate high quality, low price, name brand merchandise as well as unusual or
unique products. We frequently purchase large quantities of close-outs and other
individual items on an opportunistic or when-available basis. The capability to
purchase large quantities in a short time period makes us a unique and desirable
outlet for manufacturers looking to sell overstocked or discontinued products.
We purchase our merchandise from more than 1,000 suppliers and generally
purchase all of our product needs for a particular item from one vendor. No
single supplier accounted for more than 10% of our purchases during 1999, and we
believe there are numerous sources for products in our merchandise categories.
Selection. Our buyers and merchandising staff collectively select the
merchandise to be offered to customers by evaluating product availability,
pricing, historical demand,
4
<PAGE> 5
emerging merchandise trends and expected product profitability. Each product is
hand-picked, and most are field tested by our buyers to ensure quality,
functionality and proper sizing in order to maximize appeal to customers.
Inventory Management. Once merchandise has been selected, our rebuyers are
responsible for ordering all merchandise, determining the quantity and arrival
date, managing inventory levels, assessing customer demand, adjusting estimates,
canceling orders for slow-moving merchandise and reordering merchandise.
Utilizing our information systems, buyers and rebuyers meet seven days following
each catalog mailing to monitor product sales and take responsive action.
Slow-moving merchandise is actively promoted through telemarketing, clearance
sales, package stuffers or, when possible, is returned to the vendor.
As part of our merchandise liquidation strategy, we maintain a retail
outlet store at our primary warehouse and distribution facility in South St.
Paul from which we sell discontinued, overstocked, returned and regular catalog
merchandise. We opened a second retail store in Moundsview, Minnesota in 1997.
The retail stores along with our recently launched bargainoutfitters.com Web
site provide a liquidation outlet and serve to minimize inventory mark-downs.
Catalog Content. The merchandise offered in our catalogs is determined
based on estimated consumer demand and product availability. Close-outs and
military surplus merchandise purchased in large quantities are normally placed
in our main catalogs. If a supply of merchandise is limited, it is usually
offered in a specialty catalog or is included in a multiple page insert in the
main catalog mailed to a targeted customer segment. Numerous products are shown
on each page giving the catalog a dense look and adding to our value-oriented
image. Product sales are analyzed item by item to identify trends and help plan
future merchandise offerings.
MARKETING
Our marketing programs are based on gathering, analyzing and organizing
information on our customers. We believe that because we offer such a broad mix
of merchandise, it is particularly important for us to fully understand our
customers.
Customer Database. We maintain a proprietary customer database in which we
store detailed information on each customer in our customer list, including
demographic data and purchasing history. Our customer database contains over 4.4
million names, including over 1.1 million customers who have made purchases
within the last 12 months and 260,000 opt-in e-mail addresses provided by
customers. The customer database is updated regularly with information as new
purchases are recorded.
Customer Selection. We have developed our own customer selection models to
segment our customer list according to many variables, allowing our marketing
department to analyze each segment's buying patterns. We statistically validate
the results of each of our catalog mailings. The data is used to further update
the customer database to refine the frequency and selectivity of our catalog
mailings in an effort to maximize response rates and profitability.
List Development. Our new customer acquisition program is designed to cost-
effectively identify and capture new customers that fit our customer profile.
New customers are acquired principally through the use of targeted mailings to
individuals identified through mailing lists rented or exchanged from other
catalog companies, retail subscription
5
<PAGE> 6
lists, and lists of names compiled from businesses whose customers have
interests similar to those of our customers. We are generally entitled to make
one mailing to each name obtained through a rented or exchanged mailing list. If
the prospect responds, the name is added to our database and may be freely used
by us in the future. We are also pursuing new sources of prospective customers,
such as those who request catalogs through advertising, through our Web site or
from customer referrals. New customers accounted for approximately 15% of our
sales during 1999.
Once new customers are acquired, our objective is to maximize the long-term
profit potential from these customers. With ongoing refinements in our approach
to merchandising and marketing, we have increased the frequency and quantity of
mailings to the most profitable segments of our existing customer list.
Demographic and regression analyses of historical purchasing patterns of
existing customers, including recency, frequency and monetary modeling, are
preformed to assist in merchandising and customer targeting and to increase
sales to existing customers. Existing customers accounted for approximately 85%
of our sales during 1999.
Marketing Programs and Promotional Formats. We strive to develop
promotional formats that will stimulate customer purchases. Successful
promotional formats include catalog cover designs, different catalog covers or
wraps, free gifts, and promotional tag lines such as "last chance" offers.
We employ a disciplined approach to our marketing activities. We test a
sample of new names before mailing to a new customer group, test price and
shipping charge changes, test new list sources and test marketing programs and
promotional formats before full-scale implementation to ensure customer
acceptance and cost-effectiveness. Two significant, successful marketing
programs implemented by us are a buyer's club and an installment payment plan.
- Buyer's Club. Our buyer's club offers its members exclusive merchandise
not offered to other customers as well as a merchandise discount of 10%
on regularly priced items and 5% on sale items and special buys.
Customers can purchase a one-year membership in our buyer's club for a
$29.99 fee, or a two or three year membership for a fee of $53.99 and
$80.99. We currently have more than 120,000 members in our buyer's club.
- Installment Payment Plan. Our installment payment plan, known as the
"G.O. Painless 4-Pay Plan," is available to credit card customers with
orders of $100 or more. Payments under the plan consist of 25% of the
merchandise charges, plus 100% of any shipping charges and buyer's club
fees, if applicable, at the time of shipment with three equal
installments in 30 day increments, which are automatically charged to the
customer's credit card. No interest or additional fees are charged to
customers who elect the 4-Pay Plan.
Customer Service. A key element of our marketing strategy is our commitment
to customer service. We have a toll-free customer service telephone line
separate from our inbound ordering lines. We maintain a separate customer
service department staffed with full-time customer service representatives who
answer customer inquiries, reply to complaints and assist customers in returning
merchandise. The customer service department personally responds to all customer
correspondence. Our commitment to customer service is supported by our
unconditional guarantee which allows customers to
6
<PAGE> 7
return merchandise for any reason and at any time for refund or exchange if they
are not satisfied with the merchandise.
OUR INTERNET STRATEGY
Our objective is to leverage our existing systems, expertise and
infrastructure to become the leading marketer of value priced outdoor gear and
general merchandise for outdoor enthusiasts and build the most
heavily-trafficked outdoor destination Web site. The key elements of our
strategy include:
Develop Internet Customer Acquisition Program. We believe that building
recognition for our Web sites is critical to our Internet customer acquisition
program. We seek to attract new and retain existing customers through several
methods, including:
- Promotion in our Catalogs. Since our inception on the Internet, we have
marketed our online retail store in our catalogs. We intend to continue
to advertise in our catalogs, which have a planned circulation of
approximately 60 million in 2000. To date, this marketing channel has
been the principal marketing mechanism to reach our target audience.
- Traditional and Internet Advertising. We intend to use traditional print
media to promote our Web sites and our catalog business. We also intend
to use Internet advertising to promote our brand name and specific
merchandising opportunities.
- Direct Marketing. We currently have a database of 4.4 million names,
including 260,000 opt-in proprietary e-mail addresses. We plan to
aggressively market to our existing database, including sending broadcast
e-mails to our users promoting special product offerings. We are also
planning sweepstakes to convert our catalog customers to online
purchasers and to increase the overall number of our e-mail addresses.
- Strategic Alliances. We believe we can enhance our brand names and
increase our customer base through alliances with other Internet sites
and online service providers. Our online store currently has anchor
tenancy positions in the shopping areas on AOL.com, Lycos.com, Amazon.com
zShops and the Yahoo! Store. We intend to expand our use of these kinds
of relationships to build traffic and attract customers.
Expand Depth and Breadth of Product Offerings. Our guideoutdoors.com site
will carry deeper and more diverse product lines and merchandise categories than
we have traditionally offered. The site will feature full-line and expanded
product offerings at discount prices including merchandise for the active
sportswoman and for those who enjoy extreme sports, biking, marine, fishing,
hiking and archery.
Create an Online Outdoor Community. In the second quarter of 2000, we plan
to launch guideoutdoors.com, an online community for the outdoor enthusiast
offering both e-commerce and community features. We believe our target audience
places value on opportunities to interact with other outdoor enthusiasts through
interactive services that we will offer, including free personalized e-mail,
photo galleries, chat rooms and message boards. The content portion of the site
will provide outdoor-related information updated daily, including articles on
hunting, fishing and camping experiences, DNR information, local and national
weather forecasts, tips and hints on planning an upcoming outdoor event, maps
and outdoor, sports and other news.
7
<PAGE> 8
Provide E-Commerce and Fulfillment Solutions to Other Businesses. Our
strengths in the catalog business as well as our ability to develop a network of
e-commerce Web sites uniquely positions us to expand our Internet initiatives as
well as provide e-commerce and fulfillment solutions to other businesses. In
November 1999, we entered into an agreement to develop, build, maintain and
support e-commerce storefronts on Web sites operated by North American Outdoor
Group ("NAOG"). NAOG, the world's largest affinity membership organization with
over 3.6 million members, operates a number of special interest clubs. We are
responsible for providing e-commerce solutions for NAOG's fishing and hunting
club sites, including merchandising, warehousing, distribution and fulfillment.
Orders on these sites will be our sales with NAOG receiving a commission.
OUR WEB SITES
Our network of Web sites, The GuideOutdoors Network(TM), includes those
that offer online shopping as well as a soon to be launched online destination
site with content-rich resources and information for the outdoor enthusiast. The
GuideOutdoors Network(TM) will initially include the following three sites:
- SPORTSMANSGUIDE.COM, our online retail store;
- BARGAINOUTFITTERS.COM, our online liquidation outlet; and
- GUIDEOUTDOORS.COM, our community/destination portal for the outdoor
enthusiast.
sportsmansguide.com. Our sportsmansguide.com site is our online retail
store. The site was launched in April 1998 as an e-commerce site. We began
posting our catalogs and full product offerings on the site in February 1999.
Our online retail store generated over $12.0 million in sales in 1999 compared
to $1.1 million in 1998. Product sales on the site accounted for over 10% of our
sales in the fourth quarter of 1999 compared to less than 1% for all of 1998.
The site averaged approximately 14,000 user sessions per day with an average
user session length of 16 minutes in the fourth quarter of 1999.
Our sportsmansguide.com site is modeled on our print catalogs. The site
translates the distinctive look and editorial voice of our print catalog onto
the Internet, adding interactive functionality to make shopping an entertaining
experience. The site is designed to be fun-to-read and easy to use, enabling the
ordering process to be completed with a minimum of customer effort. The site is
advertised as The "Fun-to-Browse" Website(R). The site allows customers to order
merchandise from print media, view current catalogs and request mailed catalog
copies. E-mail addresses are collected through an optional program. E-mail
broadcast messages, which include a variety of specialized product offerings,
are delivered to 260,000 participating customers on a weekly basis.
Through our relationship with Banta Digital Group, we have automated the
re-purposing of our printed catalog pages for publication on our Web site. The
digital pre-press of our catalog pages automatically flows to the Web site,
enabling us to post entire catalogs on the site and giving the site the look and
feel of our catalogs.
bargainoutfitters.com. Our bargainoutfitters.com site is our online
liquidation outlet launched in November 1999. The site is initially dedicated to
offering clothing and footwear products that are deeply discounted, discontinued
or overstocked.
guideoutdoors.com. Our guideoutdoors.com site is our community/destination
portal offering e-commerce and content for the online outdoor enthusiast. The
site is scheduled to
8
<PAGE> 9
be launched in the second quarter of 2000. We believe the site will be unique in
its combination of name brand quality, discount pricing and breadth of product
offerings, all within a community environment. The site will offer full-line
selections of camping, fishing, footwear, clothing, hunting, archery, marine,
extreme sports, biking and hiking products at discount prices. The community
content will provide a broad and deep selection of resources and information
updated daily covering all aspects of the outdoor experience. Personalized Web
pages will include articles on hunting, fishing and camping experiences, DNR
information, local and national weather forecasts, tips and hints on planning an
upcoming outdoor event, photo galleries, chat rooms, message boards, maps, free
personalized e-mail and outdoor, sports and other news. The site will include
links to our online retail store and liquidation outlet sites.
OPERATIONS AND FULFILLMENT
Inbound Calls. We maintain an in-house call center. Approximately 72% of
customer orders are placed through our toll-free telephone lines which are
staffed 24 hours per day, seven days a week, while 20% of orders are received by
mail or facsimile and 8% are received at our Web site. Our telephone system
consists of an expandable AT&T GR3 digital switch which currently has twelve T-1
lines. Computer telephony integration software identifies the caller and, if
known, accesses the customer's records simultaneously with answering the call.
When fully staffed, our in-house call center has the capacity of handling up to
2,750 calls per hour on average.
We also contract with outside call centers to handle calls on an as-needed
basis. If calls become backlogged or in the event of telephone system failure,
back-up systems and rerouting capabilities allow the outside call centers to
handle inbound telephone orders. The outside call centers have access to
inventory availability and allow us to maintain our call standards.
Order Entry. Our telemarketing department is staffed with individuals who
are familiar with the products offered in the catalogs and can offer assistance
to customers on availability, color, size, and other information. Telemarketers
use a catalog sales system with pre-written merchandise descriptions and sales
offers and are provided monetary incentives to sell additional merchandise to
customers who order by phone. During 1999, add-on sales averaging $10 per order
were made to approximately 31% of all inbound phone orders taken by our in-house
call center.
Processing of customer orders is coordinated and handled by our on-line
order entry system. Telephone orders are entered directly into the system. Mail
orders are batched and, after payment is verified, are then entered into the
system. The system is also used in connection with all other order entry and
fulfillment tasks including credit authorization, order picking, packing and
shipment. During 1999, our on-line order processing system handled in excess of
2.2 million orders.
Credit and Payment Terms. Customers can pay for orders by major credit card
or check. Orders are shipped after credit card charges are approved or checks
are received. Charges are not billed to customer credit cards until the orders
are ready for shipment.
Picking and Packing. Through our fulfillment and delivery methods, we
strive to be a low cost operator in the direct mail industry. We use an
integrated computer-driven picking, packing and shipping system. The system
edits orders and generates warehouse pick tickets and packing slips. Packers are
provided monetary incentives to ensure accuracy
9
<PAGE> 10
of orders, which has contributed to our distribution accuracy rate in excess of
99% during 1999. We are able to fulfill and ship in excess of 25,000 packages
per day. We believe we have sufficient additional capacity available for the
foreseeable future which can be utilized by adding more shifts and weekends.
Shipping. We promise next business day shipping on orders received by 7
p.m. for in-stock merchandise and same day shipping for online orders. Virtually
all of our merchandise is stocked at, and shipped from, our two warehouse and
distribution facilities in South St. Paul and Mendota Heights, Minnesota,
although a small percentage of merchandise is drop-shipped directly to the
customer by specific vendors. We primarily utilize the U.S. Postal Service and,
to a lesser extent, United Parcel Service for shipment of merchandise to
customers. Ammunition is shipped exclusively via UPS. We utilize a consolidating
shipper for delivery of merchandise to the U.S. Postal Service. A shipping fee
is charged on each customer order based on the total dollar amount ordered. We
will expedite shipping for an additional fee.
Inventory Control. Our merchandise mix results in our maintaining a broad
selection of products as well as large quantities of individual products.
Consequently, inventory management is an important component of our operations.
We employ a cycle count, or perpetual inventory, procedure which eliminates
wall-to-wall physical counts and resulted in 99.8% inventory accuracy during
1999.
Returns. We maintain an unconditional return policy which permits customers
to return merchandise for any reason at any time for refund or exchange.
Returned merchandise is restocked, sold in the retail outlets, returned to the
supplier or scrapped. Returns processors are provided monetary incentives to
ensure accuracy of returns processing.
Seasonal Staffing. We adjust the number of employees to meet variable
demand levels, particularly during the peak selling season, which includes the
months of November and December. To meet increased order volume during our peak
selling season, we hire a significant number of temporary employees.
INFORMATION SYSTEMS AND TECHNOLOGY
We have developed an integrated management information system which is
fully redundant. In addition to on-line order entry and processing, the
information system also provides support for merchandising, inventory
management, marketing, and financial and management reporting. The on-line
access to information allows management to monitor daily trends and the
performance of merchandise and planning functions.
Our main hardware platform is the IBM RISC 6000 series of computers. We use
a Unidata database operating system.
COMPETITION
The direct marketing industry includes a wide variety of specialty and
general merchandise retailers in a highly competitive and fragmented business
environment. We sell our products to customers in all 50 states and compete in
the purchase and sale of merchandise with all retailers. Our competitors
include:
- other outdoor/hunting mail order catalogs, including Bass Pro Shops Inc.
and Cabela's Inc.;
10
<PAGE> 11
- discount retailers such as Wal-Mart Stores, Inc. or Kmart Corporation;
- Web sites maintained by online retailers of footwear, clothing and
outdoor gear;
- Internet portals and online service providers that feature shopping
services, such as America Online, Inc., Yahoo! Inc., Excite Inc. and
Lycos, Inc.; and
- Internet content-based providers that target the outdoor enthusiast such
as GORP.com, Inc. and All Outdoors, Inc.
Some of our competitors are larger and have substantially greater
financial, marketing and other resources than us.
REGULATION
We are subject to federal, state and local laws and regulations which
affect our catalog mail order operations. Federal Trade Commission regulations,
in general, govern the solicitation of orders, the information provided to
prospective customers, and the timeliness of shipments and refunds. In addition,
the Federal Trade Commission has established guidelines for advertising and
labeling many of the products we sell.
We are also subject to a variety of state laws and regulations relating to,
among other things, advertising, pricing, charging and collecting state sales or
use tax and product safety/restrictions. Some of these laws prohibit or limit
the sale, in certain states and locations, of certain items we offer such as
black powder firearms, ammunition, bows, knives and similar products. State and
local government regulation of hunting can also affect our business.
Because we import products for sale, we are subject to U.S. customs laws
and regulations pertaining to proper item classification, quotas, payment of
duties and tariffs, and maintenance of documentation and internal control
programs.
There are few laws and regulations directed specifically at electronic
commerce on the Internet. However, given the increased use of the Internet for
both mass communications and commerce, new laws and regulations may be adopted
covering a variety of areas such as collection and use of data from Web site
visitors and related privacy issues, pricing, content, copyrights, distribution
and quality of goods and services.
SERVICE MARKS
Our service marks "The Sportsman's Guide," "The 'Fun-to-Read' Catalog" and
"The 'Fun-to Browse' Website" have been registered with the United States Patent
and Trademark Office. "The Sportsman's Guide" mark has also been registered in
Canada. Applications to register "GuideOutdoors" and "Bargain Outfitters" in the
U.S. are pending. A service mark is a word or symbol used to identify,
distinguish and indicate the source of services.
EMPLOYEES
As of December 31, 1999, we employed 875 associates, including full-time
and part-time staff. During 1999, our seasonal employment ranged from a high of
approximately 900 employees, plus additional contracted temporary workers, in
November to a low of
11
<PAGE> 12
approximately 700 employees in the summer. None of our employees are currently
covered by a collective bargaining agreement. We consider our employee relations
to be good.
ITEM 2. PROPERTIES
Our principal offices are located at 411 Farwell Avenue, South Saint Paul,
Minnesota 55075. We lease approximately 330,000 square feet at this facility
under a net lease expiring March 2004 and lease an additional distribution
facility of approximately 202,000 square feet in Mendota Heights, Minnesota
under a net lease expiring July 2003. We also lease approximately 14,000 square
feet in Moundsview, Minnesota where we maintain a retail outlet store.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending proceedings other than litigation which
is incidental to our business and which we believe is not material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
<PAGE> 13
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our executive officers is set forth in Part III,
Item 10 of this report.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has traded on the Nasdaq National Market under the symbol
"SGDE" since February 5, 1998. Prior to that date our common stock was traded in
the local over-the-counter market, but such trading was limited and sporadic.
The following table sets forth, for the periods indicated, the high and low
sales prices of our common stock as reported on the Nasdaq National Market for
periods since February 5, 1998, and the high and low closing bid quotations for
our common stock in the local over-the-counter market as reported by Metro Data
Company for periods prior to February 5, 1998. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
First Quarter............................................. 7 1/4 5 1/4
Second Quarter............................................ 10 1/4 3 5/8
Third Quarter............................................. 4 3/4 3
Fourth Quarter............................................ 8 2 7/8
1999
First Quarter............................................. 7 3/4 4 5/8
Second Quarter............................................ 6 7/8 4 1/4
Third Quarter............................................. 6 1/8 3 1/2
Fourth Quarter............................................ 4 1/8 2 3/16
</TABLE>
HOLDERS
As of March 20, 2000, there were approximately 330 holders of record of our
common stock.
DIVIDENDS
We have not previously declared or paid any cash dividends on our common
stock. We currently intend to retain all earnings for use in our business in the
foreseeable future. We are prohibited from paying and declaring cash dividends
under the terms of our revolving credit agreement.
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical financial and operating
data for the periods indicated. The Statement of Operations Data and Balance
Sheet Data as of and for each of the years ended December 31, 1999, 1998, 1997,
1996 and 1995 have been derived from our financial statements audited by Grant
Thornton LLP, independent certified public accountants. The Selected Operating
Data as of and for the periods indicated were derived or computed from our
circulation or accounting records or the Statement of Operations Data identified
above. Our business is impacted by seasonal fluctuations and, therefore, interim
results are not necessarily indicative of results to be expected for the full
year. The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and notes thereto.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,(1)
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales........................................ $162,515 $142,876 $128,113 $112,270 $101,832
Cost of sales................................ 97,631 83,886 76,234 72,200 67,137
-------- -------- -------- -------- --------
Gross profit............................. 64,884 58,990 51,879 40,070 34,695
Selling, general and administrative
expenses................................... 63,758 55,915 46,830 36,014 35,924
-------- -------- -------- -------- --------
Earnings (loss) from operations.......... 1,126 3,075 5,049 4,056 (1,229)
Interest expense............................. (1,109) (883) (1,266) (981) (943)
Miscellaneous income (expense), net.......... 1 (30) (4) 11 73
-------- -------- -------- -------- --------
Earnings (loss) before income taxes...... 18 2,162 3,779 3,086 (2,099)
Income tax expense (benefit)................. 6 746 1,304 759 (355)
-------- -------- -------- -------- --------
Net earnings (loss)...................... $ 12 $ 1,416 $ 2,475 $ 2,327 $ (1,744)
======== ======== ======== ======== ========
Net earnings (loss) per share(2):
Basic...................................... $ -- $ .32 $ 1.06 $ 1.00 $ (.75)
======== ======== ======== ======== ========
Diluted.................................... $ -- $ .31 $ .85 $ .96 $ (.75)
======== ======== ======== ======== ========
Weighted average shares outstanding(2):
Basic...................................... 4,748 4,434 2,336 2,334 2,334
======== ======== ======== ======== ========
Diluted.................................... 4,818 4,616 2,919 2,431 2,334
======== ======== ======== ======== ========
SELECTED OPERATING DATA:
Catalog sales................................ $150,381 $141,792 $128,113 $112,270 $101,832
Internet sales(3)............................ 12,134 1,084 -- -- --
Gross profit as a percentage of sales........ 39.9% 41.3% 40.5% 35.7% 34.1%
Total catalogs mailed........................ 80,289 75,041 60,593 42,908 54,436
Total active customers(4).................... 1,153 1,133 1,094 1,017 1,034
BALANCE SHEET DATA:
Working capital (deficit)(5)................. $ 11,269 $ 12,491 $ 2,658 $ 3,612 $ (2,463)
Total assets................................. 53,496 43,903 37,214 27,890 23,709
Note payable-bank............................ 12,598 5,775 1,690 1,497 965
Subordinated notes payable................... -- -- 3,414 3,414 3,414
Long-term liabilities excluding trade
creditors' obligation and subordinated
notes payable.............................. 210 485 609 678 287
Shareholders' equity......................... 17,014 16,995 6,365 3,875 1,548
</TABLE>
- -------------------------
(1) Our fiscal year ends on the Sunday nearest December 31, but for clarity of
presentation, we describe all periods as if the year end is December 31.
Fiscal years 1999, 1997, 1996 and 1995 consisted of 52 weeks and 1998
consisted of 53 weeks.
14
<PAGE> 15
(2) See Note A-10 in the notes to financial statements.
(3) "Internet sales" are defined as sales derived from our sportsmansguide.com
Web site, catalog orders processed online and online offers placed by
telephone.
(4) An "active customer" is defined as a customer who has purchased merchandise
from us within 12 months preceding the end of the period indicated.
(5) Working capital at December 31, 1995 and 1997 reflects the effect of the
subordinated notes payable being classified as current liabilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a leading marketer of value priced outdoor gear and general
merchandise, with a special emphasis on outdoor clothing, equipment and
footwear. We market and sell our merchandise through main and specialty catalogs
and a network of e-commerce Web sites. Our main and specialty catalogs offer
high quality products at low prices and are advertised as The "Fun-to-Read"
Catalog(R). Our network of Web sites includes www.sportsmansguide.com, our
online retail store modeled on our print catalogs, www.bargainoutfitters.com,
our new online liquidation outlet, and www.guideoutdoors.com, our soon to be
launched community/destination portal for the outdoor enthusiast.
Our business was started in 1970 by Gary Olen, our Chairman and Chief
Executive Officer. Over time, our product offerings and marketing efforts have
broadened to include those interested in pursuing and living the outdoor
lifestyle in general and the value-oriented outdoorsman in particular. In 1992,
we began our value pricing strategy of offering outdoor equipment and supplies
at discount prices, later adding government surplus, manufacturers' close-outs
and other merchandise lines. Due in large part to the success of this strategy
and enhancements to our management team, our sales increased from $38 million in
1992 to over $160 million in 1999.
Our Internet sales have grown rapidly over the last year. We launched our
online retail store in April 1998 and began posting our catalogs and full
product offerings on the site in February 1999. Our e-commerce offerings
generated over $12.0 million in sales in 1999 compared to $1.1 million in 1998.
Product sales on the site accounted for over 10% of our sales in the fourth
quarter of 1999 compared to less than 1% for all of 1998.
FISCAL YEAR
Our fiscal year ends on the Sunday nearest December 31, but for clarity of
presentation, we describe all periods as if the year end is December 31. Fiscal
years 1999 and 1997 consisted of 52 weeks and 1998 consisted of 53 weeks.
15
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information from
our Statements of Earnings expressed as a percentage of sales.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Sales.................................................... 100.0% 100.0% 100.0%
Cost of sales............................................ 60.1 58.7 59.5
----- ----- -----
Gross profit........................................... 39.9 41.3 40.5
Selling, general and administrative expenses............. 39.2 39.1 36.6
----- ----- -----
Earnings from operations............................... 0.7 2.2 3.9
Interest and miscellaneous expense, net.................. 0.7 0.7 1.0
----- ----- -----
Earnings before income taxes........................... -- 1.5 2.9
Income tax expense....................................... -- 0.5 1.0
----- ----- -----
Net earnings........................................... --% 1.0% 1.9%
===== ===== =====
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
Sales. Sales for 1999 of $162.5 million were $19.6 million or 13.7% higher
than sales of $142.9 million for 1998. The increase in sales was primarily due
to a 7% increase in catalog mailings, increases in Internet related sales and an
increase in average order size of approximately 6%, offset somewhat by lower
catalog customer response rates. Internet sales increased in 1999 to 7.5% of
sales compared to approximately 1% of sales in 1998. Internet sales are defined
as those that are derived from our Web sites, catalog orders processed online
and online offers placed by telephone. Management believes that catalog customer
response rates were impacted throughout the entire year by higher than planned
saturation resulting from the increased number of catalog editions mailed to
existing customers and by an unusually high percentage of catalogs undelivered
or delivered late by the United States Postal Service during the third and
fourth quarters. In addition, response rates were impacted by unseasonably warm
weather during the fourth quarter which lowered demand for cold weather
products. We mailed 51 catalog editions, including 39 specialty editions, during
1999 compared to 36 catalog editions, including 25 specialty editions, during
1998.
Gross returns and allowances for 1999 were $15.8 million or 8.8% of gross
sales compared to $15.0 million or 9.5% of gross sales in 1998. Gross returns
and allowances decreased as a percent of sales during the year due to a general
improvement in return rates across most product categories versus 1998 and
actual return rates on 1998 catalogs being lower than previously estimated.
Gross Profit. Gross profit for 1999 was $64.9 million or 39.9% of sales
compared to $59.0 million or 41.3% of sales in 1998. The decrease in gross
profit as a percent of sales for the year was primarily due to higher
distribution costs and lower shipping and handling margins, offset somewhat by
higher retail product margins. Distribution expense as a percent of sales was up
primarily due to higher wage rates and higher merchandise handling costs, the
latter associated with increased inventory levels and increased number of stock
keeping units. Shipping and handling margins were down primarily due to higher
than normal backorder levels which increased the number of shipments per order,
increases in the average weight of outbound shipments and rate increases in
parcel post. Rate
16
<PAGE> 17
increases from the United States Postal Service as well as other parcel post
carriers were effective during the first quarter of 1999. Retail product margins
were up due to a larger volume of higher margin close-outs and direct import
merchandise.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $63.8 million or 39.2% of sales during 1999
compared to $55.9 million or 39.1% of sales during 1998. The dollar increase was
primarily due to the 7% increase in catalog circulation and higher facility
costs associated with increases in inventory levels. Total circulation was 80
million catalogs in 1999 compared to 75 million catalogs during 1998. The
increase in catalog circulation was due to the planned increase in the number of
specialty catalog editions. Advertising expense for 1999 was $38.2 million or
23.5% of sales compared to $33.9 million or 23.7% of sales for 1998. The
decrease in advertising expense as a percent of sales was primarily due to
higher average order size and Internet sales, offset somewhat by lower catalog
customer response rates.
Earnings from Operations. Earnings from operations were $1.1 million or
0.7% of sales during 1999 compared to $3.1 million or 2.2% of sales during 1998.
Interest Expense. Interest expense for 1999 was $1.1 million compared to
$883,000 for the same period last year. The increase in interest expense was
largely due to increased inventory levels associated with the increase in
overall sales volume and product category expansion.
Income Taxes. Income tax expense for 1999 was $6,000 compared to $746,000
during 1998. Our effective tax rate was 34.5% for both years.
Net Earnings. Net earnings for 1999 were $12,000 compared to $1.4 million
or 1.0% of sales during 1998.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Sales. Sales for 1998 of $142.9 million were $14.8 million or 11.5% higher
than sales of $128.1 million for 1997. The increase in sales was due to a 24%
increase in catalog circulation, offset partially by lower customer response
rates resulting from the increased number of catalog editions mailed to existing
customers and lower customer demand on cold weather products. Sales during the
traditionally busy fourth quarter were down from plan due to lower customer
response levels. Management believes that unseasonably warm weather throughout
the recent fourth quarter and first quarter of 1998 resulted in significantly
less demand for cold weather products, lowering overall customer response rates
for the respective quarters and entire year. We mailed 36 catalog editions,
including 25 specialty editions, during 1998 compared to 29 catalog editions,
including 18 specialty editions, during 1997.
Gross returns and allowances for 1998 were $15.0 million or 9.5% of gross
sales compared to $14.9 million or 10.4% of gross sales in 1997. Gross returns
and allowances as a percent of sales decreased during the year due to actual
return rates on new specialty catalogs and product categories being less than
originally estimated during 1997.
