Securities and Exchange Commission
Washington, D. C. 20549
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FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended March 31, 1998.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ________ to ________.
Commission file number 0-19499
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CHAMPION FINANCIAL CORPORATION
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(Name of Small Business as specified in its Charter)
UTAH 88-0169547
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
9495 East San Salvador Drive, Scottsdale, Arizona 85258
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 602) 451-8575
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Name of Each Exchange
Title of Each Class in which Registered
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Common Stock, $.001 per share OTC Bulletin Board
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 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 |_|
Check if there is 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-KSB or any amendment to
this Form 10-KSB. |_|
Issuer's revenues for its most recent fiscal year were $7,853,996.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the high and low
closing sales prices of such stock as of June 23, 1998 was $11,322,456. As of
such date, 5,955,802 shares of the Registrant's Common Stock were outstanding.
Transitional Small Business Disclosure Format: (Check One):
Yes |_| No |X|
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PART I
Item 1. Business
Overview
Champion Financial Corporation ("Champion" or "Company") is a
healthcare management company dedicated to controlling the costs, improving the
quality and enhancing the delivery of healthcare services. The Company provides
related products and services designed to reduce healthcare costs. The Company
markets and provides programs and services to insurance companies, self-insured
businesses for their medical plans, health and welfare funds and third parties
who administer employee medical plans. These programs and services assist the
Company's clients in reducing healthcare costs for group health plans and for
workers' compensation coverage and automobile accident injury claims.
The Company provides a wide array of medical cost containment services
such as implementing and coordinating case management procedures, managing and
reviewing the utilization of healthcare services, providing independent medical
examinations and intervention in the early stages of medical care for the
injured party, and comprehensive bill review, claims processing and medical
repricing services. Through its subsidiaries: National Health Benefits &
Casualty Corporation, a Nevada corporation ("NHBC"), Three Rivers Provider
Network, a Nevada corporation ("TRPN") and the recently acquired HealthStar,
Inc., an Illinois Corporation, ("HealthStar"), the Company provides access to,
and operates, one of the largest independent preferred provider organizations
("PPO") of healthcare professionals and facilities in the United States. In
addition, the Company offers a point of service ("POS") vision program, which
offers members of the program an opportunity to obtain eye exams at reduced fees
and purchase eye wear substantially below retail prices from participating
providers.
The Company seeks to expand its presence as a national provider of
medical management services in the United States. To achieve this goal, the
Company's strategy is to (i) expand its network of providers to areas currently
not covered by provider contracts, (ii) expand its range of services, (iii)
enhance its opportunities for growth through strategic acquisitions, and (iv)
focus on creating a stronger market presence in the workers' compensation and
automobile accident injury claim markets.
Development of Business
The Company is a Utah corporation organized in February 1981 as
"Bersham Energy & Minerals, Inc." In 1984, the Company changed its name to
"Champion Energy Corporation" and in 1989, changed its name to "Champion
Financial Corporation". Prior to 1997, the Company was primarily an inactive
corporation which most recently had been engaged in the business of distributing
synthetic polymers and other polymers in the United States.
In January 1997, the Company acquired all of the issued and outstanding
stock of NHBC in a business combination accounted for as a reverse acquisition.
NHBC was incorporated in Nevada in July 1996 to serve as the parent corporation
of National Property Casualty Corporation ("NPCC"). NPCC has been in business
since 1994 providing management of group healthcare services, workers'
compensation claims and automobile accident medical claims for property and
casualty insurers, third-party administrators, and self-insured employers, as
well as a POS vision program.
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In December 1997, the Company acquired HealthStar, Inc., based in
Chicago, Illinois. HealthStar is a diversified healthcare and financial services
company with over 14 years experience in the formulation and management of PPO
networks. HealthStar employs over 220 people and operates managed care networks
in the Midwest, Southeast and Southwest regions covering 23 states and 1.5
million lives. The HealthStar PPO network includes approximately 1,600 hospitals
and 88,000 physicians. HealthStar was purchased for approximately $13,700,000.
The purchase price consisted of $6,000,000 in cash plus 382,500 shares of
Company stock, a $200,000 note to the seller and transaction and related costs
of $1,244,902. Under the terms of the Purchase Agreement, there were certain
contractual adjustments which were to be measured 90 days after the acquisition
date whereby the purchase price will be adjusted accordingly. The Company is
currently negotiating the final adjustment which is not expected to have a
material adjustment on the purchase price.
The cash portion of the purchase price was obtained through the
following:
o $4,000,000 of the Company's Series A 8% Senior Subordinated
Convertible Redeemable Debentures due December 3, 1999.
o $2,500,000 Term Loan bearing interest at the Prime Rate (8.5% at
March 31, 1998) secured by substantially all of the assets of the Company due
December 14, 2000; $2,000,000 of which was utilized for the purchase.
In April 1998, the Company merged its subsidiary TRPN into HealthStar.
Industry Overview
In response to escalating healthcare costs over the past 20 years,
federal and state governmental authorities have increasingly emphasized
stringent cost-containment measures, and employers, consumers, and other
purchasers of healthcare services have sought cost-effective alternatives to
traditional indemnity insurance, under which providers generally receive payment
on a fee-for-service basis. As a result, companies providing managed healthcare
delivery systems developed.
Managed healthcare encompasses various arrangements among healthcare
providers, payors, and enrollees that apply direction of patients, case
management, utilization review, utilization of authorization systems, and
allocation of risks and rewards to increase the efficiency of delivery of
healthcare services. Managed care delivery systems may include coalitions of
independent medical practices, alliances between hospitals and individual
medical practices or physician networks, PPOs, point of service plans and health
maintenance organizations ("HMOs"). Managed care health plans create economic
incentives designed to encourage patients to seek care from a panel of providers
and for providers to monitor enrollees, eliminate inefficiencies, and reduce
unnecessary utilization of services while maintaining and improving the quality
of patient care.
The managed care industry has expanded beyond traditional organizations
providing cost containment services to group health insurance companies and
self-funded employers to include workers' compensation coverages and automobile
accident medical claims.
Group health insurance benefits may be provided through various
channels. One source is
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the traditional insurance company that charges premiums and bears the
underwriting risk. Another source is union health and welfare trust funds in
which a certain amount of union dues are placed in a trust fund and administered
by trustees in accordance with the Taft-Hartley Act. Group health benefits may
also be provided by an employer that is self-insured. In these instances, the
employer usually contracts with a Third Party Administrator (TPA) to administer
the health plan. Most states have significant legislation related to group
health insurance and HMOs. This legislation governs the financial incentives
that an insurance company may give insureds. Some state insurance departments
also regulate the services that can or must be covered by the insurance company.
In addition, the payment of health claims is regulated. In most states, HMOs are
highly regulated. PPOs, on the other hand, are usually not subject to the same
degree of regulation. In some states, there is little or no regulation of PPOs,
while in other states, PPOs are registered with the state but not subject to
licensure. Self-insured plans are subject to the federal Employers Retirement
Income Security Act (ERISA). The union health and welfare funds are subject to
the provisions of the Taft-Hartley Act.
Medical provider reimbursement methods for workers' compensation
medical services vary on a state-by-state basis. A majority of the states have
adopted fee schedules pursuant to which all healthcare providers are uniformly
reimbursed. The fee schedules mandated by each state typically establish the
maximum amounts that are required to be reimbursed for each procedure. In states
without fee schedules, healthcare providers are reimbursed based on usual,
customary and reasonable ("UCR") fees charged in the particular geographic area
within the state in which the services are provided.
Workers' compensation is a statutorily defined employee benefit which
varies on a state-by-state basis. Workers' compensation laws generally require
employers to fully pay for employees' costs of medical treatment and a
significant portion of lost wages, legal fees and other costs associated with
work-related injuries and disabilities. Companies provide such coverage to their
employees through either the purchase of commercial insurance from private
insurance companies, participation in state-run funds or through self-insurance.
For workers' compensation claims, many states do not permit employers to
restrict a claimant's choice of healthcare provider, making it more difficult
for employers and private insurance companies to utilize traditional managed
care approaches. However, employers in 20 states currently have the right to
direct employees to a specific primary healthcare provider during the onset of a
workers' compensation case, subject to the right of the employee to change
physicians after a specific period. Recently, a number of states have adopted
legislation encouraging the use of workers' compensation managed care
organizations in an effort to allow employers to control their workers'
compensation costs.
The automobile casualty industry is slowly beginning to incorporate
managed care services into controlling the medical care cost for the clients
that are injured in an automobile accident. Like the workers' compensation
industry, the automobile insurance industry is regulated on a state-by-state
basis. While regulatory approval is not required for the Company to offer most
of its services to the automobile insurance market, state regulatory approval is
required in order to offer automobile insurers products that permit them to
direct claimants into a network of medical providers. Currently, several states
have legislated the optional use of PPOs by private automobile, property and
casualty insurance companies and in return, the insured receives a reduced
annual premium. Additionally, six states have adopted fee schedules for
healthcare providers to be reimbursed for automobile related injuries. Because
of escalating medical costs, the Company expects that additional states will
pass legislation adopting managed care components for insureds
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injured in an automobile accident. The management of the Company believes that
the growing implementation of managed case services in the automobile casualty
industry creates additional market opportunities.
The Company's Programs and Services
The Company assists its customers in managing the increasing medical
costs of group health plans, workers' compensation claims and automobile related
injury claims through managed care techniques by providing access to a PPO
network, and the POS vision program, as well as a variety of cost containment
services such as utilization review, case management, bill review, claims
processing and medical repricing. In addition, the Company provides bill
negotiation for clients on medical claims from health care providers who do not
participate in the Company's PPO networks.
The Company has contracts with over 400 insurance companies, third
party administrators, health and welfare funds and self-insured employers of all
sizes in approximately 38 states. Five clients accounted for, in the aggregate,
approximately 25% of the Company's revenue for the fiscal year ended March 31,
1998. No single client accounted for more than 9% of the Company's revenue in
fiscal 1998.
PPO Networks
PPOs are typically groups of hospitals, physicians and other healthcare
providers that offer services at pre-negotiated rates to groups. PPO networks
offer the Company's clients a means of managing healthcare costs by reducing the
per-unit price of medical services provided to clients, reviewing utilization
and managing high cost cases. The Company's network is one of the largest
independent networks of directly contracted hospitals available in the United
States and includes acute care hospitals, out-patient facilities, physical
rehabilitation services, ancillary services and a panel of primary care
physicians and specialists. In addition to directly contracted providers, the
Company provides its customers with access to a limited number of PPO networks
organized by others which meet the Company's criteria for provider selection.
The Company uses the following guidelines in determining a provider's
eligibility for membership in the PPO: (a) geographic locations to meet the
needs of payors; (b) demonstrated cost effectiveness; (c) range of service
offered; (d) verification of provider's adequate professional liability
insurance and all licenses and certifications as required by law and (e) risk
profile including malpractice litigation history and licensure actions.
The Company provides limited or full access to its PPO network
depending upon the client's business practices and the level of savings for
medical costs that the client is seeking. Some customers will access all the
Company's PPO networks, while other customers will only contract with the
Company for a very specific geographic region. Most customers access the
Company's network of both hospitals and other healthcare providers including
physicians. However, there are some customers who only access the Company's PPO
hospitals. As of the end of the fiscal year, the Company had direct contracts
with over 1,600 hospitals and 88,000 physicians. In addition, there were 5,000
other healthcare providers under contract, including ancillary providers, home
health care agencies, pharmacies and outpatient facilities. Clients provide
their subscribers with identification cards with the Company's logo and
information. In addition, most clients provide their subscribers with a
directory of network providers and financial incentives to seek care from the
network providers.
The Company contracts with most hospitals using a per diem methodology
for inpatient
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services. Hospital outpatient services are currently contracted on a percentage
discount from billed charges. This outpatient services billing methodology is
being converted to a percentage of a hospital's inpatient per diem. Physicians
and other providers are normally contracted on a percentage discount from billed
charges based upon a fee schedule taking into account the provider's specialty
and geographic location. The Company's standard contract with a provider has an
initial term of two years with automatic one-year renewal unless the contracting
provider or the Company provides written notice of termination, typically 90
days prior to the renewal date.
The Company also offers a network of facilities known as the Exclusive
Provider Organization ("EPO"). The health care providers in the EPO network have
agreed to further discounts in exchange for proper patient identification,
direction on the facilities that may be used, and greater financial incentives
than found in the PPO network of providers. Over the years, the Company has
become more involved in managing its client's healthcare costs when the client
chooses to utilize the Company's EPO network. The EPO network normally requires
enhanced utilization review and case management services.
Although some state legislation prohibits automobile insurance
companies from directing a patient to a facility when the insured has suffered
an injury, no state legislation prohibits the insured from electing to direct
their own treatment in time for medical need. Consequently, a cost containment
program called Elective Extension of Benefits was instituted by the Company on
behalf of its automobile insurance clients. The creation of Elective Extension
of Benefits was designed to permit the automobile policyholder to extend the
number of medical care visits by utilizing one of the Company's contracted
medical providers. When the provider has agreed to accept a medical
reimbursement below their usual and customary fees, the policyholder is able to
receive more treatments without exceeding the medical limits of their policy.
Clients of the Company enhance benefits to their policyholders by permitting the
policyholder access to providers willing to reduce their fee for service.
A recently developed product is the Company's Non-Par Claims program.
In this program the Company negotiates a discount from medical providers who do
not participate in the PPO networks being accessed by the customer, but who
submitted a medical claim to a customer of the Company. Many of these
non-participating providers are willing to give a one time discount on the
submitted claim in exchange for timely payment of that claim. In exchange for
the discount, the client must pay the claim in a timely manner, usually within
two weeks. The Company receives a percentage of the savings as compensation for
securing the discount.
The Company has contracts with over 400 insurance companies, third
party administrators, health and welfare funds and self-insured employers of all
sizes in approximately 38 states. These clients then provide their subscribers
with identification cards, directories of the PPO network and in most cases,
financial incentives to utilize the PPO network. In addition to the printed
directory, each policyholder is given the opportunity to contact the Company on
its toll free line when requesting a qualified provider in his or her own
community. The Company also has a web site that allows subscribers to locate
medical providers. With more than 1,600 hospitals and 88,000 physicians directly
contracted in the network, the Company is striving to ensure that its providers
are located in areas desired by its customers.
The Company's compensation for network access is based on either a
percentage of savings, or a fixed access fee based on the number of insureds
("Capitation Fee"). The majority of the clients
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accessing the PPO networks pay the Company on the Capitation Fee basis. This fee
varies based upon the scope of services contracted. Clients who have contracted
with the Company for the Workers' Compensation network, the automobile casualty
network and the Non-par Claims product all reimburse the Company on a percentage
of savings basis. The fee is a percentage of the savings generated off of billed
charges.
Although the Company maintains its own PPO, it also contracts with
other national and regional PPOs based on the needs and demographics of its
clients. The PPO access fee paid by the Company to these contracted PPOs ranges
from 8% to 21% of the savings. The Company plans to continue to directly
contract with providers whenever possible. Therefore, the relationships with
other national and regional PPOs will continue to be terminated over the next
year in accordance with their contract terms.
Bill Review, Claims Processing and Medical Repricing Services
The Company offers retrospective bill review, claims processing and
medical repricing services for physician and hospital bills ("Bill Review").
Bill Review consists of an on-line computer-based information system which
stores and accesses state-mandated fee schedules and licensed usual and
customary charge information for the review of medical charges. The management
of the Company believes that their program is one of the most comprehensive bill
review and medical repricing programs in today's market.
The Company's software systems monitor the bills by matching procedure
codes with the prevailing medical diagnosis thus making the necessary
adjustments. Prior to the application of a PPO fee schedule, the Bill Review
system screens each bill for more than 90 different unwarranted charges. After a
review of the entire bill, the Bill Review system automatically makes the
necessary corrections and adjustments. In addition, the Bill Review system
reveals duplicate procedures, validates medical procedures and analyzes the
relationship of diagnosis to procedures performed. As part of the contractual
arrangements with the PPO network, clients are able to access certain PPO
contracted rates that can result in costs below the state-mandated fee schedule,
which may generate additional savings.
Vision Program
The Company's First American Vision Services ("FAVS") program is a POS
vision program offering its members the opportunity to purchase eye wear
substantially below retail prices, when purchased from an independently owned
FAVS provider. In addition, members are entitled to an eye examination at a
pre-established reduced fee. The program benefits are extended to the members
and their immediate families, and there are no restrictions on the number of
purchases.
The Company maintains toll free telephone lines to assist members in
accessing the nearest FAVS provider. FAVS providers consist primarily of Doctors
of Optometry and to a lesser extent licensed opticians. As of March 31, 1998,
there were approximately 3,650 vision care providers and 1.2 million members
participating in the FAVS program.
In addition to receiving reductions in the cost of an eye exam and eye
wear purchases, a member is entitled to purchase replacement contact lenses at
the wholesale price through the FAVS mail order program. The member simply
provides the Company with a current copy of their prescription in order to
purchase replacement contact lenses which are sent to them in the original
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manufacturer's containers. This program is available in most states, while a few
states prohibit the dispensing of contact lenses directly to the patient.
Sales and Marketing
The Company actively markets its services to group health insurance
companies, automobile insurance companies, workers' compensation insurance
companies, third-party administrators and self-insured employers through the
Company's direct sales force of seven full-time professionals. The Company
creates interest and demand for its programs and services primarily through
direct contact with potential customers and follow-up with marketing literature
and information designed to specifically address the client's needs. The Company
also participates in managed healthcare conventions and trade shows and
advertises its services on a limited basis in trade journals and other print
media, primarily to enhance name recognition and its reputation in the managed
care cost containment industry.
Competition
The managed healthcare cost containment industry is highly fragmented,
with a large number of competitors. The Company does not believe that any single
company commands significant market share. Competition for customers is intense,
and management of the Company believes the level of competition will continue to
increase in the future. Most of the Company's competitors are national managed
care providers, insurance companies, HMOs, and third-party administrators that
have implemented their own managed care programs. Several large insurance
companies for workers' compensation, health and automobile have also implemented
their own cost-containment programs through the carrier's own personnel. Many of
the Company's current and potential competitors are significantly larger and
have greater financial, technical, marketing, and management resources than the
Company.
The Company competes on the basis of its specialized knowledge and
expertise in the managed healthcare services industry and on its ability to
deliver effective services to the customer with a high level of customer
satisfaction at a very affordable price. The managed healthcare industry has
experienced significant changes in recent years, primarily as a result of rising
healthcare costs. The Company will be required to respond to various competitive
factors affecting the healthcare industry, including new medical technologies
that may be introduced; general trends relating to demand for healthcare
services; regulatory, economic, and political factors; changes in patient
demographics; and competitive pricing strategies by HMOs and other healthcare
plans. There can be no assurance that the Company will be able to compete
successfully.
Over the past few years, there has been much discussion regarding
"Silent PPOs". These are payors that do not refer or direct patients to network
providers but still take discounts on health care claims. The Silent PPOs have
undercut the integrity of managed care and damaged the reputation of legitimate
PPO networks. The Company has spent considerable time over the past few years
educating its staff, providers and customers about Silent PPOs. The Company is
not in fact, or appearance, a Silent PPO because all of the Company's standard
contracts require identification cards, directories and financial incentives.
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Intellectual Property, Proprietary Rights, and Licenses
The Company regards certain features of its programs and services as
proprietary and relies on a combination of contract, copyright, trade secret
laws and other measures to protect its proprietary information. As part of its
confidentiality procedures, the Company generally obtains nondisclosure
agreements from its employees and hospital-clients and limits access to and
distribution of its software, documentation, and other proprietary information.
The Company believes that trade secret and copyright protection are less
significant than factors such as the knowledge, ability, and experience of the
Company's employees and the timeliness and quality of the services they provide.
In addition, HealthStar holds several federally registered trademarks, including
the name HealthStar. The Company has aggressively pursued any suspected
trademark infringement of the HealthStar name.
Government Regulation
Managed healthcare programs for group healthcare, workers' compensation
and automobile accident injuries are conducted within a regulated environment.
The Company's activities are regulated principally at the state level, which
means the Company may be required to comply with certain regulatory standards
which differ from state to state. Although the laws affecting the Company's
operations vary widely from state to state, these laws fall into four principal
categories: (i) laws that require licensing, certification or other approval of
businesses that provide managed healthcare services; (ii) laws regulating the
operation of managed care provider networks; (iii) laws that restrict the
methods and procedures that the Company may employ in its health, workers'
compensation and automobile managed care programs; and (iv) proposed laws which,
if adopted, would have as their objective the reform of the healthcare system as
a whole.
Generally, parties that actually provide or arrange for the provision
of healthcare services assume financial risk related to the provision of those
services, or undertake direct responsibility for making payment or payment
decisions for those services, are subject to a number of complex regulations
that govern many aspects of their conduct and operations. In contrast, the
services provided by the Company to its customers typically have not been the
subject of regulation by the federal government and most states. Since the
managed healthcare field is a rapidly expanding and changing industry and the
cost of providing healthcare continues to increase, it is possible that the
applicable state and federal regulatory frameworks will expand to more fully
regulate the conduct and operation of the Company's business.
The Company's ability to provide comprehensive managed care services
depends in part on its ability to contract with or create networks of healthcare
facilities and providers which share the Company's objectives. The Company
offers access to networks of healthcare providers selected by the Company for
quality of care and pricing. New laws regulating the operation of managed care
provider networks have been adopted by a number of states. These laws may apply
to managed care provider networks having contracts with the Company or to
provider networks which the Company may organize or acquire. To the extent the
Company is governed by these regulations, it may be subject to additional
licensing requirements, financial oversight and procedural standards for
beneficiaries and providers. These regulations may result in increased costs of
operations for the Company, which may have an adverse impact upon the Company's
ability to compete with other available alternatives for healthcare cost
control.
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The Employee Retirement Income Security Act of 1974 ("ERISA"), governs
employee benefit plans offered by employers who self-insure. Employers opt to
self insure as a way to underwrite their own health claims and better control
their healthcare costs. Regulation of such self-insured benefit plans falls
under the jurisdiction of the United States Department of Labor, which has
strict guidelines relative to such plans and to the TPAs which administer such
plans. In addition to the ERISA guidelines, a TPA may be subject to additional
state requirements regarding registration.
The Company does not engage in any professional practice or control the
cost of professional services. Likewise, the Company does not believe that
membership in the Company's programs constitutes insurance subjecting the
Company to laws and regulations governing healthcare insurers and their
operations. Certain regulations, present in most state and local jurisdictions,
relating to the standards governing licensed healthcare professionals, prohibit
such professionals from compensating any third person for soliciting patients or
patronage on their behalf. Although the Company has not sought or received
confirmation from government officials or an opinion of counsel, the Company
believes that payments to the Company by participating vision and chiropractic
providers do not violate such regulations since the Company's programs involve
only the purchase of products and services on a cost containment basis.
The automobile insurance industry, like the workers' compensation
industry, is regulated on a state-by-state basis. While regulatory approval is
not required for the Company to offer most of its services to the automobile
insurance market, state regulatory approval is required in order to offer
automobile insurers products that permit them to direct claimants into a network
of medical providers. To date, only a few states have legislation that permits
such direction of care.
Regulations in the healthcare, workers' compensation and automobile
insurance fields are constantly evolving. The Company is unable to predict what
additional regulations, if any, affecting its business may be promulgated in the
future. The Company's business may be adversely affected by failure to comply
with existing laws and regulations, failure to obtain necessary licenses and
government approvals or failure to adapt to new or modified regulatory
requirements. Proposals for healthcare legislative reforms are regularly
considered at the federal and state levels. In addition, changes in workers'
compensation laws and regulations may impact demand for the Company's services,
require the Company to develop new or modified services to meet the demands of
the marketplace or modify the fees that the Company may charge for its services.