Gross Profit. Gross profit for 1998 was $59.0 million or 41.3% of sales
compared to $51.9 million or 40.5% of sales in 1997. The increase in gross
profit as a percent of sales was primarily due to higher retail product margins
resulting from offering a larger percentage of higher margin manufacturers'
close-outs and direct import merchandise
17
<PAGE> 18
within the clothing and footwear categories. In addition, higher retail product
margins were affected by higher shipping and handling margins resulting from a
planned price increase.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $55.9 million or 39.1% of sales during 1998
compared to $46.8 million or 36.6% of sales during 1997. The dollar increase was
primarily due to the 24% increase in catalog circulation. Total circulation
during 1998 was 75 million catalogs compared to 61 million catalogs during 1997.
The increase in catalog circulation was due to the planned increase in the
number of specialty catalog editions. Advertising expense for 1998 was $33.9
million or 23.7% of sales compared to $27.5 million or 21.4% of sales for 1997.
The increase as a percent of sales was primarily due to lower customer response
rates associated with the number of catalog editions mailed to existing
customers and lower customer response on cold weather products primarily during
the fourth quarter which management believes was caused by warmer than normal
temperatures during the past two winter seasons.
Earnings from Operations. Earnings from operations were $3.1 million or
2.2% of sales during 1998 compared to $5.0 million or 3.9% of sales in 1997.
Interest Expense. Interest expense for 1998 was $883,000 compared to $1.3
million for the same period last year. The decrease was primarily due to the
availability of additional working capital provided by a public offering of
common stock and retirement of subordinated notes payable, both completed in
February 1998.
Income Taxes. Income tax expense for 1998 was $746,000 compared to $1.3
million during 1997. Our effective tax rate was 34.5% for both years.
Net Earnings. Net earnings for 1998 were $1.4 million or 1.0% of sales
compared to $2.5 million or 1.9% of sales during 1997.
SEASONALITY AND QUARTERLY RESULTS
The majority of our sales historically occur during the second half of the
year. The seasonal nature of our business is due to our focus on outdoor
merchandise and related accessories for the fall, as well as winter apparel and
gifts for the holiday season. We expect this seasonality will continue in the
future. In anticipation of increased sales activity during the third and fourth
quarters, we incur significant additional expenses for hiring employees and
building inventory levels. Management believes that sales during the fall and
winter months of 1999 and 1998 were negatively impacted by unseasonably warmer
than normal temperatures.
18
<PAGE> 19
The following table provides certain unaudited financial information for
each of the quarters shown.
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1999
Sales...................... $38,384 $32,683 $34,659 $56,789
Gross profit............... 15,314 13,453 13,169 22,948
Earnings (loss) from
operations.............. 765 391 (1,378) 1,348
Net earnings (loss)........ 428 133 (1,146) 597
1998
Sales...................... $31,697 $28,273 $30,423 $52,483
Gross profit............... 13,292 12,437 12,464 20,797
Earnings from operations... 1,168 323 609 975
Net earnings............... 656 79 212 469
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
We typically meet our operating cash requirements through funds generated
from operations and borrowings under our revolving line of credit. On February
10, 1998, we received net proceeds of $8.5 million from the sale of 1.6 million
shares of our common stock through a public offering. We used a portion of the
offering proceeds to pay $3.4 million of subordinated notes payable and
repurchase all of our Series A Preferred Stock for $1.0 million. We are using
the remaining $4.1 million as additional working capital.
Working Capital. We had working capital of $11.3 million as of December 31,
1999 compared to $12.5 million as of December 31, 1998, with current ratios of
1.3 to 1.0 and 1.5 to 1.0, respectively. The decrease of $1.2 million was
primarily due to increased borrowings to fund the purchase of property and
equipment. Our working capital requirements increased during 1999 compared to
1998 as a result of higher inventory levels and lower inventory turnover which
are consistent with our strategic plan to increase product categories and
product margins through purchasing more direct imports. We purchase large
quantities of manufacturers' close-outs and direct imports, particularly in
footwear and apparel merchandise categories. The seasonal nature of the
merchandise may require that it be held for several months before being offered
in a catalog. This can result in increased inventory levels and lower inventory
turnover, thereby increasing our working capital requirements and related
carrying costs. Our revolving credit facility increased from $20.0 million in
1998 to $25.0 million in 1999.
We offer our 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. We had installment
receivables of $4.1 million at December 31, 1999 compared to $3.2 million at
December 31, 1998. The installment plan will continue to require the allocation
of working capital which we expect to fund from operations and availability
under our revolving credit facility.
In December 1999 we entered into a Credit and Security Agreement with
Norwest Bank Minnesota, National Association providing a revolving line of
credit up to $25.0 million, subject to an adequate borrowing base, expiring in
December 2002. The
19
<PAGE> 20
revolving line of credit is for working capital and letters of credit. Letters
of credit may not exceed $10.0 million at any one time. Funding under the credit
facility consists of a collateral base of 55% of inventory plus 80% of trade
accounts receivable. Borrowings bear interest at the bank's prime rate less
0.25%, subject to a 0.25% decrease if we achieve net earnings of $1.0 million in
2000. The revolving credit line is collateralized by substantially all of our
assets.
All borrowings are subject to various covenants. The most restrictive
covenants include a limit on monthly pretax net loss, quarterly measurement of
year-to-date earnings (loss), maximum debt to net worth ratio, maximum days
inventory levels (as defined) and maximum annual spending levels for capital
assets. The agreement also prohibits the payment of dividends to shareholders.
As of December 31, 1999, we were in compliance with all applicable covenants
under the revolving line of credit agreement. As of December 31, 1999, we had
borrowed $12.6 million against the revolving credit line compared to $5.8
million at December 31, 1998. Outstanding letters of credit were $1.5 million at
the end of 1999 compared to $1.1 million at the end of 1998.
Operating Activities. Cash flows used in operating activities during 1999
were $6.3 million compared to $5.2 million in 1998. The increase in cash used in
operations was primarily the result of decreased net earnings and increased
inventory levels, both partially offset by checks written in excess of bank
balances.
Cash flows used in operating activities during 1998 were $5.2 million
compared to cash flows generated from operating activities of $1.2 million in
1997. The increase in cash used in operations was primarily the result of
decreased net earnings and increased inventory levels.
Investing Activities. Cash flows used in investing activities during 1999
were $2.8 million compared to $2.2 million in 1998. During 1999, we expanded our
warehouse facilities and, as a result, expended funds for leasehold
improvements. We also used funds for machinery and equipment, additional
computer equipment and software, to purchase telephone equipment that was
previously leased and expanded our creative services and photo studio
departments.
Cash flows used in investing activities during 1998 were $2.2 million
compared to $1.4 million in 1997. During 1998, we purchased our main computer
servers that were previously leased and enhanced our primary office and
warehouse facility through leasehold improvements after extending the lease term
an additional five years. We also expended funds for machinery and equipment,
additional computer equipment and software to support our growing sales volume.
Financing Activities. Cash flows provided by financing activities during
1999 were $6.8 million compared to $9.7 million during 1998. Cash flows provided
by financing activities during 1999 were primarily comprised of advances made
under the revolving credit line. Cash flows provided by financing activities
during 1998 were primarily related to a public stock offering under which we
received $8.5 million in net proceeds. A portion of the proceeds was used to pay
$3.4 million of subordinated notes payable and to repurchase all of our Series A
Preferred Stock for $1.0 million. We also received proceeds from the exercise of
stock warrants and options totaling $1.6 million.
We believe that the cash flow from operations and borrowing capacity under
our revolving credit facility will be sufficient to fund our operations for the
next 12 months.
20
<PAGE> 21
YEAR 2000
We did not experience any Year 2000 related disruptions to our business. We
will continue to monitor all of our computer systems to ensure the ongoing
integrity of data processing. To our knowledge, none of our critical suppliers
have experienced any significant Year 2000 related problems. We are continuing
to monitor the progress of those suppliers to ensure Year 2000 compliance.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We use words such as "may," "believe," "estimate," "plan,"
"expect," "intend," "anticipate" and similar expressions to identify
forward-looking statements. These forward-looking statements involve risks and
uncertainties. 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 our products and the
market acceptance of our catalogs and Internet offerings as well as the risk
factors described in Exhibit 99 to this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and schedules are included herein:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Report of Independent Certified Public Accountants.......... 22
Balance Sheets as of December 31, 1999 and 1998............. 23
Statements of Earnings for the years ended December 31,
1999, 1998 and 1997....................................... 24
Statements of Changes in Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997.................... 25
Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997....................................... 26
Notes to Financial Statements............................... 27
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts for the
years ended December 31, 1999, 1998 and 1997.............. 36
</TABLE>
21
<PAGE> 22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
The Sportsman's Guide, Inc.
We have audited the accompanying balance sheets of The Sportsman's Guide,
Inc. as of December 31, 1999 and 1998 and the related statements of earnings,
changes in shareholders' equity and cash flows for each of the three fiscal
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Sportsman's Guide, Inc.
as of December 31, 1999 and 1998 and the results of its operations and its cash
flows for each of the three fiscal years in the period ended December 31, 1999
in conformity with accounting principles generally accepted in the United
States.
We have also audited schedule II for each of the three years in the period
ended December 31, 1999. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
Grant Thornton LLP
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
February 10, 2000
22
<PAGE> 23
THE SPORTSMAN'S GUIDE, INC.
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ -- $ 2,303
Accounts receivable -- net.......................... 4,944 3,931
Inventory........................................... 37,403 27,855
Promotional material................................ 4,435 3,968
Prepaid expenses.................................... 759 857
------- -------
Total current assets............................. 47,541 38,914
PROPERTY AND EQUIPMENT -- NET......................... 5,764 4,798
OTHER ASSETS.......................................... 191 191
------- -------
Total assets..................................... $53,496 $43,903
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Checks written in excess of bank balances........... $ 2,425 $ --
Notes payable -- bank............................... 12,598 5,775
Current maturities of long-term debt................ 30 30
Accounts payable
Trade............................................ 16,002 15,726
Related parties.................................. 66 294
Accrued expenses.................................... 1,809 1,556
Customer deposits and other liabilities............. 3,342 3,042
------- -------
Total current liabilities........................ 36,272 26,423
LONG-TERM LIABILITIES
Long-term debt...................................... 40 78
Deferred income taxes............................... 170 407
------- -------
Total liabilities................................ 36,482 26,908
COMMITMENTS AND CONTINGENCIES......................... -- --
SHAREHOLDERS' EQUITY
Common Stock -- $.01 par value; 36,800,000 shares
authorized; 4,747,810 and 4,746,560 shares issued
and outstanding at December 31, 1999 and 1998.... 47 47
Additional paid-in capital.......................... 11,562 11,555
Retained earnings................................... 5,405 5,393
------- -------
Total shareholders' equity....................... 17,014 16,995
------- -------
Total liabilities and shareholders' equity....... $53,496 $43,903
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 24
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Sales............................................ $162,515 $142,876 $128,113
Cost of sales.................................... 97,631 83,886 76,234
-------- -------- --------
Gross profit................................ 64,884 58,990 51,879
Selling, general and administrative expenses..... 63,758 55,915 46,830
-------- -------- --------
Earnings from operations.................... 1,126 3,075 5,049
Interest expense................................. (1,109) (883) (1,266)
Miscellaneous income (expense), net.............. 1 (30) (4)
-------- -------- --------
Earnings before income taxes................ 18 2,162 3,779
Income tax expense............................... 6 746 1,304
-------- -------- --------
Net earnings................................ 12 $ 1,416 $ 2,475
======== ======== ========
Net earnings per share:
Basic....................................... $ -- $ 0.32 $ 1.06
======== ======== ========
Diluted..................................... $ -- $ 0.31 $ 0.85
======== ======== ========
Weighted average common and common equivalent
shares outstanding:
Basic....................................... 4,748 4,434 2,336
======== ======== ========
Diluted..................................... 4,818 4,616 2,919
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 25
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- --------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------ ------ ------ ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996... 20 $-- 2,334 $23 $ 2,350 $1,502
Exercise of stock options..... -- -- 5 -- 15 --
Net earnings for the year
ended December 31, 1997.... -- -- -- -- -- 2,475
--- --- ----- --- ------- ------
Balances at December 31, 1997... 20 -- 2,339 23 2,365 3,977
Net proceeds from sale of
common stock............... -- -- 1,600 16 8,450 --
Repurchase of preferred
stock...................... (20) -- -- -- (1,000) --
Exercise of stock options and
warrants................... -- -- 808 8 1,584 --
Other......................... -- -- -- -- 156 --
Net earnings for the year
ended December 31, 1998.... -- -- -- -- -- 1,416
--- --- ----- --- ------- ------
Balances at December 31, 1998... -- -- 4,747 47 11,555 5,393
Exercise of stock options..... -- -- 1 -- 7 --
Net earnings for the year
ended December 31, 1999.... -- -- -- -- -- 12
--- --- ----- --- ------- ------
Balances at December 31, 1999... -- $-- 4,748 $47 $11,562 $5,405
=== === ===== === ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 26
THE SPORTSMAN'S GUIDE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings...................................... $ 12 $ 1,416 $ 2,475
Adjustments to reconcile net earnings to net
cash provided by (used in) operating
activities:
Depreciation and amortization............. 1,852 1,496 1,416
Deferred income taxes..................... (237) (87) 8
Other..................................... 10 164 (50)
Changes in assets and liabilities:
Accounts receivable.................... (1,013) 249 (1,142)
Inventory.............................. (9,548) (4,014) (6,076)
Promotional material................... (467) (254) (1,520)
Prepaid expenses....................... 98 306 (625)
Checks written in excess of bank
balances............................. 2,425 (2,383) (1,156)
Accounts payable....................... 48 (1,316) 6,626
Accrued expenses....................... 253 (683) 430
Customer deposits and other
liabilities.......................... 300 (66) 830
------- ------- -------
Cash flows provided by (used in)
operating activities................. (6,267) (5,172) 1,216
Cash flows from investing activities:
Purchases of property and equipment............... (2,841) (2,030) (1,377)
Other............................................. -- (191) --
------- ------- -------
Cash flows used in investing activities........ (2,841) (2,221) (1,377)
Cash flows from financing activities:
Net proceeds from revolving credit line........... 6,823 4,085 193
Payments on long-term debt........................ (25) (3,447) (47)
Proceeds from exercise of stock options and
warrants....................................... 7 1,592 15
Repurchase of preferred stock..................... -- (1,000) --
Net proceeds from sale of common stock............ -- 8,466 --
------- ------- -------
Cash flows provided by financing activities.... 6,805 9,696 161
Increase (decrease) in cash and cash equivalents.... (2,303) 2,303 --
Cash and cash equivalents at beginning of the
year.............................................. 2,303 -- --
------- ------- -------
Cash and cash equivalents at end of the year........ $ -- $ 2,303 $ --
======= ======= =======
Supplemental disclosure of cash flow information
Cash paid during the years for:
Interest....................................... $ 1,052 $ 886 $ 1,244
Income taxes................................... $ 161 $ 1,379 $ 956
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 27
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. DESCRIPTION OF BUSINESS
The Sportsman's Guide, Inc. (the "Company") is a mail order catalog and
Internet retailer, offering a variety of value priced outdoor and general
merchandise, with a special emphasis on outdoor clothing, equipment and
footwear. The Company conducts its primary operations out of one office and two
warehouse facilities and two retail outlet stores in Minnesota, distributes its
catalogs throughout the United States and hosts a network of e-commerce Web
sites. The Company operates in one business segment.
2. REVENUE RECOGNITION
Sales are recorded at the time of shipment along with a provision for
anticipated merchandise returns, net of exchanges, which is recorded based upon
historical experience and current expectations. The provision charged against
sales was $11.6 million, $11.0 million and $11.0 million during the years ended
December 31, 1999, 1998 and 1997. Reserves for returns, net of exchanges, of
$1.2 million were recorded in accrued expenses at December 31, 1999 and 1998.
Amounts billed to customers for shipping of orders are netted against the
associated costs.
3. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary investments purchased
with an original maturity of three months or less to be cash equivalents. The
Company also considers credit card settlements in-transit as cash for reporting
purposes. Chargebacks from the credit card companies are charged against
operations at the time initiated by the credit card company.
4. CHECKS WRITTEN IN EXCESS OF BANK BALANCES
As a result of maintaining a consolidated cash management system, the
Company sometimes maintains overdraft positions at its primary bank. When
outstanding checks exceed the bank balances, the bank overdraft is included in
current liabilities.
5. ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of amounts owed for merchandise by
customers utilizing an installment payment plan and amounts owed for list rental
and other advertising services provided by the Company to third parties. The
Company had an allowance for doubtful accounts of $172,000 and $90,000 at
December 31, 1999 and 1998.
6. INVENTORY
Inventory consists of purchased finished merchandise available for sale and
is recorded at the lower of cost or market with the first-in, first-out method
used to determine cost.
27
<PAGE> 28
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
7. PROMOTIONAL MATERIAL AND ADVERTISING COSTS
The cost of producing and mailing catalogs is deferred and expensed over
the estimated useful lives of the catalogs. Catalog production and mailing costs
are amortized over periods ranging from four to six months from the in-home date
of the catalog. The ongoing cost of developing and maintaining the customer list
is charged to operations as incurred. All other advertising costs are expensed
as incurred.
8. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. The Company capitalizes external and incremental internal costs of
developing computer software (including Internet software) for internal use that
represent major enhancements and/or replacements of operating and management
systems. Depreciation and amortization is computed using the straight-line
method.
9. STOCK OPTIONS
Stock options issued to employees are accounted for under the intrinsic
value method.
10. 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. 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 years ended December 31, 1999, 1998 and 1997, 70,395, 181,362 and
583,057 shares of common stock equivalents were included in the computation of
diluted net earnings per share.
Options and warrants to purchase 499,145, 301,382 and 18,650 shares of
common stock with a weighted average exercise price of $6.73, $7.14 and $8.70
were outstanding at December 31, 1999, 1998 and 1997, but were not included in
the computation of diluted net earnings per share because to do so would have
been anti-dilutive.
11. FISCAL YEAR
The Company's fiscal year ends on the Sunday nearest December 31 for 1999,
1998 and 1997, but for clarity of presentation, all periods are described as if
the year end is December 31. Fiscal years 1999 and 1997 consisted of 52 weeks
and fiscal year 1998 consisted of 53 weeks.
28
<PAGE> 29
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
Due to their short-term nature, the carrying value of the Company's current
financial assets and liabilities approximates their fair values. The fair value
of the Company's borrowings, if recalculated based on current interest rates,
would not significantly differ from the recorded amounts.
13. USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
Preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
the disclosure of contingent assets and liabilities at the date of the financial
statements, and the amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
DECEMBER 31, DECEMBER 31, USEFUL
1999 1998 LIVES
------------ ------------ ------------
<S> <C> <C> <C>
Machinery, equipment and furniture......... $ 5,016 $3,543 5-12 years
Equipment under capital leases............. 133 133 5 years
Leasehold improvements..................... 1,746 1,386 Lease life
Computer equipment and accessories......... 1,785 1,625 3-5 years
Computer software.......................... 3,802 3,312 4-5 years
------- ------
12,482 9,999
Less accumulated depreciation and
amortization............................. 6,718 5,201
------- ------
$ 5,764 $4,798
======= ======
</TABLE>
NOTE C -- REVOLVING CREDIT FACILITY
In December 1999 the Company entered into a Credit and Security Agreement
with Norwest Bank Minnesota, National Association providing a revolving line of
credit up to $25.0 million, subject to an adequate borrowing base, expiring in
December 2002. The revolving line of credit is for working capital and letters
of credit. Letters of credit may not exceed $10.0 million at any one time.
Funding under the credit facility consists of a collateral base of 55% of
inventory, plus 80% of trade accounts receivable. Borrowings bear interest at
the bank's prime rate less 0.25%, subject to a 0.25% decrease if the Company
achieves net earnings of $1.0 million in 2000. The revolving credit line is
collateralized by substantially all of the assets of the Company.
All borrowings are subject to various covenants. The most restrictive
covenants include a limit on monthly pretax net loss, quarterly measurement of
year-to-date earnings
29
<PAGE> 30
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- REVOLVING CREDIT FACILITY (CONTINUED)
(loss), maximum debt to net worth ratios, maximum days inventory levels (as
defined), maximum annual spending levels for capital assets and prohibit the
payment of dividends to shareholders. As of December 31, 1999, the Company was
in compliance with all applicable covenants under the revolving line of credit
agreement.
The following is a summary of the credit facility (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Borrowings at end of year........................... $12,598 $ 5,775 $ 1,690
Interest rate at end of year........................ 8.25% 7.25% 8.50%
Maximum month-end borrowing during the year......... $22,345 $14,769 $13,599
Average daily borrowing during the year............. $13,333 $ 9,917 $ 9,517
Weighted average interest rate during the year...... 8.15% 8.31% 9.22%
Outstanding letters of credit at end of year........ $ 1,531 $ 1,094 $ 885
</TABLE>
NOTE D -- LONG-TERM DEBT
Long-term debt consists of a note payable to a government agency with
interest at 4% which is collateralized by machinery, equipment, furniture and
fixtures. At December 31, 1999, future maturities of long-term debt are $30,000
for each of the fiscal years 2000 and 2001 and $10,000 in fiscal 2002.
NOTE E -- INCOME TAXES
The provision for income tax expense (benefit) consists of the following
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ----- -------
<S> <C> <C> <C>
Current
Federal................................................ $ 238 $820 $1,277
State.................................................. 5 13 19
----- ---- ------
243 833 1,296
Deferred
Federal................................................ (237) (87) 8
----- ---- ------
$ 6 $746 $1,304
===== ==== ======
</TABLE>
30
<PAGE> 31
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- INCOME TAXES (CONTINUED)
Differences between income tax expense and amounts derived by applying the
statutory federal income tax rate to earnings before income taxes are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory rate................. 34.0% 34.0% 34.0%
Other....................................... 0.5 0.5 0.5
---- ---- ----
34.5% 34.5% 34.5%
==== ==== ====
</TABLE>
The components of deferred taxes consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Current deferred tax assets
(liabilities):
Inventory............................. $ 825 $ 659
Vacation accrual...................... 159 137
Returns reserve....................... 401 397
Promotional material.................. (964) (947)
Prepaid expenses...................... (182) (154)
Other................................. 121 85
----- -----
Deferred tax asset............... 360 177
Long-term deferred tax assets
(liabilities):
Internally developed software......... (734) (630)
Depreciation.......................... 204 46
----- -----
Deferred tax liability........... (530) (584)
----- -----
Net deferred tax liability....... $(170) $(407)
===== =====
</TABLE>
NOTE F -- COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has several long-term contracts and operating leases related to
building facilities, telecommunications and computer equipment, long-distance
telephone services and a retail location with varying terms as long as 62
months.
At December 31, 1999, future minimum commitments under the above agreements
are as follows for the years ended December 31, (in thousands):
<TABLE>
<S> <C>
2000.................................................... $ 3,045
2001.................................................... 2,906
2002.................................................... 2,751
2003.................................................... 1,846
2004.................................................... 324
-------
$10,872
=======
</TABLE>
31
<PAGE> 32
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense was $2.8 million, $2.4 million and $2.1 million for the years
ended December 31, 1999, 1998 and 1997.
Employment Agreements
The Company has employment agreements with four of its officers. The
agreements contain various terms and conditions including a provision for the
officers to receive up to three years of base salary upon the occurrence of
certain events as defined in the agreement. The agreements provide for automatic
annual renewal unless two months' prior written notice is provided by the
Company or the officer.
Other
Several states, where the Company does not currently collect and remit
sales and use taxes, have attempted to enact legislation that seeks to require
out-of-state mail order companies to collect and remit such taxes. No
assessments have been made against the Company and, to its knowledge, none has
been threatened or is contemplated. The United States Supreme Court has held
that such taxes place an unconstitutional burden on interstate commerce, which
may only be resolved by actions of the United States Congress.
The Company is not a party to any pending legal proceedings other than
litigation which is incidental to its business and which the Company believes
will not have a material effect on its financial statements.
NOTE G -- RELATED PARTY TRANSACTIONS
The Company purchased $2.8 million, $3.9 million and $2.0 million of
inventory during the years ended December 31, 1999, 1998 and 1997 from companies
partially owned by a director of the Company.
The Company incurred interest expense on related party subordinated notes
payable of $23,000 and $183,000 during the years ended December 31, 1998 and
1997. No interest expense was incurred on related party debt during the year
ended December 31, 1999.
During 1998, the Company loaned $238,000 to an officer of the Company to be
repaid over five years with interest at 5.69% per annum. During February 2000,
the Company renewed the note, extending repayment over five years.
NOTE H -- SHAREHOLDERS' EQUITY
The Company has 40,000,000 authorized shares; 200,000 of Series A Preferred
Stock, 36,800,000 of Common Stock and 3,000,000 undesignated shares.
32
<PAGE> 33
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- SHAREHOLDERS' EQUITY (CONTINUED)
Public Offering of Common Stock
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.
Stock Options
The Company has a stock option plan (the "1991 Plan") which provides
participating employees the right to purchase common stock of the Company
through incentive stock options. A total of 35,000 shares of common stock are
reserved for issuance under the 1991 Plan. Options issued under the 1991 Plan
are exercisable over a ten year period from the date of grant. At December 31,
1999, 23,000 options were outstanding, of which 5,750 options were exercisable.
The Company previously issued options to purchase 55,000 shares of the
Company's common stock at $2.50 per share to an officer of the Company. All of
the options became exercisable upon the Company's public offering of common
stock and were exercised during 1998.
The Company also issued options to purchase 5,000 shares of the Company's
common stock at $2.50 per share to a director and former officer of the Company.
All of the options were exercised during 1997.
The Company has a non-qualified stock option plan (the "1994 Plan") which
provides for the issuance of options to purchase up to 100,000 shares of the
Company's common stock to certain employees, contingent upon meeting certain
quarterly pre-tax earnings levels. Options under the 1994 Plan are exercisable
over a ten year period from the date of grant. At December 31, 1999, a total of
35,189 options were outstanding, all of which were exercisable.
The Company has an incentive stock option plan (the "1996 Plan") which
provides selected key employees the right to purchase common stock of the
Company through the exercise of options granted. A total of 600,000 shares of
common stock are reserved for issuance under the 1996 Plan. Options issued under
the 1996 Plan are exercisable over a ten year period from the date of grant. At
December 31, 1999, a total of 558,880 options were outstanding, of which 329,543
options were exercisable.
The Company has an incentive stock option plan (the "1999 Plan") which
provides selected key employees the right to purchase common stock of the
Company through the exercise of options granted. A total of 600,000 shares of
common stock are reserved for issuance under the 1999 Plan. Options issued under
the 1999 Plan are exercisable over a ten year period from the date of grant. At
December 31, 1999, no options were outstanding.
33
<PAGE> 34
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- SHAREHOLDERS' EQUITY (CONTINUED)
The following applies to options that are outstanding at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
------------------------ ----------- ---------------- ----------------
<S> <C> <C> <C>
$2.50 - $3.70....................... 102,280 6 years $2.57
$3.94 - $5.91....................... 213,364 7 years $4.85
$6.10 - $8.70....................... 301,425 8 years $6.63
-------
617,069
=======
</TABLE>
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
------------------------ ----------- ----------------
<S> <C> <C> <C>
$2.50 - $3.70....................... 102,280 $2.57
$3.94 - $5.91....................... 136,827 $4.73
$6.10 - $8.70....................... 131,375 $6.77
-------
370,482
=======
</TABLE>
Exercise prices for all options granted were equal to or higher than the
fair value of the Company's common stock on the respective grant dates and,
therefore, no compensation expense has been recorded by the Company. A summary
of the stock option transactions during the years ended December 31, 1999, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year..................... 502,219 $5.11 348,439 $3.53 233,878 $3.27
Granted.................. 119,600 6.33 319,500 6.31 130,000 4.00
Exercised................ (1,250) 5.88 (91,308) 2.64 (5,625) 2.53
Canceled................. (2,725) 5.63 (70,287) 5.76 (5,876) 3.43
Expired.................. (775) 5.91 (4,125) 8.02 (3,938) 4.87
------- ----- ------- ----- ------- -----
Outstanding at end of
year..................... 617,069 $5.34 502,219 $5.11 348,439 $3.53
======= ===== ======= ===== ======= =====
Options exercisable at end
of year.................. 370,482 $4.86 250,182 $4.40 196,314 $3.59
======= ===== ======= ===== ======= =====
Weighted average fair value
of options granted during
the year................. $3.27 $3.26 $1.75
</TABLE>
The Company's pro forma net earnings (loss) and net earnings (loss) per
share for the years ended December 31, 1999, 1998 and 1997 had the fair value
based method of
34
<PAGE> 35
THE SPORTSMAN'S GUIDE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- SHAREHOLDERS' EQUITY (CONTINUED)
accounting for the issuance of stock options been used are set forth below.
These effects may not be representative of the future effects of applying this
method.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998 1997
----- ------ ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C> <C>
Net earnings (loss).................... As reported..... $ 12 $1,416 $2,475
Pro forma....... (314) 1,231 2,449
Net earnings (loss) per common and
common equivalent share
Basic................................ As reported..... $ -- $ .32 $ 1.06
Pro forma....... (.07) .28 1.05
Diluted.............................. As reported..... $ -- $ .31 $ .85
Pro forma....... (.07) .27 .84
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used: zero dividend yield; expected volatility of 25 percent;
risk-free interest rate of six percent; and expected life of 10 years.
Warrants
During the first quarter of 1998, the Company received net proceeds of
approximately $1.4 million from the exercise of warrants to purchase 716,027
shares of common stock. In connection with the public offering of common stock
in 1998, warrants to purchase 100,000 shares of common stock at $8.45 per share
were issued. The warrants are exercisable immediately and expire February 2003.
Preferred Stock
On February 10, 1998, the Company repurchased all of its outstanding Series
A Preferred Stock for $1.0 million.
NOTE I -- ADVERTISING EXPENSE
Selling, general and administrative expenses include advertising expenses
of $38.2 million, $33.9 million and $27.5 million for the years ended December
31, 1999, 1998 and 1997.
35
<PAGE> 36
THE SPORTSMAN'S GUIDE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------- ---------- ------------------------------- ------------ -------------
ADDITIONS
-------------------------------
(1) (2)
BALANCE AT CHARGED TO: CHARGED TO:
BEGINNING COSTS AND OTHER ACCOUNTS-- DEDUCTIONS-- BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- --------------------- ---------- ----------- ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
RETURNS RESERVE
December 31,
1999............ $1,168 $11,614 $-- $11,602* $1,180
December 31,
1998............ 1,285 10,985 -- 11,102* 1,168
December 31,
1997............ 640 10,953 -- 10,308* 1,285
</TABLE>
- -------------------------
* Represents actual returns from customers.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
<PAGE> 37
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning our directors, executive
officers and key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Gary Olen............................ 58 Chairman and Chief Executive Officer and
Director(1)
Gregory R. Binkley................... 51 President, Chief Operating Officer and
Director
Charles B. Lingen.................... 55 Senior Vice President of Finance, Chief
Financial Officer, Secretary and Director
John M. Casler....................... 49 Senior Vice President of Merchandising
Barry W. Benecke..................... 55 Senior Vice President of Creative Services
Bernard S. Bauhof.................... 52 Senior Vice President of Information
Systems and Technology and Chief
Information Officer
Vincent W. Shiel..................... 66 Director(1)(2)
Mark F. Kroger....................... 46 Director(3)
Leonard M. Paletz.................... 65 Director(2)(3)
William T. Sena...................... 63 Director(1)(2)(3)
KEY EMPLOYEES:
Janine M. Shovein.................... 41 Vice President of Sales and Customer
Service
David M. Kolkind..................... 42 Vice President of Finance/Treasurer
</TABLE>
- -------------------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
Gary Olen is our co-founder and served as our Executive Vice President and
Secretary from our incorporation in 1977 until December 31, 1993. Mr. Olen has
been Chief Executive Officer since 1994, served as President from 1994 to 1998
and has been Chairman of the Board since 1998. Mr. Olen has been a director
since our incorporation. From 1970 to 1977, Mr. Olen was employed as the
Merchandising/Marketing Director for Fidelity File Box, Inc., which sells
corrugated storage products, office and industrial equipment and office
industrial supplies through mail order catalogs. From 1967 to 1970, Mr. Olen was
a Merchandise Manager with C&H Distributors, a business-to-business mail order
catalog specializing in the sale of industrial and office equipment. From 1960
to 1967, Mr. Olen was employed in the catalog division of J.C. Penney Company.