Recently, the managed care industry has received significant amounts of
negative publicity. This publicity, in turn, has contributed to increased
legislative activity, regulation and review of industry practices. These factors
may adversely affect the Company's ability to market its products or services,
could necessitate changes in the Company's products and services, and may
increase regulatory burdens under which the Company operates, further increasing
the costs of doing business and adversely affecting profitability.
Employees
As of March 31, 1998, the Company had 198 full-time employees and 59
part time employees, including its corporate officers. The vast majority of the
employees, 173 full-time and 56 part-time, were employed by HealthStar. The
remaining 28 employees were employed by the Company and NHBC. The Company has no
collective bargaining agreements with any unions and
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believes that its overall relations with its employees are good.
The operations and success of the Company are dependent in large part
upon the efforts and abilities of Stephen J. Carder, the Company's President and
Chief Executive Officer. The loss of services of Mr. Carder would have a
material and adverse effect upon the Company. The Company has not procured
"keyman" insurance policies on the life of Mr. Carder.
The Company intends to hire additional executive personnel in
connection with the proposed expansion of its business and its acquisition of
additional PPO networks. There can be no assurance the Company will be
successful in attracting or retaining qualified personnel in such areas, and
management's plan of operation could be adversely affected if qualified
personnel are not immediately available as needed.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
Certain statements contained in the Business section and elsewhere in
this Form 10-KSB, including certain statements contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations herein,
that are not historical facts may be deemed to be "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
(`PSLRA"). When used in this Form 10-KSB and in future filings by the Company
with the Securities and Exchange Commission, in Company's press releases, and in
oral statements made by or with the approval of an authorized executive officer
of the Company, the words or phrases "believes," "anticipates," "intends," "will
likely result," "estimates," "projects" or similar expressions are intended to
identify such forward-looking statements. Forward-looking statements involve
risks and uncertainties that may cause the Company's actual results to differ
materially from the results described in the forward-looking statements.
Factors that May Effect Future Operating Results
The discussion below relates to certain factors regarding the Company's
business that investors and others should consider. The discussion is intended
to qualify under the "safe harbor" provisions of the PSLRA. In discussing these
factors, the Company is not undertaking to address or update each factor in
future filings or communications regarding the Company's business or results,
and is not undertaking to address how any of these factors may have caused
results to differ from discussions or information contained in previous filings
or communications. In addition, any of the matters discussed herein may have
affected the Company's past, as well as current, forward-looking statements
about future results, so that the Company's actual results in the future may
differ materially from those expressed in prior communication.
Volatility of Stock Market
The market prices of the securities of certain publicly-held companies
in the industry in which the Company operates have shown volatility and
sensitivity in response to many factors, including general market trends, public
communications regarding managed care, legislative or regulatory actions,
healthcare costs trends, pricing trends, competition, earnings and acquisition
activity. There can be no assurance regarding the level or stability of the
Company's share price at any time or the impact of these or any other factors on
share price.
11
<PAGE>
Control By Management
Stephen J. Carder, President and Chief Executive Officer of the
Company, has voting control of approximately 18.78% of the outstanding shares of
the Company's Common Stock. In addition, the Board of Directors has voting
control over 1,500,000 shares of Common Stock held by InfoPlan Partners, LLC
pursuant to an Irrevocable Proxy by InfoPlan Partners dated April 16, 1998. The
Irrevocable Proxy expires at the conclusion of the Annual Meeting of the
Shareholders of the Company to be conducted in calendar year 1998.
In total, senior management and the Board of Directors have voting
control of approximately 44.42% of the outstanding shares of the Company's
Common Stock. Consequently, senior management and the Board of Directors of the
Company will have a significant influence over the policies and affairs of the
Company and will be in a position to influence the outcome of corporate actions
requiring stockholder approval, including the election of directors, the
adoption of amendments to the Company's corporate documents and approval of
mergers and sales of the Company's assets. See "Security Ownership of Certain
Beneficial Owners and Management".
Possible Litigation and Legal Liability
The Company contracts and markets medical care utilization management
services and case management services that make recommendations concerning the
appropriateness of providers medical treatment plans of patients throughout the
country, and it could share in potential liabilities for adverse medical
consequences. The Company does not grant or deny claims for payment of benefits
and the Company does not believe that it engages in the practice of medicine or
the delivery of medical services. There can be no assurance however, that the
Company will not be subject to claims or litigation related to the grant or
denial of claims for payment of benefits or allegations that the Company engages
in the practice of medicine or the delivery of medical service. In addition,
there can be no assurance that the Company will not be subject to other
litigation that may adversely affect the Company's business or results of
operations. The Company is subject to potential product liability in its mail
order contact lens distribution business arising from dispensing incorrect
prescriptions, potential product tampering or damage including that occurring
while in the mail distribution system or lack of personal customer and physician
contact. In addition, it is possible that the Company could be named as a party
in any malpractice action which might be brought against a physician or hospital
in the Company's PPO network. The Company does not have product liability
insurance or insurance intended to protect against claims which might be
asserted in any malpractice action. If the Company were found liable for any
such claim, the cost of defending such claim as well as any judgment against the
Company, could materially adversely affect the Company's financial condition,
results of operations and future prospects.
Risks Related To Growth Strategy
The Company's strategy is to continue its internal growth and, as
strategic opportunities arise, to consider acquisitions of, or relationships
with, other companies in related lines of business. As a result, the Company is
subject to certain growth-related risks, including the risk that it will be
unable to attract and retain personnel or acquire other resources necessary to
service such growth adequately. Expenses arising from the Company's efforts to
increase its market penetration may have a negative impact on operating results.
In addition, there can be no assurance that any suitable opportunities for
strategic acquisitions or relationships will arise or, if they do arise, that
the
12
<PAGE>
transactions contemplated thereby could be completed. If such a transaction does
occur, there can be no assurance that the Company will be able to integrate
effectively any acquired businesses into the Company. In addition, any such
transactions would be subject to various risks associated with the acquisition
of businesses, including the financial impact of expenses associated with the
integration of businesses. There can be no assurance that any future
acquisitions or strategic relationships will not have an adverse impact on the
Company's business, financial condition or results of operations. As suitable
opportunities arise, the Company anticipates that it would finance such
transactions, as well as internal growth, through working capital or through
debt or equity financing. There can be no assurance however, that such debt and
equity financing would be available to the Company on acceptable terms when and
if suitable strategic opportunities arise.
Year 2000 Matters
The Company is in the process of reviewing, modifying, and testing its
computer applications to ensure their functionality with respect to the Year
2000 changes. At present, the Company does not anticipate that material
incremental costs will be incurred in any single future year. The Company is
also dependent on its contracting medical providers and payor clients to
successfully address their respective Year 2000 technology issues in connection
with their claims processing functions. The Company has not determined whether
such providers or clients face Year 2000 problems that if not resolved, may have
a material adverse affect on the Company's business or results of operations.
Item 2. Properties
The Company leases approximately 24,000 square feet of office space in
Chicago Illinois; 3,300 square feet of office space in Atlanta, Georgia; 7,600
square feet of office space in Independence, Ohio; 6,300 square feet of office
space in Dallas, Texas and approximately 6,700 square feet of office space in
Scottsdale, Arizona. The Atlanta, Georgia lease expires in October, 1998. The
Scottsdale, Arizona lease expires April 30, 1999. The Independence, Ohio and
Dallas, Texas leases expire in the year 2000. The Chicago, Illinois lease
expires in the year 2006. This office space is adequate for the Company's
current operations.
As a result of the acquisition of HealthStar, the Company is also
paying rent on several former HealthStar offices that have since been closed,
including; 1,300 square feet in Birmingham, Alabama; 2,900 square feet in
Jacksonville, Florida; 3,000 square feet in Indianapolis, Indiana; 2,300 square
feet in Louisville, Kentucky and 2,200 square feet in Charlotte, North Carolina.
The Birmingham, Alabama, and Louisville, Kentucky leases expire in 1998. The
Company has come to an agreement on the termination of the lease in
Indianapolis, Indiana which was scheduled to end in October 1999. The Charlotte,
North Carolina lease is scheduled to end in the year 2000. The Jacksonville,
Florida lease is through April, 2001. The Company continues to look for
subtenants for these spaces.
The Company does not have a formal policy with respect to investments
in real estate and real estate related investments.
Item 3. Legal Proceedings
In March 1998, the Company, as assignee of a shareholder, filed a
lawsuit in U.S. District Court in Arizona, alleging that a Canadian brokerage
firm, among others, perpetrated a "scheme and conspiracy to defraud" by
"manipulating the market in Champion common stock." The suit names
13
<PAGE>
Thomas Kernaghan & Co. Ltd.; Ronald G. Williams; Sheldon D. Taiger; London
Select Enterprises Ltd.; Select Capital Advisors, Inc.; Mark Valentine; and
Bronia GmbH as defendants. The complaint alleges that the defendants manipulated
the market in and for Company's common stock and, more particularly artificially
depressed the price at which the Company's common stock traded, resulting in
damages, including to the business and reputation of the Company. Certain of the
defendants have filed motions to stay and/or dismiss the lawsuit.
Additionally, Thomson Kernaghan & Co. LTD and Bronia GmbH have filed an
arbitration proceeding against the Company with the American Arbitration
Association in New York City, claiming that the Company "wrongfully refused to
honor their request to convert" certain debentures into common stock of the
Company. The relief sought against the Company is to convert certain debentures
into common stock of the Company and for "liquidated and punitive damages."
From time to time, the Company is named as a defendant in routine
litigation incidental to its business. Based on the information currently
available, the Company believes that none of such current proceedings,
individually or in the aggregate, will have a material adverse effect on the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is quoted on the Over-The-Counter Bulletin
Board market under the symbol "CPFC."
The following table sets forth the approximate high and low closing
sales prices per share as reported by the Over-The-Counter Bulletin Board market
for the Company's Common Stock for the calendar periods indicated. The
quotations do not reflect retail markups, markdowns or commissions and may not
reflect actual transactions.
Fiscal Quarter High Low
-------------- ---- ---
Quarter Ended March 31, 1998 $10.75 $2.75
Quarter Ended December 31, 1997 $12.13 $9.00
Quarter Ended September 30, 1997 $9.25 $5.00
Quarter Ended June 30, 1997 $7.00 $4.75
Quarter Ended March 31, 1997 $6.25 $4.25
Quarter Ended December 31, 1996 $8.25 $5.00
Quarter Ended September 30, 1996 $7.75 $5.50
Quarter Ended June 30, 1996 $7.50 $4.50
There were approximately 850 shareholders of record and approximately 900
beneficial owners of the Company's Common Stock as of March 31, 1998. The
Company has neither declared nor paid any cash dividends to date and is
restricted by the Harris Bank loan agreement from paying out future cash
dividends.
14
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
In January 1997, Champion acquired NHBC in a business combination
accounted for as a reverse acquisition with a publicly-traded shell company. In
completing the acquisition, Champion issued 2,200,000 shares of common stock for
all of the outstanding shares of the common stock of NHBC. To effect the
combination, the fair value of the net tangible assets of Champion were added to
the equity of NHBC. The historical financial statements of NHBC are presented as
the historical financial statements of the combined enterprise and the results
of operations of Champion are included in the financial statements of the
combined enterprise beginning on the acquisition date.
On January 9, 1997, the Company acquired the outstanding stock of TRPN
through the issuance of 100,000 shares of Champion common stock. The business
combination was treated as a purchase transaction which created $76,039 of
goodwill through excess purchase cost.
On January 14, 1997, Champion completed a private placement of common
stock. The Company received net proceeds of $753,556 for the issuance of 225,000
shares of common stock.
In April 1997, the Company acquired 12.4% of the outstanding stock of
Hayes Technology for $309,626.
On December 15, 1997, the Company acquired all of the outstanding stock
of HealthStar, for approximately $13,700,000. The acquisition was accounted for
using the purchase method and accordingly, the purchase price was allocated to
the assets purchased and the liabilities assumed, based upon fair values at the
date of acquisition. The excess purchase cost over the estimated fair value of
the net tangible assets acquired was approximately $9,000,000 and was recorded
as goodwill.
Results of Operations
When comparing the Company's financial results for the year ended March
31, 1998 to the year ended March 31, 1997, it is important to note that the
majority of the increase in the level of revenues and expenses is due primarily
to the acquisition of HealthStar which was completed on December 15, 1997. The
financial results for HealthStar for approximately 15 weeks are included in the
financial results of the Company in fiscal 1998.
Revenue
The Company derives the majority of its revenue from fees charged to
clients for access to the Company's network of contracted providers. The
Company's client base consists of a variety of payors of medical claims such as
insurance companies, third-party administrators and self-insured employers.
Access fees can be either a fixed, monthly fee per enrolled subscriber which is
called a capitated fee or can be based on a percentage of the amount of the
discount from billed charges which is granted by a contracted provider. The
Company's participation in the amount saved varies from 20% to 35% with the
exact amount determined by contractual provisions with the Company's clients.
15
<PAGE>
Total revenue increased $5,567,788 to $7,853,996 for the fiscal year
ended March 31, 1998 compared to $2,286,208 for 1997, an increase of 244%.
Approximately $5,100,000 of this increase was due to the Company's acquisition
of HealthStar. The remainder of the increase was due to the increased level of
medical claims repricing fees earned by NHBC.
Operating Expenses
Cost of services includes the cost of outsourcing the case management
and utilization review function, commissions paid to outside brokers, fees paid
to other regional PPO networks for access to providers not contracted directly
with the Company and other products and services provided by outside vendors.
Cost of services increased $469,785 from $996,602 in 1997 to $1,466,387 in 1998.
The entire increase is attributable to HealthStar and is primarily related to
the cost of outsourcing case management and utilization review. As a percentage
of revenue, cost of services decreased from 44% in 1997 to 19% in 1998. This
margin improvement is a result of the fact that HealthStar contracts directly
with healthcare providers and thus avoids paying fees to access other PPO
networks.
Salaries and wages includes all employee compensation including payroll
taxes, health insurance and other employee benefits. Also included are
commissions paid to in-house sales and marketing personnel. Salaries and wages
increased $2,576,562 from $660,972 in 1997 to $3,237,534 in 1998. A majority of
this increase is due to the addition of HealthStar, which accounted for an
additional two-hundred (200) employees. Other factors include the hiring of
additional management and administrative personnel to accommodate the increase
in business and future growth.
General and administrative expenses include all other operating
expenses such as telephone charges, office supplies, postage, travel and
entertainment, professional fees, rent and utilities. General and administrative
expenses increased $1,565,102 from $476,263 in 1997 to $2,041,365 in 1998. The
addition of HealthStar accounts for a majority of the increase in this category.
Depreciation and amortization increased significantly due to the
goodwill created as a result of the HealthStar acquisition. Goodwill of
approximately $9,000,000 is being amortized over 20 years.
Interest expense of $228,320 relates to the indebtedness incurred as a
result of the HealthStar acquisition. The interest rate on the Company's term
loan and line of credit was 8.5% at March 31, 1998. The interest rate on the
convertible debentures is 8.0%, and the interest rate on the seller note is
8.0%. Approximately $75,000 is due to the amortization of prepaid financing
costs related to the convertible debentures and the Harris Bank term loan and
line of credit.
Overall, total operating expenses increased 240% in 1998, to $7,365,586
from $2,167,841 in 1997. Despite the overall dollar increase in operating
expenses, the Company's pretax operating margin improved from 5.2% in 1997 to
6.2% in 1998.
Income taxes were provided for at an effective rate of 38% in 1998
compared to 13% in 1997. The increase in the tax provision is due to higher
overall income and limitations on the amount of net operating losses which could
be used to offset income in 1998.
Net earnings increased $200,738 or 194% from $103,367 or $0.03 per
share in 1997 to $304,105 or $0.05 per share in 1998. The Company's net margin
decreased from 4.5% in 1997 to 3.9% in 1998 due to the impact of income taxes.
16
<PAGE>
Liquidity and Capital Resources
The Company has historically funded its working capital requirements
and capital expenditures primarily from cash flow generated from operations
supplemented by short-term borrowings under various short-term credit
facilities.
The Company had approximately $200,000 in cash and cash equivalents at
March 31, 1998.
In connection with the acquisition of HealthStar, the Company secured a
$1,500,000 line of credit with Harris Trust and Savings Bank. The line of credit
bears interest at the Prime rate (8.5% at March 31, 1998) and is secured by
substantially all of the assets of Champion and its subsidiaries. At March 31,
1998, the Company had borrowed $300,000 on the line of credit, and had
approximately $720,000 of additional borrowing capacity available.
In connection with the Harris Bank term loan and line of credit, the
Company is required to comply with certain financial covenants. Covenants
include a minimum current ratio, maximum leverage ratio and a minimum fixed
charge coverage ratio.
Although there can be no assurances, management of the Company
anticipates growth and expansion to continue to accelerate in the upcoming year
through the acquisition of complementary businesses or business lines,
management personnel and infrastructure additions. The Company believes
additional sources of capital may be required in conjunction with any such
acquisition activity. There can be no assurance that the Company will be able to
obtain such funds on terms acceptable to the Company. Management believes that
cash on hand, amounts available under the revolving line of credit and cash
generated from future operations will be sufficient to fund the Company's
operations and anticipated expansion plans.
New Accounting Standards
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly-held common stock. This statement
requires the presentation of basic earnings per share and diluted earnings per
share.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" is intended to consolidate existing
disclosure requirements into one publication to make them easier to apply. This
new standard continues the requirement to disclose certain information about an
entity's capital structure, as contained in other authoritative literature. The
adoption of this statement contains no change in disclosure requirements for the
Company.
Accounting Standards Not Yet Adopted
Statement of Financial Accounting Standards No. 130, "Reporting of
Comprehensive Income" establishes standards for reporting and display of
comprehensive income (all changes in equity during a period except those
resulting from investments by and distributions to owners) and its components in
financial statements. This new standard, which will be effective for the Company
for the quarter ending June 30, 1998, is not currently anticipated to have a
significant impact on the Company's consolidated financial statements based on
the current financial structure and operations of the Company.
17
<PAGE>
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" establishes standards for
reporting information about operating segments in annual financial statements,
selected information about operating segments in interim financial reports and
disclosures about products and services, geographic area and major customers.
This pronouncement will be required to be implemented in the year ended March
31, 1999 and may result in presenting more detailed information in the notes to
the Company's consolidated financial statements.
Item 7. Financial Statements
The financial statements attached to this Report on Form 10-KSB as
pages F-1 to F-13 are incorporated herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The following table sets forth certain information as of June 15, 1998,
of the Directors and Executive Officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C> <C>
Gerald E. Finnell 58 Director, Chairman of the Board
Stephen J. Carder 43 President, Chief Executive Officer and Director
Gary L. Nielsen 55 Director
Jon M. Donnell 38 Director
Steven L. Lange 37 Vice President Sales and Marketing
Kevin J. Ryan 41 Vice President/General Counsel and Secretary
</TABLE>
Gerald E. Finnell has been a Director of the Company since June 1997.
In April 1998 Mr. Finnell was elected Chairman of the Board. Mr. Finnell was a
partner with the public accounting firm of KPMG Peat Marwick LLP from 1970 to
1995, and served on its Board of Directors from 1987 to 1994. Mr. Finnell also
serves as a Director of Westminister Capital, Inc. of Beverly Hills, California.
Stephen J. Carder, has been President, Chief Executive Officer and
Director, since April 1998. Prior to April 1998, Mr. Carder served as Executive
Vice President, Chief Financial Officer/Treasurer and Secretary of the Company.
Prior to that, Mr. Carder was principally employed since 1994 as Executive Vice
President and Chief Operating Officer of National Property and Casualty
Corporation. From 1989 to 1994, Mr. Carder served as Vice President of Finance
and Administration for the Del Webb Development Corporation, a subsidiary of Del
Webb Corporation, a NYSE company that develops and markets active adult
communities. Mr. Carder served as Vice President of Finance for National Health
Benefits Corporation from 1987 to 1988. Prior to 1987, Mr. Carder served as Vice
18
<PAGE>
President of Finance and Administration for First American Health Concepts, a
publicly traded corporation listed on NASDAQ, which markets and administers a
national vision program.
Gary L. Nielsen has been a Director of the Company since June 1997. Mr.
Nielsen is the Vice President Finance and Chief Financial Officer of Best
Western International, Inc. and has held that position since May 1996. From
October 1986 to May 1996, Mr. Nielsen was Vice President and Treasurer of Giant
Industries, Inc.
Jon M. Donnell has been a director of the Company since June 1998. Mr.
Donnell is the Chief Operating Officer and Chief Financial Officer of Dominion
Homes, Inc. and has held that position since 1995. Prior to working for Dominion
Homes, Mr. Donnell was with the Del Webb Corporation for 12 years. Mr. Donnell
also serves on the Board of Directors of Dominion Homes.
Steven L. Lange has been Vice President Sales and Marketing for the
Company since May 1998. Prior to that Mr. Lange was Vice President of Sales and
Marketing for HealthStar which he joined in 1995. Prior to joining HealthStar,
Mr. Lange worked for National Accident Insurance Underwriters, Inc. and Stewart
Smith MidAmerica, Inc.
Kevin J. Ryan has been Vice President/General Counsel, Secretary since
December 1997. Mr. Ryan was previously Vice President and Legal Counsel for
HealthStar. Mr. Ryan joined HealthStar in 1992. Prior to joining HealthStar, Mr.
Ryan was associated with the law firm of Chuhak & Tecson, P.C. from 1987 until
1992 representing corporate health care clients. From 1980 until 1987, Mr. Ryan
was employed by Ingalls Memorial Hospital in various administrative capacities,
most recently as Director of Planning.
Item 10. Executive Compensation
The following table sets forth information regarding compensation paid
for all services rendered to the Company in all capacities during the last three
completed fiscal years by the Company's Chief Executive Officer and certain
executive officers of the Company. No other executive officers of the Company
received compensation in excess of $100,000 during the fiscal year ended March
31, 1998.
<TABLE>
<CAPTION>
All Other
Name and Position Year Salary Bonus Compensation(1)
----------------- ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
Stephen J. Carder (2), 1998 $135,000 $20,000 $12,000
Executive Vice President, 1997 $83,750 $33,500 $7,800
Chief Financial Officer, 1996 $55,000 $43,350 $7,600
and Director
Steven L. Lange, 1998 $110,000 $10,000 $2,425
Vice President, 1997 $95,000 $2,500 $6,983
Sales and Marketing 1996 $95,000 $7,300 $3,000
Kevin J. Ryan, 1998 $132,500 $10,000 $2,425
Vice President, 1997 $132,500 $2,500 $3,000
General Counsel 1996 $125,000 $8,250 $7,184
Paul F. Caliendo (3) 1998 $135,000 $0 $12,000
1997 $83,750 $33,500 $9,420
1996 $55,000 $43,350 $7,600
</TABLE>
19
<PAGE>
(1) The Company pays each of its executive officers an automobile allowance each
month and pays or reimburses its executive officers for business-related
expenses. The Company also provides certain health insurance benefits for all
full time employees, including its officers. Champion's officers do not receive
additional compensation for serving as directors of the Company.
(2) Mr. Carder was elected the Company's President and Chief Executive Officer
on April 16, 1998.
(3) Mr. Caliendo served as the Company's Chairman, President and Chief Executive
Officer until April 16, 1998.
The Company did not grant any stock options or other stock-based
compensation in fiscal year 1998 and no executive officers or directors hold
stock options or other stock-based incentives.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 31, 1998, for (i)
each executive officer of the Company; (ii) each director of the Company; (iii)
all executive officers and directors of the Company as a group; and (iv) each
person known by the Company to be the beneficial owner of more than five percent
of the Common Stock.
<TABLE>
<CAPTION>
Beneficial Owner(1)
- ------------------- % of
Outstanding
Officers and Directors: Shares Beneficially Owned(2) Stock
- ---------------------- ------------------------- -----
<S> <C> <C>
Gerald E. Finnell................................. 0 *
Stephen J. Carder................................. 1,100,000 18.78%
Gary L. Nielsen................................... 0 *
Jon M. Donnell.................................... 1,000 *
Steven L. Lange................................... 0 *
Kevin J. Ryan..................................... 0 *
All six officers and directors as a group(1) 2,601,000 44.42%
5% Holders:
InfoPlan Partners(3) ............................. 1,500,000 20.49%
Paul F. Caliendo ................................. 915,000 15.63%
Thomas H. Stateman................................ 382,500 6.53%
</TABLE>
* Indicates less than 1.0%
(1) Unless otherwise indicated, the address of the beneficial owner is c/o
Champion Financial Corporation, 9495 East San Salvador Drive, Scottsdale,
Arizona 85258. The Board of Directors was granted voting control over 1,500,000
shares of Common Stock owned by InfoPlan Partners, LLC and its related parties
pursuant to an Irrevocable Proxy by InfoPlan Partners and related parties dated
April 16, 1998. The proxy gave to the Company's Board of Directors, the right to
vote all such shares at the Annual Meeting of the Shareholders of the Company to
be conducted in calendar year 1998.
(2) Beneficial ownership is determined with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock subject to stock options and
warrants currently exercisable or exercisable within 60 days are deemed to be
outstanding for computing the percentage ownership of the person holding such
options and the percentage ownership of any group of which the holder is a
member, but are not deemed outstanding for computing the percentage of any other
person. Except as indicated by footnote, and subject to community property laws
where applicable, the persons named in the table have sole voting and investment
power with respect to all shares of capital stock shown beneficially owned by
them.
(3) See note 1 above. The Board of Directors has voting control over 1,500,000
shares of Common Stock held by InfoPlan Partners, LLC pursuant to an Irrevocable
Proxy by InfoPlan Partners and related parties dated April 16, 1998.
20
<PAGE>
Item 12. Certain Relationships and Related Transactions
None.
Item 13. Exhibits, and Reports on Form 8-K
(A) EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this Report.
(B) REPORTS ON FORM 8-K.
A report on Form 8-K was filed with the Securities and Exchange Commission
on December 12, 1997, relating to the sale of the Series A 8% Senior
Subordinated Convertible Redeemable Debentures pursuant to Regulation S.
A report on Form 8-K, was filed with the Securities and Exchange
Commission on December 30, 1997, relating to the acquisition of HealthStar, Inc.
A report on Form 8-K/A, was filed with the Securities and Exchange
Commission on February 27, 1998, relating to the acquisition of HealthStar, Inc.
21
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Stephen J. Carder, as his true and lawful
attorneys-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this annual report on Form 10-KSB and any documents
related to this report and filed pursuant to the Securities and Exchange Act of
1934, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agent, or their substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
SIGNATURES
----------
Pursuant to the requirements of Section 13 and 15(2) 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.
CHAMPION FINANCIAL CORPORATION
By: /s/ Stephen J. Carder
--------------------------------------
Stephen J. Carder
President, Chief Executive Officer and
Director
22
<PAGE>
Date: June 26, 1998
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Date
--------- ----
/s/ Stephen J. Carder June 26, 1998
- --------------------------------------------
Stephen J. Carder
President, Chief Executive Officer and Director
(Principal Executive and Financial Officer)
/s/ Kevin J. Ryan June 26, 1998
- --------------------------------------------
Kevin J. Ryan
Vice President, General Counsel, Secretary and
Director
/s/ Gerald E. Finnell June 26, 1998
- --------------------------------------------
Gerald E. Finnell
Director
/s/ Gary L. Nielsen June 26, 1998
- --------------------------------------------
Gary L. Nielsen
Director
/s/ Jon M. Donnell June 26, 1998
- --------------------------------------------
Jon M. Donnell
Director
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Champion Financial Corporation:
We have audited the accompanying consolidated balance sheet of Champion
Financial Corporation and subsidiaries as of March 31, 1998 and the related
consolidated statements of earnings and retained earnings, and cash flows for
the years ended March 31, 1998 and 1997. 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 generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Champion Financial
Corporation and subsidiaries at March 31, 1998, and the results of their
operations and their cash flows for the years ended March 31, 1998 and 1997 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
June 12, 1998
F-1
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 1998
<TABLE>
<CAPTION>
Assets
<S> <C>
Current assets:
Cash and cash equivalents $ 199,466
Trade accounts receivable, less allowance for doubtful accounts of $250,000 2,512,446
Other current assets 69,126
-----------
Total current assets 2,781,038
-----------
Property and equipment, net 2,851,957
Investment in healthcare technology company 309,626
Intangibles, net of accumulated amortization of $146,030 9,006,465
Other assets, at cost 499,577
-----------
$15,448,663
===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,163,741
Accrued expenses 2,269,678
Current portion of long-term debt 400,000
Note payable 200,000
-----------
Total current liabilities 4,033,419
-----------
Line of credit 300,000
Long-term debt 6,100,000
-----------
Total liabilities 10,433,419
Shareholders' equity:
Common stock, $.001 par value 100,000,000 shares authorized, 5,855,802 shares issued and
outstanding 5,856
Additional paid-in capital 4,617,015
Retained earnings 392,373
-----------
Total shareholders' equity 5,015,244
Commitments and contingencies
Total liabilities and shareholders' equity $15,448,663
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Earnings and Retained Earnings
Years ended March 31, 1998 and 1997
1998 1997
---------- ----------
Revenues:
Capitated fees $3,536,008 --
Repricing fees 3,957,456 2,002,952
Other fees 360,532 283,256
---------- ----------
7,853,996 2,286,208
---------- ----------
Operating expenses:
Cost of services 1,466,387 996,602
Salaries and wages 3,237,534 660,972
General and administrative 2,041,365 476,263
Depreciation and amortization 391,980 34,004
Interest expense 228,320 --
---------- ----------
7,365,586 2,167,841
---------- ----------
Earnings before income taxes 488,410 118,367
Income tax 184,305 15,000
---------- ----------
Net earnings 304,105 103,367
Distribution to shareholders -- (100,000)
Retained earnings at beginning of year 88,268 84,901
---------- ----------
Retained earnings at end of year $ 392,373 88,268
========== ==========
Earnings per share - Basic $ .05 .03
========== ==========
Weighted average shares outstanding - Basic 5,587,500 3,018,000
========== ==========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net earnings $ 304,105 103,367
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 391,980 34,004
Bad debt expense 80,062 15,000
Loss on sale of fixed assets 5,658 --
Increase (decrease) in cash resulting from changes in operating assets and
liabilities:
Trade accounts receivable (619,338) (83,321)
Other current assets 38,218 (14,415)
Accounts payable (886,649) 147,717
Accrued expenses 161,539 72,993
Deferred revenue (58,909) 58,909
----------- -----------
Net cash provided by (used in) operating activities (583,334) 334,254
----------- -----------
Investing activities:
Purchases of equipment (141,751) (101,499)
Proceeds from sale of fixed assets 12,336 --
Investment in healthcare technology company (309,626) --
Acquisition of HealthStar (6,000,000) --
----------- -----------
Net cash used in investing activities (6,439,041) (101,499)
----------- -----------
Financing activities:
Increase in other assets (449,915) (4,737)
Principal payments on line of credit -- (10,000)
Net proceeds from line of credit 300,000 --
Net proceeds (payments) on long-term debt 2,475,660 (10,055)
Issuance of convertible debt 4,000,000 --
Proceeds from issuance of common stock -- 753,556
Distribution to shareholders -- (100,000)
----------- -----------
Net cash provided by financing activities 6,325,745 628,764
----------- -----------
Net increase (decrease) in cash and cash equivalents (696,630) 861,519
Cash and cash equivalents at beginning of year 896,096 34,577
----------- -----------
Cash and cash equivalents at end of year $ 199,466 896,096
=========== ===========
Supplemental financial disclosure:
Interest paid $ 106,730 3,394
=========== ===========
Income taxes paid $ 1,205 --
=========== ===========
Supplemental disclosure of noncash aspects of acquisitions through issuance of
common stock:
Assets acquired $ 4,667,250 151,209
Liabilities assumed 2,840,165 34,395
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
(1) Description of Business
National Property Casualty Corporation (NPCC) began operations in
September 1994. On January 1, 1997, NPCC was merged into National Health
Benefits & Casualty Corporation (NHBC), which was owned by the same
shareholders. NHBC provides management of health care services and
workers' compensation claims for property and casualty companies. The
Company also operates a point of sale vision care program, First American
Vision Services (FAVS), which permits members to purchase eyewear at a
reduced price from its vision network providers, and a chiropractic
network designed to assist property and casualty insurance companies in
the reduction of costs associated with soft tissue claims.
On January 1, 1997, NHBC was acquired by Champion Financial Corporation
in a business combination accounted for as a reverse acquisition with a
publicly-traded shell company. In completing the acquisition, Champion
Financial Corporation (Champion) issued 2,200,000 shares of common stock
for all of the outstanding shares of NHBC common stock. To effect the
combination, the fair value of the net tangible assets of Champion were
added to the equity of NHBC. The historical financial statements of NHBC
are presented as the historical financial statements of the combined
enterprise and the results of operations of Champion are included in the
financial statements of the combined enterprise beginning on the
acquisition date. Due to this accounting treatment, pro forma results are
equivalent to actual results.
On January 9, 1997, Champion acquired the outstanding stock of Three
Rivers Provider Network (TRPN) through the issuance of 100,000 shares of
Champion common stock valued at $.71 a share by an independent appraiser.
The business combination was treated as a purchase transaction which
created $76,039 of goodwill through excess purchase cost. The goodwill is
being amortized over 10 years. Pro forma results are not materially
different from actual results.
On January 14, 1997, Champion completed a private placement of common
stock. The Company received net proceeds of $753,556 for the issuance of
225,000 shares of common stock.
On April 29, 1997, the Company entered into an agreement (Acquisition
Agreement) with Hayes, Incorporated (Hayes). In expectation of closing
under the Acquisition Agreement, the Company advanced to Hayes an
aggregate of $309,626. The Company accepted 338,476 shares of the common
stock of Hayes for an aggregate purchase price equal to the amount of the
advance. The issuance of Hayes common stock resulted in the Company
acquiring a 12.4% interest in Hayes. Between the date of the agreement
and December 1998, Hayes has the right to redeem its common stock by
paying an amount ranging from $324,000-$340,000 to the Company.
On December 15, 1997, Champion purchased the outstanding stock of
HealthStar, Inc. (HealthStar) as of the close of business on Friday,
December 12, 1997. This transaction was accounted for under the purchase
method of accounting. The purchase price consisted of approximately $6.0
million in cash, 382,500 shares of Champion common stock valued at $9 a
share based on prices quoted by a stock exchange, a seller note in the
amount of $200,000 and transaction and related costs of $1,244,902. Under
the terms of the Purchase Agreement, there were certain contractual
adjustments which were to be measured 90 days after the acquisition date,
and the purchase price will be adjusted accordingly. The Company is
currently negotiating the final adjustment which is not expected to have
a material effect on the purchase price. The assets and liabilities of
HealthStar at the time of acquisition were adjusted to their fair values.
The excess purchase price over the estimated fair value of the tangible
net assets acquired is being amortized using the straight-line method
over a period of 20 years. In connection with the HealthStar acquisition
the Company also agreed to issue 100,000 shares of common stock valued at
$3 a share using the Black Scholes valuation method. These shares are
reflected in additional paid in capital at March 31, 1998.
F-5
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Summary of Significant Accounting Policies
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements
in conformity with generally accepted accounting principles.
Principles of Consolidation
The consolidated financial statements include the financial statements of
the Company and its three wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Cash Equivalents
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
Earnings Per Share
The Company adopted Statement of Accounting Standards No. 128 "Earnings
per Share" (SFAS 128) during 1997. The Company's Earnings per Common
Share (EPS) figures for the prior period were not effected by adoption of
SFAS 128. In accordance with SFAS 128, basic EPS is computed by dividing
net income, after deducting preferred stock dividends requirements (if
any), by the weighted average number of shares of common stock
outstanding.
Diluted EPS reflects the maximum dilution that would result after giving
effect to dilutive stock options and warrants and to the assumed
conversion of all dilutive convertible securities and stock.
The number of shares used in the calculation of diluted earnings per
share was increased 257,467 shares for the conversion of the convertible
debentures. Net income has been increased $105,778 to add back the
interest on the convertible debentures for purposes of the diluted
earnings per share calculation. The resulting $.07 per share is
antidilutive.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. Management believes that the recorded amounts of current assets
and current liabilities approximate fair value because of the short
maturity of these instruments. The recorded balance of long-term debt
approximates fair value, as the terms of the debt are similar to rates
currently offered to the Company for similar debt instruments.
Revenue Recognition
Repricing fees are derived from a negotiated percentage of the medical
savings generated from customer claims managed by the Company or on a per
member per month basis. The percentage of savings fees are recognized as
revenue as the Company renders services and notifies the health care
provider of their required billings reduction for a specified period of
time. The Company receives monthly capitation fees based upon the number
of each customer's members regardless of services actually provided.
F-6
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Cost of Services
The major components of cost of services consist of utilization review,
case management and external marketing commissions.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the
assets, which approximates three years for equipment to seven years for
furniture and fixtures. Computer software is amortized over three to five
years.
Intangibles
Intangibles, which represent the excess of purchase price over fair value
of net tangible assets acquired, are amortized on a straight-line basis
over the expected periods to be benefited, generally 20 years. The
Company assesses the recoverability of intangible assets by determining
whether the amortization of the intangibles over their remaining lives
can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of intangible impairment, if any, is
measured based on projected discounted future operating cash flows using
a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of intangibles will be impacted if
estimated future operating cash flows are not achieved.
Income Taxes
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
A valuation allowance must be established to reduce deferred income tax
benefits if it is more likely than not that a portion of the deferred
income tax benefits will not be realized. It is management's opinion that
the entire deferred tax benefit may not be recognized in future years.
Therefore, a valuation allowance equal to the deferred tax benefit has
been established.
Impairment of Long-Lived Assets
Management reviews the possible impairment of long-lived assets and
certain identifiable intangible assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value of the
assets.
F-7
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Year 2000
Management has developed a plan to address the Year 2000 problem and all
computer systems are in the process of conversion to be Year 2000
compliant. The Year 2000 problem is the result of computer programs being
written using two digits rather than four digits to define the applicable
year. The total cost of the project is not material and the Company is
expensing all associated costs as they are incurred.
(3) Property and Equipment
A summary of property and equipment by major classification at March 31,
1998 follows:
Furniture and fixtures $ 790,025
Computer software 608,000
Equipment 1,742,482
-----------
3,140,507
Accumulated depreciation (288,550)
-----------
$ 2,851,957
===========
(4) Debt
The Company maintains a $1,500,000 line of credit with Harris Trust and
Savings Bank. The line of credit bears interest at prime (8.5% at March
31, 1998). The line is collateralized by substantially all the assets of
the Company. There were $300,000 in borrowings against this line of
credit at March 31, 1998.
Debt consists of the following at March 31, 1998:
8% Series A Senior Subordinated Convertible Debentures
due December 3, 1999 in an aggregate principal
amount, interest payable quarterly $ 4,000,000
Note payable to Harris Trust and Savings Bank due on
December 14, 2000, with quarterly principal payments
ranging from $100,000 - $150,000 plus interest on
the unpaid balance at prime (8.5% at March 31,
1998), secured by substantially all the assets of
the Company 2,500,000
Unsecured note payable to an individual, interest
payable monthly at 8%, due December 15, 1998 200,000
----------
6,700,000
Less current maturities 600,000
----------
$ 6,100,000
==========
F-8
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Scheduled cash payments on principal maturities of debt are as follows
for the years ending March 31st:
1999 $ 600,000
2000 500,000
2001 1,600,000
2002 0
2003 0
----------
$ 2,500,000
==========
Champion's 8% convertible debentures due December 3, 1999 are convertible
into common stock of Champion Financial Corporation at the election of
the investor. In the event that the investor has not converted the entire
amount of the debenture prior to the maturity date of December 3, 1999,
the debenture will automatically convert into common stock on the
maturity date.
The debentures convert at the lower of 75% of the average closing bid
price of Champion stock for the five days preceding the subscription, or
75% of the closing bid price of Champion stock on the day prior to the
holders' election to convert. At March 31, 1998, $2.8 million of
debentures have been presented to the company for conversion, but the
conversion has been refused based on issues raised in the litigation
described in Note 8.
(5) Accrued Expenses
A summary of accrued expenses at March 31, 1998 follows:
Salaries and benefits $ 767,594
Professional fees 313,769
Income taxes 192,952
Transaction and restructuring costs 302,101
Interest 70,336
Other 622,926
----------
$ 2,269,678
==========
F-9
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Business and Credit Concentration
The Company operates in a very competitive market. The Company's success
is dependent upon the ability of its marketing group to continue to
identify and contract with insurance companies and self-funded companies;
to effectively administer repricing claims, and to expand into new
markets and opportunities through acquisition. Changes in the insurance
and health care industries, including the regulation thereof by federal
and state agencies, may significantly affect management's estimates of
the Company's performance.
The allowance for doubtful accounts is based on the creditworthiness of
the Company's customers as well as consideration for general economic
conditions. Consequently, an adverse change in those factors could affect
the Company's estimate of its bad debts.
The Company's customers are located throughout the United States. In
1998, there were no customers whose revenue or accounts receivable
exceeded 10% of total revenue or total accounts receivable. During 1997
revenue with four customers totaled approximately 32%, 20%, 15% and 13%
of total revenue in 1997. At March 31, 1997, three customers accounted
for 31%, 18%, and 8% of total accounts receivable.
(7) Acquisition of HealthStar
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if the acquisition
of HealthStar had occurred at April 1, 1996, with pro forma adjustments
together with related income tax effects. The pro forma results have been
prepared for comparative purposes only and do not purport to be
indicative of the results of operations that would actually have resulted
had the combination been in effect on the date indicated.
1998 1997
------------ ------------
(Unaudited)
Total revenues $ 20,328,321 $ 17,074,837
Net income 562,802 130,027
Basic earnings per common share $ .10 $ .04
F-10
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Commitments and Contingencies
The Company is obligated under noncancelable operating leases for office
space and equipment which expire at various dates during the next nine
years. Rent expense under noncancelable operating leases was $399,521 and
$148,488 in 1998 and 1997, respectively.
Future minimum lease payments under these leases are as follows:
Operating
leases
-----------
Fiscal years ending March 31:
1999 $ 1,118,000
2000 1,010,000
2001 650,000
2002 574,000
2003 571,000
Thereafter 2,081,000
-----------
Total minimum lease payments $ 6,004,000
===========
The Company has a 401(k) Plan covering substantially all of its
employees. Under this plan, the Company does not contribute any funds on
behalf of the participants.
The Company is currently involved in litigation involving the holders of
the 8% Series A Senior Subordinated Convertible Debentures. The Company
filed a lawsuit against various parties on March 18, 1998 alleging stock
manipulation and artificial depression of the Company's stock price. On
March 26, 1998, the defendants filed a demand for arbitration alleging,
among other things, that the Company wrongfully refused to honor the
holders' rights to convert their debt into Champion common stock. On May
4, 1998, the Company filed a motion to stay the arbitration. A hearing
has been set for June 29, 1998. It is management's opinion that the final
outcome of this matter will not materially effect the Company's financial
condition.
The Company is also involved in a litigation matter which was originally
filed against HealthStar prior to the purchase. In this litigation an
individual claims breach of contract among other charges. It is
management's opinion that the final outcome of this matter will not
materially effect the Company's financial condition.
The Company is also the subject of various other claims and litigation
arising out of the ordinary course of business. In the opinion of
management, the Company has adequate legal defenses and the outcome of
these matters will not materially effect the Company's financial
position.
The repricing agreements with customer companies and physicians are
cancelable at the option of those parties with written notice which
varies from 30 to 90 days. Management generally attempts to renegotiate
any such canceled agreements. Management believes that there is very
little likelihood that there would be cancellations sufficient to have a
material adverse effect on the Company's results of operations or
financial condition.
F-11
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes
The utilization of the Company's net operating carryforwards is dependent
on the Company's ability to generate sufficient taxable income during the
carryforward period. However, in March 1995, there was an ownership
change in the Company as defined in Section 382 of the Internal Revenue
Code. As a result, the Company's ability to utilize net operating losses
and capital losses available before the ownership change is restricted to
a total of approximately $46,000 per year.
At March 31, 1998, the Company has available net operating loss
carryforwards and capital loss carryforwards for Federal income tax
purposes, subject to the limitations discussed above, which may provide
future tax benefits expiring as follows:
Expiration Date Operating Capital
--------- ---------
1999 $ -- 908,393
2000 -- 48,000
2001 -- 78,791
2002 -- --
2003 -- --
2004 -- --
2005 459 --
2006 201,008 --
2007 -- --
2008 -- --
2009 -- --
2010 11,465 --
2011 1,114 --
2012 264,844 --
--------- -----------
$ 478,890 1,035,184
========= ===========
Income tax expense for the year ended March 31, 1998 consists of:
Current Deferred Total
-------- -------- --------
U.S. Federal $ 148,504 -- 148,504
State and local 35,801 -- 35,801
-------- -------- --------
$ 184,305 -- 184,305
======== ======== ========
F-12
<PAGE>
CHAMPION FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The provision for income taxes differs from the amount computed by
applying the statutory Federal income tax rate to income before taxes.
The sources and tax effects of the differences are as follows:
Computed "expected" federal income tax expense $ 172,859
Expected state income taxes, net of federal benefit 23,629
Change in valuation allowance (29,632)
Non deductible item 8,718
Other 8,731
--------
$ 184,305
========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are as follows, there are no material
deferred tax liabilities:
Deferred tax assets:
Net operating loss carry forward $ 162,823
Capital loss carryforward 351,963
Reserve for bad debt 85,000
Accrued expenses 44,880
---------
Deferred tax asset 644,666
Less valuation allowance (527,408)
--------
Net deferred tax asset $ 117,258
Deferred tax liabilities:
Amortization (22,173)
Fixed Assets (73,561)
Prepaid expenses (21,524)
---------
Deferred tax liability (117,258)
Net deferred tax asset $ --
==========
The net change in the total valuation allowance for the year ended March
31, 1998 was approximately $30,000. In assessing the realizability of the
deferred tax asset, management considers whether it is more likely than
not that some portion or all of the deferred tax asset will not be
realized. The ultimate realization of a deferred tax asset is dependent
upon generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will not
realize the entire benefit of the deferred tax assets.
F-13
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
1.1 Form of Letter Agreement between Champion Financial
Corporation and London Select Enterprises, Ltd. dated
December 1, 1997 (incorporated by reference to Exhibit 1.1
to the Company's Report on Form 8-K filed with the
Commission on December 12, 1997).
3.1 Articles of Incorporation dated February 15, 1981 and all
amendments thereto (incorporated by reference to Exhibit
3.1 to the Company's Report on Form 10-K filed with the
Commission on July 17, 1996).
3.2 By-Laws (incorporated by reference to Exhibit 3.2 to the
Company's Report on Form 10-K filed with the Commission on
July 17, 1996).
4.1 Form of Offshore Securities Subscription Agreement
(incorporated by reference to Exhibit 4.1 to the Company's
Report on Form 8-K filed with the Commission on December
12, 1997).
4.2 Form of Debenture (incorporated by reference to Exhibit 4.2
to the Company's Report on Form 8-K filed with the
Commission on December 12, 1997).