Mr. Olen was also the sole proprietor of our predecessor, The Olen Company,
founded in 1970.
Gregory R. Binkley has been a director since 1995. Mr. Binkley has been an
employee since 1994 when he was elected Vice President. Mr. Binkley became our
Senior Vice President of Operations and Chief Operating Officer in 1995, our
Executive Vice President in 1996 and our President in 1998. From 1993 to 1994,
Mr. Binkley served as an
37
<PAGE> 38
independent operations consultant. From 1990 to 1993, Mr. Binkley was Director
of Distribution of Fingerhut Companies, Inc., a mail order catalog business.
From 1988 to 1990, Mr. Binkley was Director of Distribution with Cable Value
Network, Inc., a cable television retailer. Mr. Binkley worked for Donaldsons
Department Stores, a division of Allied Stores Corporation, from 1975 to 1988,
serving as Vice President of Finance and Operations from 1987 to 1988 and Vice
President of Operations from 1981 to 1987. In 1999, Mr. Binkley was elected
President and Chief Executive Officer of Guideoutdoors.com Inc.
Charles B. Lingen has been a director since 1995. Mr. Lingen has been our
Chief Financial Officer and Vice President of Finance since 1994 and served as
Treasurer until 1999. In 1995 Mr. Lingen was elected Secretary and in 1996 was
elected Senior Vice President of Finance. From 1973 to 1994, Mr. Lingen worked
at Fingerhut Companies, Inc., serving as Vice President of Finance and
Controller from 1989 to 1994.
John M. Casler has been an employee since 1996. In 1997, he was elected
Vice President of Merchandising and in 1999 was elected Senior Vice President of
Merchandising. Mr. Casler worked for Gander Mountain, Inc, a retail mail order
catalog company, from 1989 to 1995, where he served as Division Merchandise
Manager from 1990 to 1995. Prior to that time, Mr. Casler held merchandise
management positions at Munson Sporting Goods Co., Inc. from 1985 to 1989 and at
the Target Stores Division of Dayton Hudson Corp. from 1982 to 1985.
Barry W. Benecke has been an employee since 1996, when he was Senior
Director -- Creative Services. Mr. Benecke was elected Vice President of
Creative Services in 1997 and Senior Vice President of Creative Services in
1998. Mr. Benecke worked for CyDeCosse Inc., a direct marketing company, from
1990 to 1996 as Vice President of Creative Services, and Fingerhut Companies,
Inc. from 1983 to 1990 as Creative Director. Prior to 1983, Mr. Benecke managed
his own advertising/design firm for 13 years.
Bernard S. Bauhof has been employed since 1996 as Senior Director --
Information Systems and Technology. He was elected Vice President of Information
Systems and Technology and Chief Information Officer in 1997 and Senior Vice
President of Information Systems and Technology in 1999. Mr. Bauhof worked for
CyDeCosse Inc. from 1994 to 1996 as Director of Information Systems, for
Musicland Group, Inc. from 1990 to 1994 as Director of Distributed Systems, for
Zetaco, Inc., a manufacturer of optical disc servers, from 1988 to 1990 as
Director of Software Engineering and for CPT Corporation, a network printing
company, from 1980 to 1988 as Software Engineering Director.
Janine M. Shovein has been an employee since 1994. Ms. Shovein was promoted
to Director of Sales and Customer Service in 1995 and elected Vice President of
Sales and Customer Service in 1999. Ms. Shovein worked for NordicTrack, a direct
response company, from 1992 to 1994 as Sales Manager, Fingerhut Companies, Inc.
from 1990 to 1992 as Systems Liaison, Young America Corporation, a fulfillment
company, from 1989 to 1990 as Manager of Training and Development, and CVN
Companies Inc., a cable television retailer, from 1986 to 1989 as Supervisor of
Training and Development. Prior to 1986, Ms. Shovein worked in store management
for The Limited, Inc., a woman's wear retailer.
David M. Kolkind has been an employee since 1994. Mr. Kolkind was promoted
to Corporate Controller/Assistant Treasurer in 1996 and elected Vice President
of Finance/
38
<PAGE> 39
Treasurer in 1999. Mr. Kolkind worked for Federal Land Company, a real estate
developer, from 1989 to 1994 as Controller, Hubbard Milling Company, an
agricultural and food processor, from 1988 to 1989 as Corporate Controller, Star
Tribune newspaper from 1984 to 1988 as Financial Reporting Manager, and Coast to
Coast Stores, a division of Household Finance Corporation, from 1981 to 1984 as
Supervisor of Internal Audit.
Vincent W. Shiel, Ph.D. has been a director since 1990 and served as
Chairman of the Board from 1994 to 1998. Dr. Shiel owns an interest in and
serves as a director of ABN Sports Supply, Inc., a wholesale firearms
distributor. Dr. Shiel is a principal shareholder and has served as President
and a director of Outdoor Consulting, Inc., a management consulting firm, since
1988. From 1984 to 1988, Dr. Shiel served on the board of directors and owned a
controlling interest in Gander Mountain, Inc. Dr. Shiel resigned as a director
of and sold his controlling interest in Gander Mountain in 1989. Dr. Shiel was
the principal owner and President of Outdoor Sports Headquarters, Inc., a
hunting and sporting goods wholesaler, from its formation in the early 1960's
until 1978.
Mark F. Kroger has been a director since 1990. He is the former Chairman of
the Board, President and Chief Executive Officer of ABN Sports Supply, Inc. Mr.
Kroger served as President and a director of ABN from 1986 to 1997. Mr. Kroger
also served as the Chairman of the Board, President and Chief Executive Officer
of LMV, Inc. dba Ohio Powder Company, a wholesale distributor of gun powder,
from 1995 to 1997 and as the President and a director of MKS Supply, Inc., a
marketer and seller of firearms to distributors, from 1990 to 1997. Mr. Kroger
worked for Outdoor Sports Headquarters, Inc. from 1973 to 1985 where he held
various positions in sales and merchandising.
Leonard M. Paletz is a co-founder and served as our Chairman of the Board,
President, Chief Executive Officer, Treasurer and a director from our
incorporation in 1977 until 1994. Mr. Paletz retired as an employee effective
December 31, 1994. From 1962 through 1977, Mr. Paletz worked for Fidelity File
Box, Inc. in various positions including Vice President and General Manager, and
was also a director and shareholder of Fidelity File Box, Inc.
William T. Sena has been a director since 1990. He is an investment advisor
with Sena Weller Rohs Williams, Inc., an investment advisory firm. Mr. Sena has
been associated with the investment advisory firm and its predecessor since
1965. Mr. Sena is also a director of Phoenix Medical Technology, Inc.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors, executive officers and ten percent beneficial owners of our common
stock to file reports of ownership and changes of ownership of the common stock
with the Securities and Exchange Commission. We believe that during 1999 all
Section 16 filing requirements applicable to our directors, executive officers
and ten percent beneficial owners were met.
39
<PAGE> 40
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid to the Chief
Executive Officer and to each of the other four most highly compensated
executive officers of the Company (the "Named Executive Officers") for services
rendered in all capacities for each of the years indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION LONG-TERM
------------------ COMPENSATION
SALARY BONUS OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#)
--------------------------- ---- ------- ------- ------------
<S> <C> <C> <C> <C>
Gary Olen................................. 1999 270,931 -- 40,000
Chairman and Chief Executive Officer 1998 259,605 -- 80,000
1997 207,782 110,000 33,790
Gregory R. Binkley........................ 1999 185,947 -- 10,000
President and Chief Operating Officer 1998 178,939 -- 75,000
1997 129,985 60,000 20,740
Charles B. Lingen......................... 1999 141,795 -- 7,500
Senior Vice President of Finance, 1998 136,166 -- 41,000
Chief Financial Officer and Secretary 1997 119,165 50,000 15,420
John M. Casler............................ 1999 138,114 -- 7,500
Senior Vice President of Merchandising 1998 127,110 -- 41,500
1997 100,235 45,000 10,000
Barry W. Benecke.......................... 1999 131,726 -- 7,000
Senior Vice President of Creative 1998 123,151 -- 7,500
Services
1997 93,484 15,000 5,000
</TABLE>
40
<PAGE> 41
The following table sets forth information with respect to the Named
Executive Officers concerning the grant of options during 1999.
OPTIONS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ----------- ------------ -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gary Olen............ 40,000(2) 33.4 6.59 2/11/09 165,777 420,111
Gregory R. Binkley... 10,000(2) 8.4 6.59 2/11/09 41,444 105,028
Charles B. Lingen.... 7,500(2) 6.3 6.59 2/11/09 31,083 78,771
John M. Casler....... 7,500(2) 6.3 6.59 2/11/09 31,083 78,771
Barry W. Benecke..... 7,000(2) 5.9 6.59 2/11/09 29,011 73,519
</TABLE>
- -------------------------
(1) The compounding assumes a ten-year exercise period for all option grants.
The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
common stock prices. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on the future performance of the common stock and overall stock
market conditions. The amounts reflected in this table may not necessarily
be achieved.
(2) Incentive stock options granted pursuant to the Company's 1996 Stock Option
Plan. These options become exercisable in four cumulative installments of
25% on the date of grant and each anniversary date. The date of grant was
February 11, 1999.
41
<PAGE> 42
The following table sets forth information with respect to the Named
Executive Officers concerning options held at year end 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ON VALUE YEAR-END (#) FISCAL YEAR-END ($)(1)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gary Olen............ -- -- 136,168 78,447 -- --
Gregory R. Binkley... -- -- 82,078 50,185 -- --
Charles B. Lingen.... -- -- 53,485 29,980 -- --
John M. Casler....... -- -- 35,625 28,875 -- --
Barry W. Benecke..... -- -- 10,750 10,250 -- --
</TABLE>
- -------------------------
(1) Unexercised options were in-the-money if the fair market value of the
underlying shares exceeded the exercise price of the option at December 31,
1999.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive $5,000 annually for
services as a director plus expenses incurred in attending board meetings.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Gary Olen, Gregory
R. Binkley, Charles B. Lingen and John M. Casler. Mr. Olen's agreement continues
until December 31, 2001, and Messrs. Binkley's, Lingen's and Casler's agreements
continue until December 31, 2000. Such agreements contain certain nondisclosure,
nonsolicitation and option forfeiture provisions. Each agreement is
automatically renewed for additional one year terms unless either party gives
two months' notice of nonrenewal, and terminates upon the employee's death,
disability or retirement at age 65. Upon termination of the agreement by reason
of death or disability, each of the employees or his estate is entitled to a
payment equal to 12 months of his monthly base salary, plus a pro rata portion
of the bonus that would otherwise have been payable to the employee under the
Company's bonus plan then in effect. Upon termination of the agreement (i) by
the employee for good reason (as defined in the agreement) or (ii) by the
Company without good cause or upon the Company's failure to renew the agreement,
the employee is entitled to a payment equal to 24 months of his monthly base
salary, plus a pro rata portion of the bonus that would otherwise have been
payable to the employee under the Company's bonus plan then in effect. Each
agreement also provides that if the employee is terminated, or resigns for good
reason or if the Company fails to renew the agreement within two years following
a substantial event (defined as a sale of substantially all of the Company's
assets, a merger or other reorganization resulting in the incumbent directors
constituting less than a majority of the board, or a tender offer for 50% or
more of the Company's outstanding voting stock), such employee is entitled to a
payment equal to three times his annual base salary, plus a pro rata portion of
the bonus otherwise payable to the employee.
42
<PAGE> 43
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is comprised of
Vincent W. Shiel, Leonard M. Paletz and William T. Sena. Mr. Paletz is a former
Chief Executive Officer of the Company.
During 1999, the Company purchased merchandise inventory in the amount of
$2.8 million from ABN Sports Supply, Inc. Dr. Shiel is a shareholder and
director of ABN, and Mark F. Kroger was formerly a shareholder, Chairman of the
Board, President and Chief Executive Officer of ABN. The Company believes that
the terms of such purchases were as favorable as could have been obtained from
an unrelated party.
Outdoor Consulting, Inc., a corporation owned by Dr. Shiel, provides
certain consulting services to the Company. Mr. Sena also provides certain
consulting services to the Company. See Item 13. Certain Relationships and
Related Transactions.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of March 20, 2000 by each director,
each executive officer, all directors and executive officers as a group, and
those persons or groups known to us to beneficially own more than 5% of our
common stock.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED
-----------------------
NAME NUMBER PERCENT(1)
---- --------- ----------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS(2):
Vincent W. Shiel(3)....................................... 522,000 11.0%
Gary Olen(4).............................................. 266,798 5.4%
Gregory R. Binkley(5)..................................... 118,513 2.4%
Charles B. Lingen(6)...................................... 69,465 1.4%
John M. Casler(7)......................................... 50,375 1.0%
Barry W. Benecke(8)....................................... 16,625 *
Bernard S. Bauhof(9)...................................... 13,750 *
Mark F. Kroger............................................ 78,370 1.7%
Leonard M. Paletz......................................... 204,816 4.3%
William T. Sena, as trustee of various trusts for the
benefit of Dr. and Mrs. Shiel and their children(10).... 106,819 2.2%
All directors and executive officers as a group (10
persons)(11)............................................ 1,447,531 27.9%
OTHER SHAREHOLDERS OWNING MORE THAN 5% OF COMMON STOCK:
Ralph E. Heyman, Individually and as trustee of various
trusts for the benefit of Dr. and Mrs. Shiel and their
children and grandchildren(12).......................... 383,725 8.1%
Dimensional Fund Advisors Inc.(13)
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401.................................. 328,000 6.9%
Kalmar Investments Inc.(14)
3701 Kennett Pike
Greenville, DE 19807.................................... 300,000 6.3%
</TABLE>
- -------------------------
* Less than 1% of outstanding shares
43
<PAGE> 44
(1) Percentages are calculated on the basis of the number of shares outstanding
on March 20, 2000 plus the number of shares issuable pursuant to options
held by the individual which are exercisable within 60 days after March 20,
2000.
(2) The address of each director and executive officer is 411 Farwell Avenue,
South St. Paul, Minnesota 55075.
(3) Includes 420,051 shares held by the Vincent W. Shiel Family Limited
Partnership of which the Vincent W. Shiel Revocable Trust, of which Dr.
Shiel is trustee, owns a 99.9% limited partnership interest and a 99.8%
interest in the general partner, and 101,949 shares held by the Helen M.
Shiel Family Limited Partnership of which the Helen M. Shiel Revocable
Trust, of which Mrs. Shiel is trustee, owns a 99.9% limited partnership
interest and a 99.8% interest in the general partner. Helen M. Shiel is the
wife of Dr. Shiel. Does not include 633,848 shares held by Dr. and Mrs.
Shiel's children or in trusts for the benefit of Dr. and Mrs. Shiel and
their children and grandchildren of which Dr. Shiel expressly disclaims
beneficial ownership.
(4) Includes 174,615 shares issuable upon the exercise of options. Does not
include 46,000 shares held in trusts for the benefit of Mr. Olen's children
and grandchildren of which Mr. Olen expressly disclaims beneficial
ownership.
(5) Includes 2,000 shares held in the name of Mr. Binkley's wife and 108,513
shares issuable upon the exercise of options.
(6) Includes 69,465 shares issuable upon the exercise of options.
(7) Includes 50,375 shares issuable upon the exercise of options.
(8) Includes 15,625 shares issuable upon the exercise of options.
(9) Includes 13,750 shares issuable upon the exercise of options.
(10) Includes 106,819 shares held as trustee of various trusts for the benefit
of Dr. and Mrs. Shiel and their children, of which Mr. Sena has no
pecuniary interest. Does not include 522,000 shares held by the Vincent W.
Shiel Family Limited Partnership and the Helen M. Shiel Family Limited
Partnership over which Mr. Sena shares voting and dispositive power and of
which Mr. Sena expressly disclaims beneficial ownership.
(11) Includes 432,343 shares issuable upon the exercise of options.
(12) Includes 382,725 shares held as trustee of various trusts for the benefit
of Dr. and Mrs. Shiel and their children and grandchildren, of which Mr.
Heyman has no pecuniary interest. Does not include 522,000 shares held by
the Vincent W. Shiel Family Limited Partnership and the Helen M. Shiel
Family Limited Partnership over which Mr. Heyman shares voting and
dispositive power and of which Mr. Heyman expressly disclaims beneficial
ownership. Mr. Heyman's address is 1100 Courthouse Plaza S.W., Dayton, Ohio
45402.
(13) Based on a Schedule 13G filing dated February 4, 2000. Dimensional Fund
Advisors Inc., a registered investment advisor, furnishes investment advice
to four registered investment companies and serves as investment manager to
certain other commingled group trusts and separate accounts. In its role as
investment adviser or manager, Dimensional Fund Advisors Inc. has sole
power to vote and dispose of 328,000 shares owned by these funds. To the
knowledge of Dimensional Fund Advisors Inc., no one advisory client owns
more than 5% of the class. Dimensional Fund Advisors Inc. disclaims
beneficial ownership of the 328,000 shares.
44
<PAGE> 45
(14) Based on a Schedule 13G filing dated January 8, 1999. Kalmar Investments
Inc., a registered investment advisor, has sole power to dispose of 300,000
shares but does not have the power to vote the 300,000 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1990, the Company entered into a consulting agreement with
Outdoor Consulting, Inc. pursuant to which Outdoor Consulting, Inc. provides
consulting services to the Company. The initial term of the agreement expired on
December 31, 1990 and continues on a year-to-year basis until terminated by
either party upon 60 days prior written notice. The compensation payable under
the agreement is $5,000 per month. Vincent W. Shiel is the sole shareholder and
employee of Outdoor Consulting, Inc.
In February 1998, the Company loaned Gary Olen $238,700 to pay the exercise
price of an option to purchase 55,000 shares of common stock held by Mr. Olen
(which became exercisable upon completion of the Company's public offering and
would have expired six months later) and to pay the income taxes payable by him
upon exercise of the option. The loan, approved by the Board of Directors, is
for a term of five years, bears interest at the mid-term applicable federal rate
as of the date of the loan (5.69%) and is collateralized by a pledge of the
shares acquired upon exercise. In February 2000, the Board of Directors deferred
for one year payment of the first installment due on the loan.
In April 1998, the Company entered into a consulting agreement with William
T. Sena pursuant to which Mr. Sena provides certain investor relation and
investment advisory services as requested by the Company for a minimum of 15
hours per quarter. The initial term of the agreement expired on December 31,
1998 and continues on a quarter-to-quarter basis until terminated by either
party. Mr. Sena is paid $3,000 per quarter for services under the agreement.
45
<PAGE> 46
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following financial statements of the Company are included
herein at Item 8.
Report of Independent Certified Public Accountants
Balance Sheets as of December 31, 1999 and 1998
Statements of Earnings for the years ended December 31, 1999,
1998 and 1997
Statements of Changes in Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997
Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of the Company is
included herein at Item 8.
Schedule II--Valuation and Qualifying Accounts for the years
ended December 31, 1999, 1998 and 1997
3. EXHIBITS
See Exhibit Index at page 48 of this report.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
46
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE SPORTSMAN'S GUIDE, INC.
Date: March 20, 2000
By /s/ GARY OLEN
-----------------------------------
Gary Olen
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ GARY OLEN Chairman of the Board, Chief
- ------------------------------------------ Executive Officer and
Gary Olen Director (principal
executive officer)
/s/ CHARLES B. LINGEN Senior Vice President of
- ------------------------------------------ Finance, Chief Financial
Charles B. Lingen Officer, Secretary and
Director (principal
financial and accounting
officer)
/s/ GREGORY R. BINKLEY President, Chief Operating March 20, 2000
- ------------------------------------------ Officer and Director
Gregory R. Binkley
/s/ VINCENT W. SHIEL* Director
- ------------------------------------------
Vincent W. Shiel
/s/ MARK F. KROGER* Director
- ------------------------------------------
Mark F. Kroger
/s/ LEONARD M. PALETZ* Director
- ------------------------------------------
Leonard M. Paletz
/s/ WILLIAM T. SENA* Director
- ------------------------------------------
William T. Sena
*By /s/ GARY OLEN
------------------------------------
Gary Olen, Attorney-In-Fact
</TABLE>
47
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
3.1 Restated Articles of Incorporation as restated through March
5, 1997 (incorporated by reference to Exhibit 3.1 to Form
10-K for the year ended December 27, 1996, File No. 0-15767)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to Form
S-18 Registration Statement No. 33-4496C filed April 1,
1986)
4.1 Specimen of the Company's Common Stock certificate
(incorporated by reference to Exhibit 4.1 to Amendment No. 1
to Form S-18 Registration Statement No. 33-4496C filed May
8, 1986)
4.2 Rights Agreement dated as of May 11, 1999 between the
Company and Norwest Bank Minnesota, N.A., as Rights Agent
(incorporated by reference to Exhibit 4.1 to Form 8-K dated
May 11, 1999)
4.3 Form of Promissory Note dated December 27, 1999 issued by
the Company
10.1 Letter of agreement between Vincent W. Shiel and the Company
dated September 8, 1989 (incorporated by reference to
Exhibit 19.1 to Form 10-Q for the quarter ended September
29, 1989)
10.2* Consulting Agreement dated January 11, 1990 between the
Company and Outdoor Consulting, Inc. (incorporated by
reference to Exhibit 10.16 to Form 10-K for the year ended
December 29, 1989)
10.3* The Company's 1991 Incentive Stock Option Plan (incorporated
by reference to Exhibit 10.16 to Form 10-K for the year
ended December 27, 1991)
10.4* Agreement between the Company and Gary Olen dated July 1,
1992 granting the use of Mr. Olen's name, picture and
likeness (incorporated by reference to Exhibit 10.19 to Form
10-K for the year ended December 31, 1993)
10.5 Industrial Real Estate Lease between the Company and CB
Commercial Real Estate Group, Inc. dated April 22, 1993
(incorporated by reference to Exhibit 10.20 to Form 10-K for
the year ended December 31, 1993)
10.6 Amendment to Industrial Real Estate Lease between the
Company and American Real Estate Holdings, L.P. dated
February 23, 1998 (incorporated by reference to Exhibit 10.1
to Form 10-Q for the quarter ended June 28, 1998)
10.7 Industrial Real Estate Lease between the Company and AMB
Property, L.P. as amended May 24, 1999 (incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter ended
July 4, 1999)
10.8 Credit and Security Agreement between the Company and
Norwest Bank Minnesota, National Association dated December
27, 1999
10.9* Form of Stock Option Agreement pursuant to the Company's
1994 Non-Qualified Performance Option Plan (incorporated by
reference to Exhibit 10.16 to Form 10-K for the year ended
December 27, 1996)
10.10* The Company's 1996 Stock Option Plan (incorporated by
reference to Exhibit 10.17 to Form 10-K for the year ended
December 27, 1996)
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
10.11* Form of Employment Agreement with members of senior
management (incorporated by reference to Exhibit 10.10 to
Amendment No. 1 to Form S-2 Registration Statement No.
333-31111 filed January 2, 1998)
10.12* Description of 1997 Senior Management Stock Option Plan
(incorporated by reference to Exhibit 10.10 to Form 10-K for
the year ended December 28, 1997)
10.13 Replacement Promissory Note from Gary Olen to the Company
dated February 11, 2000
10.14 Stock Pledge Agreement between Gary Olen and the Company
dated February 11, 1998 (incorporated by reference to
Exhibit 10.11 to Form 10-K for the year ended December 28,
1997)
10.15* Consulting Agreement between the Company and William T. Sena
dated April 1, 1998 (incorporated by reference to Exhibit
10.15 to Form 10-K for the year ended January 3, 1999)
10.16* The Company's 1999 Stock Option Plan
21 Subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
24.1 Powers of Attorney of each person whose name is signed to
this report pursuant to a power of attorney
27 Financial Data Schedule
99 Risk Factors
</TABLE>
- -------------------------
Those exhibits marked with an asterisk (*) above constitute management
contracts or compensatory plans or arrangements for management and executive
officers of the Company.
49
<PAGE> 1
EXHIBIT 4.3
REVOLVING NOTE
$25,000,000 Minneapolis, Minnesota
December 27, 1999
For value received, the undersigned, The Sportsman's Guide,
Inc., a Minnesota corporation (the "Borrower"), hereby promises to pay on the
Termination Date under the Credit Agreement (defined below), to the order of
Norwest Bank Minnesota, National Association, a national banking association
(the "Lender"), at its main office in Minneapolis, Minnesota, or at any other
place designated at any time by the holder hereof, in lawful money of the United
States of America and in immediately available funds, the principal sum of
Twenty-Five Million Dollars and No Cents ($25,000,000) or, if less, the
aggregate unpaid principal amount of all Revolving Advances made by the Lender
to the Borrower under the Credit Agreement (defined below) together with
interest on the principal amount hereunder remaining unpaid from time to time,
computed on the basis of the actual number of days elapsed and a 360-day year,
from the date hereof until this Note is fully paid at the rate from time to time
in effect under the Credit and Security Agreement of even date herewith (as the
same may hereafter be amended, supplemented or restated from time to time, the
"Credit Agreement") by and between the Lender and the Borrower. The principal
hereof and interest accruing thereon shall be due and payable as provided in the
Credit Agreement. This Note may be prepaid only in accordance with the Credit
Agreement.
This Note is issued pursuant, and is subject, to the Credit
Agreement, which provides, among other things, for acceleration hereof. This
Note is the Revolving Note referred to in the Credit Agreement. This Note is
secured, among other things, pursuant to the Credit Agreement and the Security
Documents as therein defined, and may now or hereafter be secured by one or more
other security agreements, mortgages, deeds of trust, assignments or other
instruments or agreements.
The Borrower hereby agrees to pay all costs of collection,
including reasonable attorneys' fees and legal expenses if this Note is not paid
when due, whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor
and protest are expressly waived.
THE SPORTSMAN'S GUIDE, INC.
By /s/ David M. Kolkind
--------------------------------
David M. Kolkind
Its Vice President Finance/Treasurer
<PAGE> 1
EXHIBIT 10.8
----------------------------------------------
----------------------------------------------
CREDIT AND SECURITY AGREEMENT
BY AND BETWEEN
THE SPORTSMAN'S GUIDE, INC.
AND
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Dated as of: DECEMBER 27, 1999
----------------------------------------------
----------------------------------------------
<PAGE> 2
Table of Contents
-----------------
<TABLE>
<S> <C> <C>
ARTICLE I Definitions............................................................................................1
Section 1.1 Definitions.......................................................................................1
Section 1.2 Cross References..................................................................................9
ARTICLE II Amount and Terms of the Credit Facility..............................................................10
Section 2.1 Revolving Advances...............................................................................10
Section 2.2 Procedures for Borrowing.........................................................................10
Section 2.3 Letters of Credit................................................................................10
Section 2.4 Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement....................11
Section 2.5 Special Account..................................................................................12
Section 2.6 Obligations Absolute.............................................................................12
Section 2.8 Interest; Interest Rate Margin; Minimum Interest Charge; Default Interest; Participations;
Usury........................................................................................................13
Section 2.8 Fees.............................................................................................13
Section 2.9 Computation of Interest and Fees; When Interest Due and Payable..................................14
Section 2.12 Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility by
Borrower.....................................................................................................16
Section 2.12 Termination and Line Reduction Fees; Waiver of Termination and Line Reduction Fees..............16
Section 2.13 Mandatory Prepayment............................................................................16
Section 2.14 Payment.........................................................................................17
Section 2.15 Payment on Non-Banking Days.....................................................................17
Section 2.16 Use of Proceeds.................................................................................17
Section 2.17 Liability Records...............................................................................17
ARTICLE III Security Interest; Occupancy; Setoff................................................................17
Section 3.1 Grant of Security Interest.......................................................................17
Section 3.2 Notification of Account Debtors and Other Obligors...............................................17
Section 3.3 Assignment of Insurance..........................................................................18
Section 3.4 Occupancy........................................................................................18
Section 3.5 License..........................................................................................19
Section 3.6 Financing Statement..............................................................................19
Section 3.7 Setoff...........................................................................................19
ARTICLE IV Conditions of Lending................................................................................19
Section 4.1 Conditions Precedent to the Initial Revolving Advance and the Initial Letter of Credit...........19
Section 4.2 Conditions Precedent to All Advances and Letters of Credit.......................................21
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE V Representations and Warranties........................................................................21
Section 5.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations;
Tax Identification Number....................................................................................21
Section 5.2 Capitalization...................................................................................21
Section 5.3 Authorization of Borrowing; No Conflict as to Law or Agreements..................................21
Section 5.4 Legal Agreements.................................................................................22
Section 5.5 Subsidiaries.....................................................................................22
Section 5.6 Financial Condition; No Adverse Change...........................................................22
Section 5.7 Litigation.......................................................................................22
Section 5.8 Regulation U.....................................................................................23
Section 5.9 Taxes............................................................................................23
Section 5.10 Titles and Liens................................................................................23
Section 5.11 Year 2000.......................................................................................23
Section 5.12 Intellectual Property Rights....................................................................23
Section 5.13 Plans...........................................................................................24
Section 5.14 Default.........................................................................................24
Section 6.15 Environmental Matters...........................................................................24
Section 5.16 Submissions to Lender...........................................................................25
Section 5.17 Financing Statements............................................................................25
Section 5.18 Rights to Payment...............................................................................26
Section 5.19 Financial Solvency..............................................................................26
ARTICLE VI Borrower's Affirmative Covenants.....................................................................27
Section 6.1 Reporting Requirements...........................................................................27
Section 6.2 Books and Records; Inspection and Examination....................................................29
Section 6.3 Account Verification.............................................................................29
Section 6.4 Compliance with Laws.............................................................................30
Section 6.5 Payment of Taxes and Other Claims................................................................30
Section 6.6 Maintenance of Properties........................................................................30
Section 6.7 Insurance........................................................................................31
Section 6.8 Preservation of Existence........................................................................31
Section 6.9 Delivery of Instruments, etc.....................................................................31
Section 6.10 P.O. Box;Credit Card Payments; Collateral Accounts..............................................31
Section 6.11 Landlord's Disclaimers..........................................................................32
Section 6.12 Performance by the Lender.......................................................................32
Section 6.13 Maximum Debt to Book Net Worth Ratio............................................................33
Section 6.14 Minimum Pre-Tax Net Income per Accounting Period................................................33
Section 6.15 Minimum Fiscal Year-To-Date Net Income..........................................................33
Section 6.16 Maximum Inventory Days..........................................................................33
Section 6.17 New Covenants...................................................................................34
ARTICLE VII Negative Covenants..................................................................................34
Section 7.1 Liens............................................................................................34
Section 7.2 Indebtedness.....................................................................................34
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 7.3 Guaranties.......................................................................................35
Section 7.4 Investments and Subsidiaries.....................................................................35
Section 7.5 Dividends........................................................................................36
Section 7.6 Sale or Transfer of Assets; Suspension of Business Operations....................................36
Section 7.7 Intellectual Property............................................................................36
Section 7.8 Consolidation and Merger; Asset Acquisitions.....................................................36
Section 7.9 Sale and Leaseback...............................................................................36
Section 7.10 Restrictions on Nature of Business..............................................................36
Section 7.11 Capital Expenditures............................................................................36
Section 7.12 Accounting......................................................................................36
Section 7.13 Discounts, etc..................................................................................37
Section 7.14 Defined Benefit Pension Plans...................................................................37
Section 7.15 Other Defaults..................................................................................37
Section 7.16 Place of Business; Name.........................................................................37
Section 7.17 Organizational Documents........................................................................37
Section 7.18 Salaries........................................................................................37
ARTICLE VIII Events of Default, Rights and Remedies.............................................................37
Section 9.1 Events of Default................................................................................37
Section 8.2 Rights and Remedies..............................................................................39
Section 8.3 Certain Notices..................................................................................40
ARTICLE IX Miscellaneous........................................................................................40
Section 9.1 Release..........................................................................................40
Section 9.2 No Waiver; Cumulative Remedies...................................................................41
Section 9.3 Amendments, Etc..................................................................................41
Section 9.4 Addresses for Notices, Etc.......................................................................41
Section 9.5 Servicing of Credit Facility.....................................................................42
Section 9.6 Further Documents................................................................................43
Section 9.7 Collateral.......................................................................................43
Section 9.8 Costs and Expenses...............................................................................43
Section 9.9 Indemnity........................................................................................44
Section 9.10 Participants....................................................................................44
Section 9.11 Execution in Counterparts.......................................................................44
Section 9.12 Binding Effect; Assignment; Complete Agreement; Exchanging Information..........................45
Section 9.13 Severability of Provisions......................................................................45
Section 9.14 Headings........................................................................................45
Section 9.15 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial........................................46
</TABLE>
-iii-
<PAGE> 5
CREDIT AND SECURITY AGREEMENT
Dated as of December 27, 1999
The Sportsman's Guide, Inc., a Minnesota corporation (the
"Borrower"), and Norwest Bank Minnesota, National Association, a national
banking association (the "Lender"), hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. For all purposes of this Agreement,
except as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
"Accounting Period" means a four or five week fiscal period of
the Borrower.