4.3 Form of Warrant Certificate (incorporated by reference to
Exhibit 4.3 to the Company's Report on Form 8-K filed with
the Commission on December 12, 1997).
10.1 Stock Purchase Agreement by and among Champion Financial
Corporation, HealthStar Inc., and Thomas H. Stateman, dated
December 8, 1997 (incorporated by reference to Exhibit 2.1
to the Company's Form 8-K/A filed with the Commission
February 27, 1998).
10.2 Non-Negotiable Subordinated Promissory Note between the
company and Thomas H. Stateman Dated December 15, 1997
(incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K/A filed with the Commission February 27, 1998).
10.3.1 Credit Agreement by and between Champion Financial
Corporation and Harris Trust and Savings Bank, dated
December 15, 1997.
10.3.2 Pledge and Security Agreement by and between Champion
Financial Corporation and Harris Trust and Savings Bank,
dated December 15, 1997.
10.3.3 Security Agreement by and between Champion Financial
Corporation and Harris Trust and Savings Bank, dated
December 15, 1997.
10.3.4 Security Agreement by and between HealthStar Inc. and
Harris Trust and Savings Bank, dated December 15, 1997.
10.3.5 Security Agreement by and between National Health Benefits
& Casualty Corporation and Harris Trust and Savings Bank,
dated December 15, 1997.
10.4 Form of Agreement dated April 1998 by and among the Company
and the other parties thereto (related to InfoPlan proxy
and severance with Paul F. Caliendo, former CEO).
21. Subsidiaries of the Registrant.
27. Financial Data Schedule
Exhibit 10.31
================================================================================
$4,000,000
CREDIT AGREEMENT
BY AND BETWEEN
CHAMPION FINANCIAL CORPORATION
AND
HARRIS TRUST AND SAVINGS BANK
DATED AS OF DECEMBER 15, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. THE CREDITS...................................... 1
Section 1.1. Revolving Credit............................. 1
Section 1.2. Loans........................................ 1
Section 1.3. Term Credit.................................. 2
Section 1.4. Manner and Disbursement of Borrowings........ 2
SECTION 2. INTEREST AND CHANGE IN CIRCUMSTANCES............. 2
Section 2.1. Interest Rate Options........................ 2
Section 2.2. Minimum Amounts.............................. 4
Section 2.3. Computation of Interest...................... 4
Section 2.4. Manner of Rate Selection..................... 4
Section 2.5. Change of Law................................ 4
Section 2.6. Unavailability of Deposits or Inability to
Ascertain Adjusted LIBOR..................... 4
Section 2.7. Taxes and Increased Costs.................... 5
Section 2.8. Funding Indemnity............................ 6
Section 2.9. Lending Branch............................... 6
Section 2.10. Discretion of Bank as to Manner of Funding... 6
SECTION 3. FEES, PREPAYMENTS, TERMINATIONS, APPLICATIONS AND
CAPITAL ADEQUACY................................. 6
Section 3.1. Fees......................................... 6
Section 3.2. Voluntary Prepayments........................ 7
Section 3.3. Mandatory Prepayments........................ 7
Section 3.4. Terminations................................. 8
Section 3.5. Place and Application of Payments............ 8
Section 3.6. Notations.................................... 8
Section 3.7. Change in Capital Adequacy Requirements...... 9
SECTION 4. THE COLLATERAL AND THE GUARANTIES................ 9
Section 4.1. Security..................................... 9
Section 4.2. Guaranties................................... 9
Section 4.3. Further Assurances........................... 9
-i-
<PAGE>
SECTION 5. DEFINITIONS...................................... 10
Section 5.1. Definitions.................................. 10
Section 5.2. Interpretation............................... 18
SECTION 6. REPRESENTATIONS AND WARRANTIES................... 18
Section 6.1. Organization and Qualification............... 18
Section 6.2. Subsidiaries................................. 19
Section 6.3. Margin Stock................................. 19
Section 6.4. Financial Reports............................ 19
Section 6.5. Good Title................................... 20
Section 6.6. Litigation and Other Controversies........... 20
Section 6.7. Taxes........................................ 20
Section 6.8. Approvals.................................... 20
Section 6.9. Affiliate Transactions....................... 20
Section 6.10. Investment Company; Public Utility Holding
Company...................................... 21
Section 6.11. ERISA........................................ 21
Section 6.12. Compliance with Laws; Environmental Laws..... 21
Section 6.13. Other Agreements............................. 21
SECTION 7. CONDITIONS PRECEDENT............................. 22
Section 7.1. Each Advance................................. 22
Section 7.2. Initial Advance.............................. 22
SECTION 8. COVENANTS........................................ 24
Section 8.1. Corporate Existence, Etc..................... 24
Section 8.2. Maintenance of Properties.................... 24
Section 8.3. Taxes and Assessments........................ 24
Section 8.4. Insurance.................................... 24
Section 8.5. Financial Reports............................ 24
Section 8.6. Current Ratio................................ 26
Section 8.7. Leverage Ratio............................... 26
Section 8.8. Fixed Charge Coverage Ratio.................. 26
Section 8.9. Indebtedness for Borrowed Money.............. 26
Section 8.10. Liens........................................ 27
Section 8.11. Investments, Acquisitions, Loans, Advances
and Guaranties............................... 28
Section 8.12. Debentures and Subordinated Note............. 29
Section 8.13. Sales and Leasebacks......................... 29
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Section 8.14. Dividends and Certain Other Restricted
Payments..................................... 29
Section 8.15. Mergers, Consolidations and Sales............ 29
Section 8.16. ERISA........................................ 29
Section 8.17. Compliance with Laws......................... 30
Section 8.18. Burdensome Contracts With Affiliates......... 30
Section 8.19. No Changes in Fiscal Year.................... 30
Section 8.20. Formation of Subsidiaries.................... 30
Section 8.21. Inspection and Field Audit................... 30
Section 8.22. Use of Credit................................ 31
SECTION 9. EVENTS OF DEFAULT AND REMEDIES................... 31
Section 9.1. Events of Default............................ 31
Section 9.2. Non-Bankruptcy Defaults...................... 33
Section 9.3. Bankruptcy Defaults.......................... 33
SECTION 10. MISCELLANEOUS.................................... 33
Section 10.1. Holidays..................................... 33
Section 10.2. No Waiver, Cumulative Remedies............... 33
Section 10.3. Amendments, Etc.............................. 34
Section 10.4. Costs and Expenses........................... 34
Section 10.5. Documentary Taxes............................ 34
Section 10.6. Survival of Representations.................. 34
Section 10.7. Survival of Indemnities...................... 34
Section 10.8. Notices...................................... 34
Section 10.9. Headings..................................... 35
Section 10.10. Severability of Provisions................... 35
Section 10.11. Counterparts................................. 35
Section 10.12. Binding Nature, Governing Law, Etc........... 35
Section 10.13. Terms of Collateral Documents not Superseded. 36
Signature................................................................... 37
Exhibit A - Revolving Credit Note
Exhibit B - Term Note
Exhibit C - Borrowing Base
Exhibit D - Opinion of Counsel
Exhibit E - Compliance Certificate
Schedule 6.2 - Subsidiaries
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CHAMPION FINANCIAL CORPORATION
CREDIT AGREEMENT
Harris Trust and Savings Bank
Chicago, Illinois
Ladies and Gentlemen:
The undersigned, Champion Financial Corporation, a Utah corporation
(the "Company"), applies to you (the "Bank") for your commitment, subject to the
terms and conditions hereof and on the basis of the representations and
warranties hereinafter set forth, to extend credit to the Company, all as more
fully hereinafter set forth.
SECTION 1. THE CREDITS.
Section 1.1. Revolving Credit. Subject to the terms and conditions
hereof, the Bank agrees to extend a revolving credit (the "Revolving Credit") to
the Company which may be availed of by the Company from time to time during the
period from the date hereof to and including the Termination Date, at which time
the commitment of the Bank to extend credit under the Revolving Credit shall
expire. The Revolving Credit may be utilized by the Company in the form of
Revolving Credit Loans, all as more fully hereinafter set forth, provided that
the aggregate amount of Revolving Credit Loans outstanding at any one time shall
not exceed the lesser of (i) $1,500,000 (such amount, as the same may be reduced
pursuant to Section 3.4 hereof, being hereinafter referred to as the "Revolving
Credit Commitment"); provided, however, that Loans which bear interest with
reference to Adjusted LIBOR shall be in such greater amount as is required by
Section 2 hereof and (ii) the Available Borrowing Base. For all purposes of this
Agreement, where a determination of the unused or available amount of the
Revolving Credit Commitment is necessary, the Revolving Credit Loans shall be
deemed to utilize the Revolving Credit Commitment.
Section 1.2. Loans. Subject to all of the terms and conditions hereof,
the Revolving Credit may be utilized in the form of Revolving Credit Loans. Each
Revolving Credit Loan shall be in a minimum amount of $100,000 or such greater
amount which is an integral multiple of $50,000. Each Loan shall initially
constitute part of the Domestic Rate Portion except to the extent the Company
has otherwise timely elected that such Loan, or any part thereof, constitute
part of a LIBOR Portion as provided in Section 2 hereof. Each Revolving Credit
Loan shall be made against and evidenced by a single promissory note of the
Company in the form (with appropriate insertions) attached hereto as Exhibit A
(the "Revolving Credit Note") payable to the order of the Bank in the face
principal amount of $1,500,000. The
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Revolving Credit Note shall be dated the date of issuance thereof, be expressed
to bear interest as set forth in Section 2.1 hereof, and be expressed to mature
on the Termination Date. Without regard to the principal amount of the Revolving
Credit Note stated on its face, the actual principal amount at any time
outstanding and owing by the Company on account of the Revolving Credit Note
shall be the sum of all Revolving Credit Loans made under this Section
(including for such purposes, as aforesaid, the Existing Revolving Credit Loans)
less all payments of principal actually received by the Bank.
Section 1.3. Term Credit. Subject to the terms and conditions hereof,
the Bank also agrees to make a term loan (the "Term Loan") to the Company in an
amount not exceeding $2,500,000 (the "Term Credit Commitment") on or before
December 15, 1997, at which time the Term Credit Commitment shall expire. There
shall be a maximum of one advance under the Term Credit Commitment. The Term
Loan shall be made against and evidenced by a single promissory note of the
Company in the form (with appropriate insertions) attached hereto as Exhibit B
(the "Term Note", and together with the Revolving Credit Note, the "Notes")
payable to the order of the Bank in the original principal amount of the Term
Loan. The Term Note shall be dated the date of issuance thereof, be expressed to
bear interest as set forth in Section 2.1 hereof, and be expressed to mature in
twelve (12) consecutive quarterly installments, commencing on March 31, 1998 and
continuing on the last day of each and every June, September, December and
March, with the final payment due on December 14, 2000, the date on which the
final installment is due, with each installment through and including December
31, 1998 in the amount of $100,000, with each installment from and including
March 31, 1999 through and including December 31, 1999 in the amount of $125,000
and with each installment from and including March 31, 2000 through and
including December 14, 2000 in the amount of $150,000 (except for the last such
installment on December 14, 2000, which shall be in the full amount of the then
unpaid balance of the Term Note). No amount paid or prepaid on the Term Note may
be reborrowed.
Section 1.4. Manner and Disbursement of Borrowings. The Company shall
give written or telephonic notice to the Bank (which notice shall be irrevocable
once given and, if given by telephone, shall be promptly confirmed in writing)
by no later than 11:00 a.m. (Chicago time) on the date the Company requests the
Bank to make a Loan hereunder. Each such notice shall specify the date of the
Loan requested (which must be a Business Day), whether such Loan is the Term
Loan or a Revolving Credit Loan and the amount of such Loan. The Company agrees
that the Bank may rely upon any written or telephonic notice given by any person
the Bank in good faith believes is an Authorized Representative without the
necessity of independent investigation and, in the event any telephonic notice
conflicts with the written confirmation, such notice shall govern if the Bank
has acted in reliance thereon. Subject to the provisions of Section 7 hereof,
the proceeds of each Loan shall be made available to the Company at the
principal office of the Bank in Chicago, Illinois, in immediately available
funds.
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SECTION 2. INTEREST AND CHANGE IN CIRCUMSTANCES.
Section 2.1. Interest Rate Options.
(a) Subject to all of the terms and conditions of this Section 2,
portions of the principal indebtedness evidenced by the Notes (all of the
indebtedness evidenced by the Notes bearing interest at the same rate for the
same period of time being hereinafter referred to as a "Portion") may, at the
option of the Company, bear interest with reference to the Domestic Rate (the
"Domestic Rate Portion") or with reference to an Adjusted LIBOR ("LIBOR
Portions"), and Portions may be converted from time to time from one basis to
the other. All of the indebtedness evidenced by the Notes which is not part of a
LIBOR Portion shall constitute a single Domestic Rate Portion. All of the
indebtedness evidenced by the Notes which bears interest with reference to a
particular Adjusted LIBOR for a particular Interest Period shall constitute a
single LIBOR Portion. There shall not be more than three LIBOR Portions
applicable to the Notes outstanding at any one time. Anything contained herein
to the contrary notwithstanding, the obligation of the Bank to create, continue
or effect by conversion any LIBOR Portion shall be conditioned upon the fact
that at the time no Default or Event of Default shall have occurred and be
continuing. The Company hereby promises to pay interest on each Portion at the
rates and times specified in this Section 2.
(b) Domestic Rate Portion. Each Domestic Rate Portion shall bear
interest at the Domestic Rate as in effect from time to time, provided that if
the Domestic Rate Portion or any part thereof is not paid when due (whether by
lapse of time, acceleration or otherwise) such Portion shall bear interest,
whether before or after judgment, until payment in full thereof at the rate per
annum determined by adding 2% to the interest rate which would otherwise be
applicable thereto from time to time. Interest on the Domestic Rate Portion
shall be payable quarterly in arrears on the last day of each March, June,
September and December in each year (commencing March 31, 1998) and at maturity
of the Notes and interest after maturity (whether by lapse of time, acceleration
or otherwise) shall be due and payable upon demand. Any change in the interest
rate on the Domestic Rate Portion resulting from a change in the Domestic Rate
shall be effective on the date of the relevant change in the Domestic Rate.
(c) LIBOR Portions. Each LIBOR Portion shall bear interest for each
Interest Period selected therefor at a rate per annum determined by adding 3% to
the Adjusted LIBOR for such Interest Period, provided that if any LIBOR Portion
is not paid when due (whether by lapse of time, acceleration or otherwise) such
Portion shall bear interest, whether before or after judgment, until payment in
full thereof through the end of the Interest Period then applicable thereto at
the rate per annum determined by adding 2% to the interest rate which would
otherwise be applicable thereto, and effective at the end of such Interest
Period such LIBOR Portion shall automatically be converted into and added to the
Domestic Rate Portion and shall thereafter bear
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interest at the interest rate applicable to the Domestic Rate Portion after
default. Interest on each LIBOR Portion shall be due and payable on the last day
of each Interest Period applicable thereto and, with respect to any Interest
Period applicable to a LIBOR Portion in excess of 3 months, on the date
occurring every 3 months after the date such Interest Period began and at the
end of such Interest Period, and interest after maturity (whether by lapse of
time, acceleration or otherwise) shall be due and payable upon demand. The
Company shall notify the Bank on or before 11:00 a.m. (Chicago time) on the
third Business Day preceding the end of an Interest Period applicable to a LIBOR
Portion whether such LIBOR Portion is to continue as a LIBOR Portion, in which
event the Company shall notify the Bank of the new Interest Period selected
therefor, and in the event the Company shall fail to so notify the Bank, such
LIBOR Portion shall automatically be converted into and added to the Domestic
Rate Portion as of and on the last day of such Interest Period.
Section 2.2. Minimum Amounts. Each LIBOR Portion shall be in an amount
equal to $500,000 or such greater amount which is an integral multiple of
$250,000.
Section 2.3. Computation of Interest. All interest on the Notes shall
be computed on the basis of a year of 360 days for the actual number of days
elapsed.
Section 2.4. Manner of Rate Selection. The Company shall notify the
Bank by 11:00 a.m. (Chicago time) at least 3 Business Days prior to the date
upon which the Company requests that any LIBOR Portion be created or that any
part of the Domestic Rate Portion be converted into a LIBOR Portion. If any
request is made to convert a LIBOR Portion into a Domestic Rate Portion, such
conversion shall only be made so as to become effective as of the last day of
the Interest Period applicable thereto. All requests for the creation,
continuance and conversion of Portions under this Agreement shall be
irrevocable. Such requests may be written or oral and the Bank is hereby
authorized to honor telephonic requests for creations, continuances and
conversions received by it from any person the Bank in good faith believes to be
an Authorized Representative without the need of independent investigation, the
Company hereby indemnifying the Bank from any liability or loss ensuing from so
acting.
Section 2.5. Change of Law. Notwithstanding any other provisions of
this Agreement or any Note, if at any time the Bank shall determine that any
change in applicable laws, treaties or regulations or in the interpretation
thereof makes it unlawful for the Bank to create or continue to maintain any
LIBOR Portion, it shall promptly so notify the Company and the obligation of the
Bank to create, continue or maintain any such LIBOR Portion under this Agreement
shall terminate until it is no longer unlawful for the Bank to create, continue
or maintain such LIBOR Portion. The Company, on demand, shall, if the continued
maintenance of any such LIBOR Portion is unlawful, thereupon prepay the
outstanding principal amount of the affected LIBOR Portion, together with all
interest accrued thereon and all other amounts payable
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to the Bank with respect thereto under this Agreement; provided, however, that
the Company may elect to convert the principal amount of the affected Portion
into another type of Portion available hereunder, subject to the terms and
conditions of this Agreement.
Section 2.6. Unavailability of Deposits or Inability to Ascertain
Adjusted LIBOR. Notwithstanding any other provision of this Agreement or any
Note, if prior to the commencement of any Interest Period, the Bank shall
determine that deposits in the amount of any LIBOR Portion scheduled to be
outstanding during such Interest Period are not readily available to the Bank in
the relevant market or, by reason of circumstances affecting the relevant
market, adequate and reasonable means do not exist for ascertaining Adjusted
LIBOR, then the Bank shall promptly give notice thereof to the Company and the
obligations of the Bank to create, continue or effect by conversion any such
LIBOR Portion in such amount and for such Interest Period shall terminate until
deposits in such amount and for the Interest Period selected by the Company
shall again be readily available in the relevant market and adequate and
reasonable means exist for ascertaining Adjusted LIBOR.
Section 2.7. Taxes and Increased Costs. With respect to any LIBOR
Portion, if the Bank shall determine that any change in any applicable law,
treaty, regulation or guideline (including, without limitation, Regulation D of
the Board of Governors of the Federal Reserve System) or any new law, treaty,
regulation or guideline, or any interpretation of any of the foregoing by any
governmental authority charged with the administration thereof or any central
bank or other fiscal, monetary or other authority having jurisdiction over the
Bank or its lending branch or the LIBOR Portions contemplated by this Agreement
(whether or not having the force of law), shall:
(i) impose, increase, or deem applicable any reserve, special
deposit or similar requirement against assets held by, or deposits in
or for the account of, or loans by, or any other acquisition of funds
or disbursements by, the Bank which is not in any instance already
accounted for in computing the interest rate applicable to such LIBOR
Portion;
(ii) subject the Bank, any LIBOR Portion or any Note to the
extent it evidences such a Portion to any tax (including, without
limitation, any United States interest equalization tax or similar tax
however named applicable to the acquisition or holding of debt
obligations and any interest or penalties with respect thereto), duty,
charge, stamp tax, fee, deduction or withholding in respect of this
Agreement, any LIBOR Portion or any Note to the extent it evidences
such a Portion, except such taxes as may be measured by the overall net
income or gross receipts of the Bank or its lending branches and
imposed by the jurisdiction, or any political subdivision or taxing
authority thereof, in which the Bank's principal executive office or
its lending branch is located;
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<PAGE>
(iii) change the basis of taxation of payments of principal and
interest due from the Company to the Bank hereunder or under any Note
to the extent it evidences any LIBOR Portion (other than by a change in
taxation of the overall net income or gross receipts of the Bank); or
(iv) impose on the Bank any penalty with respect to the
foregoing or any other condition regarding this Agreement, any LIBOR
Portion, or its disbursement, or any Note to the extent it evidences
any LIBOR Portion;
and the Bank shall determine that the result of any of the foregoing is to
increase the cost (whether by incurring a cost or adding to a cost) to the Bank
of creating or maintaining any LIBOR Portion hereunder or to reduce the amount
of principal or interest received or receivable by the Bank (without benefit of,
or credit for, any prorations, exemption, credits or other offsets available
under any such laws, treaties, regulations, guidelines or interpretations
thereof), then the Company shall pay on demand to the Bank from time to time as
specified by the Bank such additional amounts as the Bank shall reasonably
determine are sufficient to compensate and indemnify it for such increased cost
or reduced amount. If the Bank makes such a claim for compensation, it shall
provide to the Company a certificate setting forth the computation of the
increased cost or reduced amount as a result of any event mentioned herein in
reasonable detail and such certificate shall be conclusive if reasonably
determined.
Section 2.8. Funding Indemnity. In the event the Bank shall incur any
loss, cost or expense (including, without limitation, any loss (including loss
of profit), cost or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired or contracted to be acquired by
the Bank to fund or maintain any LIBOR Portion or the relending or reinvesting
of such deposits or other funds or amounts paid or prepaid to the Bank) as a
result of:
(i) any payment of a LIBOR Portion on a date other than the
last day of the then applicable Interest Period for any reason, whether
before or after default, and whether or not such payment is required by
any provisions of this Agreement; or
(ii) any failure by the Company to create, borrow, continue or
effect by conversion a LIBOR Portion on the date specified in a notice
given pursuant to this Agreement;
then upon the demand of the Bank, the Company shall pay to the Bank such amount
as will reimburse the Bank for such loss, cost or expense. If the Bank requests
such a reimbursement, it shall provide to the Company a certificate setting
forth the computation of the loss, cost or expense giving rise to the request
for reimbursement in reasonable detail and such certificate shall be conclusive
if reasonably determined.
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Section 2.9. Lending Branch. The Bank may, at its option, elect to
make, fund or maintain Portions of the Loans hereunder at such of its branches
or offices as the Bank may from time to time elect.
Section 2.10. Discretion of Bank as to Manner of Funding.
Notwithstanding any provision of this Agreement to the contrary, the Bank shall
be entitled to fund and maintain its funding of all or any part of any Loan in
any manner it sees fit, it being understood, however, that for the purposes of
this Agreement all determinations hereunder (including, without limitation,
determinations under Sections 2.6, 2.7 and 2.8 hereof) shall be made as if the
Bank had actually funded and maintained each LIBOR Portion during each Interest
Period applicable thereto through the purchase of deposits in the relevant
market in the amount of such LIBOR Portion, having a maturity corresponding to
such Interest Period, and, in the case of any LIBOR Portion, bearing an interest
rate equal to the LIBOR for such Interest Period.
SECTION 3. FEES, PREPAYMENTS, TERMINATIONS, APPLICATIONS AND CAPITAL
ADEQUACY
Section 3.1. Fees.
(a) Commitment Fee. The Company shall pay to the Bank a commitment fee
at the rate of 1/2 of 1% per annum (computed on the basis of a year of 360 days
and the actual number of days elapsed) on the daily average unused portion of
the Revolving Credit Commitment available hereunder. Such commitment fee shall
be payable quarter-annually in arrears on the last day of each March, June,
September and December in each year (commencing January 31, 1998) and on the
Termination Date, unless the Revolving Credit Commitment is terminated in whole
on an earlier date, in which event the commitment fee for the period to the date
of such termination in whole shall be paid on the date of such termination.
(b) Closing Fee. On the date hereof, the Company shall pay to the Bank
a non-refundable closing fee equal to 1% per annum of the Commitments.
(c) Audit Fees. The Company shall pay for each audit of the Collateral
performed by the Bank or any of its agents or representatives.
Section 3.2. Voluntary Prepayments.
(a) Domestic Rate Portion. The Company shall have the privilege of
prepaying without premium or penalty and in whole or in part (but if in part,
then in an amount not less than $100,000) the Domestic Rate Portion of the Note
at any time upon notice to the Bank prior to 11:00 a.m. (Chicago time) on the
date fixed for prepayment, each such prepayment to be made
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<PAGE>
by the payment of the principal amount to be prepaid and accrued interest
thereon to the date of prepayment.
(b) LIBOR Portions. The Company may prepay any LIBOR Portion of the
Notes only on the last date of the then applicable Interest Period, in whole or
in part (but if in part, then in an amount not less than $500,000 or such
greater amount which is an integral multiple of $250,000), upon 3 Business Days'
prior notice to the Bank (which notice shall be irrevocable once given, must be
received by the Bank no later than 11:00 a.m. (Chicago time) on the third
Business Day preceding the date of such prepayment, and shall specify the
principal amount to be repaid); provided, however, that the outstanding
principal amount of any LIBOR Portion of the Notes prepaid in part shall not be
less than $500,000 or such greater amount which is an integral multiple of
$250,000 after giving effect to such prepayment. Any such prepayment shall be
effected by payment of the principal amount to be prepaid and accrued interest
thereon to the end of the applicable Interest Period.
Section 3.3. Mandatory Prepayments. (a) Available Borrowing Base
Deficiency. The Company agrees that if at any time the sum of the then unpaid
principal balance of the Revolving Credit Loans shall be in excess of the
Available Borrowing Base as then determined and computed, the Company shall
immediately and without notice or demand pay over the amount of the excess to
the Bank as and for a mandatory prepayment on such obligations, with such
prepayments to be first applied to the Revolving Credit Note until payment in
full thereof with any remaining balance to be held by the Bank as collateral
security for the obligations owing under the Term Note.
(b) Borrowing Base Deficiency. The Company agrees that if at any time
the outstanding principal amount of the Term Note shall at any time and for any
reason exceed the Borrowing Base as then determined and computed, the Company
shall immediately and without notice or demand pay over the amount of the excess
to the Bank as and for a mandatory prepayment on the Term Note.
Section 3.4. Terminations. The Company shall have the right at any time
and from time to time, upon three (3) Business Days' prior notice to the Bank,
to terminate without premium or penalty and in whole or in part (but if in part,
then in an amount not less than $500,000) the Revolving Credit Commitment,
provided that the Revolving Credit Commitment may not be reduced to an amount
less than the aggregate principal amount of the Revolving Credit Loans then
outstanding. Any termination of the Revolving Credit Commitment pursuant to this
Section may not be reinstated.
Section 3.5. Place and Application of Payments. All payments of
principal, interest, fees and all other amounts payable hereunder shall be made
to the Bank at its principal office in
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Chicago, Illinois no later than 11:00 a.m. (Chicago time) on the date any such
payment is due and payable. All such payments shall be made in lawful money of
the United States of America, in immediately available funds at the place of
payment, without setoff or counterclaim and without reduction for, and free
from, any and all present or future taxes, levies, imposts, duties, fees,
charges, deductions, withholdings, restrictions or conditions of any nature
imposed by any government or any political subdivision or taxing authority
thereof (but excluding any taxes imposed on or measured by the net income of the
Bank). Any amount paid or prepaid on the Revolving Credit Note may, subject to
the terms and conditions of this Agreement, be reborrowed. No amount paid or
prepaid on the Term Note may be reborrowed. All prepayments on the Term Note
shall be applied to the several installments thereof in the inverse order of
their maturity. Unless the Company otherwise directs, principal payments shall
be first applied to the Domestic Rate Portion until payment in full thereof,
with any balance applied to the LIBOR Portions in the order in which their
Interest Periods expire.
Section 3.6. Notations. All Loans made against the Notes, the status of
all amounts evidenced by the Note as constituting part of the Domestic Rate
Portion or a LIBOR Portion, and, in the case of any LIBOR Portion, the rates of
interest and Interest Periods applicable to such Portions shall be recorded by
the Bank on its books and records or, at its option in any instance, endorsed on
a schedule to the appropriate Note and the unpaid principal balance and status,
rates and Interest Periods so recorded or endorsed by the Bank shall be prima
facie evidence in any court or other proceeding brought to enforce such Note of
the principal amount remaining unpaid thereon, the status of the Loans evidenced
thereby and the interest rates and Interest Periods applicable thereto; provided
that the failure of the Bank to record any of the foregoing shall not limit or
otherwise affect the obligation of the Company to repay the principal amount of
each Note together with accrued interest thereon. Prior to any negotiation of
any Note, the Bank shall record on a schedule thereto the status of all amounts
evidenced thereby as constituting part of the Domestic Rate Portion or a LIBOR
Portion and, in the case of any LIBOR Portion, the rates of interest and the
Interest Periods applicable thereto.
Section 3.7. Change in Capital Adequacy Requirements. If the Bank shall
determine that the adoption after the date hereof of any applicable law, rule or
regulation regarding capital adequacy, or any change in any existing law, rule
or regulation, or any change in the interpretation or administration thereof, by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Bank (or any of
its branches) with any request or directive regarding capital adequacy (whether
or not having the force of law) of any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on the Bank's capital as a consequence of its obligations hereunder or for the
credit which is the subject matter hereof to a level below that which the Bank
could have achieved but for such adoption, change or compliance (taking into
consideration the Bank's policies with respect to liquidity and capital
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<PAGE>
adequacy) by an amount deemed by the Bank to be material, then from time to
time, within fifteen (15) days after demand by the Bank, the Company shall pay
to the Bank such additional amount or amounts reasonably determined by the Bank
as will compensate the Bank for such reduction.
SECTION 4. THE COLLATERAL AND THE GUARANTIES.
Section 4.1. Security. The Notes and the other Obligations shall be
secured by all of the Company's accounts receivable, and certain other assets
and property related thereto, of the Company pursuant to that certain Security
Agreement dated of even date herewith from the Company to the Bank, as the same
may be amended, modified or supplemented from time to time (the "Security
Agreement"), and a pledge of the stock of the Guarantors pursuant to that
certain Pledge and Security Agreement dated of even date herewith from the
Company to the Bank (the "Pledge Agreement").
Section 4.2. Guaranties. The Notes and the other Obligations shall be
guaranteed by each Guarantor pursuant to separate guaranty agreements which are
in form and substance satisfactory to the Bank (individually a "Guaranty" and
collectively the "Guaranties"). Each Guaranty shall be secured by valid and
perfected first Liens on all of the accounts receivable, equipment and certain
other assets and property related thereto, of the Guarantor executing such
Guaranty. In the event the Company forms or acquires a direct Subsidiary after
the date hereof in accordance with Section 8.20 hereof, the Company shall cause
each such Subsidiary to (i) execute and deliver to the Bank a guaranty agreement
in form and substance satisfactory to the Bank, (ii) secure such guaranty
agreement by valid and perfected first Liens on all of the accounts receivable,
equipment and certain other assets and property related thereto, of such
Subsidiary, and (iii) execute such of the instruments, documents, certificates
and opinions required by the Bank in connection therewith.
Section 4.3. Further Assurances. The Company covenants and agrees that
it shall comply with, and will cause each Subsidiary to comply with, all terms
and conditions of each of the Collateral Documents and that it will, and will
cause each Subsidiary to, at any time and from time to time as requested by the
Bank, execute and deliver such further instruments and do such acts and things
as the Bank may deem necessary or desirable to provide for or protect or perfect
the Liens of the Bank on the Collateral.
SECTION 5. DEFINITIONS; INTERPRETATION.
Section 5.1. Definitions. The following terms when used herein shall
have the following meanings:
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"Adjusted LIBOR" means a rate per annum determined by the Bank in
accordance with the following formula:
Adjusted LIBOR = LIBOR
-----------------------
100%-Reserve Percentage
"Reserve Percentage" means, for the purpose of computing Adjusted LIBOR, the
maximum rate of all reserve requirements (including, without limitation, any
marginal, emergency, supplemental or other special reserves) imposed by the
Board of Governors of the Federal Reserve System (or any successor) under
Regulation D on Eurocurrency liabilities (as such term is defined in Regulation
D) for the applicable Interest Period as of the first day of such Interest
Period, but subject to any amendments to such reserve requirement by such Board
or its successor, and taking into account any transitional adjustments thereto
becoming effective during such Interest Period. For purposes of this definition,
LIBOR Portions shall be deemed to be Eurocurrency liabilities as defined in
Regulation D without benefit of or credit for prorations, exemptions or offsets
under Regulation D. "LIBOR" means, for each Interest Period, (a) the LIBOR Index
Rate for such Interest Period, if such rate is available, and (b) if the LIBOR
Index Rate cannot be determined, the arithmetic average of the rates of interest
per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) at which
deposits in U.S. Dollars in immediately available funds are offered to the Bank
at 11:00 a.m. (London, England time) two (2) Business Days before the beginning
of such Interest Period by three (3) or more major banks in the interbank
eurodollar market selected by the Bank for a period equal to such Interest
Period and in an amount equal or comparable to the applicable LIBOR Portion
scheduled to be outstanding from the Bank during such Interest Period. "LIBOR
Index Rate" means, for any Interest Period, the rate per annum (rounded upwards,
if necessary, to the next higher one hundred-thousandth of a percentage point)
for deposits in U.S. Dollars for a period equal to such Interest Period, which
appears on the Telerate Page 3750 as of 11:00 a.m. (London, England time) on the
day two (2) Business Days before the commencement of such Interest Period.
"Telerate Page 3750" means the display designated as "Page 3750" on the Telerate
Service (or such other page as may replace Page 3750 on that service or such
other service as may be nominated by the British Bankers' Association as the
information vendor for the purpose of displaying British Bankers' Association
Interest Settlement Rates for U.S. Dollar deposits). Each determination of LIBOR
made by the Bank shall be conclusive and binding absent manifest error.
"Affiliate" means any Person, directly or indirectly controlling or
controlled by, or under direct or indirect common control with, another Person.
A Person shall be deemed to control another Person for the purposes of this
definition if such Person possesses, directly or indirectly, the power to
direct, or cause the direction of, the management and policies of the other
Person,
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whether through the ownership of voting securities, common directors, trustees
or officers, by contract or otherwise.
"Authorized Representative" means those persons shown on the list of
officers provided by the Company pursuant to Section 6.2(a) hereof or on any
update of any such list provided by the Company to the Bank, or any further or
different officer(s) of the Company so named by any Authorized Representative of
the Company in a written notice to the Bank.
"Available Borrowing Base" means the amount (if any) by which (x) the
Borrowing Base as then determined and computed exceeds (y) the principal amount
then outstanding under the Term Loan.
"Bank" is defined in the introductory paragraph hereof.
"Borrowing Base" means, as of any time it is to be determined, the sum
of:
(a) 80% of the then outstanding unpaid amount of Eligible
Accounts of the Company and the Guarantors; plus
(b) 50% of the Eligible Equipment of the Company and the
Guarantors.
The Borrowing Base shall be computed only as against and on so much of the
Collateral as is included on the certificates to be furnished from time to time
by the Company pursuant to Section 8.5(a) hereof and, if required by the Bank
pursuant to any of the terms hereof or of any Collateral Document, as verified
by such other evidence reasonably required to be furnished to the Bank pursuant
hereto or pursuant to any such Collateral Document.
"Business Day" means any day other than a Saturday or Sunday on which
the Bank is not authorized or required to close in Chicago, Illinois and, when
used with respect to LIBOR Portions, a day on which the Bank is also dealing in
United States Dollar deposits in London, England and Nassau, Bahamas.
"Capital Expenditures" means for any Person, for any period, the
capital expenditures of such Person and its Subsidiaries during such period as
defined and classified in accordance with GAAP.
"Capital Lease" means any lease of Property which in accordance with
GAAP is required to be capitalized on the balance sheet of the lessee.
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"Capitalized Lease Obligation" means the amount of the liability shown
on the balance sheet of any Person in respect of a Capital Lease determined in
accordance with GAAP.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor statute thereto.
"Collateral" means all properties, rights, interests and privileges
from time to time subject to the Liens granted to the Bank by the Collateral
Documents.
"Collateral Documents" means (i) all guaranties as shall from time to
time guarantee the Notes or any other Obligations, (ii) the Pledge Agreement,
and (iii) the Security Agreement and all other mortgages, deeds of trust,
security agreements, assignments, financing statements and other documents as
shall from time to time secure the Obligations or any such guaranties, all as
the same may from time to time be modified, supplemented or amended.
"Commitments" mean and include the Revolving Credit Commitment and the
Term Credit Commitment.
"Company" is defined in the introductory paragraph hereof.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Company or any Subsidiary, are treated
as a single employer under Section 414 of the Code.
"Current Ratio" means, at any time the same is to be determined, the
ratio of current assets of the Company and its Subsidiaries to current
liabilities of the Company and its Subsidiaries, all as determined on a
consolidated basis in accordance with GAAP consistently applied.
"Debentures" means the 8% Series A Senior Subordinated Convertible
Redeemable Debentures of the Company Due December 31, 1999, in an aggregate
principal amount equal to $4,000,000.
"Default" means any event or condition the occurrence of which would,
with the passage of time or the giving of notice, or both, constitute an Event
of Default.
"Domestic Rate" means, for any day, the rate of interest announced by
the Bank from time to time as its prime commercial rate, as in effect on such
day.
"Domestic Rate Portion" is defined in Section 2.1(a) hereof.
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"EBIT" means for any Person, with reference to any period, Net Income
for such period plus all amounts deducted in arriving at such Net Income amount
in respect of (i) Interest Expense for such period and (ii) federal, state and
local income taxes for such period.
"EBITDA" means for any Person, with reference to any period, EBIT for
such period plus all amounts properly charged for depreciation of fixed assets
and amortization of intangible assets during such period on the books of the
Company and its Subsidiaries.
"Eligible Account" means, as to any Person, each account receivable of
such Person, provided that an account receivable shall only be an Eligible
Account to the extent it:
(a) is included, in the ordinary course of such Person's
business, on the separate accounts receivable records of such Person in
accordance with GAAP;
(b) arises out of the sale (including the rendition of
services in connection with such sale) of finished goods,
work-in-process or other inventory by such Person to an account debtor
located within the United States of America or, if such right has
arisen out of the sale of such goods to an account debtor located in
any other country, such right is secured by a valid and irrevocable
letter of credit pursuant to which any of such Person or its transferee
may draw on a lender reasonably acceptable to the Bank for the full
amount thereof;
(c) is the valid, binding and legally enforceable obligation
of the account debtor obligated thereon and such account debtor is not
(i) a Subsidiary or Affiliate of the Company or such Person, (ii) a
shareholder, director, officer or employee of the Company, such Person
or any Affiliate of the Company or such Person, (iii) the United States
of America or any department, agency or instrumentality thereof unless
such Person has complied with the Assignment of Claims Act to the
satisfaction of the Bank, (iv) a debtor under any proceeding under the
United States Bankruptcy Code or any other comparable bankruptcy or
insolvency law applicable under the law of any other country or
political subdivision thereof, or (v) an assignor for the benefit of
creditors;
(d) is assignable and not evidenced by an instrument or
chattel paper unless the same has been endorsed and delivered to the
Bank;
(e) is subject to a perfected, first priority Lien in favor of
the Bank, and is free and clear of any other Lien;
(f) is net of any credit or allowance given by such Person to
such account debtor;
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(g) is not subject to any offset, counterclaim or other
defense with respect thereto;
(h) is not unpaid more than ninety (90) days after the invoice
date;
(i) is not owed by an account debtor who is obligated on
accounts owed to such Person more than 30% of the aggregate unpaid
balance of which have been past due for longer than the relevant period
specified in clause (h) above unless the Bank has approved the
continued eligibility thereof;
(j) it would not cause the total Eligible Accounts owing from
any one account debtor or its Affiliates to exceed 25% of all Eligible
Accounts; and
(k) does not arise from a sale to an account debtor on a
bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval,
consignment or any other repurchase or return basis, provided that this
subsection (k) shall not exclude sales by such Person where such Person
delays delivery of the goods in the ordinary course of its business as
presently conducted for a period no longer than fifteen (15) days after
billing for such sale because the account debtor on such sale is not
ready to accept delivery of such goods.
"Eligible Equipment" means all equipment of any Person acceptable to
the Bank in its sole discretion provided that no such equipment shall be deemed
"eligible" if it is not:
(a) an asset of such Person to which it has good and
marketable title, freely assignable, subject to a perfected, first
priority Lien in favor of the Bank, and is free and clear of any other
Lien other than Liens permitted by Section 8.10(a) and (b) hereof; and
(b) located at such Person's facilities in such locations as
are approved in writing by the Bank and, in the case of facilities not
owned by such Person, which are at all times subject to landlord waiver
agreements in form and substance satisfactory to the Bank; provided,
however, that with respect to the equipment of HealthStar, Inc., such
landlord waiver agreements may be delivered within 60 days of the date
hereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute thereto.
"Event of Default" means any event or condition identified as such in
Section 8.1 hereof.
"Fixed Charges" means, with reference to any period, the sum of (i) the
aggregate amount of payments required to be made by the Company and its
Subsidiaries during the next
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succeeding twelve-month period in respect of principal on all Indebtedness for
Borrowed Money (whether at maturity, as a result of mandatory sinking fund
redemption, mandatory prepayment, acceleration or otherwise), plus (ii) Interest
Expense for the four fiscal quarters then ended, plus (iii) the aggregate amount
of payments required to be made by the Company and its Subsidiaries during the
next succeeding twelve-month period in respect of leases or similar arrangements
(including without limitation all payments required under operating and Capital
Leases under which the Company or any Subsidiary is liable as lessee).
"GAAP" means generally accepted accounting principles as an effect from
time to time, applied by the Company and its Subsidiaries on a basis consistent
with the preparation of the Company's most recent financial statements furnished
to the Bank pursuant to Section 5.4 hereof.
"Guaranties" is defined in Section 6.4 hereof.
"Guarantors" means and includes NHBC, TRPN and HealthStar.
"HealthStar" means HealthStar, Inc., an Illinois corporation.
"Indebtedness for Borrowed Money" means for any Person (without
duplication) (i) all indebtedness created, assumed or incurred in any manner by
such Person representing money borrowed (including by the issuance of debt
securities), (ii) all indebtedness for the deferred purchase price of property
or services (other than trade accounts payable arising in the ordinary course of
business which are not more than ninety (90) days past due), (iii) all
indebtedness secured by any Lien upon Property of such Person, whether or not
such Person has assumed or become liable for the payment of such indebtedness,
(iv) all Capitalized Lease Obligations of such Person and (v) all obligations of
such Person on or with respect to letters of credit, bankers' acceptances and
other extensions of credit whether or not representing obligations for borrowed
money.
"Interest Expense" means for any Person, with reference to any period,
the sum of all interest charges (including imputed interest charges with respect
to Capitalized Lease Obligations and all amortization of debt discount and
expense) of such Person and its Subsidiaries for such period determined in
accordance with GAAP.
"Interest Period" means, with respect to any LIBOR Portion, the period
commencing on, as the case may be, the creation, continuation or conversion date
with respect to such LIBOR Portion and ending 1, 3 or 6 months thereafter as
selected by the Company in its notice as provided herein; provided that all of
the foregoing provisions relating to Interest Periods are subject to the
following:
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(i) if any Interest Period would otherwise end on a day which
is not a Business Day, that Interest Period shall be extended to the
next succeeding Business Day, unless in the case of an Interest Period
for a LIBOR Portion the result of such extension would be to carry such
Interest Period into another calendar month in which event such
Interest Period shall end on the immediately preceding Business Day;
(ii) no Interest Period may extend beyond the final maturity
date of the Notes;
(iii) the interest rate to be applicable to each Portion for
each Interest Period shall apply from and including the first day of
such Interest Period to but excluding the last day thereof; and
(iv) no Interest Period may be selected if after giving effect
thereto the Company will be unable to make a principal payment
scheduled to be made during such Interest Period without paying part of
a LIBOR Portion on a date other than the last day of the Interest
Period applicable thereto.
For purposes of determining an Interest Period, a month means a period starting
on one day in a calendar month and ending on a numerically corresponding day in
the next calendar month, provided, however, if an Interest Period begins on the
last day of a month or if there is no numerically corresponding day in the month
in which an Interest Period is to end, then such Interest Period shall end on
the last Business Day of such month.
"LIBOR Portions" is defined in Section 2.1(a) hereof.
"Lien" means any mortgage, lien, security interest, pledge, charge or
encumbrance of any kind in respect of any Property, including the interests of a
vendor or lessor under any conditional sale, Capital Lease or other title
retention arrangement.
"Loan" means a Revolving Credit Loan or the Term Loan, unless the
context in which such term is used shall otherwise require.
"Loan Documents" means this Agreement, the Notes and the Collateral
Documents.
"Material Plan" is defined in Section 9.1(h) hereof.
"Net Income" means for any Person, with reference to any period, the
net income (or net deficit) of such Person and its Subsidiaries for such period
as computed on a consolidated basis in accordance with GAAP, and without
limiting the foregoing, after deduction from gross
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income of all expenses and reserves, including reserves for all taxes on or
measured by income, but excluding any extraordinary profits and also excluding
any taxes on such profits.
"NHBC" means National Health Benefit & Casualty Corporation, a Nevada
corporation.
"Notes" is defined in Section 1.3 hereof.
"Obligations" means all obligations of the Company to pay principal and
interest on the Loans, all fees and charges payable hereunder, and all other
payment obligations of the Company arising under or in relation to any Loan
Document, in each case whether now existing or hereafter arising, due or to
become due, direct or indirect, absolute or contingent, and howsoever evidenced,
held or acquired.
"PBGC" means the Pension Benefit Guaranty Corporation or any Person
succeeding to any or all of its functions under ERISA.
"Person" means an individual, partnership, corporation, association,
trust, unincorporated organization or any other entity or organization,
including a government or agency or political subdivision thereof.
"Plan" means any employee pension benefit plan covered by Title IV of
ERISA or subject to the minimum funding standards under Section 412 of the Code
that either (i) is maintained by a member of the Controlled Group for employees
of a member of the Controlled Group, (ii) is maintained pursuant to a collective
bargaining agreement or any other arrangement under which more than one employer
makes contributions and to which a member of the Controlled Group is then making
or accruing an obligation to make contributions or has within the preceding five
plan years made contributions, or (iii) under which a member of the Controlled
Group has any liability, including any liability by reason of having been a
substantial employer within the meaning of Section 4063 of ERISA at any time
during the preceding five years or by reason of being deemed a contributing
sponsor under Section 4064 of ERISA.
"Pledge Agreement" is defined in Section 4.1 hereof.
"Portion" is defined in Section 2.1(a) hereof.
"Property" means any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible.
"Restricted Payments" means for any Person (i) any dividend or other
distribution, direct or indirect, on account of any shares of any class of stock
of such Person, now or hereafter
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outstanding, except a dividend payable solely in shares of that class of stock
to the holders of that class or (ii) any redemption, retirement, purchase or
other acquisition for value, direct or indirect, of any shares of any class of
stock of such Person.
"Revolving Credit" is defined in Section 1.1 hereof.
"Revolving Credit Commitment" is defined in Section 1.1 hereof.
"Revolving Credit Loan" means a loan under the Revolving Credit.
"Revolving Credit Note" is defined in Section 1.2 hereof.