"Accounts" means as to any Person, all of that Person's
accounts, as such term is defined in the UCC, including without
limitation the aggregate unpaid obligations of customers and other
account debtors to that Person arising out of the sale or lease of
goods or rendition of services by that Person on an open account or
deferred payment basis.
"Advance" means a Revolving Advance.
"Affiliate" means, with respect to any specified Person, any
other Person directly or indirectly controlling or controlled by or
under direct or indirect common control with such specified Person. For
the purposes of this definition, "control," when used with respect to
any specified Person, means the power to direct the management and
policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the
foregoing.
"Agreement" means this Credit and Security Agreement, as
amended, supplemented or restated from time to time.
"Availability" means the difference of (i) the Borrowing Base
and (ii) the sum of (A) the outstanding principal balance of the
Revolving Note and (B) the L/C Amount.
<PAGE> 6
"Banking Day" means a day other than a Saturday, Sunday or
other day on which banks are generally not open for business in
Minneapolis, Minnesota.
"Book Net Worth" means the total assets of the Borrower minus
its total liabilities, as determined in accordance with GAAP.
"Borrowing Base" means, at any time the lesser of:
(a) the Maximum Line; or
(b) subject to change from time to time in the Lender's
sole discretion, the sum of:
(i) 80% of Eligible Accounts, plus
(ii) 55% of Eligible Inventory, less
(iii) the Landlord's Disclaimer Reserve.
"Capital Expenditures", as to any Person, means any
expenditure of money for the capital lease, purchase or other
acquisition of any capital asset.
"Change of Control" means the occurrence of any of the
following events:
(i) Any event, transaction or occurrence, or
series thereof, where any Person or "group" (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange
Act 1934) is or becomes the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a
person will be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether
such right is exercisable immediately or only after the
passage of time) of twenty-five percent (25%) or more of the
assets, or economic or voting rights associated with ownership
of the Borrower, and such Person or Group was not the
beneficial owner of such assets or rights immediately prior to
such event, transaction or occurrence, or series thereof;
provided, however, that this clause (i) does not exclude any
Person or group who becomes the benefical owner of up to
thirty-five percent (35%) of the assets, or economic or voting
rights associated with ownership of the Borrower, in
connection with the private placement being conducted by
Cruttenden Roth Incorporated on behalf of the Borrower.
(ii) During any consecutive two-year period,
individuals who at the beginning of such period constituted
the board of directors of the Borrower (together with any new
directors whose election to such board of directors, or whose
nomination for election by the stockholders of the Borrower,
was approved by a vote of 66 2/3% of the directors then still
in office who were either directors at the beginning of such
period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a
majority of the board of directors of the Borrower then in
office.
-2-
<PAGE> 7
(iii) The Borrower is liquidated or dissolved or
adopts a plan of liquidation or dissolution.
"Collateral" means all of the Borrower's Equipment, General
Intangibles, Inventory, Receivables, Investment Property, all sums on
deposit in any Collateral Account, and any items in any lockbox or the
P.O. Box; together with (i) all substitutions and replacements for and
products of any of the foregoing; (ii) proceeds of any and all of the
foregoing; (iii) in the case of all tangible goods, all accessions;
(iv) all accessories, attachments, parts, equipment and repairs now or
hereafter attached or affixed to or used in connection with any
tangible goods; (v) all warehouse receipts, bills of lading and other
documents of title now or hereafter covering such goods; and (vi) all
sums on deposit in the Special Account.
"Collateral Account" has the meaning given in the Collateral
Account Agreement.
"Collateral Account Agreement" means the Collateral Account
Agreement of even date herewith by and among the Borrower, Norwest Bank
Minnesota, National Association, in its capacity as collateral account
agent, and the Lender.
"Commitment" means the Lender's commitment to make Advances
and to issue Letters of Credit to or for the Borrower's account
pursuant to Article II.
"Credit Facility" means the credit facility being made
available to the Borrower by the Lender pursuant to Article II.
"Debt" of any Person means all items of indebtedness or
liability which in accordance with GAAP would be included in
determining total liabilities as shown on the liabilities side of a
balance sheet of that Person on a consolidated basis as of the date as
of which Debt is to be determined. For purposes of determining a
Person's aggregate Debt at any time, "Debt" shall also include the
aggregate payments required to be made by such Person at any time under
any lease that is considered a capitalized lease in accordance with
GAAP.
"Debt to Book Net Worth Ratio" as of a given date means the
ratio of the Borrower's Debt to its Book Net Worth.
"Default" means an event that, with giving of notice or
passage of time or both, would constitute an Event of Default.
"Default Period" means any period of time beginning on the
first day of any fiscal quarter during which a Default or Event of
Default has occurred and ending on the date the Lender notifies the
Borrower in writing that such Default or Event of Default has been
cured or waived.
-3-
<PAGE> 8
"Default Rate" means an annual rate equal to two percent (2%)
over the Floating Rate, which rate shall change when and as the
Floating Rate changes.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Eligible Accounts" means all unpaid Accounts owed to the
Borrower, net of any credits, except the following shall not in any
event be deemed Eligible Accounts:
(i) That portion of (a) the Borrower's "EZ Pay
Plan" Accounts for which payments are delinquent and (b) list
rental Accounts unpaid 120 days or more after the invoice
date;
(ii) That portion of Accounts that is disputed or
subject to a claim of offset or a contra account;
(iii) That portion of Accounts not yet earned by the
final delivery of goods or rendition of services by the
Borrower to the customer;
(iv) Accounts owed by any unit of government,
whether foreign or domestic (provided, however, that there
shall be included in Eligible Accounts that portion of
Accounts owed by such units of government for which the
Borrower has provided evidence satisfactory to the Lender that
(A) the Lender has a first priority perfected security
interest and (B) such Accounts may be enforced by the Lender
directly against such unit of government under all applicable
laws);
(v) Accounts owed by an account debtor located
outside the United States which are not (A) backed by a bank
letter of credit naming the Lender as beneficiary or assigned
to the Lender, in the Lender's possession and acceptable to
the Lender in all respects, in its sole discretion, (B)
covered by a foreign receivables insurance policy acceptable
to the Lender in its sole discretion;
(vi) Accounts owed by an account debtor that is
insolvent, the subject of bankruptcy proceedings or has gone
out of business;
(vii) Accounts owed by a shareholder, Subsidiary,
Affiliate, officer or employee of the Borrower;
(viii) Accounts not subject to a duly perfected
security interest in the Lender's favor or which are subject
to any lien, security interest or claim in favor of any Person
other than the Lender including without limitation any payment
or performance bond;
(ix) That portion of Accounts that has been
restructured, extended, amended or modified;
(x) That portion of Accounts that constitutes
advertising, finance charges, service charges or sales or
excise taxes;
-4-
<PAGE> 9
(xi) List rental Accounts owed by an account
debtor, regardless of whether otherwise eligible, if 10% or
more of the total amount due under Accounts from such debtor
is ineligible under clauses (i), (ii) or (ix) above;
(xii) "EZ Pay Plan Accounts" owed by an account
debtor, regardless of whether otherwise eligible, if 10% or
more of the total amount due under Accounts from such debtor
is ineligible under clauses (ii) or (ix) above; and
(xiii) Accounts, or portions thereof,
otherwise deemed ineligible by the Lender in its sole
discretion.
"Eligible Inventory" means all Inventory of the Borrower
reduced by any Eligible Inventory Reserve; provided, however, that the
following shall not in any event be deemed Eligible Inventory:
(i) Inventory that is: in-transit unless such
Inventory is acquired with the support of a documentary Letter
of Credit and the Lender or a Person who has agreed to act as
the Lender's agent has possession of all duplicate original
documents of title covering such Inventory; located at any
warehouse, job site or other premises not approved by the
Lender in writing; located outside of the states, or
localities, as applicable, in which the Lender has filed
financing statements to perfect a first priority security
interest in such Inventory; covered by any negotiable or
non-negotiable warehouse receipt, bill of lading or other
document of title; on consignment from or to any Person or
subject to any bailment;
(ii) Supplies, packaging, maintenance parts or
sample Inventory;
(iii) Inventory that is damaged or not currently
saleable in the normal course of the Borrower's operations;
(iv) Inventory that the Borrower has returned, has
attempted to return, is in the process of returning or intends
to return to the vendor thereof;
(v) Inventory that is perishable or live;
(vi) Inventory that is subject to a security
interest in favor of any Person other than the Lender;
(vii) Inventory that has been held for two (2) years
or more to the extent the value thereof, after applying the
Eligible Inventory Reserve, exceeds $1,000,000; and
(viii) Inventory otherwise deemed ineligible by the
Lender in its sole discretion.
"Eligible Inventory Reserve" means the greater of:
(i) The reserve amount required by GAAP; or
(ii) The sum of:
-5-
<PAGE> 10
(A) For Inventory that has been held for one
(1) year or more but less than two (2) years,
twenty-five percent (25%) of cost for such Inventory;
and
(B) For Inventory that has been held for two
(2) years or more, fifty percent (50%) of cost for
such Inventory.
"Environmental Laws" has the meaning specified in Section
5.15.
"Equipment" means, as to any Person, all of that Person's
equipment, as such term is defined in the UCC, whether now owned or
hereafter acquired, including but not limited to all present and future
machinery, vehicles, furniture, fixtures, manufacturing equipment, shop
equipment, office and recordkeeping equipment, parts, tools, supplies,
and including specifically (without limitation) the goods described in
any equipment schedule or list herewith or hereafter furnished to the
Lender by that Person.
"Event of Default" has the meaning specified in Section 8.1.
"Floating Rate" means an annual rate equal to the difference
of the Prime Rate less the Margin, which annual rate shall change when
and as the Prime Rate changes.
"Funding Date" has the meaning given in Section 2.1.
"GAAP" means generally accepted accounting principles, applied
on a basis consistent with the accounting practices applied in the
financial statements described in Section 5.6.
"General Intangibles" means, as to any Person, all of that
Person's general intangibles, as such term is defined in the UCC,
whether now owned or hereafter acquired, including (without limitation)
all present and future patents, patent applications, copyrights,
service marks, trademarks, trade names, trade secrets, customer or
supplier lists and contracts, manuals, operating instructions, permits,
franchises, the right to use that Person's name, and the goodwill of
that Person's business.
"Hazardous Substance" has the meaning given in Section 5.15.
"Inventory" means, as to any Person, all of that Person's
inventory, as such term is defined in the UCC, whether now owned or
hereafter acquired, whether consisting of whole goods, spare parts or
components, supplies or materials, whether acquired, held or furnished
for sale, for lease or under service contracts or for manufacture or
processing, and wherever located.
-6-
<PAGE> 11
"Inventory Days" as of any date means the product of 360 times
the ratio of (i) Inventory at the lower of cost or market value as of
such date to (ii) the cost of goods sold during the period of twelve
(12) Accounting Periods ending on such date.
"Investment Property" means, as to any Person, all of that
Person's investment property, as such term is defined in the UCC,
whether now owned or hereafter acquired, including but not limited to
all securities, security entitlements, securities accounts, commodity
contracts, commodity accounts, stocks, bonds, mutual fund shares, money
market shares and U.S. Government securities.
"L/C Amount" means the sum of (i) the aggregate face amount of
any issued and outstanding Letters of Credit and (ii) the unpaid amount
of the Obligation of Reimbursement.
"L/C Application" means an application and agreement for
letters of credit in the Lender's then-current standard form.
"Landlord's Disclaimer Reserve" has the meaning specified in
Section 6.11.
"Letter of Credit" has the meaning specified in Section 2.3.
"Loan Documents" means this Agreement, the Note and the
Security Documents.
"Margin" has the meaning given in Section 2.7(a).
"Maturity Date" means December 23, 2002.
"Maximum Line" means $25,000,000, unless said amount is
reduced pursuant to Section 2.11, in which event it means such lower
amount.
"Minimum Interest Charge" has the meaning given in Section
2.7(c).
"Net Income" means after-tax consolidated net income from
continuing operations as determined in accordance with GAAP.
"Note" means the Revolving Note.
"Obligations" means the Note and each and every other debt,
liability and obligation of every type and description which the
Borrower may now or at any time hereafter owe to the Lender, whether
such debt, liability or obligation now exists or is hereafter created
or incurred, whether it arises in a transaction involving the Lender
alone or in a transaction involving other creditors of the Borrower,
and whether it is direct or indirect, due or to become due, absolute or
contingent, primary or secondary, liquidated or unliquidated, or sole,
joint, several or joint and several, and including specifically, but
not limited to, the Obligation of Reimbursement and all indebtedness of
the Borrower arising under this Agreement, the Note, any L/C
Application
-7-
<PAGE> 12
completed by the Borrower, or any other loan or credit agreement or
guaranty between the Borrower and the Lender, whether now in effect or
hereafter entered into.
"Obligation of Reimbursement" has the meaning given in Section
2.4(a).
"Permitted Lien" has the meaning given in Section 7.1.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or government or any agency or
political subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained
for the Borrower's employees and covered by Title IV of ERISA.
"Premises" means all premises where the Borrower conducts its
business or has any rights of possession, including (without
limitation) the premises legally described in Exhibit C attached
hereto.
"Prime Rate" means the rate publicly announced from time to
time by Wells Fargo Bank, N.A. as its "prime rate" or, if such bank
ceases to announce a rate so designated, any similar successor rate
designated by the Lender.
"Receivables" means each and every right of the Borrower to
the payment of money, whether such right to payment now exists or
hereafter arises, whether such right to payment arises out of a sale,
lease or other disposition of goods or other property, out of a
rendering of services, out of a loan, out of the overpayment of taxes
or other liabilities, or otherwise arises under any contract or
agreement, whether such right to payment is created, generated or
earned by the Borrower or by some other Person who subsequently
transfers such Person's interest to the Borrower, whether such right to
payment is or is not already earned by performance, and howsoever such
right to payment may be evidenced, together with all other rights and
interests (including all liens and security interests) which the
Borrower may at any time have by law or agreement against any account
debtor or other obligor obligated to make any such payment or against
any property of such account debtor or other obligor; all including but
not limited to all present and future accounts, contract rights, loans
and obligations receivable, chattel papers, bonds, notes and other debt
instruments, tax refunds and rights to payment in the nature of general
intangibles.
"Reportable Event" shall have the meaning assigned to that
term in Title IV of ERISA.
"Revolving Advance" has the meaning given in Section 2.1.
"Revolving Note" means the Borrower's revolving promissory
note, payable to the order of the Lender in substantially the form of
Exhibit A hereto and any note
-8-
<PAGE> 13
or notes issued in substitution therefor, as the same may hereafter be
amended, supplemented or restated from time to time.
"Security Documents" means this Agreement, the Collateral
Account Agreement, any lockbox agreement, the Trademark Security
Agreement and any other document delivered to the Lender from time to
time to secure the Obligations, as the same may hereafter be amended,
supplemented or restated from time to time.
"Security Interest" has the meaning given in Section 3.1.
"Servicer" means Wells Fargo Business Credit, Inc., a
Minnesota corporation, or such other Person as the Lender may from time
to time designate.
"Special Account" means a specified cash collateral account
maintained by the Lender in connection with Letters of Credit, as
contemplated by Section 2.5.
"Subsidiary" means any corporation of which more than 50% of
the outstanding shares of capital stock having general voting power
under ordinary circumstances to elect a majority of the board of
directors of such corporation, irrespective of whether or not at the
time stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency, is at the
time directly or indirectly owned by the Borrower, by the Borrower and
one or more other Subsidiaries, or by one or more other Subsidiaries.
"Tax Expense" as of any date means state and federal income
taxes accrued for by the Borrower for the applicable period ending on
such date, in accordance with GAAP.
"Termination Date" means the earliest of (i) the Maturity
Date, (ii) the date the Borrower terminates the Credit Facility, or
(iii) the date the Lender demands payment of the Obligations after an
Event of Default pursuant to Section 8.2.
"Trademark Security Agreement" means the Trademark Security
Agreement by the Borrower in favor of the Lender of even date herewith.
"UCC" means the Uniform Commercial Code as in effect from time
to time in the state designated in Section 9.15 as the state whose laws
shall govern this Agreement, or in any other state whose laws are held
to govern this Agreement or any portion hereof.
Section 1.2 Cross References. All references in this Agreement
to Articles, Sections and subsections, shall be to Articles, Sections and
subsections of this Agreement unless otherwise explicitly specified.
-9-
<PAGE> 14
ARTICLE II
AMOUNT AND TERMS OF THE CREDIT FACILITY
Section 2.1 Revolving Advances. The Lender agrees, on the
terms and subject to the conditions herein set forth, to make advances to the
Borrower from time to time from the date all of the conditions set forth in
Section 4.1 are satisfied (the "Funding Date") to the Termination Date (the
"Revolving Advances"). The Lender shall have no obligation to make a Revolving
Advance to the extent the amount thereof would exceed Availability. The
Borrower's obligation to pay the Revolving Advances shall be evidenced by the
Revolving Note and shall be secured by the Collateral as provided in Article
III. Within the limits set forth in this Section 2.1, the Borrower may borrow,
prepay pursuant to Section 2.11 and reborrow.
Section 2.2 Procedures for Borrowing. The Borrower agrees to
comply with the following procedures in requesting Revolving Advances under
Section 2.1:
(a) The Borrower shall make each request for a Revolving
Advance to the Lender before 11:00 a.m. (Minneapolis, Minnesota time)
of the day of the requested Revolving Advance. Requests may be made in
writing or by telephone, specifying the date of the requested Revolving
Advance and the amount thereof. Each request shall be by (i) any
officer of the Borrower; or (ii) any person designated as the
Borrower's agent by any officer of the Borrower in a writing delivered
to the Lender; or (iii) any person whom the Lender reasonably believes
to be an officer of the Borrower or such a designated agent.
(b) Upon fulfillment of the applicable conditions set forth in
Article IV, the Lender shall disburse the proceeds of the requested
Revolving Advance by crediting the same to the Borrower's demand
deposit account maintained with the Lender unless the Lender and the
Borrower shall agree in writing to another manner of disbursement. Upon
the Lender's request, the Borrower shall promptly confirm each
telephonic request for an Advance by executing and delivering an
appropriate confirmation certificate to the Lender. The Borrower shall
repay all Advances even if the Lender does not receive such
confirmation and even if the person requesting an Advance was not in
fact authorized to do so. Any request for an Advance, whether written
or telephonic, shall be deemed to be a representation by the Borrower
that the conditions set forth in Section 4.2 have been satisfied as of
the time of the request.
Section 2.3 Letters of Credit.
(a) The Lender agrees, on the terms and subject to the
conditions herein set forth, to issue, from the Funding Date to the
Termination Date, one or more irrevocable standby or documentary
letters of credit (each, a "Letter of Credit") for the Borrower's
account. The Lender shall have no obligation to issue any Letter of
Credit if the face amount of the Letter of Credit to be issued, would
exceed the lesser of:
-10-
<PAGE> 15
(i) $10,000,000 less the L/C Amount, or
(ii) Availability.
Each Letter of Credit, if any, shall be issued pursuant to a separate
L/C Application entered into between the Borrower and the Lender,
completed in a manner satisfactory to the Lender. The terms and
conditions set forth in each such L/C Application shall supplement the
terms and conditions hereof, but if the terms of any such L/C
Application and the terms of this Agreement are inconsistent, the terms
hereof shall control.
(b) No Letter of Credit shall be issued with an expiry date
later than the Termination Date in effect as of the date of issuance.
(c) Any request to issue a Letter of Credit under this Section
2.3 shall be deemed to be a representation by the Borrower that the
conditions set forth in Section 4.2 have been satisfied as of the date
of the request.
Section 2.4 Payment of Amounts Drawn Under Letters of Credit;
Obligation of Reimbursement. The Borrower shall reimburse the Lender for all
draws under any Letter of Credit in accordance with the applicable L/C
Application and as follows:
(a) The Borrower shall pay to the Lender on the day a draft is
honored under any Letter of Credit a sum equal to all amounts drawn
under such Letter of Credit plus any and all reasonable charges and
expenses that the Lender may pay or incur relative to such draw and the
applicable L/C Application, plus interest on all such amounts, charges
and expenses as set forth below (the Borrower's obligation to pay all
such amounts is herein referred to as the "Obligation of
Reimbursement").
(b) Whenever a draft is submitted under a Letter of Credit,
the Lender shall make a Revolving Advance in the amount of the
Obligation of Reimbursement and shall apply the proceeds of such
Revolving Advance thereto. Such Revolving Advance shall be repayable in
accordance with and be treated in all other respects as a Revolving
Advance hereunder.
(c) If a draft is submitted under a Letter of Credit when the
Borrower is unable, because a Default Period exists or for any other
reason, to obtain a Revolving Advance to pay the Obligation of
Reimbursement, the Borrower shall pay to the Lender on demand and in
immediately available funds, the amount of the Obligation of
Reimbursement together with interest, accrued from the date of the
draft until payment in full at the Default Rate. Notwithstanding the
Borrower's inability to obtain a Revolving Advance for any reason, the
Lender is irrevocably authorized, in its sole discretion, to make a
Revolving Advance in an amount sufficient to discharge the Obligation
of Reimbursement and all accrued but unpaid interest thereon.
-11-
<PAGE> 16
(d) The Borrower's obligation to pay any Revolving Advance
made under this Section 2.4, shall be evidenced by the Revolving Note
and shall bear interest as provided in Section 2.7.
Section 2.5 Special Account. If the Credit Facility is
terminated for any reason whatsoever while any Letter of Credit is outstanding,
the Borrower shall thereupon pay the Lender in immediately available funds for
deposit in the Special Account an amount equal to the L/C Amount. The Special
Account shall be an interest bearing account maintained for the Lender by any
financial institution acceptable to the Lender. Any interest earned on amounts
deposited in the Special Account shall be credited to the Special Account.
Amounts on deposit in the Special Account may be applied by the Lender at any
time or from time to time to the Obligations in the Lender's sole discretion,
and shall not be subject to withdrawal by the Borrower so long as the Lender
maintains a security interest therein. The Lender agrees to transfer any balance
in the Special Account to the Borrower at such time as the Lender is required to
release its security interest in the Special Account under applicable law.
Section 2.6 Obligations Absolute. The Borrower's obligations
arising under Section 2.4 shall be absolute, unconditional and irrevocable, and
shall be paid strictly in accordance with the terms of Section 2.4, under all
circumstances whatsoever, including (without limitation) the following
circumstances:
(a) any lack of validity or enforceability of any Letter of
Credit or any other agreement or instrument relating to any Letter of
Credit (collectively the "Related Documents");
(b) any amendment or waiver of or any consent to departure
from all or any of the Related Documents;
(c) the existence of any claim, setoff, defense or other right
which the Borrower may have at any time, against any beneficiary or any
transferee of any Letter of Credit (or any persons or entities for whom
any such beneficiary or any such transferee may be acting), or other
person or entity, whether in connection with this Agreement, the
transactions contemplated herein or in the Related Documents or any
unrelated transactions;
(d) any statement or any other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect whatsoever;
(e) payment by or on behalf of the Lender under any Letter of
Credit against presentation of a draft or certificate which does not
strictly comply with the terms of such Letter of Credit; or
(f) any other circumstance or happening whatsoever, whether or
not similar to any of the foregoing.
-12-
<PAGE> 17
Section 2.7 Interest; Interest Rate Margin; Minimum Interest
Charge; Default Interest; Participations; Usury. Interest accruing on the Note
shall be due and payable in arrears on the first day of each month.
(a) MARGIN. The margin by which the Prime Rate shall be
reduced (the "Margin") shall be equal to one quarter of one percent
(0.25%) until changed pursuant to this Subsection (a). On the date the
Lender receives and approves the Borrower's audited consolidated
financial statements for its fiscal year ending December 31, 2000, if
the Borrower's Net Income for such fiscal year is greater than
$1,000,000, the Margin shall be one half of one percent (0.50%).
(b) REVOLVING NOTE. Except as set forth in Sections 2.7(d) and
2.7(f), the outstanding principal balance of the Revolving Note shall
bear interest at the Floating Rate.
(c) MINIMUM INTEREST CHARGE. Notwithstanding the interest
payable pursuant to Section 2.7(b), the Borrower shall pay to the
Lender interest of not less than $500,000 per calendar year beginning
after December 31, 1999 (the "Minimum Interest Charge") during the term
of this Agreement, prorated for partial years, and the Borrower shall
pay any deficiency between the Minimum Interest Charge and the amount
of interest otherwise calculated under Section 2.7(b) on the date and
in the manner provided in Section 2.9.
(d) DEFAULT INTEREST RATE. At any time during any Default
Period, in the Lender's sole discretion and without waiving any of its
other rights and remedies, the principal of the Advances outstanding
from time to time shall bear interest at the Default Rate, effective
for any periods designated by the Lender from time to time during that
Default Period.
(e) PARTICIPATIONS. If any Person shall acquire a
participation in the Advances or the Obligation of Reimbursement, the
Borrower shall be obligated to the Lender to pay the full amount of all
interest calculated under this Section 2.7, along with all other fees,
charges and other amounts due under this Agreement, regardless if such
Person elects to accept interest with respect to its participation at a
lower rate than the Floating Rate, or otherwise elects to accept less
than its prorata share of such fees, charges and other amounts due
under this Agreement.
(f) USURY. In any event no rate change shall be put into
effect which would result in a rate greater than the highest rate
permitted by law.
Section 2.8 Fees.
(a) AMENDMENT FEE. The Borrower shall pay to the Lender a
fully earned and non-refundable amendment fee of $15,000, due and
payable upon the execution of this Agreement.
-13-
<PAGE> 18
(b) ANNUAL FACILITY FEE. The Borrower shall pay to the Lender
an annual facility fee equal to one eighth of one percent (0.125%) of
the Maximum Line which shall be due and payable in equal quarterly
installments on the date hereof and the first day of each calendar
quarter thereafter other than January 1, 2000, which fee shall be
deemed fully earned and non-refundable upon payment.
(c) LETTER OF CREDIT FEES. The Borrower shall pay to the
Lender a fee with respect to each Letter of Credit, if any, accruing on
a daily basis and computed at the annual rate of one and one half
percent (1.5%) of the aggregate amount that may then be drawn on all
issued and outstanding Letters of Credit assuming compliance with all
conditions for drawing thereunder (the "Aggregate Face Amount"), from
and including the date of issuance of such Letter of Credit until such
date as such Letter of Credit shall terminate by its terms or be
returned to the Lender, due and payable monthly in arrears on the first
day of each month and on the Termination Date; provided, however that
during Default Periods, in the Lender's sole discretion and without
waiving any of its other rights and remedies, such fee shall increase
to three and one half percent (3.5%) of the Aggregate Face Amount. The
foregoing fee shall be in addition to any and all fees, commissions and
charges of any Issuer of a Letter of Credit with respect to or in
connection with such Letter of Credit.
(d) AUDIT FEES. The Borrower shall pay to the Lender, on
demand, audit fees in connection with any audits or inspections
conducted by the Lender of any Collateral or the Borrower's operations
or business at the rates established from time to time by the Lender as
its audit fees (which fees are currently $500 per eight (8) hour day
per auditor), together with all actual out-of-pocket costs and expenses
incurred in conducting any such audit or inspection; provided, however,
that except during Default Periods, the Borrower shall not have to
reimburse the Lender for more than two audits or inspections per year.
(e) INVENTORY APPRAISALS. The Borrower shall reimburse the
Lender on demand for the cost of any appraisal of its Inventory;
provided, however, that except during Default Periods, the Borrower
shall not have to reimburse the Lender for more than one inventory
appraisal per year.
Section 2.9 Computation of Interest and Fees; When Interest
Due and Payable. Fees hereunder and interest accruing on the outstanding
principal balance of the Advances and the Obligation of Reimbursement
outstanding from time to time shall be computed on the basis of actual number of
days elapsed in a year of 360 days. Interest shall be payable in arrears on the
first day of each month and on the Termination Date.
Section 2.10 Capital Adequacy; Increased Costs and Reduced
Return.
(a) CAPITAL ADEQUACY. If any Related Lender determines at any
time that its Return has been reduced as a result of any Rule Change,
such Related Lender may require the Borrower to pay it the amount
necessary to restore its Return to what it
-14-
<PAGE> 19
would have been had there been no Rule Change. For purposes of this
Section 2.10(a):
(i) "Capital Adequacy Rule" means any law, rule,
regulation, guideline, directive, requirement or request
regarding capital adequacy, or the interpretation or
administration thereof by any governmental or regulatory
authority, central bank or comparable agency, whether or not
having the force of law, that applies to any Related Lender.
Such rules include rules requiring financial institutions to
maintain total capital in amounts based upon percentages of
outstanding loans, binding loan commitments and letters of
credit.