"Security Agreement" is defined in Section 4.1 hereof.
"Subordinated Note" means the Non-Negotiable Subordinated Promissory
Note, dated December 15, 1997, in an amount not to exceed $200,000, issued by
the Company to Thomas H. Stateman.
"Subsidiary" means any corporation or other Person more than 50% of the
outstanding ordinary voting shares or other equity interests of which is at the
time directly or indirectly owned by the Company, by one or more of its
Subsidiaries, or by the Company and one or more of its Subsidiaries.
"Term Credit Commitment" is defined in Section 1.3 hereof.
"Termination Date" means December 14, 2000, or such earlier date on
which one or both of the Commitments is terminated in whole pursuant to Sections
3.4, 9.2 or 9.3 hereof.
"Term Loan" is defined in Section 1.3 hereof.
"Term Note" is defined in Section 1.3 hereof.
"Total Liabilities" means for any Person, as of any time the same is to
be determined, the aggregate of all indebtedness, obligations, liabilities,
reserves and any other items which would be listed as a liability on a balance
sheet of such Person and its Subsidiaries determined on a consolidated basis in
accordance with GAAP.
"TRPN" means Three Rivers Provider Network, a Nevada corporation.
"Unfunded Vested Liabilities" means, for any Plan at any time, the
amount (if any) by which the present value of all vested nonforfeitable accrued
benefits under such Plan exceeds the fair market value of all Plan assets
allocable to such benefits, all determined as of the then most
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recent valuation date for such Plan, but only to the extent that such excess
represents a potential liability of a member of the Controlled Group to the PBGC
or the Plan under Title IV of ERISA.
"Voting Stock" of any Person means the capital stock of any class or
classes or other equity interest (however designated) having ordinary voting
power for the election of directors or similar governing body of such Person,
other than stock or other equity interests having such power only by reason of
the happening of a contingency.
"Welfare Plan" means a "welfare plan" as defined in Section 3(1) of
ERISA.
"Wholly Owned Subsidiary" means a Subsidiary of which all of the issued
and outstanding shares of capital stock (other than directors' qualifying shares
as required by law) or other equity interests are owned by the Company and/or
one or more Wholly Owned Subsidiaries within the meaning of this definition.
Section 5.2. Interpretation. The foregoing definitions are equally
applicable to both the singular and plural forms of the terms defined. The words
"hereof", "herein" and "hereunder" and words of like import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement. All references to time of day herein are references
to Chicago, Illinois time unless otherwise specifically provided. Where the
character or amount of any asset or liability or item of income or expense is
required to be determined or any consolidation or other accounting computation
is required to be made for the purposes of this Agreement, it shall be done in
accordance with GAAP except where such principles are inconsistent with the
specific provisions of this Agreement.
SECTION 6. REPRESENTATIONS AND WARRANTIES.
The Company represents and warrants to the Bank as follows:
Section 6.1. Organization and Qualification. The Company is duly
organized, validly existing and in good standing as a corporation under the laws
of the State of Utah, has full and adequate corporate power to own its Property
and conduct its business as now conducted, and is duly licensed or qualified and
in good standing in each jurisdiction in which the nature of the business
conducted by it or the nature of the Property owned or leased by it requires
such licensing or qualifying and in which the failure to be so licensed or
qualified could reasonably be expected to have or does in fact have a material
adverse effect on the business, operations or assets of the Company and its
Subsidiaries considered as a whole. The Company has full right and authority to
enter into this Agreement, to make the borrowings herein provided for, to issue
its Notes in evidence thereof, and to perform each and all of the matters and
things herein and therein provided for; and this Agreement and the other Loan
Documents do not, nor does the performance or observance by the Company of any
of the matters and things herein or
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therein provided for, contravene or constitute a default under any provision of
law or any judgment, injunction, order or decree binding upon the Company or any
charter or by-law provision of the Company or any covenant, indenture or
agreement of or affecting the Company or any of its Properties, or result in the
creation or imposition of any Lien on any Property of the Company.
Section 6.2. Subsidiaries. Each Subsidiary is duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it is
incorporated or organized, as the case may be, has full and adequate power to
own its Property and conduct its business as now conducted, and is duly licensed
or qualified and in good standing in each jurisdiction in which the nature of
the business conducted by it or the nature of the Property owned or leased by it
requires such licensing or qualifying and in which the failure to be so licensed
or qualified could reasonably be expected to have or does in fact have a
material adverse effect on the business, operations or assets of the Company and
its Subsidiaries considered as a whole. Schedule 6.2 hereto (as updated from
time to time in accordance with Section 8.20 hereof) identifies each Subsidiary,
the jurisdiction of its incorporation or organization, as the case may be, the
percentage of issued and outstanding shares of each class of its capital stock
or other equity interests owned by the Company and the Subsidiaries and, if such
percentage is not 100% (excluding directors' qualifying shares as required by
law), a description of each class of its authorized capital stock and other
equity interests and the number of shares of each class issued and outstanding.
All of the outstanding shares of capital stock and other equity interests of
each Subsidiary are validly issued and outstanding and fully paid and
nonassessable and all such shares and other equity interests indicated on
Schedule 6.2 as owned by the Company or a Subsidiary are owned, beneficially and
of record, by the Company or such Subsidiary free and clear of all Liens. There
are no outstanding commitments or other obligations of any Subsidiary to issue,
and no options, warrants or other rights of any Person to acquire, any shares of
any class of capital stock or other equity interests of any Subsidiary.
Section 6.3. Margin Stock. Neither the Company nor any of its
Subsidiaries is 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 Loan will be used to purchase or carry any such margin stock or to extend
credit to others for the purpose of purchasing or carrying any such margin
stock.
Section 6.4. Financial Reports. The consolidated balance sheet of the
Company and its Subsidiaries as of March 31, 1997 and the related consolidated
statements of income, retained earnings and cash flows of the Company and its
Subsidiaries for the fiscal year then ended, and accompanying notes thereto,
which financial statements are accompanied by the audit report of KPMG Peat
Marwick, independent public accountants, and the unaudited interim consolidated
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balance sheet of the Company and its Subsidiaries as at September 30, 1997 and
the related consolidated statements of income, retained earnings and cash flows
of the Company and its Subsidiaries for the six (6) months then ended, and the
balance sheet of HealthStar, dated December 12, 1997, heretofore furnished to
the Bank, fairly present the consolidated financial condition of the Company and
its Subsidiaries as at said dates and the consolidated results of their
operations cash flows for the periods then ended in conformity with GAAP applied
on a consistent basis. Neither the Company nor any Subsidiary has contingent
liabilities which are material to it other than as indicated on such financial
statements or, with respect to future periods, on the financial statements
furnished pursuant to Section 8.5 hereof. Since March 31, 1997, there has been
no material adverse change in the condition (financial or otherwise) or business
prospects of the Company and its Subsidiaries nor any change to the Company and
its Subsidiaries except those occurring in the ordinary course of business.
Section 6.5. Good Title. The Company and each of its Subsidiaries have
good and defensible title to its assets as reflected on the most recent
consolidated balance sheet of the Company and its Subsidiaries furnished to the
Bank (except for sales of assets by the Company and its Subsidiaries in the
ordinary course of its business), subject to no Liens other than such thereof as
are permitted by Section 8.10 hereof.
Section 6.6. Litigation and Other Controversies. There is no litigation
or governmental proceeding or labor controversy pending, nor to the knowledge of
the Company threatened, against the Company or any Subsidiary which if adversely
determined would result in any material adverse change in the financial
condition, Properties, business or operations of the Company and its
Subsidiaries taken as a whole.
Section 6.7. Taxes. All federal, state, local and other tax returns of
the Company and each Subsidiary required to be filed have been filed and the
Company and each Subsidiary have paid, or have made adequate provisions for the
payment of all federal, state, local and other taxes, assessments and other
governmental charges upon the Company and its Subsidiaries or their Property,
except such taxes, assessments and charges which are being contested in good
faith and by appropriate proceedings and as to which adequate reserves have been
established therefor. There are no objections to or controversies or assessments
due in respect of the tax returns of the Company and its Subsidiaries pending,
nor to the knowledge of the Company is any such objection, controversy or
assessment threatened.
Section 6.8. Approvals. No authorization, consent, license, exemption,
filing or registration with any court or governmental department, agency or
instrumentality (other than those which have already been obtained), nor any
approval or consent of the stockholders of the Company or any other Person, is
or, to the knowledge and belief of the Company, will be
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necessary to the valid execution, delivery or performance by the Company of this
Agreement or the Notes.
Section 6.9. Affiliate Transactions. Neither the Company nor any
Subsidiary is a party to any contracts or agreements with any of its Affiliates
(other than with Wholly Owned Subsidiaries) on terms and conditions which are
less favorable to the Company or such Subsidiary than would be usual and
customary in similar contracts or agreements between Persons not affiliated with
each other.
Section 6.10. Neither the Company nor any Subsidiary is an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended, or a "public utility holding
company" within the meaning of the Public Utility Holding Company Act of 1935,
as amended.
Section 6.11. ERISA. To the knowledge and belief of the Company and its
Subsidiaries, the Company and its Subsidiaries are in compliance in all material
respects with ERISA to the extent applicable to them and have received no notice
to the contrary from the PBGC or any other governmental entity or agency. As of
November 30, 1997, the net liability of the Company and its Subsidiaries to the
PBGC in respect of Unfunded Vested Liabilities would not have been in excess of
$0 if all employee pension benefit plans maintained by the Company and its
Subsidiaries had been terminated as of such date. To the knowledge and belief of
the Company and its Subsidiaries, no condition exists nor has any event or
transaction occurred with respect to any Plan which could reasonably be expected
to result in the incurrence by the Company or any Subsidiary of any material
liability, fine or penalty under ERISA or in connection with any Plan. Neither
the Company nor any Subsidiary has any contingent liability for any
post-retirement benefits under a Welfare Plan, other than liability for
continuation of coverage described in Part 6 of Title I of ERISA.
Section 6.12. To the knowledge and belief of the Company and its
Subsidiaries, the Company and each of its Subsidiaries are in compliance with
the requirements of all federal, state and local laws, rules and regulations
applicable to or pertaining to the Properties or business operations of the
Company and its Subsidiaries (including, without limitation, the Occupational
Safety and Health Act of 1970, the Americans with Disabilities Act of 1990, and
laws and regulations establishing quality criteria and standards for air, water,
land and toxic or
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hazardous wastes and substances), non-compliance with which could have a
material adverse effect on the financial condition, Properties, business or
operations of the Company and its Subsidiaries taken as a whole. Neither the
Company nor any Subsidiary has received notice to the effect that its operations
are not in compliance with any of the requirements of applicable federal, state
or local environmental, health and safety statutes and regulations or are the
subject of any governmental investigation evaluating whether any remedial action
is needed to respond to a release of any toxic or hazardous waste or substance
into the environment, which non-compliance or remedial action could have a
material adverse effect on the financial condition, Properties, business or
operations of the Company and its Subsidiaries taken as a whole.
Section 6.13. Other Agreements. Neither the Company nor any Subsidiary
is in default under the terms of any covenant, indenture or agreement of or
affecting the Company, any Subsidiary or any of their Properties, which default
if uncured would have a material adverse effect on the financial condition,
Properties, business or operations of the Company and its Subsidiaries taken as
a whole.
SECTION 7. CONDITIONS PRECEDENT.
The obligation of the Bank to make any Loan under this Agreement is
subject to the following conditions precedent:
Section 7.1. Each Advance. As of the time of the making of each
extension of credit (including the initial extension of credit) hereunder:
(a) each of the representations and warranties set forth in
Section 6 hereof and in the other Loan Documents shall be true and
correct as of such time, except to the extent the same expressly relate
to an earlier date;
(b) the Company shall be in full compliance with all of the
terms and conditions of this Agreement and of the other Loan Documents,
and no Default or Event of Default shall have occurred and be
continuing or would occur as a result of making such extension of
credit;
(c) after giving effect to such extension of credit, the
aggregate principal amount of all Revolving Credit Loans outstanding
under this Agreement shall not exceed the lesser of (i) the Revolving
Credit Commitment and (ii) the Available Borrowing Base; and
(d) no Default or Event of Default shall have occurred and be
continuing hereunder.
The Company's request for any Loan shall constitute its warranty as to the
foregoing effects.
Section 7.2. Initial Advance. At or prior to the making of the initial
extension of credit hereunder, the following conditions precedent shall also
have been satisfied:
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(a) the Bank shall have received the following (each to be
properly executed and completed) and the same shall have been approved
as to form and substance by the Bank:
(i) the Notes;
(ii) the Collateral Documents, together with any
financing statements requested by the Bank in connection
therewith;
(iii) the Guaranties;
(iv) certified copies of resolutions of the Board of
Directors of the Company and each Guarantor authorizing the
execution and delivery of this Agreement, the Notes, the
Guaranties and the other Loan Documents, as appropriate,
indicating the authorized signers of such documents and all
other documents relating thereto and the specimen signatures
of such signers;
(v) copies of the Articles of Incorporation and
Bylaws of the Company and each Guarantor certified by the
Secretary or other appropriate officer of the Company or such
Guarantor, as the case may be;
(vi) an incumbency certificate containing the name,
title and genuine signatures of each of the Company's
Authorized Representatives; and
(vii) evidence of insurance required by Section 8.4
hereof.
(b) legal matters incident to the execution and delivery of
this Agreement and other Loan Documents and to the transactions
contemplated hereby shall be satisfactory to the Bank and its counsel;
(c) the Bank shall have received the favorable written opinion
of counsel for the Company and the Guarantors in the form attached
hereto as Exhibit D and otherwise satisfactory to the Bank and its
counsel;
(d) the Bank shall have received a Borrowing Base certificate
in the form attached hereto as Exhibit C showing the computation of the
Available Borrowing Base in reasonable detail as of December 15, 1997;
(e) the Bank shall have received good standing certificates
for the Company and each Guarantor (dated as of the date no earlier
than ten (10) days prior to the date
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hereof) from the office of the secretary of state of the state of its
incorporation and each state in which it is qualified to do business as
a foreign corporation;
(f) the Liens granted to the Bank under the Collateral
Documents shall have been perfected in a manner satisfactory to the
Bank and its counsel;
(g) the Bank shall have received the initial fees called for
by Section 3.2(b) hereof;
(h) the acquisition referred to in Section 8.22 hereof shall
have occurred (except for the Bank's funding of a portion of the
purchase price therefor) on terms and conditions substantially similar
to those heretofore provided to the Bank in writing; and
(i) the bank shall have received a subordination agreement in
form and substance satisfactory to the Bank from the payee of the
Subordinated Note.
SECTION 8. COVENANTS.
The Company agrees that, so long as any credit is available to or in
use by the Company hereunder, except to the extent compliance in any case or
cases is waived in writing by the Bank:
Section 8.1. Corporate Existence, Etc. The Company shall, and shall
cause each Subsidiary to, preserve and maintain its corporate existence. The
Company will preserve and keep in force and effect, and cause each Subsidiary to
preserve and keep in force and effect, all licenses, permits and franchises
necessary to the proper conduct of its business.
Section 8.2. Maintenance of Properties. The Company will maintain,
preserve and keep its Properties in good repair, working order and condition
(ordinary wear and tear excepted) and will from time to time make all needful
and proper repairs, renewals, replacements, additions and betterments thereto so
that at all times the efficiency thereof shall be fully preserved and
maintained, and will cause each Subsidiary to do so in respect of Property owned
or used by it.
Section 8.3. Taxes and Assessments. The Company will duly pay and
discharge, and will cause each Subsidiary to duly pay and discharge, all taxes,
rates, assessments, fees and governmental charges upon or against it or its
Properties, in each case before the same become delinquent and before penalties
accrue thereon, unless and to the extent that the same are being contested in
good faith and by appropriate proceedings which prevent enforcement of the
matter under contest and adequate reserves are provided therefor.
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Section 8.4. Insurance. The Company will insure and keep insured, and
will cause each Subsidiary to insure and keep insured, with good and responsible
insurance companies, all insurable Property owned by it which is of a character
usually insured by Persons similarly situated and operating like Properties
against loss or damage from such hazards and risks, and in such amounts, as are
insured by Persons similarly situated and operating like Properties; and the
Company will insure, and cause each Subsidiary to insure, such other hazards and
risks (including employers' and public liability risks) with good and
responsible insurance companies as and to the extent usually insured by Persons
similarly situated and conducting similar businesses. The Company will upon
request (which requests, prior to the occurrence of an Event of Default
hereunder, shall be no more frequent than once per calendar year), of the Bank
furnish a certificate setting forth in summary form the nature and extent of the
insurance maintained pursuant to this Section.
Section 8.5. Financial Reports. The Company will, and will cause each
Subsidiary to, maintain a standard system of accounting in accordance with GAAP
and will furnish to the Bank and its duly authorized representatives such
information respecting the business and financial condition of the Company and
its Subsidiaries as the Bank may reasonably request; and without any request,
will furnish to the Bank:
(a) as soon as available, and in any event within thirty (30)
days after the close of each calendar month, a Borrowing Base
certificate in the form attached hereto as Exhibit C showing the
computation of the Available Borrowing Base in reasonable detail as of
the close of business on the last day of such month, prepared by the
Company and certified to by the chief financial officer of the Company;
(b) as soon as available, and in any event within (i) thirty
(30) days after the close of each calendar month, and (ii) within
forty-five (45) days after the close of each calendar quarter, prepared
on a consolidated and consolidating basis, copies of the consolidated
and consolidating balance sheets for the Company and its Subsidiaries
as of the close of each such period and the consolidated and
consolidating statements of income, retained earnings and cash flows of
the Company and its Subsidiaries for such period, all in reasonable
detail and, commencing January 31, 1998, showing in comparative form
the figures for the corresponding date and period in the previous
fiscal year, prepared by the Company in accordance with GAAP and
certified to by the chief financial officer of the Company;
(c) as soon as available, and in any event within ninety (90)
days after the close of each annual accounting period of the Company,
copies of the consolidated and consolidating balance sheets of the
Company and its Subsidiaries as of the close of such period and the
consolidated and consolidating statements of income, retained earnings
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and cash flows of the Company and its Subsidiaries for such period, and
accompanying notes thereto, all in reasonable detail showing in
comparative form the figures for the previous fiscal year, accompanied
by an unqualified opinion thereon of KPMG Peat Marwick or another firm
of independent public accountants of recognized national standing,
selected by the Company and satisfactory to the Bank, to the effect
that the financial statements have been prepared in accordance with
GAAP and present fairly in accordance with GAAP the consolidated
financial condition of the Company and its Subsidiaries as of the close
of such fiscal year and the results of their operations and cash flows
for the fiscal year then ended and that an examination of such accounts
in connection with such financial statements has been made in
accordance with generally accepted auditing standards and, accordingly,
such examination included such tests of the accounting records and such
other auditing procedures as were considered necessary in the
circumstances;
(d) as soon as available and in any event by March 31, 1998,
financial statements of the Company and HealthStar as of the date
hereof prepared by the Company and audited by KPMG Peat Marwick LLP,
for the period from April 1, 1997 through the date hereof, including a
computation of Working Capital as of the date hereof; and
(e) promptly after knowledge thereof shall have come to the
attention of any responsible officer of the Company, written notice of
any threatened or pending litigation or governmental proceeding or
labor controversy against the Company or any Subsidiary which, if
adversely determined, would adversely effect the financial condition,
Properties, business or operations of the Company and its Subsidiaries
taken as a whole or of the occurrence of any Default or Event of
Default hereunder.
Each of the financial statements furnished to the Bank pursuant to clauses (b)
and (c) of this Section shall be accompanied by a written certificate in the
form attached hereto as Exhibit E signed by the chief financial officer of the
Company to the effect that to the best of the chief financial officer's
knowledge and belief no Default or Event of Default has occurred during the
period covered by such statements or, if any such Default or Event of Default
has occurred during such period, setting forth a description of such Default or
Event of Default and specifying the action, if any, taken by the Company to
remedy the same. Such certificate shall also set forth the calculations
supporting such statements in respect of Sections 8.6, 8.7 and 8.8 of this
Agreement.
Section 8.6. Current Ratio. The Company shall not, at any time during
the periods specified below, permit the Current Ratio to be less than:
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FROM AND INCLUDING TO AND INCLUDING CURRENT RATIO SHALL NOT BE
LESS THAN
The date hereof 03/31/98 0.65 to 1.0
04/01/98 03/31/99 1.0 to 1.0
04/01/99 all times thereafter 1.1 to 1.0
Section 8.7. Leverage Ratio. The Company shall not, as of the last day
of each fiscal quarter of the Company permit the ratio of Total Indebtedness for
Borrowed Money to EBITDA for the four quarters of the Company then ended to be
more than (i) 3.0 to 1.0 for the fiscal quarter ending March 31, 1998, (ii) 2.75
to 1.0 for the fiscal quarter ending June 30, 1998, (iii) 2.50 to 1.0 for the
fiscal quarter ending September 30, 1998, and (iv) 2.25 to 1.0 for each fiscal
quarter thereafter; provided, however, that for purposes of this covenant,
EBITDA shall be computed during the 1998 calendar year, cumulatively for all
fiscal quarters completed as of the date of determination and on an annualized
basis.
Section 8.8. Fixed Charge Coverage Ratio. The Company shall not, as of
the last day of each fiscal quarter of the Company permit the ratio of EBITDA
less capital expenditures for the four fiscal quarters of the Company then ended
plus Fixed Charges to Fixed Charges (the "Fixed Charge Coverage Ratio") to be
less than (i) 1.50 to 1.0 for the fiscal quarters of the Company ending March
31, 1998, June 30, 1998 and September 30, 1998, (ii) 1.75 to 1.0 for the fiscal
quarters of the Company ending December 31, 1998 and March 31, 1999 and (iii)
2.00 to 1.0 for each fiscal quarter of the Company thereafter; provided,
however, that for purposes of this covenant, EBITDA and Interest Expense shall
be computed during the 1998 calendar year, cumulatively for all fiscal quarters
completed as of the date of determination and on an annualized basis.
Section 8.9. Indebtedness for Borrowed Money. The Company will not, nor
will it permit any Subsidiary to, issue, incur, assume, create or have
outstanding any Indebtedness for Borrowed Money; provided, however, that the
foregoing provisions shall not restrict nor operate to prevent:
(a) the indebtedness of the Company on the Notes and other
indebtedness of the Company owing to the Bank;
(b) Capitalized Lease Obligations in an aggregate amount not
to exceed $50,000 at any one time outstanding;
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(c) indebtedness secured by Liens on real property and
equipment (excluding Collateral) permitted by Section 8.10(d) hereof in
an aggregate amount not to exceed $50,000 at any one time outstanding;
and
(d) intercompany indebtedness of Subsidiaries permitted by
Section 8.11 hereof;
(e) the Subordinated Note; and
(f) the Debentures.
Section 8.10. Liens. The Company will not, nor will it permit any
Subsidiary to, create, incur or permit to exist any Lien of any kind on any
Property owned by the Company or any Subsidiary; provided, however, that this
Section shall not apply to nor operate to prevent:
(a) Liens arising by statute in connection with worker's
compensation, unemployment insurance, old age benefits, social security
obligations, taxes, assessments, statutory obligations or other similar
charges, good faith cash deposits or liens in connection with tenders,
contracts or leases to which the Company or any Subsidiary is a party
or other cash deposits or liens to secure performances of statutory
obligations, tenders, contracts or leases all of which are required to
be made in the ordinary course of business, provided in each case that
the obligation is not for borrowed money and that the obligation
secured is not overdue or, if overdue, is being contested in good faith
by appropriate proceedings which prevent enforcement of the matter
under contest and adequate reserves have been established therefor;
(b) mechanics', workmen's, materialmen's, landlords',
carriers', or other similar Liens arising in the ordinary course of
business with respect to obligations which are not due or which are
being contested in good faith by appropriate proceedings which prevent
enforcement of the matter under contest;
(c) the pledge of assets for the purpose of securing an
appeal, stay or discharge in the course of any legal proceeding,
provided that the aggregate amount of liabilities of the Company and
its Subsidiaries secured by a pledge of assets permitted under this
clause, including interest and penalties thereon, if any, shall not be
in excess of $50,000 at any one time outstanding;
(d) Liens on Property other than Collateral securing
indebtedness permitted by Section 8.9(c) hereof; and
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(e) Liens granted in favor of the Bank by the Collateral
Documents.
Section 8.11. Investments, Acquisitions, Loans, Advances and
Guaranties. The Company will not, nor will it permit any Subsidiary to, directly
or indirectly, make, retain or have outstanding any investments (whether through
purchase of stock or obligations or otherwise) in, or loans or advances (other
than for travel advances and other cash advances made to employees in the
ordinary course of business) to, any other Person, or acquire all or any
substantial part of the assets or business of any other Person, or be or become
liable as endorser, guarantor, surety or otherwise for any debt, obligation or
undertaking of any other Person, or otherwise agree to provide funds for payment
of the obligations of another, or supply funds thereto or invest therein or
otherwise assure a creditor of another against loss or apply for or become
liable to the issuer of a letter of credit which supports an obligation of
another, or subordinate any claim or demand it may have to the claim or demand
of any other Person; provided, however, that the foregoing provisions shall not
apply to nor operate to prevent:
(a) investments in direct obligations of the United States of
America or of any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of
America, provided that any such obligations shall mature within one
year of the date of issuance thereof;
(b) investments in commercial paper rated at least P-1 by
Moody's Investors Services, Inc. and at least A-1 by Standard & Poor's
Corporation maturing within 270 days of the date of issuance thereof;
(c) investments in certificates of deposit issued by any
United States commercial bank having capital and surplus of not less
than $100,000,000 which have a maturity of one year or less;
(d) endorsement of items for deposit or collection of
commercial paper received in the ordinary course of business;
(e) loans and advances by the Company to its Subsidiaries or
loans and advances by the Company's Subsidiaries to the Company or to
another Subsidiary of the Company; and
(f) loans and advances by the Company to employees in the
ordinary course of business aggregating not more than $20,000 at any
one time outstanding.
In determining the amount of investments, acquisitions, loans, advances and
guarantees permitted under this Section, investments and acquisitions shall
always be taken at the original
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cost thereof (regardless of any subsequent appreciation or depreciation
therein), loans and advances shall be taken at the principal amount thereof then
remaining unpaid and guarantees shall be taken at the amount of obligations
guaranteed thereby.
Section 8.12. Debentures and Subordinated Note. The Company will not,
without the prior written consent of the Bank, (i) prepay any principal of or
interest on the Debentures or the Subordinated Note prior to the date when due
thereunder, or (ii) amend, modify, supplement or alter the Debentures or the
Subordinated Note. The Company shall pay all amounts due under the Debentures by
issuing common stock of the Company in accordance with the terms of the
Debentures, unless the Bank shall otherwise consent in writing.
Section 8.13. Sales and Leasebacks. The Company will not, nor will it
permit any Subsidiary to, enter into any arrangement with any bank, insurance
company or any other lender or investor providing for the leasing by the Company
or any Subsidiary of any Property theretofore owned by it and which has been or
is to be sold or transferred by such owner to such lender or investor.
Section 8.14. Dividends and Certain Other Restricted Payments. The
Company will not, nor will it permit a Subsidiary to, make any Restricted
Payments.
Section 8.15. Mergers, Consolidations and Sales. The Company will not,
nor will it permit any Subsidiary to, be a party to any merger or consolidation,
or sell, transfer, lease or otherwise dispose of all or any substantial part of
its Property (except for sales of inventory in the ordinary course of business),
or in any event sell or discount (with or without recourse) any of its notes or
accounts receivable; provided, however, that this Section shall not apply to nor
prohibit:
(a) any merger or consolidation so long as the Company is the
surviving corporation and, at the time of such merger or consolidation
or immediately after giving effect thereto, no Default or Event of
Default shall occur or be continuing;
(b) any merger or consolidation of a Subsidiary of the Company
with or into the Company (so long as the Company is the surviving
entity) or any other Subsidiary of the Company (so long as a Wholly
Owned Subsidiary is the surviving entity) so long as, at the time of
such merger or consolidation or immediately after giving effect
thereto, no Default or Event of Default shall occur or be continuing;
(c) the sale, lease, transfer or other disposition by any
Subsidiary of all or any portion of its assets to the Company or any
other Subsidiary.
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The term "substantial" as used herein shall mean to sell, transfer, lease or
other disposition of 10% of the total consolidated assets of the Company.
Section 8.16. ERISA. The Company will, and will cause each Subsidiary
to, promptly pay and discharge all obligations and liabilities arising under
ERISA of a character which if unpaid or unperformed might result in the
imposition of a Lien against any of its Properties. The Company will, and will
cause each Subsidiary to, promptly notify the Bank of (i) the occurrence of any
reportable event (as defined in ERISA) with respect to a Plan, (ii) receipt of
any notice from the PBGC of its intention to seek termination of any Plan or
appointment of a trustee therefor, (iii) its intention to terminate or withdraw
from any Plan, and (iv) the occurrence of any event with respect to any Plan
which would result in the incurrence by the Company or any Subsidiary of any
material liability, fine or penalty, or any material increase in the contingent
liability of the Company or any Subsidiary with respect to any post-retirement
Welfare Plan benefit.
Section 8.17. Compliance with Laws. The Company will, and will cause
each Subsidiary to, comply in all respects with the requirements of all federal,
state and local laws, rules, regulations, ordinances and orders applicable to or
pertaining to the Properties or business operations of the Company or any
Subsidiary, non-compliance with which could have a material adverse effect on
the financial condition, Properties, business or operations of the Company and
its Subsidiaries or could result in a Lien upon any of their Property in
violation of this Agreement.
Section 8.18. Burdensome Contracts With Affiliates. The Company will
not, nor will it permit any Subsidiary to, enter into any contract, agreement or
business arrangement with any of its Affiliates (other than with Wholly Owned
Subsidiaries) on terms and conditions which are less favorable to the Company or
such Subsidiary than would be usual and customary in similar contracts,
agreements or business arrangements between Persons not affiliated with each
other.
Section 8.19. No Changes in Fiscal Year. Neither the Company nor any
Subsidiary will change its fiscal year from its present basis without the prior
written consent of the Bank.
Section 8.20. Formation of Subsidiaries. Except for existing
Subsidiaries designated on Schedule 6.2 hereto, the Company will not, nor will
it permit any Subsidiary to, form or acquire any Subsidiary without the prior
written consent of the Bank. In the event any direct Subsidiary is formed or
acquired by the Company after the date hereof, the Company shall cause any such
newly-formed or acquired direct Subsidiary with assets in excess of $250,000 to
(i) execute and deliver a guaranty agreement in form and substance satisfactory
to the Bank, (ii) secure such guaranty agreement by valid and perfected first
Liens on all of the accounts receivable, equipment and certain other assets and
property related thereto, and (iii) execute and
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deliver such instruments, documents, certificates and opinions required by the
Bank in connection therewith. Thereafter, such direct Subsidiary shall be deemed
a Subsidiary hereunder and Schedule 6.2 of this Agreement shall be deemed
amended to include reference to such Subsidiary.
Section 8.21. Inspection and Field Audit. The Company will, and will
cause each Subsidiary to, permit the Bank and its duly authorized
representatives and agents to visit and inspect any of the Properties, corporate
books and financial records of the Company and each Subsidiary, to examine and
make copies of the books of accounts and other financial records of the Company
and each Subsidiary, and to discuss the affairs, finances and accounts of the
Company and each Subsidiary with, and to be advised as to the same by, its
officers and independent public accountants (and by this provision the Company
authorizes such accountants to discuss with the Bank the finances and affairs of
the Company and of each Subsidiary) at such reasonable times and reasonable
intervals as the Bank may designate. After the occurrence of an Event of
Default, the Company shall pay for all costs and expenses incurred by the Bank
in connection with any such visitation or inspection.
Section 8.22. Use of Credit. The Company will use all credit under this
Agreement solely to (i) finance general corporate purposes and (ii) finance the
acquisition of certain assets and liabilities of HealthStar.
SECTION 9. EVENTS OF DEFAULT AND REMEDIES.
Section 9.1. Events of Default. Any one or more of the following shall
constitute an Event of Default hereunder:
(a) default in the payment when due of all or any part of the
principal of or interest on any Note (whether at the stated maturity
thereof or at any other time provided for in this Agreement) or of any
fee or other Obligation payable by the Company hereunder or under any
other Loan Document; or
(b) default in the observance or performance of any covenant
set forth in Sections 8.4, 8.6, 8.7, 8.8, 8.9, 8.10, 8.11, 8.12, 8.13,
8.14, 8.15, 8.16, 8.17, 8.18, 8.19, 8.20, 8.21 or 8.22 hereof or of any
provision of any Loan Document requiring the maintenance of insurance
on the Collateral subject thereto or dealing with the use or remittance
of proceeds of Collateral; or
(c) default in the observance or performance of any other
provision hereof or of any other Loan Document which is not remedied
within thirty (30) days after written notice thereof to the Company by
the Bank; or
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(d) any representation or warranty made by the Company herein
or in any other Loan Document, or in any statement or certificate
furnished by it pursuant hereto or thereto, or in connection with any
extension of credit made hereunder, proves untrue in any material
respect as of the date of the issuance or making thereof; or
(e) any Guarantor shall purport to disavow, revoke, repudiate
or terminate its Guaranty; or
(f) (i) default shall occur under any evidence of Indebtedness
for Borrowed Money issued, assumed or guaranteed by the Company or any
Subsidiary aggregating in excess of $100,000 or under any indenture,
agreement or other instrument under which the same may be issued, and
such default shall continue for a period of time sufficient to permit
the acceleration of the maturity of any such Indebtedness for Borrowed
Money (whether or not such maturity is in fact accelerated) or any such
Indebtedness for Borrowed Money shall not be paid when due (whether by
lapse of time, acceleration or otherwise), or (ii) an event of default,
or an event which, with the giving of notice or passage of time, or
both, shall constitute an event of default under any Debenture shall
have occurred; or
(g) any judgment or judgments, writ or writs, or warrant or
warrants of attachment, or any similar process or processes in an
aggregate amount in excess of $100,000 shall be entered or filed
against the Company or any of its Subsidiaries or against any of their
Property and which remains unvacated, unbonded, unstayed or unsatisfied
for a period of thirty (30) days; or
(h) the Company or any member of its Controlled Group shall
fail to pay when due an amount or amounts aggregating in excess
$100,000 which it shall have become liable to pay to the PBGC or to a
Plan under Title IV of ERISA; or notice of intent to terminate a Plan
or Plans having aggregate Unfunded Vested Liabilities in excess of
$100,000 (collectively, a "Material Plan") shall be filed under Title
IV of ERISA by the Company or any other member of its Controlled Group,
any plan administrator or any combination of the foregoing; or the PBGC
shall institute proceedings under Title IV of ERISA to terminate or to
cause a trustee to be appointed to administer any Material Plan or a
proceeding shall be instituted by a fiduciary of any Material Plan
against the Company or any member of its Controlled Group to enforce
Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have
been dismissed within thirty (30) days thereafter; or a condition shall
exist by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any Material Plan must be terminated; or
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(i) any Person or two or more Persons acting in concert shall
acquire beneficial ownership (within the meaning or Rule 13d-3 of the
Securities and Exchange Commission under the Securities Exchange Act of
1934) of 20% or more of the issued and outstanding Voting Stock of the
Company (a "20% Holder"), except any Person who is on the date hereof a
20% Holder; or
(j) the Company shall at any time and for any reason cease to
own, both legally and beneficially, 100% of the Voting Stock of any
Guarantor; or
(k) the Company or any Subsidiary shall (i) have entered
involuntarily against it an order for relief under the United States
Bankruptcy Code, as amended, (ii) not pay, or admit in writing its
inability to pay, its debts generally as they become due, (iii) make an
assignment for the benefit of creditors, (iv) apply for, seek, consent
to, or acquiesce in, the appointment of a receiver, custodian, trustee,
examiner, liquidator or similar official for it or any substantial part
of its Property, (v) institute any proceeding seeking to have entered
against it an order for relief under the United States Bankruptcy Code,
as amended, to adjudicate it insolvent, or seeking dissolution, winding
up, liquidation, reorganization, arrangement, adjustment or composition
of it or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors or fail to file an answer or other
pleading denying the material allegations of any such proceeding filed
against it, or (vi) fail to contest in good faith any appointment or
proceeding described in Section 8.1(m) hereof; or
(l) a custodian, receiver, trustee, examiner, liquidator or
similar official shall be appointed for the Company or any of its
Subsidiaries or any substantial part of any of their Property, or a
proceeding described in Section 8.1(l)(v) shall be instituted against
the Company or any of its Subsidiaries, and such appointment continues
undischarged or such proceeding continues undismissed or unstayed for a
period of sixty (60) days.
Section 9.2. Non-Bankruptcy Defaults. When any Event of Default
described in clauses (a) through (k), both inclusive, of Section 8.1 has
occurred and is continuing, the Bank or any holder of the Notes may, by notice
to the Company, take either or both of the following actions:
(a) terminate the obligation of the Bank to extend any further
credit hereunder on the date (which may be the date thereof) stated in
such notice;
(b) declare the principal of and the accrued interest on the
Notes to be forthwith due and payable and thereupon the Notes,
including both principal and interest and all fees, charges and other
Obligations payable hereunder and under the other Loan
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Document shall be and become immediately due and payable without
further demand, presentment, protest or notice of any kind; and
(c) enforce any and all rights and remedies available to it
under the Loan Documents or applicable law.
Section 9.3. Bankruptcy Defaults. When any Event of Default described
in clauses (k) or (l) of Section 9.1 has occurred and is continuing, then the
Notes, including both principal and interest, and all fees, charges and other
Obligations payable hereunder and under the other Loan Documents, shall
immediately become due and payable without presentment, demand, protest or
notice of any kind, and the obligation of the Bank to extend further credit
pursuant to any of the terms hereof shall immediately terminate. In addition,
the Bank may exercise any and all remedies available to it under the Loan
Documents or applicable law.
SECTION 10. MISCELLANEOUS.
Section 10.1. Holidays. If any payment of principal or interest on any
Note or any fee or other Obligation shall fall due on a day which is not a
Business Day, the due date thereof shall be extended to the next succeeding
Business Day on which the same is payable and, in the case of any payment of
principal, interest shall continue to accrue thereon at the rate per annum
determined in accordance with this Agreement during such extension.
Section 10.2. No Waiver, Cumulative Remedies. No delay or failure on
the part of the Bank or on the part of the holder of any of the Obligations in
the exercise of any power or right shall operate as a waiver thereof, nor as an
acquiescence in any default, nor shall any single or partial exercise of any
power or right preclude any other or further exercise thereof, or the exercise
of any other power or right. The rights and remedies hereunder of the Bank and
of the holders of any of the Obligations are cumulative to, and not exclusive
of, any rights or remedies which any of them would otherwise have.
Section 10.3. Amendments, Etc. No amendment, modification, termination
or waiver of any provision of this Agreement or of the other Loan Documents, nor
consent to any departure by the Company therefrom, shall in any event be
effective unless the same shall be in writing and signed by the Bank. No notice
to or demand on the Company in any case shall entitle the Company to any other
or further notice or demand in similar or other circumstances.
Section 10.4. Costs and Expenses. The Company agrees to pay on demand
the reasonable costs and expenses of the Bank in connection with the
negotiation, preparation, execution and delivery of this Agreement, the other
Loan Documents and the other instruments and documents to be delivered hereunder
or thereunder, and in connection with the recording or
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<PAGE>
filing of any of the foregoing, and in connection with the transactions
contemplated hereby or thereby, and in connection with any consents hereunder or
waivers or amendments hereto or thereto, including the reasonable fees and
expenses of Messrs. Chapman and Cutler, counsel for the Bank, with respect to
all of the foregoing (whether or not the transactions contemplated hereby are
consummated), and all reasonable costs and expenses (including attorneys' fees),
if any, incurred by the Bank or any other holder of any of the Obligations in
connection with a default under, or the enforcement of, this Agreement, any
other Loan Document or any other instrument or document to be delivered
hereunder or thereunder or in connection with any action, suit or proceeding
brought against the Bank by any Person which in any way arises out of the
transactions contemplated or financed hereby or out of any action or inaction by
the Bank hereunder or thereunder except for such thereof arising solely from the
Bank's gross negligence or willful misconduct. In addition, at the time of
requesting any amendment hereof or consent or waiver hereunder, the Company must
negotiate with the Bank a fee to the Bank for engaging in and documenting any
such action.
Section 10.5. Documentary Taxes. The Company agrees to pay on demand
any documentary, stamp or similar taxes payable in respect of this Agreement or
any other Loan Document, including interest and penalties, in the event any such
taxes are assessed, irrespective of when such assessment is made and whether or
not any credit is then in use or available hereunder.
Section 10.6. Survival of Representations. All representations and
warranties made herein or in any of the other Loan Documents or in certificates
given pursuant hereto or thereto shall survive the execution and delivery of
this Agreement and the other Loan Documents, and shall continue in full force
and effect with respect to the date as of which they were made as long as any
credit is in use or available hereunder.
Section 10.7. Survival of Indemnities. All indemnities and other
provisions relative to reimbursement to the Bank of amounts sufficient to
protect the yield of the Bank with respect to the Loans, including, but not
limited to, Sections 2.7 and 2.8 hereof, shall survive the termination of this
Agreement and the payment of the Note.
Section 10.8. Notices. Except as otherwise specified herein, all
notices hereunder shall be in writing (including cable, telecopy or telex) and
shall be given to the relevant party at its address or telecopier number set
forth below, or such other address or telecopier number as such party may
hereafter specify by notice to the other given by United States certified or
registered mail or by other telecommunication device capable of creating a
written record of such notice and its receipt. Notices hereunder shall be
addressed:
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<PAGE>
to the Company at:
Champion Financial Corporation
9495 East San Salvador Drive
Scottsdale, Arizona 85258
Attention: Chief Financial Officer/Mr. Stephen Carder
Telephone: (602) 614-4285
Telecopy: (602) 451-9087
to the Bank at:
Harris Trust and Savings Bank
P.O. Box 755
111 West Monroe Street
Chicago, Illinois 60690
Attention: Tax-Exempt Institutions Division
Mr. Christopher Randall
Telephone: (312) 461-5068
Telecopy: (312) 461-7365
Each such notice, request or other communication shall be effective (i) if given
by telecopier, when such telecopy is transmitted to the telecopier number
specified in this Section and a confirmation of such telecopy has been received
by the sender, (ii) if given by mail, five (5) days after such communication is
deposited in the mail, certified or registered with return receipt requested,
addressed as aforesaid or (iii) if given by any other means, when delivered at
the addresses specified in this Section; provided that any notice given pursuant
to Section 1 or Section 2 hereof shall be effective only upon receipt.
Section 10.9. Headings. Section headings used in this Agreement are for
convenience of reference only and are not a part of this Agreement for any other
purpose.
Section 10.10. Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
Section 10.11. Counterparts. This Agreement may be executed in any
number of counterparts, and by different parties hereto on separate counterpart
signature pages, and all such counterparts taken together shall be deemed to
constitute one and the same instrument.
Section 10.12. Binding Nature, Governing Law, Etc. This Agreement shall
be binding upon the Company and its successors and assigns, and shall inure to
the benefit of the Bank and the benefit of its successors and assigns, including
any subsequent holder of the Obligations.
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<PAGE>
This Agreement and the rights and duties of the parties hereto shall be governed
by, and construed in accordance with, the internal laws of the State of Illinois
without regard to principles of conflicts of laws. This Agreement constitutes
the entire understanding of the parties with respect to the subject matter
hereof and any prior agreements, whether written or oral, with respect thereto
are superseded hereby. The Company may not assign its rights hereunder without
the written consent of the Bank.
Section 10.13. Terms of Collateral Documents not Superseded. Nothing
contained herein shall be deemed or construed to permit any act or omission
which is prohibited by the terms of any Collateral Document, the covenants and
agreements contained herein being in addition to and not in substitution for the
covenants and agreements contained in the Collateral Documents.
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<PAGE>
Upon your acceptance hereof in the manner hereinafter set forth, this
Agreement shall constitute a contract between us for the uses and purposes
hereinabove set forth.
Dated as of this 15th day of December, 1997.
CHAMPION FINANCIAL CORPORATION
By /s/ Stephen J Carder
-----------------------
Its Executive Vice President
Accepted and agreed to at Chicago, Illinois as of the day and year last
above written.
HARRIS TRUST AND SAVINGS BANK
By /s/ Mark Lewis
-----------------
Its Senior Vice President
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EXHIBIT 10.32
PLEDGE AND SECURITY AGREEMENT
This Pledge and Security Agreement (the "Agreement") is dated as of
December 15, 1997, between CHAMPION FINANCIAL CORPORATION, a Utah corporation
(the "Debtor"), with its chief executive office and mailing address at 9495 East
San Salvador Drive, Scottsdale, Arizona 85258, and HARRIS TRUST AND SAVINGS
BANK, an Illinois banking corporation (the "Secured Party"), with its mailing
address at 111 West Monroe Street, Chicago, Illinois 60690.
PRELIMINARY STATEMENT
A. The Debtor has requested that the Secured Party extend credit or
otherwise make financial accommodations available to or for the account of the
Debtor.
B. As a condition to extending credit or otherwise making financial
accommodations available to or for the account of the Debtor, the Secured Party
requires, among other things, that the Debtor grant the Secured Party a security
interest in the Debtor's personal property described herein subject to the terms
and conditions hereof.
NOW, THEREFORE, in consideration of the benefits accruing to the
Debtor, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. Grant of Security Interest. The Debtor hereby grants to the Secured
Party a lien on and security interest in, and acknowledges and agrees that the
Secured Party has and shall continue to have a continuing lien on and security
interest in, any and all right, title and interest of the Debtor, whether now
owned or existing or hereafter created, acquired or arising, in and to the
following: (a) all shares of the capital stock of each subsidiary of the Debtor,
whether now existing or hereafter formed or acquired (those shares delivered to
and deposited with the Secured Party on the date hereof being listed and
described on Schedule A attached hereto), and all substitutions and additions to
such shares (herein, the "Pledged Securities"), (b) all dividends, distributions
and sums distributable or payable from, upon or in respect of the Pledged
Securities, (c) all other rights and privileges incident to the Pledged
Securities, and (d) all proceeds and products of the foregoing (all of the
foregoing being hereinafter referred to collectively as the "Collateral").
2. Obligations Hereby Secured. The lien and security interest granted
and provided for herein is made and given to secure, and shall secure, the
payment and performance of (a) any and all indebtedness, obligations and
liabilities of whatsoever kind and nature of the Debtor to
<PAGE>
the Secured Party (whether arising before or after the filing of a petition in
bankruptcy), whether direct or indirect, absolute or contingent, due or to
become due, and whether now existing or hereafter arising and howsoever held,
evidenced or acquired, and whether several, joint or joint and several and (b)
any and all expenses and charges, legal or otherwise, suffered or incurred by
the Secured Party in collecting or enforcing any of such indebtedness,
obligations and liabilities or in realizing on or protecting or preserving any
security therefor, including, without limitation, the lien and security interest
granted hereby (all of the foregoing being hereinafter referred to as the
"Obligations").