(ii) "L/C Rule" means any law, rule, regulation,
guideline, directive, requirement or request regarding letters
of credit, or the interpretation or administration thereof by
any governmental or regulatory authority, central bank or
comparable agency, whether or not having the force of law,
that applies to any Related Lender. Such rules include rules
imposing taxes, duties or other similar charges, or mandating
reserves, special deposits or similar requirements against
assets of, deposits with or for the account of, or credit
extended by any Related Lender, on letters of credit.
(iii) "Related Lender" includes (but is not limited
to) the Lender, any parent corporation of the Lender and any
assignee of any interest of the Lender hereunder and any
participant in the loans made hereunder.
(iv) "Return", for any period, means the return as
determined by a Related Lender on the Advances and Letters of
Credit based upon its total capital requirements and a
reasonable attribution formula that takes account of the
Capital Adequacy Rules and L/C Rules then in effect, costs of
issuing or maintaining any Letter of Credit and amounts
received or receivable under this Agreement or the Notes with
respect to any Advance or Letter of Credit. Return may be
calculated for each calendar quarter and for the shorter
period between the end of a calendar quarter and the date of
termination in whole of this Agreement.
(v) "Rule Change" means any change in any Capital
Adequacy Rule or L/C Rule occurring after the date of this
Agreement, but the term does not include any changes in
applicable requirements that at the Closing Date are scheduled
to take place under the existing Capital Adequacy Rules or L/C
Rules or any increases in the capital that any Related Lender
is required to maintain to the extent that the increases are
required due to a regulatory authority's assessment of the
financial condition of such Related Lender.
The Lender will promptly notify the Borrower of any event of which it
has knowledge, occurring after the date hereof, which will entitle the
Lender to compensation pursuant to this Section 2.10. Certificates of
any Related Lender sent to the Borrower from time to time claiming
compensation under this Section 2.10, stating the reason therefor and
setting forth in reasonable detail the calculation of the additional
-15-
<PAGE> 20
amount or amounts to be paid to the Related Lender hereunder to restore
its Return shall be conclusive absent manifest error. In determining
such amounts, the Related Lender may use any reasonable averaging and
attribution methods.
Section 2.11 Voluntary Prepayment; Reduction of the Maximum
Line; Termination of the Credit Facility by Borrower. Except as otherwise
provided herein, the Borrower may prepay the Revolving Advances in whole at any
time or from time to time in part. The Borrower may terminate the Credit
Facility or reduce the Maximum Line at any time if (i) the Borrower gives the
Lender at least 30 days' prior written notice and (ii) the Borrower pays the
Lender the prepayment, termination or line reduction fees in accordance with
Section 2.12. Any reduction in the Maximum Line must be in an amount not less
than $1,000,000 or an integral multiple thereof. If the Borrower reduces the
Maximum Line to zero, all Obligations shall be immediately due and payable. Upon
termination of the Credit Facility and payment and performance of all
Obligations, the Lender shall release or terminate the Security Interest and the
Security Documents to which the Borrower is entitled by law.
Section 2.12 Termination and Line Reduction Fees; Waiver of
Termination and Line Reduction Fees.
(a) TERMINATION AND LINE REDUCTION FEES. If the Lender or the
Borrower terminates the Credit Facility for any reason as of a date
other than the Maturity Date, or if the Borrower reduces the Maximum
Line, the Borrower shall pay the Lender a fee in an amount equal to a
percentage of the Maximum Line (or the reduction thereof, as the case
may be) as follows: (i) one percent (1.0%) if the termination or
reduction occurs on or before the first anniversary of the Funding
Date; and (ii) one half of one percent (0.5%) if the termination or
reduction occurs after the first anniversary of the Funding Date but on
or before the second anniversary of the Funding Date.
(b) WAIVER OF TERMINATION AND LINE REDUCTION FEES. The
Borrower will not be required to pay the termination or line reduction
fees otherwise due under this Section 2.12 if such termination or line
reduction is made because of refinancing by the Lender or an affiliate
of the Lender.
Section 2.13 Mandatory Prepayment. Without notice or demand,
if the sum of the outstanding principal balance of the Revolving Advances plus
the L/C Amount shall at any time exceed the Borrowing Base, the Borrower shall
(i) first, immediately prepay the Revolving Advances to the extent necessary to
eliminate such excess; and (ii) if prepayment in full of the Revolving Advances
is insufficient to eliminate such excess, pay to the Lender in immediately
available funds for deposit in the Special Account an amount equal to the
remaining excess. Any payment received by the Lender under this Section 2.13 or
under Section 2.11 may be applied to the Obligations, in such order and in such
amounts as the Lender, in its discretion, may from time to time determine.
-16-
<PAGE> 21
Section 2.14 Payment. All payments to the Lender shall be made
in immediately available funds. Amounts constituting proceeds of checks or cash
shall be applied to the Obligations one Banking Day after receipt by the Lender.
Amounts constituting proceeds of credit card payments, wire transfers or ACH
transfers received at or before 12:30 p.m. Minneapolis, Minnesota on a Banking
Day shall be applied to the Obligations upon receipt. Except as provided in the
preceeding sentence, the Lender may hold all payments not constituting
immediately available funds for three (3) additional days before applying them
to the Obligations. Notwithstanding anything in Section 2.1, the Borrower hereby
authorizes the Lender to charge against the Borrower's account with the Lender
or, in its discretion at any time or from time to time without the Borrower's
request and even if the conditions set forth in Section 4.2 would not be
satisfied, to make a Revolving Advance in an amount equal to the portion of the
Obligations from time to time due and payable.
Section 2.15 Payment on Non-Banking Days. Whenever any payment
to be made hereunder shall be stated to be due on a day which is not a Banking
Day, such payment may be made on the next succeeding Banking Day, and such
extension of time shall in such case be included in the computation of interest
on the Advances or the fees hereunder, as the case may be.
Section 2.16 Use of Proceeds. The Borrower shall use the
proceeds of Advances, and each Letter of Credit, if any, for ordinary working
capital purposes.
Section 2.17 Liability Records. The Lender may maintain from
time to time, at its discretion, liability records as to the Obligations. All
entries made on any such record shall be presumed correct until the Borrower
establishes the contrary. Upon the Lender's demand, the Borrower will admit and
certify in writing the exact principal balance of the Obligations that the
Borrower then asserts to be outstanding. Any billing statement or accounting
rendered by the Lender shall be conclusive and fully binding on the Borrower
unless the Borrower gives the Lender specific written notice of exception within
30 days after receipt.
ARTICLE III
SECURITY INTEREST; OCCUPANCY; SETOFF
Section 3.1 Grant of Security Interest. The Borrower hereby
pledges, assigns and grants to the Lender a security interest (collectively
referred to as the "Security Interest") in the Collateral, as security for the
payment and performance of the Obligations.
Section 3.2 Notification of Account Debtors and Other
Obligors. The Lender may at any time (whether or not a Default Period then
exists) notify any account debtor of the Borrower or other Person obligated to
pay an amount due that such right to payment has been assigned or transferred to
the Lender for security and shall be paid directly to the Lender. The Borrower
will join in giving such notice if the Lender so requests. At any time after the
Borrower or the Lender gives such notice to an account debtor or other obligor,
the
-17-
<PAGE> 22
Lender may, but need not, in the Lender's name or in the Borrower's name, (a)
demand, sue for, collect or receive any money or property at any time payable or
receivable on account of, or securing, any such right to payment, or grant any
extension to, make any compromise or settlement with or otherwise agree to
waive, modify, amend or change the obligations (including collateral
obligations) of any such account debtor or other obligor; and (b) as the
Borrower's agent and attorney-in-fact, notify the United States Postal Service
to change the address for delivery of the Borrower's mail to any address
designated by the Lender, otherwise intercept the Borrower's mail, and receive,
open and dispose (to the extent such mail constitutes Collateral) of the
Borrower's mail, applying all Collateral as permitted under this Agreement and
holding all other mail for the Borrower's account or promptly forwarding such
mail to the Borrower's last known address.
Section 3.3 Assignment of Insurance. As additional security
for the payment and performance of the Obligations, the Borrower hereby assigns
to the Lender any and all monies (including, without limitation, proceeds of
insurance and refunds of unearned premiums) due or to become due under, and all
other rights of the Borrower with respect to, any and all policies of insurance
now or at any time hereafter covering the Collateral or any evidence thereof or
any business records or valuable papers pertaining thereto, and the Borrower
hereby directs the issuer of any such policy to pay all such monies directly to
the Lender. At any time, whether or not a Default Period then exists, the Lender
may (but need not), in the Lender's name or in the Borrower's name, execute and
deliver proof of claim, receive all such monies, endorse checks and other
instruments representing payment of such monies, and adjust, litigate,
compromise or release any claim against the issuer of any such policy.
Section 3.4 Occupancy.
(a) The Borrower hereby irrevocably grants to the Lender the
right to take exclusive possession of the Premises at any time during a
Default Period.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise
dispose of goods that are Collateral and for other purposes that the
Lender may in good faith deem to be related or incidental purposes.
(c) The Lender's right to hold the Premises shall cease and
terminate upon the earlier of (i) payment in full and discharge of all
Obligations and termination of the Commitment, and (ii) final sale or
disposition of all goods constituting Collateral and delivery of all
such goods to purchasers.
(d) The Lender shall not be obligated to pay or account for
any rent or other compensation for the possession, occupancy or use of
any of the Premises; provided, however, that if the Lender does pay or
account for any rent or other compensation for the possession,
occupancy or use of any of the Premises, the Borrower shall reimburse
the Lender promptly for the full amount thereof. In addition, the
Borrower will pay, or reimburse the Lender for, all taxes, fees,
duties,
-18-
<PAGE> 23
imposts, charges and expenses at any time incurred by or imposed upon
the Lender by reason of the execution, delivery, existence,
recordation, performance or enforcement of this Agreement or the
provisions of this Section 3.4.
Section 3.5 License. Without limiting the generality of the
Trademark Security Agreement, the Borrower hereby grants to the Lender a
non-exclusive, worldwide and royalty-free license to use or otherwise exploit
all trademarks, franchises, trade names, copyrights and patents of the Borrower
for the purpose of selling, leasing or otherwise disposing of any or all
Collateral during any Default Period.
Section 3.6 Financing Statement. A carbon, photographic or
other reproduction of this Agreement or of any financing statements signed by
the Borrower is sufficient as a financing statement and may be filed as a
financing statement in any state to perfect the security interests granted
hereby. For this purpose, certain information is set out in Schedule 3.6.
Section 3.7 Setoff. The Borrower agrees that the Lender may at
any time or from time to time during any Default Period, at its sole discretion
and without demand and without notice to anyone, setoff any liability owed to
the Borrower by the Lender, whether or not due, against any Obligation, whether
or not due. In addition, each other Person holding a participating interest in
any Obligations shall have the right to appropriate or setoff any deposit or
other liability then owed by such Person to the Borrower, whether or not due,
and apply the same to the payment of said participating interest, as fully as if
such Person had lent directly to the Borrower the amount of such participating
interest.
ARTICLE IV
CONDITIONS OF LENDING
Section 4.1 Conditions Precedent to the Initial Revolving
Advance and the Initial Letter of Credit. The Lender's obligation to make the
initial Revolving Advance or to issue the initial Letter of Credit hereunder
shall be subject to the condition precedent that the Lender shall have received
all of the following, each in form and substance satisfactory to the Lender:
(a) This Agreement, properly executed by the Borrower.
(b) The Note, properly executed by the Borrower.
(c) An acknowledgment and agreement from each licensor in
favor of the Lender, together with a true, correct and complete copy of
all license agreements.
(d) The Collateral Account Agreement, properly executed by the
Borrower.
-19-
<PAGE> 24
(e) The Trademark Security Agreement, properly executed by the
Borrower.
(f) Current searches of appropriate filing offices showing
that (i) no state or federal tax liens have been filed and remain in
effect against the Borrower, (ii) no financing statements or
assignments of patents or trademarks have been filed and remain in
effect against the Borrower except those financing statements and
assignments of patents or trademarks relating to Permitted Liens or to
liens held by Persons who have agreed in writing that upon receipt of
proceeds of the Advances, they will deliver UCC releases and/or
terminations and releases of such assignments of patents or trademarks
satisfactory to the Lender, and (iii) the Lender has duly filed all
financing statements necessary to perfect the Security Interest, to the
extent the Security Interest is capable of being perfected by filing.
(g) A certificate of the Borrower's secretary certifying as to
(i) the resolutions of the Borrower's directors and if required,
shareholders, authorizing the execution, delivery and performance of
the Loan Documents, (ii) the Borrower's articles of incorporation and
bylaws, and (iii) the signatures of the Borrower's officers or agents
authorized to execute and deliver the Loan Documents and other
instruments, agreements and certificates, including Advance requests,
on the Borrower's behalf.
(h) For the Borrower, a current certificate issued by the
Secretary of State of its jurisdiction of organization, certifying that
it is in good standing in such State.
(i) Evidence that the Borrower is duly licensed or qualified
to transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it
makes such licensing or qualification necessary.
(j) An opinion of counsel to the Borrower, addressed to the
Lender.
(k) Certificates of the insurance required hereunder, with all
hazard insurance containing a lender's loss payable endorsement in the
Lender's favor and with all liability insurance naming the Lender as an
additional insured.
(l) Payment of the fees and commissions due through the date
of the initial Advance or Letter of Credit under Section 2.8 and
expenses incurred by the Lender through such date and required to be
paid by the Borrower under Section 9.8, including all legal expenses
incurred through the date of this Agreement.
(m) Evidence that after making the initial Revolving Advance
and satisfying all obligations under the Old Credit Documents, trade
payables unpaid more than forty-five (45) days after their stated due
date, any book overdrafts and all costs incurred in connection with
this Agreement, Availability shall be not less than $500,000.
-20-
<PAGE> 25
(n) Such other documents as the Lender in its sole discretion may
require.
Section 4.2 Conditions Precedent to All Advances and Letters of
Credit. The Lender's obligation to make each Advance or to issue any Letter of
Credit shall be subject to the further conditions precedent that on such date:
(a) the representations and warranties contained in Article V are
correct on and as of the date of such Advance or issuance of Letter of
Credit as though made on and as of such date, except to the extent that
such representations and warranties relate solely to an earlier date; and
(b) no event has occurred and is continuing, or would result from such
Advance or the issuance of such Letter of Credit, as the case may be, which
constitutes a Default or an Event of Default.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender as follows:
Section 5.1 Corporate Existence and Power; Name; Chief Executive
Office; Inventory and Equipment Locations; Tax Identification Number. The
Borrower is a corporation, duly organized, validly existing and in good standing
under the laws of the State of its organization and is duly licensed or
qualified to transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it makes
such licensing or qualification necessary. No dissolution or termination of the
Borrower has occurred, and no notice of dissolution or articles of termination
have been filed with respect to the Borrower. The Borrower has all requisite
power and authority, corporate or otherwise, to conduct its business, to own its
properties and to execute and deliver, and to perform all of its obligations
under, the Loan Documents. For the Borrower, during its existence, (i) it has
done business solely under the names set forth in Schedule 5.1 (ii) its chief
executive office and principal place of business is located at the address set
forth in Schedule 5.1, (iii) all of its records relating to its business or the
Collateral are kept at that location, (iv) all of its Inventory and Equipment is
located at that location or at one of the other locations set forth in Schedule
5.1, and (v) its tax identification number is correctly set forth in Schedule
3.6.
Section 5.2 Capitalization. Schedule 5.2 constitutes a correct and
complete list of all ownership interests in the Borrower and rights to acquire
ownership interests equal to or exceeding five percent (5.0%).
Section 5.3 Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of the
-21-
<PAGE> 26
Borrower's shareholders; (ii) require any authorization, consent or approval by,
or registration, declaration or filing with, or notice to, any governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, or any third party, except such authorization, consent, approval,
registration, declaration, filing or notice as has been obtained, accomplished
or given prior to the date hereof; (iii) violate any provision of any law, rule
or regulation (including, without limitation, Regulation X of the Board of
Governors of the Federal Reserve System) or of any order, writ, injunction or
decree presently in effect having applicability to the Borrower or its articles
of incorporation; (iv) result in a breach of or constitute a default under any
indenture or loan or credit agreement or any other material agreement, lease or
instrument to which the Borrower is a party or by which it or its properties may
be bound or affected; or (v) result in, or require, the creation or imposition
of any mortgage, deed of trust, pledge, lien, security interest or other charge
or encumbrance of any nature (other than the Security Interest) upon or with
respect to any of the properties now owned or hereafter acquired by the
Borrower.
Section 5.4 Legal Agreements.
(a) The Old Credit Documents constitute the legal, valid and binding
obligations of the Borrower, enforceable against the Borrower in accordance
with their respective terms. The Borrower has no claim, defense or offset
to enforcement of the Old Credit Documents.
(b) This Agreement constitutes and, upon due execution by the
Borrower, the other Loan Documents will constitute, the legal, valid and
binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms.
Section 5.5 Subsidiaries. Except for GuideOutdoors.com Inc. which the
Borrower intends to organize as a wholly owned subsidiary of the Borrower, the
Borrower has no Subsidiaries. Guide Outdoors.com Inc. has been incorporated
under the laws of the State of Delaware.
Section 5.6 Financial Condition; No Adverse Change. The Borrower has
heretofore furnished to the Lender audited financial statements dated as of
January 3, 1999, and unaudited interim financial statements dated as of October
31, 1999 and those statements fairly present the Borrower's financial condition
as of the dates thereof and the results of its operations and cash flows for the
periods then ended and were prepared in accordance with generally accepted
accounting principles. Since the date of the most recent financial statements,
there has been no material adverse change in the Borrower's business, properties
or condition (financial or otherwise).
Section 5.7 Litigation. There are no actions, suits or proceedings
pending or, to the Borrower's knowledge, threatened against or affecting the
Borrower or any of its Affiliates or the properties of the Borrower or any of
its Affiliate before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which, if determined
adversely to the Borrower or any of its Affiliates, would
-22-
<PAGE> 27
have a material adverse effect on the financial condition, properties or
operations of the Borrower or any of its Affiliates.
Section 5.8 Regulation U. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any Advance will be used to
purchase or carry any margin stock or to extend credit to others for the purpose
of purchasing or carrying any margin stock.
Section 5.9 Taxes. The Borrower and its Affiliates has paid or caused
to be paid to the proper authorities when due all federal, state and local taxes
required to be withheld by each of them. The Borrower and its Affiliates have
filed all federal, state and local tax returns which to the knowledge of the
officers of the Borrower or any of its Affiliates, as the case may be, are
required to be filed, and the Borrower and its Affiliates have paid or caused to
be paid to the respective taxing authorities all taxes as shown on said returns
or on any assessment received by any of them to the extent such taxes have
become due.
Section 5.10 Titles and Liens. The Borrower has good and absolute
title to all Collateral described in the collateral reports provided to the
Lender and all other Collateral, properties and assets reflected in the latest
financial statements referred to in Section 5.6 and all proceeds thereof, free
and clear of all mortgages, security interests, liens, adverse claims and
encumbrances, except for Permitted Liens. No financing statement naming the
Borrower as debtor is on file in any office except to perfect only Permitted
Liens.
Section 5.11 Year 2000. The Borrower has evaluated all of the data
processing systems necessary to the conduct of its business (including computer
hardware, software and firmware, and including data processing systems embedded
within equipment) and has implemented such hardware and software modifications
and upgrades as may be necessary for such systems to be Year 2000 Compliant. For
purposes hereof, "Year 2000 Compliant" means with respect to any data processing
system, (i) that such system accurately records, stores, processes and presents
date data with respect to dates on and after January 1, 2000 in the same manner,
and with substantially the same functionality, as the such system records,
stores, processes and presents date data with respect to dates on and before
December 31, 1999; and (ii) that such system accurately records, stores,
processes and presents date ranges beginning on or before December 31, 1999 and
ending on or after January 1, 2000, or occurring entirely on or after January 1,
2000, in the same manner, and with substantially the same functionality, as such
system records, stores, processes and presents date ranges occurring entirely on
or before December 31, 1999.
Section 5.12 Intellectual Property Rights. The Borrower owns or has
the exclusive right to use, free and clear of all material liens, claims and
restrictions, all patents, trademarks, service marks, trade names, copyrights,
licenses and rights with respect to the foregoing, used in the conduct of its
business as now conducted. The Borrower is not obligated or under any liability
whatsoever to make any payments of a material nature by
-23-
<PAGE> 28
way of royalties, fees or otherwise to any owner of, licensor of, or other
claimant to, any patent, trademark, trade name, copyright or other intangible
asset, with respect to the use thereof or in connection with the conduct of its
business or otherwise. The Borrower owns or has the unrestricted right to use
all trade secrets, including know-how, inventions, designs, processes, computer
programs and technical data necessary to the development, operation and sale of
all products and services sold or proposed to be sold by it, free and clear of
any rights, liens or claims of others. The Borrower is not using any
confidential information or trade secrets of others. The Borrower is not, nor
has the Borrower received notice with respect to, infringing upon or otherwise
acting adversely to any known right or claimed right of any Person under or with
respect to any patents, trademarks, service marks, trade names, copyrights,
licenses or rights with respect to the foregoing which could have a material
adverse effect on the Borrower.
Section 5.13 Plans. Except as disclosed to the Lender in writing prior
to the date hereof, neither the Borrower nor any of its Affiliates maintains or
has maintained any Plan. Neither the Borrower nor any of its Affiliates has
received any notice or has any knowledge to the effect that they are not in full
compliance with any of the requirements of ERISA. No Reportable Event or other
fact or circumstance which may have an adverse effect on the Plan's tax
qualified status exists in connection with any Plan. Neither the Borrower nor
any of its Affiliates has:
(a) Any accumulated funding deficiency within the meaning of ERISA; or
(b) Any liability or know of any fact or circumstances which could
result in any liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service, the Department of Labor or any participant in
connection with any Plan (other than accrued benefits which or which may
become payable to participants or beneficiaries of any such Plan).
Section 5.14 Default. The Borrower is in compliance with all
provisions of all agreements, instruments, decrees and orders to which it is a
party or by which it or its property is bound or affected, the breach or default
of which could have a material adverse effect on the Borrower's financial
condition, properties or operations.
Section 5.15 Environmental Matters.
(a) Definitions. As used in this Agreement, the following terms shall
have the following meanings:
(i) "Environmental Law" means any federal, state, local or other
governmental statute, regulation, law or ordinance dealing with the
protection of human health and the environment.
(ii) "Hazardous Substances" means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and fractions
thereof, and all other chemicals, wastes, substances and materials
listed in, regulated by or identified in any Environmental Law.
-24-
<PAGE> 29
(b) To the Borrower's best knowledge, there are not present in, on or
under the Premises any Hazardous Substances in such form or quantity as to
create any liability or obligation for the Borrower or the Lender under
common law of any jurisdiction or under any Environmental Law, and no
Hazardous Substances have ever been stored, buried, spilled, leaked,
discharged, emitted or released in, on or under the Premises in such a way
as to create any such liability.
(c) To the Borrower's best knowledge, the Borrower has never disposed
of Hazardous Substances in such a manner as to create any liability under
any Environmental Law.
(d) There are not and there never have been, during the Borrower's
occupancy, any requests, claims, notices, investigations, demands,
administrative proceedings, hearings or litigation, relating in any way to
the Premises or the Borrower, alleging liability under, violation of, or
noncompliance with any Environmental Law or any license, permit or other
authorization issued pursuant thereto. To the Borrower's best knowledge, no
such matter is threatened or impending.
(e) To the Borrower's best knowledge, the Borrower's businesses are
and have in the past always been conducted in accordance with all
Environmental Laws and all licenses, permits and other authorizations
required pursuant to any Environmental Law and necessary for the lawful and
efficient operation of such businesses are in the Borrower's possession and
are in full force and effect. No permit required under any Environmental
Law is scheduled to expire within 12 months and there is no threat that any
such permit will be withdrawn, terminated, limited or materially changed.
(f) To the Borrower's best knowledge, the Premises are not and never
have been listed on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System or
any similar federal, state or local list, schedule, log, inventory or
database.
(g) The Borrower has delivered to Lender all environmental
assessments, audits, reports, permits, licenses and other documents
describing or relating in any way to the Premises or the Borrower's
businesses.
Section 5.16 Submissions to Lender. All financial and other
information provided to the Lender by or on behalf of the Borrower in connection
with the Borrower's request for the Credit Facility is true and correct in all
material respects and, as to projections, valuations or proforma financial
statements, present a good faith opinion as to such projections, valuations and
proforma condition and results.
Section 5.17 Financing Statements. The Borrower has provided to the
Lender signed financing statements sufficient when filed to perfect the Security
Interest and the other security interests created by the Security Documents.
When such financing statements
-25-
<PAGE> 30
are filed in the offices noted therein, the Lender will have a valid and
perfected security interest in all Collateral and all other collateral described
in the Security Documents which is capable of being perfected by filing
financing statements. None of the Collateral or other collateral covered by the
Security Documents is or will become a fixture on real estate, unless a
sufficient fixture filing is in effect with respect thereto.
Section 5.18 Rights to Payment. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation.
Section 5.19 Financial Solvency. Both before and after giving effect
to the transactions contemplated in the Loan Documents, neither the Borrower or
any of its Affiliates:
(a) was or will be insolvent, as that term is used and defined in
Section 101(32) of the United States Bankruptcy Code and Section 2 of the
Uniform Fraudulent Transfer Act;
(b) has unreasonably small capital or is engaged or about to engage in
a business or a transaction for which any remaining assets of the Borrower
or such Affiliate are unreasonably small;
(c) by executing, delivering or performing its obligations under the
Loan Documents or other documents to which it is a party or by taking any
action with respect thereto, intends to, nor believes that it will, incur
debts beyond its ability to pay them as they mature;
(d) by executing, delivering or performing its obligations under the
Loan Documents or other documents to which it is a party or by taking any
action with respect thereto, intends to hinder, delay or defraud either its
present or future creditors; and
(e) at this time contemplates filing a petition in bankruptcy or for
an arrangement or reorganization or similar proceeding under any law any
jurisdiction, nor, to the best knowledge of the Borrower, is the subject of
any actual, pending or threatened bankruptcy, insolvency or similar
proceedings under any law of any jurisdiction.
-26-
<PAGE> 31
ARTICLE VI
BORROWER'S AFFIRMATIVE COVENANTS
So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower will comply with the following
requirements, unless the Lender shall otherwise consent in writing:
Section 6.1 Reporting Requirements. The Borrower will deliver, or
cause to be delivered, to the Lender each of the following, which shall be in
form and detail acceptable to the Lender:
(a) as soon as available, and in any event within 90 days after the
end of each fiscal year of the Borrower, the Borrower's audited financial
statements with the unqualified opinion of independent certified public
accountants selected by the Borrower and acceptable to the Lender, which
annual financial statements shall include the Borrower's balance sheet as
at the end of such fiscal year and the related statements of the Borrower's
income, retained earnings and cash flows for the fiscal year then ended,
prepared on a consolidating and consolidated basis to include any
Subsidiaries of the Borrower, all in reasonable detail and prepared in
accordance with GAAP, together with (i) copies of all management letters
prepared by such accountants; (ii) a report signed by such accountants
stating that in making the investigations necessary for said opinion they
obtained no knowledge, except as specifically stated, of any Default or
Event of Default hereunder and all relevant facts in reasonable detail to
evidence, and the computations as to, whether or not the Borrower is in
compliance with the requirements set forth in Sections 6.13, 6.14, 6.15,
6.16 and 7.11; and (iii) a certificate of the Borrower's chief financial
officer, vice president of finance or controller stating that such
financial statements have been prepared in accordance with GAAP, fairly
represent the Borrower's financial position and the results of its
operations, and whether or not such officer has knowledge of the occurrence
of any Default or Event of Default hereunder and, if so, stating in
reasonable detail the facts with respect thereto;
(b) as soon as available and in any event within 20 days after the end
of each Accounting Period, an unaudited/internal balance sheet and
statements of income and retained earnings of the Borrower as at the end of
and for such Accounting Period and for the fiscal year-to-date period then
ended, prepared on a consolidating and consolidated basis to include any
Subsidiaries, in reasonable detail and stating in comparative form the
figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end audit adjustments;
and accompanied by a certificate of the Borrower's chief financial officer,
vice president of finance or controller, substantially in the form of
Exhibit B hereto stating (i) that such financial statements have been
prepared in accordance with GAAP, subject to year-end audit adjustments,
and fairly represent the Borrower's financial position and the results of
its operations, (ii) whether or not such officer has
-27-
<PAGE> 32
knowledge of the occurrence of any Default or Event of Default hereunder
not theretofore reported and remedied and, if so, stating in reasonable
detail the facts with respect thereto, and (iii) all relevant facts in
reasonable detail to evidence, and the computations as to, whether or not
the Borrower is in compliance with the requirements set forth in Sections
6.13, 6.14, 6.15, 6.16 and 7.11;
(c) within 15 days after the end of each Accounting Period or more
frequently if the Lender so requires, agings of the Borrower's accounts
receivable and its accounts payable, an inventory certification report for
the Borrower, and a calculation of the Borrower's Accounts, Eligible
Accounts, Inventory and Eligible Inventory as at the end of such month or
shorter time period;
(d) at least 30 days before the beginning of each fiscal year of the
Borrower, the projected balance sheets and income statements for each
Accounting Period of such year, each in reasonable detail, representing the
Borrower's good faith projections and certified by the Borrower's chief
financial officer as being the most accurate projections available and
identical to the projections used by the Borrower for internal planning
purposes, together with such supporting schedules and information as the
Lender may in its discretion require;
(e) immediately after the commencement thereof, notice in writing of
all litigation and of all proceedings before any governmental or regulatory
agency affecting the Borrower of the type described in Section 5.15 or
which seek a monetary recovery against the Borrower in excess of $100,000;
(f) as promptly as practicable (but in any event not later than five
business days) after an officer of the Borrower obtains knowledge of the
occurrence of any breach, default or event of default under any Security
Document or any event which constitutes a Default or Event of Default
hereunder, notice of such occurrence, together with a detailed statement by
a responsible officer of the Borrower of the steps being taken by the
Borrower to cure the effect of such breach, default or event;
(g) as soon as possible and in any event within 30 days after the
Borrower knows or has reason to know that any Reportable Event with respect
to any Plan has occurred, the statement of the Borrower's chief financial
officer setting forth details as to such Reportable Event and the action
which the Borrower proposes to take with respect thereto, together with a
copy of the notice of such Reportable Event to the Pension Benefit Guaranty
Corporation;
(h) as soon as possible, and in any event within 10 days after the
Borrower fails to make any quarterly contribution required with respect to
any Plan under Section 412(m) of the Internal Revenue Code of 1986, as
amended, the statement of the Borrower's chief financial officer setting
forth details as to such failure and the action which the Borrower proposes
to take with respect thereto, together with a copy of any notice of such
failure required to be provided to the Pension Benefit Guaranty
Corporation;
-28-
<PAGE> 33
(i) promptly upon knowledge thereof, notice of (i) any disputes or
claims by the Borrower's customers exceeding $100,000 in the aggregate
during any fiscal year; and (ii) any change in the persons constituting the
Borrower's officers and board of directors;
(j) promptly upon knowledge thereof, notice of any loss of or material
damage to any Collateral or other collateral covered by the Security
Documents or of any substantial adverse change in any Collateral or such
other collateral or the prospect of payment thereof;
(k) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall have sent
to its stockholders;
(l) promptly after the sending or filing thereof, copies of all
regular and periodic reports which the Borrower shall file with the
Securities and Exchange Commission or any national securities exchange;
(m) promptly upon knowledge thereof, notice of the Borrower's
violation of any law, rule or regulation, the non-compliance with which
could materially and adversely affect the Borrower's business or its
financial condition; and
(n) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment
schedules, copies of invoices to account debtors, shipment documents and
delivery receipts for goods sold, and such other material, reports, records
or information as the Lender may request.
Section 6.2 Books and Records; Inspection and Examination. The
Borrower will keep accurate books of record and account for itself pertaining to
the Collateral and pertaining to its business and financial condition and such
other matters as the Lender may from time to time request in which true and
complete entries will be made in accordance with GAAP and, upon the Lender's
request, will permit any officer, employee, attorney or accountant for the
Lender to audit, review, make extracts from or copy any and all corporate and
financial books and records at all times during ordinary business hours, to send
and discuss with account debtors and other obligors requests for verification of
amounts owed to the Borrower, and to discuss the Borrower's affairs with any of
its board of directors, officers and designated employees or agents. The
Borrower will permit the Lender, or its employees, accountants, attorneys or
agents, to examine and inspect any Collateral, other collateral covered by the
Security Documents or any other property of the Borrower at any time during
ordinary business hours.
Section 6.3 Account Verification. The Lender may at any time and from
time to time send or require the Borrower to send requests for verification of
accounts or notices of assignment to account debtors and other obligors. The
Lender may also at any time and from time to time telephone account debtors and
other obligors to verify accounts.
-29-
<PAGE> 34
Section 6.4 Compliance with Laws.
(a) The Borrower will (i) comply with the requirements of applicable
laws and regulations, the non-compliance with which would materially and
adversely affect its business or its financial condition and (ii) use and
keep the Collateral, and require that others use and keep the Collateral,
only for lawful purposes, without violation of any federal, state or local
law, statute or ordinance.
(b) Without limiting the foregoing undertakings, the Borrower
specifically agrees that it will comply with all applicable Environmental
Laws and obtain and comply with all permits, licenses and similar approvals
required by any Environmental Laws, and will not generate, use, transport,
treat, store or dispose of any Hazardous Substances in such a manner as to
create any liability or obligation under the common law of any jurisdiction
or any Environmental Law.
Section 6.5 Payment of Taxes and Other Claims. The Borrower will pay
or discharge, when due, (a) all taxes, assessments and governmental charges
levied or imposed upon it or upon its income or profits, upon any properties
belonging to it (including, without limitation, the Collateral) or upon or
against the creation, perfection or continuance of the Security Interest, prior
to the date on which penalties attach thereto, (b) all federal, state and local
taxes required to be withheld by it, and (c) all lawful claims for labor,
materials and supplies which, if unpaid, might by law become a lien or charge
upon any properties of the Borrower; provided, that the Borrower will be
required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which proper reserves have been made.
Section 6.6 Maintenance of Properties.
(a) The Borrower will keep and maintain the Collateral, the other
collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition, repair
and working order (normal wear and tear excepted) and will from time to
time replace or repair any worn, defective or broken parts; provided,
however, that nothing in this Section 6.6 shall prevent the Borrower from
discontinuing the operation and maintenance of any of its properties if
such discontinuance is, in the Borrower's judgment, desirable in the
conduct of its business and not disadvantageous in any material respect to
the Lender as holder of the Obligations.
(b) The Borrower will defend the Collateral against all claims or
demands of all Persons (other than the Lender) claiming the Collateral or
any interest therein.
(c) The Borrower will keep all Collateral and other collateral covered
by the Security Documents free and clear of all security interests, liens
and encumbrances except Permitted Liens.
-30-
<PAGE> 35
Section 6.7 Insurance. The Borrower will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which the Borrower operates.
Without limiting the generality of the foregoing, the Borrower will at all times
maintain business interruption insurance including coverage for force majeure
and keep all tangible Collateral insured against risks of fire (including
so-called extended coverage), theft, collision (for Collateral consisting of
motor vehicles) and such other risks and in such amounts as the Lender may
reasonably request, with any loss payable to the Lender to the extent of its
interest, and all policies of such insurance shall contain a lender's loss
payable endorsement for the Lender's benefit acceptable to the Lender. All
policies of liability insurance required hereunder shall name the Lender as an
additional insured.
Section 6.8 Preservation of Existence. The Borrower will preserve and
maintain its existence and all of its rights, privileges and franchises
necessary or desirable in the normal conduct of its business and shall conduct
its business in an orderly, efficient and regular manner.
Section 6.9 Delivery of Instruments, etc. Upon request by the Lender,
the Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or assigned
by the Borrower.
Section 6.10 P.O. Box; Credit Card Payments; Collateral Accounts.
(a) The Borrower will irrevocably direct all present and future
Account debtors (except account debtors whose payments arise from credit
cards) and other Persons obligated to make payments constituting Collateral
to make such payments directly to the P.O. Box. All of the borrower's
invoices, account statements and other written or oral communciations
directing, instructing, demanding or requesting payment of any Account or
any other amount constituting Collateral shall conspicuously direct that
all payments be made to the P.O. Box and shall include the P.O. Box
address.
(b) The Borrower shall instruct all present and future credit card
processors to deposit all funds payable to the Borrower under all present
and future agreements between the Borrower and such credit card processors
directly into the Collateral Account. The Borrower shall deposit in the
Collateral Account or, at the Lender's option, to deliver to the Lender all
collections on Accounts and all other proceeds of Collateral which are
received in the P.O. Box, and/or which the Borrower may receive directly
notwithstanding its direction to Account debtors and other obligors to make
payments to the P.O. Box, immeditaely upon reciept thereof, in the form
received, except for any necessary endorsement of the Borrower.
-31-
<PAGE> 36
(c) Until so deposited, the Borrower shall hold all such payments in
trust for and as the property of the Lender and shall not commingle such
payments with any of its other funds or property.
(d) Amounts deposited in the Collateral Account shall not bear
interest and shall not be subject to withdrawal by the Borrower, except
after full payment and discharge of all Obligations.
(e) All deposits in the Collateral Account shall constitute proceeds
of Collateral and shall not constitute payment of the Obligations. The
Lender from time to time at its discretion may, in accordance with Section
2.14, apply deposited funds in the Collateral Account to the payment of the
Obligations, in any order or manner of application satisfactory to the
Lender, by transferring such funds to the Lender's general account.
(f) All items deposited in any Collateral Account shall be subject to
final payment. If any such item is returned uncollected, the Borrower will
immediately pay the Lender the amount of that item, or the Lender at its
discretion may charge any uncollected item to the Borrower's commercial
account or other account. The Borrower shall be liable as an endorser on
all items deposited in any Collateral Account, whether or not in fact
endorsed by the Borrower.
Section 6.11 Landlord's Disclaimers. The Borrower shall deliver to the
Lender, in form and substance satisfactory to the Lender, true and correct copy
of any and all leases pursuant to which the Borrower is leasing the Premises,
together with a landlord's disclaimer and consent with respect to each lease
within sixty (60) days of the date hereof. Until the Borrower so delivers all of
the aforementioned documents, the Lender shall reserve an amount equal to three
months rent owed under the Leases (the "Landlord's Disclaimer Reserve").
Section 6.12 Performance by the Lender. If the Borrower at any time
fails to perform or observe any of the foregoing covenants contained in this
Article VI or elsewhere herein, and if such failure shall continue for a period
of ten calendar days after the Lender gives the Borrower written notice thereof
(or in the case of the agreements contained in Sections 6.5, 6.7 and 6.10,
immediately upon the occurrence of such failure, without notice or lapse of
time), the Lender may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of the Borrower (or, at the Lender's option, in
the Lender's name) and may, but need not, take any and all other actions which
the Lender may reasonably deem necessary to cure or correct such failure
(including, without limitation, the payment of taxes, the satisfaction of
security interests, liens or encumbrances, the performance of obligations owed
to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrower shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Lender in connection with or
-32-
<PAGE> 37
as a result of the performance or observance of such agreements or the taking of
such action by the Lender, together with interest thereon from the date expended
or incurred at the Default Rate. To facilitate the Lender's performance or
observance of such covenants of the Borrower, the Borrower hereby irrevocably
appoints the Lender, or the Lender's delegate, acting alone, as the Borrower's
attorney in fact (which appointment is coupled with an interest) with the right
(but not the duty) from time to time to create, prepare, complete, execute,
deliver, endorse or file in the name and on behalf of the Borrower any and all
instruments, documents, assignments, security agreements, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed, delivered or endorsed by the Borrower under this Section
6.12.
Section 6.13 Maximum Debt to Book Net Worth Ratio. The Borrower will
maintain the ratio of its Debt to its Book Net Worth, determined as at the end
of each fiscal quarter ending on or about the dates listed below, at not more
than the ratio set forth opposite such period:
<TABLE>
<CAPTION>
Date Maximum Debt to Book Net
---- ------------------------
Worth Ratio
---------------
<S> <C>
3/31/2000 2.25 to 1.00
6/30/2000 2.25 to 1.00
9/30/2000 2.50 to 1.00
12/31/2000 2.00 to 1.00
</TABLE>
Section 6.14 Minimum Pre-Tax Net Income per Accounting Period. The
Borrower will achieve Net Income plus Tax Expense during each Accounting Period
of not less than $(500,000).
Section 6.15 Minimum Fiscal Year-To-Date Net Income. The Borrower will
achieve fiscal year-to-date Net Income, determined as of the end of each fiscal
quarter ending on or about the dates listed below, of not less than the amount
set forth opposite such date:
<TABLE>
<CAPTION>
Date Minimum Fiscal Year-To-
---- ------------------------
Date Net Income
---------------
<S> <C>
3/31/2000 $(300,000)
6/30/2000 $(300,000)
9/30/2000 $(300,000)
12/31/2000 $1,000,000
</TABLE>
Section 6.16 Maximum Inventory Days. As of the end of each fiscal
quarter, the Borrower shall maintain an Inventory level of not more than 175
Inventory Days on hand.
-33-
<PAGE> 38
Section 6.17 New Covenants. On or before the end of each fiscal year
of the Borrower, the Borrower and the Lender shall agree on new covenant levels
for Sections 6.13, 6.15 and 7.11 for periods after such date. The new covenant
levels will be based on the Borrower's projections for such periods and shall be
no less stringent than the present levels.
ARTICLE VII
NEGATIVE COVENANTS
So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower agrees that, without the Lender's prior
written consent:
Section 7.1 Liens. The Borrower will not create, incur or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, adverse
claim, assignment or transfer upon or of any of its assets, now owned or
hereafter acquired, to secure any indebtedness; excluding, however, from the
operation of the foregoing, the following (collectively, "Permitted Liens"):
(a) in the case of any of the Borrower's property which is not
Collateral or other collateral described in the Security Documents,
covenants, restrictions, rights, easements and minor irregularities in
title which do not materially interfere with the Borrower's business or
operations as presently conducted;
(b) mortgages, deeds of trust, pledges, liens, security interests and
assignments in existence on the date hereof and listed in Schedule 7.1
hereto, securing indebtedness for borrowed money permitted under Section
7.2;
(c) the Security Interest and liens and security interests created by
the Security Documents; and
(d) purchase money security interests relating to the acquisition of
machinery and equipment of the Borrower not exceeding the lesser of cost or
fair market value thereof , not exceeding $2,000,000 for any one purchase
or $3,000,000 in the aggregate during any fiscal year]and so long as no
Default Period is then in existence and none would exist immediately after
such acquisition.
Section 7.2 Indebtedness. The Borrower will not incur, create, assume
or permit to exist any indebtedness or liability on account of deposits or
advances or any indebtedness for borrowed money or letters of credit issued on
its behalf, or any other indebtedness or liability evidenced by notes, bonds,
debentures or similar obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness in existence on the date hereof and listed in
Schedule 7.2 hereto; and
-34-
<PAGE> 39
(c) indebtedness relating to liens permitted in accordance with
Section 7.1.
Section 7.3 Guaranties. The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the Borrower for
deposit or collection or similar transactions in the ordinary course of
business; and
(b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons, in
existence on the date hereof and listed in Schedule 7.2 hereto.
Section 7.4 Investments and Subsidiaries.
(a) The Borrower will not purchase or hold beneficially any stock or
other securities or evidences of indebtedness of, make or permit to exist
any loans or advances to, or make any investment or acquire any interest
whatsoever in, any other Person, including specifically but without
limitation any partnership or joint venture, except:
(i) investments in direct obligations of the United States of
America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of
America having a maturity of one year or less, commercial paper issued
by U.S. corporations rated "A-1" or "A-2" by Standard & Poors
Corporation or "P-1" or "P-2" by Moody's Investors Service or
certificates of deposit or bankers' acceptances having a maturity of
one year or less issued by members of the Federal Reserve System
having deposits in excess of $100,000,000 (which certificates of
deposit or bankers' acceptances are fully insured by the Federal
Deposit Insurance Corporation);
(ii) except as set forth in clause (iii), travel advances or
loans to the Borrower's officers and employees not exceeding at any
one time an aggregate of $100,000;
(iii) a loan to Mr. Olen in the amount of $262,583.03 and all
interest accrued and accruing thereon not exceeding the applicable
federal rate;
(iv) the Borrower's investment in GuideOutdoors.com Inc. not
exceeding its investment as of the date hereof and the net proceeds of
any offering of the Borrower's equity securities for the purpose of
financing such company; and
(v) advances in the form of progress payments, prepaid rent not
exceeding two months or security deposits.
-35-
<PAGE> 40
(b) The Borrower will not create or permit to exist any Subsidiary
other than GuideOutdoors.com Inc.
Section 7.5 Dividends. Except as set forth below, the Borrower will
not declare or pay any dividends (other than dividends payable solely in stock
of the Borrower) on any class of its stock or make any payment on account of the
purchase, redemption or other retirement of any shares of such stock or make any
distribution in respect thereof, either directly or indirectly.
Section 7.6 Sale or Transfer of Assets; Suspension of Business
Operations. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than the
sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The Borrower will not in any manner
transfer any property without prior or present receipt of full and adequate
consideration.
Section 7.7 Intellectual Property. The Borrower will not sell, assign
or grant licenses to use, any of its applications for patents, patents,
copyrights, trademarks, trade secrets, trade names or other intellectual
property to any other Person.
Section 7.8 Consolidation and Merger; Asset Acquisitions. The Borrower
will not consolidate with or merge into any Person, or permit any other Person
to merge into it, or acquire (in a transaction analogous in purpose or effect to
a consolidation or merger) all or substantially all the assets of any other
Person.
Section 7.9 Sale and Leaseback. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which the Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
Section 7.10 Restrictions on Nature of Business. The Borrower will not
engage in any line of business materially different from that in which it is
presently engaged and will not purchase, lease or otherwise acquire assets not
related to its business.
Section 7.11 Capital Expenditures. The Borrower will not incur or
contract to incur Capital Expenditures of more than $3,000,000.
Section 7.12 Accounting. The Borrower will not adopt any material
change in accounting principles other than as required by GAAP. The Borrower
will not adopt, permit or consent to any change in its fiscal year.
-36-
<PAGE> 41
Section 7.13 Discounts, etc. The Borrower will not at any time
(whether before or after notice from the Lender) modify, amend, subordinate,
cancel or terminate the obligation of any account debtor or other obligor.
Section 7.14 Defined Benefit Pension Plans. The Borrower will not
adopt, create, assume or become a party to any defined benefit pension plan,
unless disclosed to the Lender pursuant to Section 5.13.
Section 7.15 Other Defaults. The Borrower will not permit any breach,
default or event of default to occur under any note, loan agreement, indenture,
lease, mortgage, contract for deed, security agreement or other contractual
obligation binding upon it.
Section 7.16 Place of Business; Name. The Borrower will not transfer
its chief executive office or principal place of business, or move, relocate,
close or sell any business location. The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest. The Borrower will not change
its name.
Section 7.17 Organizational Documents. The Borrower will not amend its
articles of incorporation and bylaws. The Borrower will not become an S
Corporation within the meaning of the Internal Revenue Code of 1986, as amended.
Section 7.18 Salaries. The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation.
ARTICLE VIII
EVENTS OF DEFAULT, RIGHTS AND REMEDIES
Section 8.1 Events of Default. "Event of Default", wherever used
herein, means any one of the following events:
(a) Default in the payment of the Obligations when they become due and
payable;
(b) Failure to pay when due any amount specified in Section 2.4
relating to the Obligation of Reimbursement, or failure to pay immediately
when due or upon termination of the Credit Facility any amounts required to
be paid for deposit in the Special Account under Section 2.5;
(c) Default in the payment of any fees, commissions, costs or expenses
required to be paid by the Borrower under this Agreement ;
(d) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement;
-37-
<PAGE> 42
(e) A Change of Control shall occur with respect to the Borrower;
(f) The Borrower shall be or become insolvent, or admit in writing its
inability to pay its debts as they mature, or make an assignment for the
benefit of creditors; or the Borrower shall apply for or consent to the
appointment of any receiver, trustee, or similar officer for it or for all
or any substantial part of its property; or such receiver, trustee or
similar officer shall be appointed without the application or consent of
the Borrower; or the Borrower shall institute (by petition, application,
answer, consent or otherwise) any bankruptcy, insolvency, reorganization,
arrangement, readjustment of debt, dissolution, liquidation or similar
proceeding relating to it under the laws of any jurisdiction; or any such
proceeding shall be instituted (by petition, application or otherwise)
against the Borrower; or any judgment, writ, warrant of attachment or
execution or similar process shall be issued or levied against a
substantial part of the property of the Borrower;
(g) A petition shall be filed by or against the Borrower under the
United States Bankruptcy Code naming the Borrower as debtor;
(h) Any representation or warranty made by the Borrower in this
Agreement or by the Borrower (or by any of its officers) in any agreement,
certificate, instrument or financial statement or other statement
contemplated by or made or delivered pursuant to or in connection with this
Agreement shall prove to have been incorrect in any material respect when
deemed to be effective;
(i) The rendering against the Borrower of a final judgment, decree or
order for the payment of money in excess of $100,000 and the continuance of
such judgment, decree or order unsatisfied and in effect for any period of
30 consecutive days without a stay of execution;
(j) A default under any bond, debenture, note or other evidence of
indebtedness of the Borrower owed to any Person other than the Lender, or
under any indenture or other instrument under which any such evidence of
indebtedness has been issued or by which it is governed, or under any lease
of any of the Premises, and the expiration of the applicable period of
grace, if any, specified in such evidence of indebtedness, indenture, other
instrument or lease;
(k) Any Reportable Event, which the Lender determines in good faith
might constitute grounds for the termination of any Plan or for the
appointment by the appropriate United States District Court of a trustee to
administer any Plan, shall have occurred and be continuing 30 days after
written notice to such effect shall have been given to the Borrower by the
Lender; or a trustee shall have been appointed by an appropriate United
States District Court to administer any Plan; or the Pension Benefit
Guaranty Corporation shall have instituted proceedings to terminate any
Plan or to appoint a trustee to administer any Plan; or the Borrower shall
have filed for a distress termination of any Plan under Title IV of ERISA;
or the Borrower shall have failed to make any quarterly contribution
required with respect to any Plan under
-38-
<PAGE> 43
Section 412(m) of the Internal Revenue Code of 1986, as amended, which the
Lender determines in good faith may by itself, or in combination with any
such failures that the Lender may determine are likely to occur in the
future, result in the imposition of a lien on the Borrower's assets in
favor of the Plan;
(l) An event of default shall occur under any Security Document or
under any other security agreement, mortgage, deed of trust, assignment or
other instrument or agreement securing any obligations of the Borrower
hereunder or under any note;
(m) The Borrower shall liquidate, dissolve, terminate or suspend its
business operations or otherwise fail to operate its business in the
ordinary course, or sell all or substantially all of its assets, without
the Lender's prior written consent;
(n) The Borrower shall fail to pay, withhold, collect or remit any tax
or tax deficiency when assessed or due (other than any tax deficiency which
is being contested in good faith and by proper proceedings and for which it
shall have set aside on its books adequate reserves therefor) or notice of
any state or federal tax liens shall be filed or issued;
(o) Default in the payment of any amount owed by the Borrower to the
Lender other than any indebtedness arising hereunder;
(p) Any event or circumstance with respect to the Borrower shall occur
such that the Lender shall believe in good faith that the prospect of
payment of all or any part of the Obligations or the performance by the
Borrower under the Loan Documents is impaired or any material adverse
change in the business or financial condition of the Borrower shall occur;
or
(q) Any breach, default or event of default by or attributable to any
Affiliate of the Borrower under any agreement between such Affiliate and
the Lender.
Section 8.2 Rights and Remedies. During any Default Period, the Lender
may exercise any or all of the following rights and remedies:
(a) the Lender may, by notice to the Borrower, declare the Commitment
to be terminated, whereupon the same shall forthwith terminate;
(b) the Lender may, by notice to the Borrower, declare the Obligations
to be forthwith due and payable, whereupon all Obligations shall become and
be forthwith due and payable, without presentment, notice of dishonor,
protest or further notice of any kind, all of which the Borrower hereby
expressly waives;
(c) the Lender may, without notice to the Borrower and without further
action, apply any and all money owing by the Lender to the Borrower,
including without limitation any funds on deposit with the Lender, whether
or not matured, to the payment of the Obligations;
-39-
<PAGE> 44
(d) the Lender may make demand upon the Borrower and, forthwith upon
such demand, the Borrower will pay to the Lender in immediately available
funds for deposit in the Special Account pursuant to Section 2.13 an amount
equal to the aggregate maximum amount available to be drawn under all
Letters of Credit then outstanding, assuming compliance with all conditions
for drawing thereunder;
(e) the Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including, without limitation, the right to take possession of Collateral,
or any evidence thereof, proceeding without judicial process or by judicial
process (without a prior hearing or notice thereof, which the Borrower
hereby expressly waives) and the right to sell, lease or otherwise dispose
of any or all of the Collateral, and, in connection therewith, the Borrower
will on demand assemble the Collateral and make it available to the Lender
at a place to be designated by the Lender which is reasonably convenient to
both parties;
(f) the Lender may exercise and enforce its rights and remedies under
the Loan Documents; and
(g) the Lender may exercise any other rights and remedies available to
it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (f) or (g) of Section 8.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.
Section 8.3 Certain Notices. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 9.4) at least ten calendar days before
the date of intended disposition or other action.
ARTICLE IX
Miscellaneous
Section 9.1 Release. The Borrower hereby absolutely and
unconditionally releases and forever discharges the Lender, any participants and
any and all parent corporations, subsidiary corporations, affiliated
corporations, insurers, indemnitors, successors and assigns thereof, together
with all of the present and former directors, officers, agents and employees of
any of the foregoing, from any and all claims, demands or causes of action of
any kind, nature or description, whether arising in law or equity or upon
contract or tort or under any state or federal law or otherwise, which the
Borrower has had, now has or has made claim to have against any such Person for
or by reason of any act, omission, matter, cause or thing whatsoever arising
from the beginning of time to and including the date of this
-40-
<PAGE> 45
Agreement, whether such claims, demands and causes of action are matured or
unmatured or known or unknown.
Section 9.2 No Waiver; Cumulative Remedies. No failure or delay by the
Lender in exercising any right, power or remedy under the Loan Documents shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy under the Loan Documents. The
remedies provided in the Loan Documents are cumulative and not exclusive of any
remedies provided by law.
Section 9.3 Amendments, Etc. No amendment, modification, termination
or waiver of any provision of any Loan Document or consent to any departure by
the Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
Section 9.4 Addresses for Notices, Etc. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for under the Loan Documents shall be in writing and shall be (a)
personally delivered, (b) sent by first class United States mail, (c) sent by
overnight courier of national reputation, or (d) transmitted by telecopy, in
each case addressed or telecopied to the party to whom notice is being given at
its address or telecopier number as set forth below:
If to the Borrower:
The Sportsman's Guide, Inc.
411 Farwell Avenue
South St. Paul, Minnesota 55075
Telecopier: (651) 552-5345
Attention: David M. Kolkind
With a copy to:
Bruce A. Teeters, Esq.
Chernesky, Heyman & Kress P.L.L
10 Courthouse Plaza SW, Suite 1100
Dayton, Ohio 45402
Telecopier: (937) 449-2821
-41-
<PAGE> 46
If to the Lender:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
MAC N9312-040
Minneapolis, Minnesota 55479-0095
Telecopier: (612) 667-2269
Attention: Brian Fitzpatrick
or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II shall not be
effective until received by the Lender.
Section 9.5 Servicing of Credit Facility.
(a) The Lender has entered into a servicing agreement (the "Servicing
Agreement") with the Servicer to service and enforce the Loan Documents and
collect the Obligations on the Lender's behalf. Pursuant to the Servicing
Agreement, the Lender has authorized the Servicer to take certain actions,
perform certain duties and exercise certain powers on the Lender's behalf
under the provisions of the Loan Documents and any other instruments and
agreements referred to in this Agreement.
(b) The Servicer shall have no duties or responsibilities to the
Borrower, but only to the Lender and then only as expressly set forth in
the Servicing Agreement. Without limiting the generality of the foregoing,
the Servicer shall have no obligation to make any loans or advances to the
Borrower. Neither the Servicer nor any of its officers, directors,
employees or agents shall be liable for any action taken or omitted by them
hereunder or in connection herewith, unless caused by its or their willful
misconduct. The Servicer's duties shall be mechanical and administrative in
nature; nothing in this Agreement, express or implied, is intended to or
shall be so construed as to impose upon the Servicer any obligations with
respect to the Loan Documents except as expressly set forth herein. The
Borrower will not in any way be construed to be a third party beneficiary
of any relationship between the Servicer and the Lender.
(c) The Servicer shall be entitled to rely, and shall be fully
protected in relying, upon any communication whether written or oral
believed by it to be genuine and correct and to have been signed, sent or
made by the proper Person, and, with respect to all legal matters
pertaining to this Agreement and its duties hereunder, upon advice of
counsel selected by it.
-42-
<PAGE> 47
(d) The Borrower shall be entitled to rely upon any communication
whether written or oral sent or made by the Servicer for and on behalf of
the Lender with respect to all matters pertaining to the Loan Documents and
the Borrower's duties and obligations hereunder, unless and until the
Borrower receives written notice from the Lender that the Servicer is no
longer servicing the Credit Facility.
(e) The Servicer shall hold and be the custodian of the Loan Documents
on the Lender's behalf for so long as the Servicer is servicing the Credit
Facility.
(f) The Servicing Agreement may be terminated at any time without
prior notice to or consent of the Borrower. Upon termination of the
Servicing Agreement and failure to replace the Servicing Agreement with a
new servicing agreement, all references herein to the Servicer shall
thereafter mean and refer to the Lender.
Section 9.6 Further Documents. The Borrower will from time to time
execute and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements and other agreements and
writings that the Lender may reasonably request in order to secure, protect,
perfect or enforce the Security Interest or the Lender's rights under the Loan
Documents (but any failure to request or assure that the Borrower executes,
delivers or endorses any such item shall not affect or impair the validity,
sufficiency or enforceability of the Loan Documents and the Security Interest,
regardless of whether any such item was or was not executed, delivered or
endorsed in a similar context or on a prior occasion).
Section 9.7 Collateral. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application.
Section 9.8 Costs and Expenses. The Borrower shall pay on demand all
costs and expenses, including (without limitation) reasonable attorneys' fees,
incurred by the Lender in connection with the Obligations, this Agreement, the
Loan Documents, any Letters of Credit, and any other document or agreement
related hereto or thereto, and the transactions contemplated hereby, including
without limitation all such costs, expenses and fees incurred in connection with
the negotiation, preparation, execution, amendment, administration, performance,
collection and enforcement of the Obligations and all such documents and
agreements and the creation, perfection, protection, satisfaction, foreclosure
or enforcement of the Security Interest.
-43-
<PAGE> 48
Section 9.9 Indemnity. In addition to the payment of expenses pursuant
to Section 9.8, the Borrower shall indemnify, defend and hold harmless the
Lender, and any of its participants, parent corporations, subsidiary
corporations, affiliated corporations, successor corporations, and all present
and future officers, directors, employees, attorneys and agents of the foregoing
(the "Indemnitees") from and against any of the following (collectively,
"Indemnified Liabilities"):
(i) any and all transfer taxes, documentary taxes, assessments or
charges made by any governmental authority by reason of the execution
and delivery of the Loan Documents or the making of the Advances;
(ii) any claims, loss or damage to which any Indemnitee may be
subjected if any representation or warranty contained in Section 5.15
proves to be incorrect in any respect or as a result of any violation
of the covenant contained in Section 6.4(b); and
(iii) any and all other liabilities, losses, damages, penalties,
judgments, suits, claims, costs and expenses of any kind or nature
whatsoever (including, without limitation, the reasonable fees and
disbursements of counsel) in connection with the foregoing and any
other investigative, administrative or judicial proceedings, whether
or not such Indemnitee shall be designated a party thereto, which may
be imposed on, incurred by or asserted against any such Indemnitee, in
any manner related to or arising out of or in connection with the
making of the Advances and the Loan Documents or the use or intended
use of the proceeds of the Advances.
If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee's request,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower's sole costs and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The Borrower's obligation
under this Section 9.9 shall survive the termination of this Agreement and the
discharge of the Borrower's other obligations hereunder.
Section 9.10 Participants. The Lender and its participants, if any,
are not partners or joint venturers, and the Lender shall not have any liability
or responsibility for any obligation, act or omission of any of its
participants. All rights and powers specifically conferred upon the Lender may
be transferred or delegated to any of the Lender's participants, successors or
assigns.
Section 9.11 Execution in Counterparts. This Agreement and other Loan
Documents may be executed in any number of counterparts, each of which when so
executed
-44-
<PAGE> 49
and delivered shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same instrument.
Section 9.12 Binding Effect; Assignment; Complete Agreement;
Exchanging Information. The Loan Documents shall be binding upon and inure to
the benefit of the Borrower and the Lender and their respective successors and
assigns, except that the Borrower will not have the right to assign its rights
thereunder or any interest therein without the Lender's prior written consent.
This Agreement, together with the Loan Documents, comprises the complete and
integrated agreement of the parties on the subject matter hereof and supersedes
all prior agreements, written or oral, on the subject matter hereof. Without
limiting the Lender's right to share information regarding the Borrower and its
Affiliates with the Lender's participants, accountants, lawyers and other
advisors, the Lender, Wells Fargo & Company, and all direct and indirect
subsidiaries of Wells Fargo & Company, may exchange among themselves any and all
information they may have in their possession regarding the Borrower and its
Affiliates, and the Borrower waives any right of confidentiality it may have
with respect to such exchange of such information.
Section 9.13 Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
Section 9.14 Headings. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
-45-
<PAGE> 50
Section 9.15 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial.
The Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Minnesota. The
parties hereto hereby (i) consent to the personal jurisdiction of the state and
federal courts located in the State of Minnesota in connection with any
controversy related to this Agreement; (ii) waive any argument that venue in any
such forum is not convenient, (iii) agree that any litigation initiated by the
Lender or the Borrower in connection with this Agreement or the other Loan
Documents shall be venued in either the District Court of Hennepin County,
Minnesota, or the United States District Court, District of Minnesota, Fourth
Division; and (iv) agree that a final judgment in any such suit, action or
proceeding may be enforced in other jurisdictions by suit on the judgment or in
any other manner provided by law.
THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED
ON OR PERTAINING TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of the
date first above written.
NORWEST BANK MINNESOTA, THE SPORTSMAN'S GUIDE, INC.
NATIONAL ASSOCIATION
By /s/ Brian Fitzpatrick By /s/ David M. Kolkind
--------------------------------- ------------------------------------
Brian Fitzpatrick David M. Kolkind
Its Vice President Its Vice President Finance/Treasurer
-46-
<PAGE> 51
Table of Exhibits and Schedules
Exhibit A Form of Revolving Note
Exhibit B Form of Compliance Certificate
Exhibit C Premises
-------------------
Schedule 3.6 Financing Statement Information
Schedule 5.1 Trade Names, Chief Executive Office, Principal
Place of Business, and Locations of Collateral
Schedule 5.2 Capital Stock
Schedule 7.1 Permitted Liens
Schedule 7.2 Permitted Indebtedness and Guaranties
<PAGE> 52
Exhibit A to Credit and Security
Agreement
REVOLVING NOTE
$25,000,000 Minneapolis, Minnesota
December 27, 1999
For value received, the undersigned, The Sportsman's Guide, Inc., a
Minnesota corporation (the "Borrower"), hereby promises to pay on the
Termination Date under the Credit Agreement (defined below), to the order of
Norwest Bank Minnesota, National Association, a national banking association
(the "Lender"), at its main office in Minneapolis, Minnesota, or at any other
place designated at any time by the holder hereof, in lawful money of the United
States of America and in immediately available funds, the principal sum of
Twenty-Five Million Dollars and No Cents ($25,000,000) or, if less, the
aggregate unpaid principal amount of all Revolving Advances made by the Lender
to the Borrower under the Credit Agreement (defined below) together with
interest on the principal amount hereunder remaining unpaid from time to time,
computed on the basis of the actual number of days elapsed and a 360-day year,
from the date hereof until this Note is fully paid at the rate from time to time
in effect under the Credit and Security Agreement of even date herewith (as the
same may hereafter be amended, supplemented or restated from time to time, the
"Credit Agreement") by and between the Lender and the Borrower. The principal
hereof and interest accruing thereon shall be due and payable as provided in the
Credit Agreement. This Note may be prepaid only in accordance with the Credit
Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Revolving Note referred to in the Credit Agreement. This Note is secured, among
other things, pursuant to the Credit Agreement and the Security Documents as
therein defined, and may now or hereafter be secured by one or more other
security agreements, mortgages, deeds of trust, assignments or other instruments
or agreements.
The Borrower hereby agrees to pay all costs of collection, including
reasonable attorneys' fees and legal expenses if this Note is not paid when due,
whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and
protest are expressly waived.
THE SPORTSMAN'S GUIDE, INC.
By
-------------------------------------
David M. Kolkind
Its Vice President Finance/Treasurer
<PAGE> 53
Exhibit B to Credit and Security
Agreement
COMPLIANCE CERTIFICATE
To: Brian Fitzpatrick
Norwest Bank Minnesota, National Association
Date: , 200
------------------ -----
Subject: The Sportsman's Guide, Inc.
Financial Statements
In accordance with our Credit and Security Agreement dated as of
December 23, 1999 (the "Credit Agreement"), attached are the financial
statements of The Sportsman's Guide, Inc. (the "Borrower") as of and for
, 200 (the "Reporting Date") and the year-to-date period then
ended (the "Current Financials"). All terms used in this certificate have the
meanings given in the Credit Agreement.
I certify that the Current Financials have been prepared in accordance
with GAAP, subject to year-end audit adjustments, and fairly present the
Borrower's financial condition and the results of its operations as of the
Reporting Date.
Events of Default. (Check one):
[ ] The undersigned does not have knowledge of the occurrence of a Default
or Event of Default under the Credit Agreement.
[ ] The undersigned has knowledge of the occurrence of a Default or Event
of Default under the Credit Agreement and attached hereto is a
statement of the facts with respect to thereto. The Borrower
acknowledges that pursuant to Section 2.7(d) the Lender may impose the
Default Rate at any time during the resulting Default Period.
Financial Covenants. I further hereby certify as follows:
1. Maximum Debt to Book Net Worth Ratio. Pursuant to Section 6.13 of
the Credit Agreement, as of the Reporting Date, the ratio of the Borrower's
Debt to its Book Net Worth was to 1.00 which [ ] satisfies [ ] does
not satisfy the requirement that such ratio be no more than to 1.00
on the Reporting Date as set forth in table below:
<PAGE> 54
<TABLE>
<CAPTION>
Date Maximum Debt to Book Net
---- ------------------------
Worth Ratio
-----------
<S> <C>
3/31/2000 2.25 to 1.00
6/30/2000 2.25 to 1.00
9/30/2000 2.50 to 1.00
12/31/2000 2.00 to 1.00
</TABLE>
2. Minimum Net Income. Pursuant to Section 6.15 of the Credit
Agreement, the Borrower's fiscal year-to-date Net Income as of the
Reporting Date was $ , which [ ] satisfies [ ] does not satisfy
the requirement that such amount be not less than $ during such period as
set forth in table below:
<TABLE>
<CAPTION>
Date Minimum Fiscal Year-To-
---- -----------------------
Date Net Income
---------------
<S> <C>
3/31/2000 $(300,000)
6/30/2000 $(300,000)
9/30/2000 $(300,000)
12/31/2000 $1,000,000
</TABLE>
3. Minimum Pre-Tax Net Income per Accounting Period. Pursuant to
Section 6.14, for the Accounting Period ending on the Reporting Date, the
Borrower's Net Income plus Tax Expense was $ , which [ ]
satisfies [ ] does not satisfy the requirement that such amount be not less
than $(500,000) during such Accounting Period.
4. Maximum Inventory Days. Pursuant to Section 6.16 of the Credit
Agreement, as of the end of the Reporting Date, the turnover rate for
Inventory was Inventory Days which [ ] satisfies [ ] does not
satisfy the requirement that such amount be not more than 175 Inventory
Days.
5. Capital Expenditures. Pursuant to Section 7.11 of the Credit
Agreement, for the year-to-date period ending on the Reporting Date, the
Borrower has expended or contracted to expend during the year
ended , 199 , for Capital Expenditures, $
in the aggregate and at most $ in any one transaction, which
[ ] satisfies [ ] does not satisfy the requirement that such expenditures
not exceed $3,000,000 in the aggregate and $ for any one
transaction during such year.
6. Salaries. As of the Reporting Date, the Borrower [ ] is [ ] is not
in compliance with Section 7.18 of the Credit Agreement concerning
salaries.
-2-
<PAGE> 55
Attached hereto are all relevant facts in reasonable detail to
evidence, and the computations of the financial covenants referred to above.
These computations were made in accordance with GAAP.
THE SPORTSMAN'S GUIDE, INC.
By
-------------------------------
Its
---------------------------
-3-
<PAGE> 56
Exhibit C to Credit and Security
Agreement
PREMISES
The Premises referred to in the Credit and Security Agreement are
legally described as follows:
I. 411 FARWELL AVENUE SOUTH, SAINT PAUL, MINNESOTA 55075
Legal Description of Land: All that part of Government Lot 2, Section 34,
Township 28, Range 23, described as follows: Beginning at a point 233.00
feet south of the Northwest Corner of said Government Lot 2 and 934.76 feet
East of the West line of above-mentioned Government Lot 2, which point is
established with an Iron Monument; thence continuing East 398.91 feet to
the West Right-of-Way line (Radius of curve 1547.69 feet) to an Iron
Monument; thence South 40 09' E a distance of 182.79 feet, along said
Right-of-Way line, to an Iron Monument; thence West, parallel with
aforesaid North line of Government Lot 2 a distance of 567.27 feet to an
Iron Monument thence North, parallel with the West line of Government Lot 2
a distance of 195.43 feet to the point of beginning.
That part of Government Lot 2 of Section 34, Township 28, Range 23,
described as follows, to-wit: Commencing at the intersection of the
northerly line of the Chicago, Milwaukee, St. Paul and Pacific Railroad and
the west line of said Government Lot 2, thence northerly along said west
line to its intersection with the southerly right-of-way line of S.T.H. No.
13, thence Northeasterly along said Southeasterly right-of-way line to a
point which is 233 feet south of the North line of said Government Lot 2,
thence East parallel with the North line of said Government Lot 2, to a
point which is 934.76 feet East of the West line of said Government Lot 2,
thence South parallel to the West line of said Government Lot 2, a distance
of 195.43 feet thence East parallel to the North line of said Government
Lot 2, to a point which is 1002.03 feet East of the West line of said
Government Lot 2, thence south and parallel to the West line of said
Government Lot 2, a distance of 895.60 feet to a point on the Northerly
right-of-way of the Chicago, Milwaukee, St. Paul and Pacific Railroad,
thence Northwesterly along said Northerly right-of-way line to the point of
beginning.
II. 2360 PILOT KNOB ROAD, MENDOTA HEIGHTS, MINNESOTA
That part of the NE 1/4 of Section 27, T 28 N, R 22 W described as follows:
<PAGE> 57
Commencing at the Southeast corner of said NE 1/4; thence S 89 degrees
26' 30" W, along the South line of said NE 1/4, 50 feet to the West R/W
line of the Chicago & North Western Rwy.; thence N 0 degrees 00' W,
along said R/W line 177.43 feet to the point of beginning of the
property to be described; thence S 63 degrees 25' W, 356.37 feet;
thence N 26 degrees 35' W, 429 feet; thence S 63 degrees 25' W, 100
feet; thence N 26 degrees 35' W 48 feet; thence S 63 degrees 25' W, 287
feet to the Northeasterly R/W line of the Stockyards Road (a private
road with a R/W 25 feet on each side of the centerline); thence N 26
degrees 35' W, along said R/W line 563.01 feet to the Southeasterly R/W
line of Armour Ave. (a private road 66 feet wide); thence N 63 degrees
26' E, along said R/W line 977.32 feet to the Westerly R/W line of the
Chicago & North Western Rwy.; thence S 26 degrees 32' E along said R/W
line 356.53 feet; thence Southerly along said R/W line on a curve
concave to the West, central angle 26 degrees 32', radius of 918.9
feet, arc distance of 425.54 feet; thence S 0 degrees 00' E, along said
R/W line 305.04 feet to the point of beginning, containing 776,592
square feet or 17.828 acres more or less.
The bearings for this description are based on an assumed bearing of N
0 degrees 00' E on the East line of said NE 1/4 of Section 27.
III. 2537 WEST HIGHWAY 10, MOUNDS VIEW, MINNESOTA
All that part of the Northeast Quarter of the Northeast Quarter
of Section 7, Township 30 North, Range 23 West, Ramsey County,
Minnesota, lying northeasterly of S.T.H. No. 10, subject to S.T.H. No.
10, to Long Lake Road over the easterly 33 feet thereof, and subject to
County Road "I," said County Road "I" is described as follows on Page
299, Book 1034 of Deeds, Document No. 951328:
The northerly 33 feet of the Northeast Quarter of the Northeast
Quarter of Section 7, Township 30 North, Range 23 West, lying easterly
of the right-of-way of the Anoka Cutoff (U.S. #10) and westerly of the
right-of-way of Long Lake Road.
Subject to a utility easement to the City of Mounds View
described as follows:
A strip of land 20 feet in width lying 10 feet on each side of
the following described centerline: Commencing at the Northeast corner
of Section 7, Township 30, Range 23, Ramsey County, Minnesota; thence
South along the east line of said Section 7 a distance of 597 feet;
thence deflecting to the right 89 degrees 07 feet to the west line of
Long Lake Road for the actual point of beginning of the strip being
described; thence continuing along said line deflected right 89 degrees
017 feet a distance of 320.99 feet; thence deflecting to the right 41
degrees 32 feet a distance of 180.26 feet to Point A and then
continuing on said deflection right of 41 degrees 32 feet a further
distance of 244.18 feet, being a distance of 424.44 feet in all on this
line;
-C2-
<PAGE> 58
thence deflecting to the right 49 degrees 21 feet a distance of 47.74
feet to Point B and continuing on said line deflected right 49 degrees
21 feet a distance of 234.73 feet, more or less, being a total distance
of 282.47 feet, more or less, on this line, to the south line of County
Road "I" for the point of termination of the strip being described;
thence continuing on said line deflected 49 degrees 21 feet right to
the north line of said Section 7; thence East on the north line of said
Section 7 a distance of 676 feet, more or less, to the point of
commencement. And also a strip of land 20 feet in width lying 10 feet
on each side of the following described centerline: Commencing at Point
A in the previously described description; thence northeasterly at
right angles to the line on which Point A is situated a distance of
282.70 feet and there terminating. And also a strip of land 20 feet in
width lying 10 feet on each side of the following described centerline:
Commencing at Point B in the previously described centerline; thence
Easterly at right angles to the line on which Point B is situated a
distance of 54 feet and there terminating.
Subject to the rights of the State of Minnesota to erect
temporary snow fences upon S.T.H. No. 10 right-of-way and upon the
lands adjacent thereto as described on Page 453, Book 1440 of Deeds,
Document No. 1326463.
-C3-
<PAGE> 59
Schedule 3.6 to Credit and Security
Agreement
FINANCING STATEMENT INFORMATION
- -------------------------------------------------------------------------------
NAME, ADDRESS AND EMPLOYER
IDENTIFICATION NUMBER OF DEBTOR:
The Sportsman's Guide, Inc.
411 Farwell Avenue
South St. Paul, Minnesota 55075
Federal Employer Identification No. 41-
1293081
NAME, ADDRESS AND EMPLOYER
IDENTIFICATION NUMBER OF SECURED PARTY:
Norwest Bank Minnesota, National
Association
Sixth Street and Marquette Avenue
MAC N9312-040
Minneapolis, Minnesota 55479-0095
Federal Tax Identification No. 41-1592157
- -------------------------------------------------------------------------------
<PAGE> 60
Schedule 5.1 to Credit and Security
Agreement
Trade Names, Chief Executive Office, Principal Place of Business,
and Locations of Collateral
TRADE NAMES
The Sportsman's Guide
Guide Outdoors.com
Bargain Outfitters.com
The Company transacted business under the name "The
Olen Company" prior to 1986.
CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS
411 Farwell Avenue
South St. Paul, Minnesota 55075
OTHER INVENTORY AND EQUIPMENT LOCATIONS
2537 W. Highway 10 2360 Pilot Knob Road
Mounds View, Minnesota 55112 Mendota Heights, Minnesota 55118
Telephone: (651) 792-9492 Telephone: (651) 406-9740
Fax: (651) 792-9788 Fax: (651) 406-9741
Attention: Karl Pixler Attention: Al Fettig
<PAGE> 61
Schedule 5.2 to Credit and Security
Agreement
CAPITAL STOCK
<TABLE>
<CAPTION>
- ---------------------------------------- -------------------------------------- ----------------------------------
TYPE/CLASS/SERIES OF STOCK NUMBER OF AUTHORIZED SHARES NUMBER OF ISSUED AND OUTSTANDING
SHARE
- ---------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Common, $.01 par value 36,800,000 4,747,810
- ---------------------------------------- -------------------------------------- --------------------------------------
Series A Preferred, $.01 par value 200,000 0
- ---------------------------------------- -------------------------------------- --------------------------------------
Undesignated 3,000,000 0
- ---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
The Borrower has granted options to purchase up to 617,069 common
shares pursuant to incentive and other employee stock option plans.
The Borrower granted to the managing underwriters of the Borrower's
1998 public equity offering a warrant to purchase up to 100,000 common shares.
See attached for 5% holders.
<PAGE> 62
FIVE PERCENT BENEFICIAL OWNERS
The following list sets forth certain information with respect to the
beneficial ownership of common stock of the Borrower as of December 27, 1999 by
those persons or groups known to the Borrower to beneficially own more than 5%
of our common stock.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED
------------------
NAME NUMBER PERCENT (1)
- ---- ------ -----------
<S> <C> <C>
522,000 11.0%
Vincent W. Shiel (2)...............................................
250,851 5.1%
Gary Olen (3)......................................................
Ralph E. Heyman,
individually and as trustee of various trusts for the
benefit of Dr. and Mrs. Shiel and their children 383,725 8.1%
and grandchildren (4) ........................................
Wellington Management Company, LLP (5)
75 State Street 335,400 7.1%
Boston, MA 02109.............................................
Dimensional Fund Advisors Inc. (6)
1299 Ocean Avenue
11th Floor 302,800 6.4%
Santa Monica, CA 90401.......................................
Kalmar Investments Inc. (7)
3701 Kennett Pike 300,000 6.3%
Greenville, DE 19807 ........................................
</TABLE>
-5.2-2-
<PAGE> 63
- ----------------
(1) Percentages are calculated on the basis of the number of shares
outstanding on December 27, 1999 plus the number of shares issuable
pursuant to options held by the individual which are exercisable within
60 days after December 27, 1999.
(2) Includes 420,051 shares held by the Vincent W. Shiel Family Limited
Partnership of which the Vincent W. Shiel Revocable Trust, of which Dr.
Shiel is trustee, owns a 99.9% limited partnership interest and a 99.8%
interest in the general partner, and 101,949 shares held by the Helen
M. Shiel Family Limited Partnership of which the Helen M. Shiel
Revocable Trust, of which Mrs. Shiel is trustee, owns a 99.9% limited
partnership interest and a 99.8% interest in the general partner. Helen
M. Shiel is the wife of Dr. Shiel. Does not include 633,848 shares held
by Dr. and Mrs. Shiel's children or in trusts for the benefit of Dr.
and Mrs. Shiel and their children and grandchildren of which Dr. Shiel
expressly disclaims beneficial ownership.
(3) Includes 158,668 shares issuable upon the exercise of options. Does not
include 46,000 shares held in trusts for the benefit of Mr. Olen's
children and grandchildren of which Mr. Olen expressly disclaims
beneficial ownership.
(4) Includes 382,725 shares held as trustee of various trusts for the
benefit of Dr. and Mrs. Shiel and their children and grandchildren, of
which Mr. Heyman has no pecuniary interest. Does not include 522,000
shares held by the Vincent W. Shiel Family Limited Partnership and the
Helen M. Shiel Family Limited Partnership over which Mr. Heyman shares
voting and dispositive power and of which Mr. Heyman expressly
disclaims beneficial ownership. Mr. Heyman's address is 1100 Courthouse
Plaza S.W., Dayton, Ohio 45402.
(5) Based on a Schedule 13G filing dated February 9, 1999. Wellington
Management Company, LLP, a registered investment advisor, is the
beneficial owner of 335,400 shares owned of record by its clients and
has shared power to vote and dispose of the 335,400 shares.
(6) Based on a Schedule 13G filing dated February 11, 1999. Dimensional
Fund Advisors Inc., a registered investment advisor, has sole power to
vote and dispose of 302,800 shares held by investment companies and
other investment vehicles to which Dimensional Fund Advisors Inc.
provides investment advice. Dimensional Fund Advisors Inc. disclaims
beneficial ownership of the 302,800 shares.
(7) Based on a Schedule 13G filing dated January 8, 1999. Kalmar
Investments Inc., a registered investment advisor, has sole power to
dispose of 300,000 shares but does not have the power to vote the
300,000 shares.
-5.2-3-
<PAGE> 64
Schedule 7.1 to Credit and Security
Agreement
<TABLE>
<CAPTION>
PERMITTED LIENS
- -------------------------------------------------------------------------------------------------------------------------
CREDITOR COLLATERAL JURISDICTION FILING DATE FILING NUMBER
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Computer Sales Leased equipment pursuant Minnesota Secretary of 1/9/1995 1728610
International, Inc. to Master Lease State
- -------------------------------------------------------------------------------------------------------------------------
Bank One Leasing Leased equipment pursuant Minnesota Secretary of 1/9/1995 1728611
Corporation (assigned by to Master Lease State
Computer Sales
International, Inc.)
- -------------------------------------------------------------------------------------------------------------------------
Bank One Leasing Leased equipment pursuant Minnesota Secretary of 1/24/1995 1732697
Corporation (assigned by to Master Lease State
Computer Sales
International, Inc.)
- -------------------------------------------------------------------------------------------------------------------------
Bank One Leasing Leased equipment pursuant Minnesota Secretary of 1/27/1995 1733564
Corporation (assigned by to Master Lease State
Computer Sales
International, Inc.)
- -------------------------------------------------------------------------------------------------------------------------
Bank One Leasing Leased equipment pursuant Minnesota Secretary of 2/8/1995 1736473
Corporation (assigned by to Master Lease State
Computer Sales
International, Inc.)
- -------------------------------------------------------------------------------------------------------------------------
Bank One Leasing Leased equipment pursuant Minnesota Secretary of 2/8/1995 1736474
Corporation (assigned by to Master Lease State
Computer Sales
International, Inc.)
- -------------------------------------------------------------------------------------------------------------------------
Bank One Financial Specific equipment pursuant Minnesota Secretary of 6/6/1995 1766979
Services Corp. to Purchase/Service State
Agreement
- -------------------------------------------------------------------------------------------------------------------------
Bank One Financial Specific equipment pursuant Minnesota Secretary of 6/6/1995 1766982
Services Corp. to Purchase/Service State
Agreement
- -------------------------------------------------------------------------------------------------------------------------
Computer Sales Leased equipment pursuant Minnesota Secretary of 8/3/1995 1780263
International, Inc. to Master Lease State
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 65
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Bank One Leasing Leased equipmentpursuant to Minnesota Secretary of 10/23/1995 1797994
Corporation (assigned by MasterLease State
Computer Sales
International, Inc.)
- -------------------------------------------------------------------------------------------------------------------------
Norwest Business Credit, Blanket Minnesota Secretary of 5/3/1996 1845531
Inc. State
- -------------------------------------------------------------------------------------------------------------------------
Norwest Bank Minnesota, All inventory, equipment, Minnesota Secretary of 5/31/1996 1853428
National Association, as right to payment of money, State
Agent on behalf of itself general intangibles
and certain other lenders
under one or more
agreements among the
Debtor, the Agent and
such lenders.
- -------------------------------------------------------------------------------------------------------------------------
First Bank of Highland Leased equipment pursuant Minnesota Secretary of 11/8/1996 1892201
Park (assigned by Computer to Master Lease State
Sales International, Inc.)
- -------------------------------------------------------------------------------------------------------------------------
Crown Credit Company Specific equipment Minnesota Secretary of 3/18/1997 1925517
State
- -------------------------------------------------------------------------------------------------------------------------
Crown Credit Company Specific equipment Minnesota Secretary of 3/27/1997 1928003
State
- -------------------------------------------------------------------------------------------------------------------------
First American Bank, N.A. Leased computer equipment Minnesota Secretary of 3/31/1997 1928582
(assigned by Carlton State
Financial Corporation)
- -------------------------------------------------------------------------------------------------------------------------
SalePoint, Inc. Specific computer equipment Minnesota Secretary of 7/7/1997 1954980
State
- -------------------------------------------------------------------------------------------------------------------------
First American Bank, N.A. Leased computer equipment Minnesota Secretary of 9/29/1997 1976570
(assigned by Carlton State
Financial Corporation)
- -------------------------------------------------------------------------------------------------------------------------
Community First Financial, Leased computer equipment Minnesota Secretary of 11/21/1997 1990789
Inc. (assigned by Carlton State
Financial Corporation)
- -------------------------------------------------------------------------------------------------------------------------
Hampton Bank (assigned by Leased computer equipment Minnesota Secretary of 8/17/1998 2061697
Carlton Financial State
Corporation)
- -------------------------------------------------------------------------------------------------------------------------
Bremer Bank, N.A. Leased computer equipment Minnesota Secretary of 5/11/1999 2130192
(assigned by Carlton State
Financial Corporation)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
-7.1-2-
<PAGE> 66
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Community First Financial, Leased computer equipment Minnesota Secretary of 11/17/1999 2178407
Inc. (assigned by Carlton State
Financial Corporation)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
-7.1-3-
<PAGE> 67
Schedule 7.2 to Credit and Security
Agreement
PERMITTED INDEBTEDNESS AND GUARANTIES
Indebtedness
<TABLE>
<CAPTION>
Creditor Principal Maturity Monthly Collateral
-------- --------- -------- ------- ----------
Amount Date Payment
------ ---- -------
<S> <C> <C> <C> <C>
SSP HRA $55,000 10/31/03 $25,000/yr Machinery & equipment
SSP HRA $15,000 10/31/03 None Unsecured
required
</TABLE>
Guaranties
None
<PAGE> 1
EXHIBIT 10.13
This Replacement Promissory Note and payment hereof is subject to and secured
by the terms of a certain Stock Pledge Agreement dated February 11, 1998
between the Maker and the Payee, the provisions of which are incorporated
herein and made a part hereof. By executing below, the Maker hereby affirms the
terms and conditions of such Stock Pledge Agreement and acknowledges that this
Replacement Promissory Note is in substitution for, replacement of, and shall
constitute the "Note" as defined in such Stock Pledge Agreement.
REPLACEMENT PROMISSORY NOTE
---------------------------
$238,700 February 11, 2000
South St. Paul, Minnesota
FOR VALUE RECEIVED, Gary Olen, an individual resident of the State of
Minnesota ("Maker"), hereby promises to pay to the order of THE SPORTSMAN'S
GUIDE, INC., its successors and assigns ("Payee") at its offices located at 411
Farwell Avenue, South St. Paul, Minnesota (or at such other place as the holder
hereof may specify in writing to the Maker from time to time) the principal
amount of TWO HUNDRED THIRTY-EIGHT THOUSAND SEVEN HUNDRED DOLLARS ($238,700) in
five (5) equal annual installments of principal and interest, such interest on
the unpaid principal amount hereof to be calculated at a rate per annum equal
to 5.69%.
This Note is dated the date hereof, relates back to, and has been executed
and delivered by the Maker in the amount of $238,700, in replacement of, and in
substitution for, the Promissory Note issued by the Maker to the Payee dated
February 11, 1998, as replaced and substituted for pursuant to a Replacement
Promissory Note dated February 11, 1999 (the "Original Note").
Interest shall accrue from the date hereof to the date of repayment of the
principal amount hereof in full (calculated on the basis of the actual number
of days elapsed over a year of 365 days). Annual principal and interest
payments (including, interest accruing pursuant to the Original Note) shall be
due and payable on each February 11, commencing February 11, 2001, at maturity
(whether by acceleration or otherwise) and, after maturity, upon demand. The
amount of any payment shall be applied first to the payment of accrued interest
on the unpaid principal amount hereof through the date of such payment and then
to the outstanding principal.
Overdue principal and, to the extent permitted by law, overdue interest
shall bear interest at a rate per annum equal to 7.69%.
Whenever any payment to be made hereunder shall be stated to be due on a
day which is not a business day, the due date thereof shall be extended to the
next succeeding business day and, if payment of principal has been so extended,
interest shall be payable on such principal at the applicable rate during such
extension.
This Note may be prepaid, in whole at any time and in part from time to
time, without premium or penalty, on any business day.
All payments under this Note shall be made without set-off, deduction or
counterclaim on the date due in U.S. dollars and in immediately available funds.
<PAGE> 2
Until the indebtedness evidenced hereby is paid in full, the Maker shall
promptly, after obtaining knowledge, notify the Payee of the occurrence of any
Event of Default or of any event, act or condition which with notice or lapse
of time or both would constitute an Event of Default.
Upon the occurrence of any of the following events (each an "Event of
Default"):
(a) default shall be made in the due and punctual payment of any
principal and/or interest on this Note and such default shall continue for
thirty days after written notice of such nonpayment is made by the Payee
to the Maker;
(b) the occurrence of any default or event of default under any other
agreement, document or instrument executed and delivered by the Payee to
the Maker whether currently in existence or entered into after the date of
this Note; including without limitation, the Employment Agreement dated
July 25, 1997 between Maker and Payee;
(c) Maker commences, or there is commenced against the Maker (or any
material assets of the Maker), any proceedings under any bankruptcy,
insolvency, reorganization, receivership, relief of debtors, dissolution,
liquidation or similar law of any jurisdiction and, if commenced against
the Maker, such proceedings remain undismissed for a period of 30 days; or
(d) Maker ceases, for any reason, to be employed by the Payee; provided,
however, if Maker ceases to be employed by the Payee for reason of death
or disability, such default shall not exist until 120 days after such
death or disability. For purposes of this provision, disability means a
mental or physical condition which causes the Maker to be unable to
perform his employment duties;
then, in any such event, and at any time thereafter, if any Event of Default
shall then be continuing, the Payee, by written notice to the Maker, may
declare the principal of, and accrued interest in respect of, this Note to be,
whereupon the same shall become, forthwith due and payable without presentment,
demand, protest or any other notice of any kind, all of which are hereby
expressly waived by the Maker; provided, however, that if an Event of Default
described in clause (c) above shall occur, the result which would otherwise
occur only upon the giving of written notice as specified herein, shall occur
automatically without the giving of any such notice.
The Maker shall promptly pay all out-of-pocket costs and expenses
(including attorneys' fees and expenses) reasonably incurred by Payee in
connection with the enforcement or collection of this Note.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of Minnesota.
/s/ Gary Olen
------------------
Gary Olen
2
<PAGE> 1
EXHIBIT 10.16
THE SPORTSMAN'S GUIDE, INC.
1999 STOCK OPTION PLAN
1. PURPOSE. The purpose of this Plan is to advance the interests of The
Sportsman's Guide, Inc., a Minnesota corporation (the "Company") by providing an
opportunity to selected key employees of the Company to purchase stock of the
Company through the exercise of options granted under this Plan. By encouraging
such stock ownership, the Company seeks to attract, retain and motivate key
employees of training, experience and ability, and to encourage the judgment,
initiative and efforts of such employees for the successful conduct of the
Company's business. It is intended that these purposes will be effected by the
granting of stock options as provided herein which will qualify as "incentive
stock options" under the provisions of Section 422 (or its successor provisions)
of the Internal Revenue Code of 1986 (the "Code"), and options which do not
qualify as incentive stock options under the Code ("nonqualified options").
2. STOCK SUBJECT TO THE PLAN. The total number of shares that may be
subject to options granted under this Plan shall not exceed 600,000 shares of
the Common Stock of the Company, $.01 par value ("Common Stock"). Shares subject
to an option which for any reason expires or is terminated unexercised as to
such shares may again be the subject of an option under the Plan. The shares
delivered upon exercise of options granted under this Plan may be either
authorized but unissued shares or issued shares reacquired by the Company.
3. ADMINISTRATION. The Plan shall be administered by the Compensation
Committee of the Board of Directors of the Company or such other committee
designated by the Board (the "Committee") consisting of two or more directors
who shall be appointed by and shall serve at the pleasure of the Board. Subject
to the provisions of this Plan, the Committee shall have full power to construe
and interpret the Plan and to establish, amend and rescind rules and regulations
for its administration. The Committee shall recommend to the Board of Directors
the individuals to whom and the times at which options shall be granted, the
designation of each option as an incentive stock option or a nonqualified
option, and the number of shares subject to each option. Any such construction,
rule determination or other action taken by the Committee pursuant to the Plan
shall be binding and conclusive upon the approval by the Board of Directors.
Actions by a majority of the Committee at a meeting at which a quorum
is present, or actions approved in writing by all of the members of the
Committee, shall be the valid acts of the Committee. No member of the Board of
Directors or the Committee shall be liable for any action or determination made
in good faith with respect to the Plan or any option granted under it.
4. ELIGIBLE EMPLOYEES. Options may be granted by the Board of Directors
to such key employees of the Company, including members of the Board of
Directors who are also employees of the Company, as are selected by the
Committee. The maximum number of shares subject to options which may be granted
to any individual shall be the total number of shares available under the Plan.
5. TERMS AND CONDITIONS OF OPTIONS. All options granted under this Plan
shall be evidenced by stock option agreements in such form and not inconsistent
with the Plan as the Com-
<PAGE> 2
mittee shall approve from time to time, which agreements shall include, but not
be limited to, the following terms and conditions:
(a) Price. The purchase price per share of stock payable upon the
exercise of each option granted hereunder shall not be less than the fair market
value of the stock on the date the option is granted. If at the time of grant of
an incentive stock option the optionee owns stock possessing more than 10% of
the combined voting power of all classes of stock of the Company, such purchase
price per share shall not be less than 110% of the fair market value of the
stock on the date the option is granted. Such fair market value shall be
determined in accordance with procedures established by the Committee conforming
to regulations issued by the Internal Revenue Service with regard to incentive
stock options.
(b) Number of Shares. Each option agreement shall specify the
number of shares to which it pertains.
(c) Exercise of Options. Each option shall be exercisable for the
full amount or for any part thereof and at such intervals or in such
installments as the Board of Directors may determine at the time it grants such
option. No option shall be exercisable with respect to any shares later than ten
years after the date of grant of the option. If at the time of grant of an
incentive stock option the optionee owns stock possessing more than 10% of the
combined voting power of all classes of stock of the Company, such option shall
be exercisable no later than five years after the date of grant.
(d) Notice of Exercise and Payment. An option shall be
exercisable by delivery of a written notice to the Secretary of the Company
specifying the number of shares for which it is exercised. If the shares are not
at the time registered under the Securities Act of 1933, the optionee shall
include with such notice a letter, in form and substance satisfactory to the
Company, confirming that the shares are being purchased for the optionee's own
account for investment and not with a view to distribution. The exercise price
and any withholding obligations under applicable tax laws shall be paid in full
at the time of delivery of the notice of exercise, either by (i) cashier's,
certified or personal check, (ii) if permitted by a vote of the Board of
Directors by delivery and assignment to the Company of shares of Common Stock or
(iii) by a combination of (i) and (ii). The value of the Company stock for such
purpose shall be its fair market value as of the date the option is exercised.
(e) Non-Transferability. No option shall be transferable by the
optionee otherwise than by will or the laws of descent and distribution, and
each option shall be exercisable during the lifetime of the optionee only by him
or her, except that the Committee may, in its discretion, authorize options
granted under this Plan to be on terms which permit the optionee to transfer the
option to family members of the optionee, trusts for the benefit of such family
members, family limited partnerships or other persons or entities.
(f) Termination of Options. Each option shall terminate and may
no longer be exercised if the optionee ceases for any reason to be an employee
of the Company, except that:
2
<PAGE> 3
(i) If the optionee's employment shall have terminated for
any reason other than cause, disability (as defined below)
or death, the optionee may at any time within a period of
three months after such termination of employment exercise
the option to the extent the option was exercisable by the
optionee on the date of termination of employment.
(ii) If the optionee's employment shall have been terminated
because of disability within the meaning of Section 22(e)(3)
of the Code, the optionee may at any time within a period of
one year after such termination of employment exercise the
option to the extent the option was exercisable by the
optionee on the date of termination of employment.
(iii) If the optionee dies at a time when the option was
exercisable by the optionee, the optionee's estate, personal
representative or beneficiary to whom it has been
transferred pursuant to Section 5(e) hereof may, within six
months following the death, exercise the option to the
extent the option might have been exercised at the time of
the optionee's death.
(iv) No option may be exercised to any extent by anyone
after the expiration date of the option.
(g) Rights as Shareholder. The optionee shall have no rights as
a shareholder with respect to any shares covered by an option until the date of
issuance of a stock certificate to the optionee for such shares.
6. TREATMENT OF CERTAIN INCENTIVE STOCK OPTIONS. To the extent that
the aggregate fair market value (determined as of the date the option is
granted) of shares with respect to which one or more incentive stock options
first become exercisable by an optionee in any calendar year exceeds $100,000,
taking into account shares subject to incentive stock options under this Plan
and shares subject to incentive stock options under all other plans of the
Company or other entities referenced in Section 422(d)(1) of the Code, the
options shall be treated as nonqualified stock options.
7. STOCK DIVIDENDS; STOCK SPLITS; COMBINATIONS; RECAPITALIZATIONS.
Appropriate adjustment shall be made in the maximum number of shares of Common
Stock subject to the Plan and in the number, kind and option price of shares
covered by outstanding options granted hereunder to give effect to any stock
dividends or other distribution, stock splits, stock combinations,
recapitalizations and other similar changes in the capital structure of the
Company after the effective date of the Plan.
8. MERGER; SALE OF ASSETS; DISSOLUTION. In the event of a change of
the Common Stock resulting from a merger or similar reorganization as to which
the Company is the surviving corporation, the number and kind of shares which
thereafter may be optioned and sold under the Plan and the number and kind of
shares then subject to options granted hereunder and the price per share thereof
shall be appropriately adjusted in such a manner as the Committee may deem
equitable to prevent substantial dilution or enlargement of the rights available
or granted here-
3
<PAGE> 4
under. If the Company at any time should dissolve, sell all or substantially all
of its assets, undergo a reorganization, or merge or consolidate with any
corporation and the Company is not the surviving corporation, then (unless in
the case of a reorganization, merger or consolidation the surviving corporation
assumes the optionees' rights under the Plan or issues substantially equivalent
substitute rights in place thereof) each optionee shall be notified by the
Company of his or her right to exercise all outstanding options (both vested and
unvested) prior to any such dissolution, sale, reorganization, merger or
consolidation. The failure to exercise such outstanding options within 30 days
of such notification shall cause the options to be terminated.
Notwithstanding the foregoing, in the case of an incentive stock
option, no adjustment shall be made pursuant to Section 7 or 8 hereof which
would cause the Plan to violate Section 424(a) of the Code or any successor
provisions thereto, without the written consent of the optionee adversely
affected thereby.
9. AMENDMENT OR TERMINATION OF PLAN. The Board of Directors may at any
time amend or terminate the Plan or alter or amend any outstanding stock option
agreements under the Plan in any manner it deems advisable, provided that no
such action shall adversely affect or impair any then outstanding option without
the consent of the optionee holding such option.
10. EFFECT OF THE PLAN ON EMPLOYMENT RELATIONSHIP. The establishment of
the Plan shall in no way, now or hereafter, reduce, enlarge or modify the
employment relationship between the Company and the optionee, except that any
options granted under the Plan shall be subject to the provisions of any
employment agreement between the Company and the optionee. Nothing contained in
the Plan shall be construed as conferring upon any optionee any right to
continued employment with the Company or to give any employee any right to
participate in the Plan or to receive options. The granting of options under the
Plan shall be entirely discretionary with the Board of Directors.
11. EFFECTIVE DATE; DURATION OF PLAN. This Plan was adopted by the
Board of Directors as of February 11, 1999, subject to approval by the
shareholders of the Company, and shall become effective upon shareholder
approval. The Plan shall remain in effect until discontinued by the Board of
Directors, except that no incentive stock option may be granted under the Plan
after May 10, 2009.
12. DEFINITIONS.
(a) The term "key employees" means those executive, administrative,
operational or managerial employees of the Company who are determined by the
Committee to be eligible for options under this Plan.
(b) The term "optionee" means a key employee to whom an option is
granted under this Plan.
As approved by shareholders effective May 10, 1999.
4
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE SPORTSMAN'S GUIDE, INC.
State of
Name Incorporation
---- -------------
GuideOutdoors.com Inc. Delaware
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 10, 2000 accompanying the
financial statements and schedule included in the Annual Report of The
Sportsman's Guide, Inc. on Form 10-K for the fiscal year ended December 31,
1999. We hereby consent to the incorporation by reference of said reports in the
Registration Statements of The Sportsman's Guide, Inc. on Forms S-8 (File No.
333-26311, effective May 1, 1997, File No. 333-26313, effective May 1, 1997,
File No. 333-26315, effective May 1, 1997, File No. 333-26317, effective May 1,
1997 File No. 333-39765, effective November 7, 1997 and File No. 333-80869,
effective June 17, 1999) and on Form S-3 (File No. 333-50369, effective May 8,
1998).
/s/ Grant Thornton LLP
Minneapolis, Minnesota
March 22, 2000
<PAGE> 1
EXHIBIT 24.1
THE SPORTSMAN'S GUIDE, INC.
POWER OF ATTORNEY
WHEREAS, The Sportsman's Guide, Inc. (the "Company") intends to file
with the Securities and Exchange Commission its Annual Report on Form 10-K for
the fiscal year ended January 2, 2000.
NOW, THEREFORE, the undersigned in his capacity as a director of the
Company hereby appoints Gary Olen, Gregory R. Binkley and Charles B. Lingen, or
any one of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, to execute in his name, place and
stead, the Company's Annual Report on Form 10-K for the fiscal year ended
January 2, 2000 (including any amendment to such report) and any and all other
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in the aforesaid capacity, to all intents and purposes as the
undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
14th day of March, 2000.
/s/ Vincent W. Shiel
-------------------------------
Vincent W. Shiel
<PAGE> 2
THE SPORTSMAN'S GUIDE, INC.
POWER OF ATTORNEY
WHEREAS, The Sportsman's Guide, Inc. (the "Company") intends to file
with the Securities and Exchange Commission its Annual Report on Form 10-K for
the fiscal year ended January 2, 2000.
NOW, THEREFORE, the undersigned in his capacity as a director of the
Company hereby appoints Gary Olen, Gregory R. Binkley and Charles B. Lingen, or
any one of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, to execute in his name, place and
stead, the Company's Annual Report on Form 10-K for the fiscal year ended
January 2, 2000 (including any amendment to such report) and any and all other
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in the aforesaid capacity, to all intents and purposes as the
undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
14th day of March, 2000.
/S/ Mark F. Kroger
-------------------------------
Mark F. Kroger
<PAGE> 3
THE SPORTSMAN'S GUIDE, INC.
POWER OF ATTORNEY
WHEREAS, The Sportsman's Guide, Inc. (the "Company") intends to file
with the Securities and Exchange Commission its Annual Report on Form 10-K for
the fiscal year ended January 2, 2000.
NOW, THEREFORE, the undersigned in his capacity as a director of the
Company hereby appoints Gary Olen, Gregory R. Binkley and Charles B. Lingen, or
any one of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, to execute in his name, place and
stead, the Company's Annual Report on Form 10-K for the fiscal year ended
January 2, 2000 (including any amendment to such report) and any and all other
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in the aforesaid capacity, to all intents and purposes as the
undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
14th day of March, 2000.
/S/ Leonard M. Paletz
-------------------------------
Leonard M. Paletz
<PAGE> 4
THE SPORTSMAN'S GUIDE, INC.
POWER OF ATTORNEY
WHEREAS, The Sportsman's Guide, Inc. (the "Company") intends to file
with the Securities and Exchange Commission its Annual Report on Form 10-K for
the fiscal year ended January 2, 2000.
NOW, THEREFORE, the undersigned in his capacity as a director of the
Company hereby appoints Gary Olen, Gregory R. Binkley and Charles B. Lingen, or
any one of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, to execute in his name, place and
stead, the Company's Annual Report on Form 10-K for the fiscal year ended
January 2, 2000 (including any amendment to such report) and any and all other
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in the aforesaid capacity, to all intents and purposes as the
undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
14th day of March, 2000.
/s/ William T. Sena
--------------------------------
William T. Sena
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF EARNINGS FOUND ON PAGES 23 AND 24 OF THE COMPANY'S FORM
10-K 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> YEAR
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> JAN-02-2000
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,116
<ALLOWANCES> 172
<INVENTORY> 37,403
<CURRENT-ASSETS> 47,541
<PP&E> 12,482
<DEPRECIATION> 6,718
<TOTAL-ASSETS> 53,496
<CURRENT-LIABILITIES> 36,272
<BONDS> 40
0
0
<COMMON> 47
<OTHER-SE> 16,967
<TOTAL-LIABILITY-AND-EQUITY> 53,496
<SALES> 162,515
<TOTAL-REVENUES> 162,515
<CGS> 97,631
<TOTAL-COSTS> 97,631
<OTHER-EXPENSES> 1
<LOSS-PROVISION> 240
<INTEREST-EXPENSE> 1,109
<INCOME-PRETAX> 18
<INCOME-TAX> 6
<INCOME-CONTINUING> 12
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
RISK FACTORS
You should carefully consider the risk factors described below as well
as the other information in our SEC filings before making an investment in The
Sportsman's Guide, Inc. common stock.
RISKS RELATED TO OUR BUSINESS
WE ARE SUBJECT TO RISKS ASSOCIATED WITH CATALOG AND ONLINE RETAILING.
Our success depends on the success of our catalog-based business as
well as our e-commerce business. We believe this success is achieved through the
following:
- efficient targeting of our customers;
- appropriate shifts in our merchandising mix;
- our ability to achieve adequate response rates to our catalog
mailings and online offerings; and
- our ability to accurately forecast economic conditions and
consumer demand.
Catalog mailings involve substantial postage, paper and printing costs.
Merchandise acquisition costs are incurred prior to mailing each catalog and
making each online offering. If we were to experience a significant shortfall in
anticipated sales from a particular catalog mailing or online offering and not
recover costs associated with that offer, our results of operations could be
adversely affected.
Response rates and sales generated by each catalog mailing and online
offering can be affected by factors such as consumer preferences, economic
conditions, timing of our catalog mailings and online offerings as well as our
competitors' and our mix of merchandise. Our inability to accurately target the
appropriate customers or to achieve adequate response rates could result in
lower sales and profits.
OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND SEASONALITY.
Our sales and results of operations have fluctuated and can be expected
to continue to fluctuate as a result of a number of factors, including:
- the timing of new merchandise, catalog and online offerings;
- recognition of costs or sales contributed by new merchandise,
catalog and online offerings;
- fluctuations in response rates and success of advertising
campaigns;
<PAGE> 2
- fluctuations in postage, paper and printing costs;
- fluctuations in merchandise returns;
- adverse weather conditions that affect response, distribution or
shipping;
- shifts in the timing of holidays;
- changes in our product mix;
- seasonal fluctuations in consumer purchasing patterns and
advertising spending;
- changes in the growth rate of Internet usage and online user
traffic levels;
- actions of our competitors; and
- general economic and market conditions.
The majority of our sales historically occur during the third and
fourth quarters. The seasonal nature of our business is due to our focus on
outdoor merchandise and related accessories for the fall, as well as winter
apparel and gifts for the holiday season. We expect this seasonality will
continue in the future. In anticipation of increased sales activity during the
third and fourth quarters, we incur significant additional expenses for hiring
additional employees and building inventory levels. Our annual financial results
would be adversely impacted if sales were to fall substantially below what we
normally expect during the third and fourth quarters.
WE DEPEND ON THIRD PARTY SERVICE PROVIDERS TO OPERATE OUR BUSINESS.
We depend on a number of third parties to provide services to operate
our business. For example, we depend on:
- outside printers and pre-press providers to print and mail our
catalogs and to convert the catalogs to digital format for Web
site posting;
- shipping companies and the U.S. Postal Service for timely
delivery of our catalogs and shipment of merchandise to our
customers;
- telephone companies to provide telephone service to our in-house
and outside call centers;
- outside call centers to handle inbound customer telephone orders;
- communications providers to provide our Internet users with
access to our Web sites; and
- vendors or suppliers for timely fulfillment of merchandise
orders.
Any disruption in these services could have a negative impact on our
business. Strikes or other service interruptions affecting our shippers would
impair our ability to deliver
2
<PAGE> 3
merchandise on a timely basis. Shipper strikes can suppress our sales because
customers may perceive that their orders cannot be delivered or will be
significantly delayed.
Our Web sites could experience disruptions or interruptions in service
due to failures by communications providers. Our users depend on Internet
service providers and Web site operators for access to our Web sites. Our users
may experience significant outages, delays or other difficulties due to system
failures unrelated to our systems. These types of occurrences could cause users
to perceive our Web sites as not functioning properly and therefore cause them
to stop using our services.
A third party hosts and manages our two e-commerce sites and will host
and manage our community/destination portal. System failures by this third party
could lead to disruption in service on our sites. These system disruptions could
have a material adverse effect on our business.
WE FACE SIGNIFICANT COMPETITION FROM CATALOG, RETAIL AND INTERNET-BASED
BUSINESSES.
The direct marketing industry is highly competitive and fragmented. We
have significant competitors within each merchandise category and may face
competition from new entrants or existing competitors who shift focus to markets
we serve. Our competitors include:
- other outdoor/hunting mail order catalogs, including Bass Pro
Shops Inc. and Cabela's Inc.;
- discount retailers such as Wal-Mart Stores, Inc. or Kmart
Corporation;
- Web sites maintained by online retailers of footwear, clothing
and outdoor gear;
- Internet portals and online service providers that feature
shopping services, such as America Online, Inc., Yahoo! Inc.,
Excite Inc. and Lycos, Inc.; and
- Internet content-based providers that target the outdoor
enthusiast such as GORP.com, Inc. and All Outdoors, Inc.
Some of our competitors are larger and have substantially greater
financial, marketing and other resources than us. Our competitors may be able to
secure products from vendors on more favorable terms, fulfill customer orders
more efficiently and adopt more aggressive pricing or inventory availability
policies than we can. Our competitors may develop products or services that are
equal or superior to our solutions or achieve greater market acceptance than
ours. Traditional store-based retailers also enable customers to see and feel
products in a manner that is not possible in catalogs or over the Internet.
INCREASES IN POSTAGE AND PAPER COSTS AND PAPER SHORTAGES CAN ADVERSELY IMPACT
OUR CATALOG BUSINESS.
3
<PAGE> 4
Increases in postal rates and paper costs have a significant impact on
the cost of production and mailing of our catalogs and the shipment of customer
orders. Postage prices increase periodically, and we have no control over
increases that may occur in the future. Paper prices historically have been
cyclical and we have experienced significant increases in the past. Significant
increases in postal rates or paper costs could negatively impact our operating
results, particularly to the extent we are unable to pass on increases directly
to our customers or offset the increases by reducing other costs.
In addition, we are dependent upon the availability of paper to print
our catalogs. Paper shortages have occurred in the past and may occur in the
future. Any paper shortage may increase our paper costs and cause us to reduce
our catalog circulation, change to a different weight or grade of paper or
reduce the number of pages per catalog. These increased costs or responsive
actions could negatively impact our sales and operating results.
WE MUST DEVELOP AND MAINTAIN OUR MAILING LIST TO GROW OUR CATALOG BUSINESS.
We mail catalogs to individuals whose names are in our proprietary
customer database and to potential customers whose names we obtain from rented
or exchanged mailing lists. Names derived from rented or exchanged lists
generate lower response rates while requiring the same or greater advertising
expenses than names in our in-house database. Consequently, overall response
rates could decline while expenses increase if we were to increase our use of
rented or exchanged lists relative to the use of names in our customer database.
Attrition reduces the number and quality of names in our mailing list.
We must constantly develop and maintain our mailing list by identifying new
prospective customers and tracking purchases by existing customers. We use
internally developed customer selection models to identify prospective and
existing customers to whom a catalog will be mailed. Incorrect modeling
assumptions or our failure to update our mailing list could negatively impact
our sales and operating results.
OUR INTERNET OPERATIONS ARE EXPECTED TO INCUR SUBSTANTIAL NET LOSSES FOR THE
FORESEEABLE FUTURE.
We expect our Internet operations to record substantial net losses for
the foreseeable future. We believe that the continued growth of our Internet
business will depend in large part on our ability to:
- increase awareness of our Web site brand names, build traffic on
our Web sites and convert site users to single and multi-buyers;
- develop a fully operational and integrated portal providing both
e-commerce and community services to outdoor enthusiasts;
- provide our customers with superior Internet community and
e-commerce experience; and
4
<PAGE> 5
- continue to enhance our systems and technology to support
increased traffic to our Web sites.
We intend to significantly increase our level of Internet marketing and
promotional expenditures. We also expect to make investments to further develop
our Web sites, technology and operating systems. Slower revenue growth than we
anticipate or operating expenses that exceed our expectations would harm our
Internet business.
WE MAY NEED ADDITIONAL CAPITAL TO CONTINUE TO EXPAND OUR INTERNET BUSINESS.
We will require substantial working capital to fund expansion of our
Internet business and may need more in the future. We believe our available
funds should be sufficient to meet our working capital and capital expenditures
needs for the next 12 months. If we accelerate our Internet initiatives from
current plans, we may need to raise additional funds through the issuance of
equity, equity-related or debt securities. In that event, your rights may be
subordinate to other investors and your stock ownership percentage may be
diluted. We cannot be certain that additional financing will be available to us.
WE DEPEND ON OUR SENIOR MANAGEMENT FOR OUR SUCCESS.
Our success is dependent to a significant extent on the efforts of our
executive officers and key management employees. The loss of any member of our
senior management could hurt our business.
OUR MANAGEMENT'S EXPERIENCE IN THE INTERNET INDUSTRY IS LIMITED AND WE MAY FAIL
TO HIRE, RETAIN AND INTEGRATE KEY EMPLOYEES.
Our senior management has limited experience operating and managing Web
sites engaged in the sale of outdoor gear and providing Internet community
services. We depend on their ability to quickly develop an expertise in the
e-commerce and community aspects of our Internet business.
We anticipate hiring additional persons to serve on our Internet
management team. Our success depends on our ability to continue to attract,
retain and motivate skilled employees who can effectively manage a fully
integrated Internet portal business. Competition to hire qualified e-commerce
and Internet community employees is intense. We may be unable to retain our
present key employees in the future. We may experience difficulty in hiring and
retaining skilled employees with appropriate qualifications. Our business will
be harmed if we fail to attract and retain key employees.
In addition, because of the current low unemployment rate in the
Minneapolis/St. Paul metropolitan area, we face a shrinking pool of available
labor and we could experience labor shortages and higher labor costs in the
future.
5
<PAGE> 6
WE MAY NEED TO EXPAND OUR COMPUTER SYSTEMS TO SUPPORT INCREASED SALES VOLUME AND
INCREASED TRAFFIC ON OUR WEB SITES.
Growth in our sales volume, in the number of users of our Web sites or
in the e-commerce solutions we provide to other businesses may strain or exceed
the capacity of our computer systems and lead to declines in performance or
systems failure. We believe that we will need to continually improve and enhance
the functionality and performance of our e-commerce, customer tracking and other
technical systems. We intend to upgrade our existing systems and implement new
systems as we anticipate new demand. Failure to implement these systems
effectively or within a reasonable period of time would cause decreased levels
of customer service and satisfaction.
DISRUPTION IN OUR FULFILLMENT OPERATIONS WOULD HARM OUR BUSINESS.
Our ability to receive, process and fulfill customer orders depends on
the effective operation of our telephone lines, operational and management
information systems, and warehouse and distribution facilities. Any material
disruption in our order receipt, processing or fulfillment systems resulting
from internal or external telephone system failure, electrical problems, failure
of our information systems or other technical problems could cause significant
delays in our ability to receive and fill orders and may cause orders to be
lost, shipped or delivered late or cancelled by the customer.
Our primary facility is our headquarters in South St. Paul, Minnesota.
If this facility were destroyed or significantly damaged by fire or other
disaster, we would need to obtain alternative facilities and replenish our
inventory, either of which would result in significantly increased operating
costs and delays in fulfilling customer orders.
WE DEPEND ON FINDING AND MAINTAINING SOURCES FOR OUR MERCHANDISE.
We offer a changing mix of products. This changing mix of products
presents certain unique challenges in finding merchandise for our catalogs and
e-commerce offerings. Our buyers must develop and maintain relationships with
vendors to locate sources for high quality, low price, name brand merchandise
they believe will interest our customers. We cannot assure you that we will be
able to locate sources for or maintain ongoing access to manufacturers'
close-outs, military surplus and other items featured by us or that such
merchandise will be available to us at the times or prices or in the quantities
desired.
EXCESSIVE MERCHANDISE RETURNS COULD ADVERSELY IMPACT OUR BUSINESS.
We maintain a policy of making refunds or exchanges for all merchandise
returned by customers for any reason, and we place no time limit on this return
policy. As our merchandise mix of footwear and apparel has increased so have
merchandise returns. While we make allowances in our financial statements for
anticipated merchandise returns based on historical return rates, actual
merchandise returns could exceed our reserves. We may
6
<PAGE> 7
experience increased returns of Y2K-related merchandise, such as gas or solar
powered generators, after January 2000. Any significant increase in merchandise
returns or merchandise returns that exceed our reserves could negatively impact
our operating results.
HIGHER BACKORDER LEVELS CAN NEGATIVELY IMPACT OUR OPERATING RESULTS.
The average order is approximately three items. Backorders frequently
result in our shipping the customer two packages, but we charge the customer
shipping only for the first package. Consequently, higher backorder levels
increase our shipping costs and negatively impact our operating results.
Effectively managing our level of backorders depends both on our ability to
accurately forecast customer demand and product availability from our vendors.
GOVERNMENT REGULATION AFFECTS OUR BUSINESS.
We are subject to federal, state and local laws and regulations which
affect our business. Federal Trade Commission regulations govern the manner in
which orders may be solicited and prescribe other obligations in fulfilling
orders and consummating sales. Other laws and regulations prohibit or limit the
sale, in certain states and localities, of certain items we offer such as black
powder firearms, ammunition, bows, knives and similar products. Government
regulation of firearms can affect sales of these ancillary firearm products, and
any increase in such regulation could adversely impact our sales of those
products.
State and local government regulation of hunting can result in changes
to hunting seasons, bans or limitations on hunting or other similar
restrictions. Because a significant amount of our sales are attributable to
hunting, such changes or restrictions could decrease the demand for some of our
products.
We import products for sale. Consequently, we are subject to U.S.
customs laws and regulations pertaining to proper item classification, quotas,
payment of duties and tariffs, and maintenance of documentation and internal
control programs.
We do not collect sales or similar taxes on sales of merchandise
shipped to residents of states other than Minnesota. Various states have sought
to impose on direct marketers the burden of collecting state sales and use taxes
on the sale of merchandise shipped to residents of that state. If we become
subject to collection or payment of additional sales, use or other taxes, our
customer response rates could be adversely affected.
WE FACE PRODUCT LIABILITY RISKS ON THE PRODUCTS WE SELL.
Our products include black powder firearms, ammunition, air guns,
paintball guns, blank firing firearms, bows, slingshots, knives, stun guns,
blowguns, crossbows, certain non-lethal and chemical spray devices and other
potentially dangerous products. Although we are not a manufacturer of any of
these products, the sale of these products involves a risk of being named as a
party defendant in product liability litigation. We cannot assure you that our
7
<PAGE> 8
insurance will cover all potential claims arising from the sale of these
products or that the amount of the coverage will be adequate, nor can we assure
you that adequate insurance coverage can be obtained in the future at an
acceptable cost or at all. Any uninsured or inadequately insured claim or
liability could have a material adverse effect on our business and operating
results.
RISKS RELATED TO THE INDUSTRY
WE DEPEND ON CONTINUED GROWTH IN USE OF THE INTERNET.
A decrease in the growth of Web usage would hurt our business. The
following factors may inhibit growth in Web usage:
- inadequate Internet infrastructure;
- security and privacy concerns;
- inconsistent quality of service; and
- unavailability of cost-effective and high-speed service.
The performance and reliability of the Internet may decline as the
number of users increases or the bandwidth requirements of users increase. If
outages or delays frequently occur in the future, Web usage, including usage of
our Web sites, could grow slowly or decline. Even if the necessary
infrastructure or technologies are developed, we may have to spend considerable
amounts to adapt our solutions accordingly.
WE DEPEND ON CONTINUED GROWTH OF E-COMMERCE.
Our future revenue and profits depend upon the widespread acceptance
and use of the Internet as an effective medium of commerce. Failure of the
Internet and online services to become a viable commercial marketplace would
hurt our business. Rapid growth in the use of the Internet and commercial online
services is a recent phenomenon. We cannot assure you that a large base of
consumers will adopt and continue to use the Internet for commerce. Demand for
recently introduced services and products over the Internet and online services
is subject to a high level of uncertainty. The successful development of the
Internet and online services is subject to a number of factors, including:
- continued growth in the number of users of such services;
- concerns about transaction security;
- continued development of the necessary technological
infrastructure; and
- the development of complementary services and products.
WE DEPEND ON AN UNPROVEN INTERNET BUSINESS MODEL.
8
<PAGE> 9
The profit potential for an Internet business model is unproven. We
intend to make significant expenditures to advertise our Web sites in
traditional print media as well as online. It remains to be proven whether this
advertising can raise awareness and increase usage of specific Internet sites.
Even if we are successful in generating increased user traffic to our Web sites,
we cannot be sure these users will purchase products or be repeat customers.
WE MAY BE VULNERABLE TO BREACHES OF ONLINE SECURITY.
Our servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. We may need to expend significant
additional capital and other resources to protect against a security breach or
to alleviate problems caused by security breaches. Our business may be harmed if
security measures do not prevent security breaches. We cannot assure protection
against all security breaches.
RISKS RELATED TO OUR STOCK
OUR PRINCIPAL SHAREHOLDER AND MANAGEMENT OWN A SIGNIFICANT PORTION OF OUR COMMON
STOCK AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR AFFAIRS.
Vincent W. Shiel, a director of the Company, and members of his family
as well as trusts for the benefit of children and grandchildren, together with
our other directors and executive officers, beneficially owned approximately
33.5% of the outstanding shares of our common stock as of December 31, 1999.
These persons also beneficially owned options to purchase 534,343 shares which
if fully exercised would result in them beneficially owning 40.2% of our
outstanding common stock.
As a result of this share ownership, our management, and in particular
Dr. Shiel, will be able to exert significant influence on corporate action
requiring shareholder approval, including the election of directors. This share
ownership could delay or prevent a change in control. It could also prevent our
shareholders from realizing a premium over the market price for their common
stock or effecting a change in management. In addition, our Restated Articles of
Incorporation provide that shareholders may cumulate their votes for the
election of directors, which may allow shareholders owning less than a majority
of our outstanding common stock to elect one or more directors.
THE SUBSTANTIAL NUMBER OF SHARES THAT ARE ELIGIBLE FOR PUBLIC SALE MAY ADVERSELY
AFFECT OUR STOCK PRICE.
There were 4,747,810 shares of our common stock outstanding as of
December 31, 1999. Of these outstanding shares, 3,733,622 shares are freely
tradable without restriction or registration under the Securities Act and
1,014,188 shares are eligible for public sale under Rule 144 of the Securities
Act.
9
<PAGE> 10
As of December 31, 1999, 617,069 shares of common stock were issuable
pursuant to options granted under our stock option plans. Of these option
shares, 370,482 shares are exercisable. We may issue options to purchase up to
an additional 616,062 shares under our stock option plans. All shares issuable
under our stock option plans have been registered under the Securities Act. We
also have outstanding warrants to purchase 100,000 shares.
Sales of substantial amounts of common stock in the public market, or
the perception that such sales could occur, could adversely impact the market
price of our common stock.
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY.
The trading price of our common stock has been volatile and is likely
to continue to be volatile. Our stock price could be subject to wide
fluctuations in response to a variety of factors. The stock market has
experienced significant price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of particular
companies. Broad market factors may have a material adverse effect on our stock
price, regardless of our actual performance.
10