3. Covenants, Agreements, Representations and Warranties. The Debtor
hereby covenants and agrees with, and represents and warrants to, the Secured
Party that:
(a) The Debtor is a corporation duly organized and validly existing in
good standing under the laws of the State of Utah, is the sole and lawful legal,
record and beneficial owner of the Collateral, and has full right, power and
authority to enter into this Agreement and to perform each and all of the
matters and things herein provided for. The execution and delivery of this
Agreement, and the observance and performance of the matters and things herein
set forth, will not (i) contravene or constitute a default under any provision
of law, or any judgment, injunction, order or decree binding upon the Debtor, or
any provision of the Debtor's articles of incorporation or by-laws, or any
covenant, indenture or agreement of or affecting the Debtor or any of its
property, or (ii) result in the creation or imposition of any lien or
encumbrance on any property of the Debtor except for the lien and security
interest in the Collateral granted to the Secured Party pursuant to this
Agreement. The Debtor's chief executive office is located at 9495 East San
Salvador Drive, Scottsdale, Arizona 85258, and the Debtor shall not move its
chief executive office without first providing the Secured Party 30 days prior
written notice of the Debtor's intent to do so, provided that the Debtor shall
at all times maintain its chief executive office in the United States of America
and, with respect to any such new location, the Debtor shall have taken all
action requested by the Secured Party to maintain the lien and security interest
of the Secured Party in the Collateral at all times fully perfected and in full
force and effect. The Debtor's Federal tax identification number is 88-0169547.
(b) The certificates for all shares of the Pledged Securities shall be
delivered by the Debtor to the Secured Party duly endorsed in blank for transfer
or accompanied by an appropriate assignment or assignments or an appropriate
undated stock power or powers, in every case sufficient to transfer title
thereto. The Secured Party may at any time after the occurrence of an Event of
Default cause to be transferred into its name or into the name of its nominee or
nominees any and all of the shares of the Pledged Securities. The Secured Party
shall at all times have the right to exchange the certificates representing the
Pledged Securities for certificates of smaller or larger denominations.
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<PAGE>
(c) The Pledged Securities have been validly issued and are fully paid
and non-assessable. There are no outstanding commitments or other obligations of
the issuer of any of the Pledged Securities to issue, and no options, warrants
or other rights of any person or entity to acquire, any share of any class or
series of capital stock of such issuer. The Pledged Securities listed and
described on Schedule A attached hereto constitute all of the issued and
outstanding capital stock of every class and series of the issuers thereof
(other than directors' qualifying shares as required by law). The Debtor further
agrees that in the event that any such issuer of the Pledged Securities shall
issue any additional capital stock of any class or series, the Debtor shall
forthwith pledge and deposit hereunder, or cause to be pledged and deposited
hereunder, all such additional shares of such capital stock (other than
directors' qualifying shares as required by law).
(d) The Collateral and every part thereof is and will be free and clear
of all security interests, liens (including, without limitation, mechanics',
laborers' and statutory liens), attachments, levies and encumbrances of every
kind, nature and description and whether voluntary or involuntary, except for
the security interest of the Secured Party therein and as otherwise provided on
Schedule B attached hereto. The Debtor shall warrant and defend the Collateral
against any claims and demands of all persons or entities at any time claiming
the same or any interest in the Collateral adverse to the Secured Party. The
Debtor has the right to vote the Collateral and there are no restrictions upon
the voting rights associated with, or the transfer of, any of the Collateral,
except as provided by federal and state laws applicable to the sale of
securities generally or as otherwise disclosed to the Secured Party in writing.
(e) None of the Collateral constitutes margin stock (within the meaning
of Regulation U of the Board of Governors of the Federal Reserve System).
(f) The Debtor shall not, without the Secured Party's prior written
consent, sell, assign, or otherwise dispose of the Collateral or any interest
therein.
(g) The Debtor shall promptly pay when due all taxes, assessments and
governmental charges and levies upon or against the Debtor or the Collateral, in
each case before the same become delinquent and before penalties accrue thereon,
unless and to the extent that the same are being contested in good faith by
appropriate proceedings which prevent foreclosure on or other realization upon
any of the Collateral and the Debtor shall have established adequate reserves
therefor.
(h) The Debtor agrees to execute and deliver to the Secured Party such
further agreements, assignments, instruments and documents and to do all such
other things as the Secured Party may deem necessary or appropriate to assure
the Secured Party its lien and security interest hereunder, including such
assignments, stock powers, financing statements,
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<PAGE>
instruments and documents as the Secured Party may from time to time require in
order to comply with the Uniform Commercial Code as enacted in the State of
Illinois and any successor statute(s) thereto (the "Code"). The Debtor hereby
agrees that a carbon, photographic or other reproduction of this Agreement or
any such financing statement is sufficient for filing as a financing statement
by the Secured Party without notice thereof to the Debtor wherever the Secured
Party in its sole discretion desires to file the same. In the event for any
reason the law of any jurisdiction other than Illinois becomes or is applicable
to the Collateral or any part thereof, or to any of the Obligations, the Debtor
agrees to execute and deliver all such agreements, assignments, instruments and
documents and to do all such other things as the Secured Party in its sole
discretion deems necessary or appropriate to preserve, protect and enforce the
lien and security interest of the Secured Party under the law of such other
jurisdiction. The Debtor agrees to mark its books and records to reflect the
lien and security interest of the Secured Party in the Collateral.
(i) If, as and when the Debtor delivers any securities for pledge
hereunder in addition to those listed on Schedule A hereto, the Debtor shall
furnish to the Secured Party a duly completed and executed amendment to such
Schedule in substantially the form (with appropriate insertions) of Schedule C
hereto reflecting the securities pledged hereunder after giving effect to such
addition.
(j) On failure of the Debtor to perform any of the covenants and
agreements herein contained, the Secured Party may, at its option, perform the
same and in so doing may expend such sums as the Secured Party may deem
advisable in the performance thereof, including, without limitation, the payment
of any taxes, liens and encumbrances, expenditures made in defending against any
adverse claims, and all other expenditures which the Secured Party may be
compelled to make by operation of law or which the Secured Party may make by
agreement or otherwise for the protection of the security hereof. All such sums
and amounts so expended shall be repayable by the Debtor immediately without
notice or demand, shall constitute additional Obligations secured hereunder and
shall bear interest from the date said amounts are expended at the rate per
annum (computed on the basis of a 360-day year for the actual number of days
elapsed) determined by adding 2% to the rate per annum from time to time
announced by the Secured Party as its prime commercial rate, with any change in
such rate per annum as so determined by reason of a change in such prime
commercial rate to be effective on the date of such change in said prime
commercial rate (such rate per annum as so determined being hereinafter referred
to as the "Default Rate"). No such performance of any covenant or agreement by
the Secured Party on behalf of the Debtor, and no such advancement or
expenditure therefor, shall relieve the Debtor of any default under the terms of
this Agreement or in any way obligate the Secured Party to take any further or
future action with respect thereto. The Secured Party, in making any payment
hereby authorized, may do so according to any bill, statement or estimate
procured from the appropriate public office or holder of the claim to be
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<PAGE>
discharged without inquiry into the accuracy of such bill, statement or estimate
or into the validity of any tax assessment, sale, forfeiture, tax lien or title
or claim. The Secured Party, in performing any act hereunder, shall be the sole
judge of whether the Debtor is required to perform same under the terms of this
Agreement. The Secured Party is hereby authorized to charge any depository or
other account of the Debtor maintained with the Secured Party for the amount of
such sums and amounts so expended.
4. Special Provisions re: Voting Rights and Dividends. Unless and until
an Event of Default has occurred and thereafter until notified by the Secured
Party pursuant to Section 6(b) hereof:
(a) The Debtor shall be entitled to exercise all voting and/or
consensual powers pertaining to the Collateral or any part thereof for
all purposes not inconsistent with the terms of this Agreement or any
other document evidencing or otherwise relating to any of the
Obligations.
(b) The Debtor shall be entitled to receive and retain all
dividends which are paid in cash out of earned surplus of the issuer of
the relevant Pledged Securities; but all dividends paid upon or in
respect of the Collateral and all stock or other property distributed
in respect thereof representing stock or liquidating dividends or a
distribution or return of capital upon or in respect of the Collateral
or any part thereof or resulting from a split-up or reclassification of
the Collateral or any part thereof or received in addition to, in
substitution of or in exchange for the Collateral or any part thereof
as a result of a merger, consolidation or otherwise, shall be paid,
delivered or transferred, as appropriate, directly to the Secured Party
immediately upon the receipt thereof by the Debtor and may, in the case
of cash, be applied by the Secured Party to the satisfaction of
Obligations (in whatever order the Secured Party elects) whether or not
the same may then be due or otherwise adequately secured and shall, in
the case of all other property, together with any cash received by the
Secured Party and not applied as aforesaid, be held by the Secured
Party pursuant hereto as additional Collateral pledged under and
subject to the terms of this Agreement.
(c) In order to permit the Debtor to exercise such voting
and/or consensual powers which it is entitled to exercise under
subsection (a) above and to receive such distributions which the Debtor
is entitled to receive and retain under subsection (b) above, the
Secured Party will, if necessary, upon the written request of the
Debtor, from time to time execute and deliver to the Debtor appropriate
proxies and dividend orders.
(d) In order to permit the Secured Party to receive all cash
and other property to which it may be entitled under subsection (b)
above, the Debtor shall, if necessary,
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<PAGE>
upon the written request of the Secured Party, from time to time
execute and deliver to the Secured Party appropriate dividend orders.
5. Power of Attorney. The Debtor hereby appoints the Secured Party, and
each of its nominees, officers, agents, attorneys, and any other person whom the
Secured Party may designate, as the Debtor's attorney-in-fact, with full power
and authority to ask, demand, collect, receive, receipt for, sue for, compound
and give acquittance for any and all sums or properties which may be or become
due, payable or distributable in respect of the Collateral or any part thereof,
with full power to settle, adjust or compromise any claim thereunder or therefor
as fully as the Debtor could itself do, to endorse or sign the Debtor's name on
any assignments, stock powers, or other instruments of transfer and on any
checks, notes, acceptances, money orders, drafts and any other forms of payment
or security that may come into the Secured Party's possession and on all
documents of satisfaction, discharge or receipt required or requested in
connection therewith, and, in its discretion, to file any claim or take any
other action or proceeding, either in its own name or in the name of the Debtor,
or otherwise, which the Secured Party may deem necessary or appropriate to
collect or otherwise realize upon all or any part of the Collateral, or effect a
transfer thereof, or which may be necessary or appropriate to protect and
preserve the right, title and interest of the Secured Party in and to such
Collateral and the security intended to be afforded hereby. The Debtor hereby
ratifies and approves all acts of any such attorney and agrees that neither the
Secured Party nor any such attorney will be liable for any acts or omissions nor
for any error of judgment or mistake of fact or law other than such person's
gross negligence or willful misconduct. The Secured Party may file one or more
financing statements disclosing its security interest in all or any part of the
Collateral without the Debtor's signature appearing thereon, and the Debtor also
hereby grants the Secured Party a power of attorney to execute any such
financing statements, and any amendments or supplements thereto, on behalf of
the Debtor without notice thereof to the Debtor. The foregoing powers of
attorney, being coupled with an interest, are irrevocable until the Obligations
have been fully paid and satisfied and all agreements of the Secured Party to
extend credit to or for the account of the Debtor have expired or otherwise have
been terminated.
6. Defaults and Remedies.
(a) The occurrence of any one or more of the following events shall
constitute an "Event of Default" hereunder:
(i) default in the payment when due (whether by demand, lapse
of time, acceleration or otherwise) of the Obligations or any part
thereof; or
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<PAGE>
(ii) default in the observance or performance of any covenant
set forth in Section 4 hereof or of any provision hereof dealing with
the use or remittance of proceeds of Collateral; or
(iii) default in the observance or performance of any other
provision hereof which is not remedied within 10 days after the earlier
of (a) the date on which such default shall first become known to any
officer of the Debtor or (b) written notice thereof is given to the
Debtor by the Secured Party; or
(iv) any representation or warranty made by the Debtor herein,
or in any statement or certificate furnished by it pursuant hereto, or
in connection with any loan or extension of credit made to or on behalf
of or at the request of the Debtor by the Secured Party, shall be false
in any material respect as of the date of the issuance or making
thereof; or
(v) default in the observance or performance of any terms or
provisions of any mortgage, security agreement or any other instrument
or document securing any Obligations or setting forth terms and
conditions applicable thereto or otherwise relating thereto, or this
Agreement or any such other mortgage, security agreement, instrument or
document shall for any reason not be or shall cease to be in full force
and effect or any of the foregoing is declared to be null and void; or
(vi) default shall occur under any evidence of indebtedness
issued, assumed or guaranteed by the Debtor or under any indenture,
agreement or other instrument under which the same may be issued, and
such default shall continue for a period of time sufficient to permit
the acceleration of the maturity of any such indebtedness (whether or
not such maturity is in fact accelerated), or any such indebtedness
shall not be paid when due (whether by lapse of time, acceleration or
otherwise); or
(vii) the Debtor makes any payment on account of the principal
of or interest on any indebtedness which is prohibited under the terms
of any instrument subordinating such indebtedness to indebtedness owed
to the Secured Party; or
(viii) any judgment or judgments, writ or writs, or warrant or
warrants of attachment, or any similar process or processes in an
aggregate amount in excess of $100,000 shall be entered or filed
against the Debtor or against any of its property or assets and which
remains unvacated, unbonded, unstayed or unsatisfied for a period of 30
days; or
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<PAGE>
(ix) the Debtor shall (a) have entered involuntarily against
it an order for relief under the United States Bankruptcy Code, as
amended, (b) not pay, or admit in writing its inability to pay, its
debts generally as they become due, (c) make an assignment for the
benefit of creditors, (d) apply for, seek, consent to, or acquiesce in,
the appointment of a receiver, custodian, trustee, examiner, liquidator
or similar official for it or any substantial part of its property, (e)
institute any proceeding seeking to have entered against it an order
for relief under the United States Bankruptcy Code, as amended, to
adjudicate it insolvent, or seeking dissolution, winding up,
liquidation, reorganization, arrangement, adjustment or composition of
it or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors or fail to file an answer or other
pleading denying the material allegations of any such proceeding filed
against it, (f) take any action in furtherance of any matter described
in parts (a) through (e) above, or (g) fail to contest in good faith
any appointment or proceeding described in Section 6(a)(x) hereof; or
(x) a custodian, receiver, trustee, examiner, liquidator or
similar official shall be appointed for the Debtor or any substantial
part of any of its property, or a proceeding described in Section
6(a)(ix)(e) shall be instituted against the Debtor, and such
appointment continues undischarged or such proceeding continues
undismissed or unstayed for a period of 60 days; or
(xi) any guarantor of any Obligations shall die or shall
terminate, breach, repudiate or disavow its guarantee or any part
thereof, or any event specified in Sections 6(a)(viii), 6(a)(ix) or
6(a)(x) hereof shall occur with regard to said guarantor.
(b) Upon the occurrence of any Event of Default, all rights of the
Debtor to receive and retain the distributions which it is entitled to receive
and retain pursuant to Section 4(b) hereof shall, at the option of the Secured
Party, cease and thereupon become vested in the Secured Party which, in addition
to all other rights provided herein or by law, shall then be entitled solely and
exclusively to receive and retain the distributions which the Debtor would
otherwise have been authorized to retain pursuant to Section 4(b) hereof and all
rights of the Debtor to exercise the voting and/or consensual powers which it is
entitled to exercise pursuant to Section 4(a) hereof shall, at the option of the
Secured Party, cease and thereupon become vested in the Secured Party which, in
addition to all other rights provided herein or by law, shall then be entitled
solely and exclusively to exercise all voting and other consensual powers
pertaining to the Collateral and to exercise any and all rights of conversion,
exchange or subscription and any other rights, privileges or options pertaining
thereto as if the Secured Party were the absolute owner thereof including,
without limitation, the right to exchange, at its discretion, the Collateral or
any part thereof upon the merger, consolidation, reorganization,
recapitalization or other readjustment of the respective issuer thereof or upon
the exercise by or
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<PAGE>
on behalf of any such issuer or the Secured Party of any right, privilege or
option pertaining to the Collateral or any part thereof and, in connection
therewith, to deposit and deliver the Collateral or any part thereof with any
committee, depositary, transfer agent, registrar or other designated agency upon
such terms and conditions as the Secured Party may determine.
(c) Upon the occurrence of any Event of Default, the Secured Party
shall have, in addition to all other rights provided herein or by law, the
rights and remedies of a secured party under the Code (regardless of whether the
Code is the law of the jurisdiction where the rights or remedies are asserted
and regardless of whether the Code applies to the affected Collateral), and
further the Secured Party may, without demand and without advertisement, notice,
hearing or process of law, all of which the Debtor hereby waives, at any time or
times, sell and deliver any or all Collateral held by or for it at public or
private sale, at any securities exchange or broker's board or elsewhere, for
cash, upon credit or otherwise, at such prices and upon such terms as the
Secured Party deems advisable, in its sole discretion. In the exercise of any
such remedies, the Secured Party may sell all the Collateral as a unit even
though the sales price thereof may be in excess of the amount remaining unpaid
on the Obligations. The Secured Party is authorized at any sale or other
disposition of the Collateral, if it deems it advisable so to do, to restrict
the prospective bidders or purchasers to persons who will represent and agree
that they are purchasing for their own account for investment, and not with a
view to the distribution or resale of any of the Collateral. In addition to all
other sums due the Secured Party hereunder, the Debtor shall pay the Secured
Party all costs and expenses incurred by the Secured Party, including attorneys'
fees and court costs, in obtaining, liquidating or enforcing payment of
Collateral or the Obligations or in the prosecution or defense of any action or
proceeding by or against the Secured Party or the Debtor concerning any matter
arising out of or connected with this Agreement or the Collateral or the
Obligations, including, without limitation, any of the foregoing arising in,
arising under or related to a case under the United States Bankruptcy Code (or
any successor statute). Any requirement of reasonable notice shall be met if
such notice is personally served on or mailed, postage prepaid, to the Debtor in
accordance with Section 9(b) hereof at least 10 days before the time of sale or
other event giving rise to the requirement of such notice; provided however, no
notification need be given to the Debtor if the Debtor has signed, after an
Event of Default has occurred, a statement renouncing any right to notification
of sale or other intended disposition. The Secured Party shall not be obligated
to make any sale or other disposition of the Collateral regardless of notice
having been given. The Secured Party may be the purchaser at any such sale or
other disposition of the Collateral or any part thereof. The Debtor hereby
waives all of its rights of redemption from any sale or other disposition of the
Collateral or any part thereof. Subject to the provisions of applicable law, the
Secured Party may postpone or cause the postponement of the sale of all or any
portion of the Collateral by announcement at the time and place of such sale,
and such sale may, without further notice, be made at the time and place to
which the sale was postponed or the Secured Party may further postpone such sale
by announcement made at such time and place.
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(d) The powers conferred upon the Secured Party hereunder are solely to
protects its interest in the Collateral and shall not impose on it any duty to
exercise such powers. The Secured Party shall be deemed to have exercised
reasonable care in the custody and preservation of the Collateral in its
possession if the Collateral is accorded treatment substantially equivalent to
that which the Secured Party accords its own property, consisting of similar
type securities, it being understood, however, that the Secured Party shall have
no responsibility for (a) ascertaining or taking any action with respect to
calls, conversions, exchanges, maturities, tenders or other matters relating to
any Collateral, whether or not the Secured Party has or is deemed to have
knowledge of such matters, (b) taking any necessary steps to preserve rights
against any parties with respect to any Collateral, or (c) initiating any action
to protect the Collateral against the possibility of a decline in market value.
This Agreement constitutes an assignment of rights only and not an assignment of
any duties or obligations of the Debtor in any way related to the Collateral,
and the Secured Party shall have no duty or obligation to discharge any such
duty or obligation.
(e) Failure by the Secured Party to exercise any right, remedy or
option under this Agreement or any other agreement between the Debtor and the
Secured Party or provided by law, or delay by the Secured Party in exercising
the same, shall not operate as a waiver; and no waiver by the Secured Party
shall be effective unless it is in writing and then only to the extent
specifically stated. Neither the Secured Party nor any party acting as attorney
for the Secured Party shall be liable for any acts or omissions or for any error
of judgment or mistake of fact or law other than their gross negligence or
willful misconduct. The rights and remedies of the Secured Party under this
Agreement shall be cumulative and not exclusive of any other right or remedy
which the Secured Party may have. For purposes of this Agreement, an Event of
Default shall be construed as continuing after its occurrence until the same is
waived in writing by the Secured Party.
7. Application of Proceeds. The proceeds and avails of the Collateral
at any time received by the Secured Party after the occurrence of any Event of
Default hereunder shall, when received by the Secured Party in cash or its
equivalent, be applied by the Secured Party as follows:
(i) First, to the payment and satisfaction of all sums paid
and costs and expenses incurred by the Secured Party hereunder or
otherwise in connection herewith, including such monies paid or
incurred in connection with protecting, preserving or realizing upon
the Collateral or enforcing any of the terms hereof, including
attorneys' fees and court costs, together with any interest thereon
(but without preference or priority of principal over interest or of
interest over principal), to the extent the Secured Party is not
reimbursed therefor by the Debtor; and
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(ii) Second, to the payment and satisfaction of the remaining
Obligations, whether or not then due (in whatever order the Secured
Party elects), both for interest and principal.
The Debtor shall remain liable to the Secured Party for any deficiency. Any
surplus remaining after the full payment and satisfaction of the foregoing shall
be returned to the Debtor or to whomsoever the Secured Party reasonably
determines is lawfully entitled thereto.
8. Continuing Agreement. This Agreement shall be a continuing agreement
in every respect and shall remain in full force and effect until all of the
Obligations, both for principal and interest, have been fully paid and satisfied
and all agreements of the Secured Party to extend credit to or for the account
of the Debtor have expired or otherwise have been terminated. Upon such
termination of this Agreement, the Secured Party shall, upon the request and at
the expense of the Debtor, forthwith release its security interest hereunder.
9. Miscellaneous.
(a) This Agreement cannot be changed or terminated orally. All of the
rights, privileges, remedies and options given to the Secured Party hereunder
shall inure to the benefit of its successors and assigns, and all the terms,
conditions, covenants, agreements, representations and warranties of and in this
Agreement shall bind the Debtor and its legal representatives, successors and
assigns, provided that the Debtor may not assign its rights or delegate its
duties hereunder without the Secured Party's prior written consent. The Debtor
hereby releases the Secured Party from any liability for any act or omission
relating to the Collateral or this Agreement, except for the Secured Party's
gross negligence or willful misconduct.
(b) Except as otherwise specified herein, all notices hereunder shall
be in writing (including, without limitation, notice by telecopy) and shall be
given to the relevant party at its address or telecopier number set forth below,
or such other address or telecopier number as such party may hereafter specify
by notice to the other given by United States certified or registered mail, by
telecopy or by other telecommunication device capable of creating a written
record of such notice and its receipt. Notices hereunder shall be addressed:
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to the Debtor at: to the Secured Party at:
Champion Financial Corporation Harris Trust and Savings Bank
9495 East San Salvador Drive P.O. Box 755
Scottsdale, Arizona 85258 111 West Monroe Street
Attention: Mr. Stephen Carder, Chicago, Illinois 60690
Chief Financial Officer Attention: Mr. Christopher Randall,
Telephone: (602) 614-4285 Tax-Exempt Institutions Division
Telecopy: (602) 451-9087 Telephone: (312) 461-5068
Telecopy: (312) 461-7365
Each such notice, request or other communication shall be effective (i) if given
by telecopier, when such telecopy is transmitted to the telecopier number
specified in this Section and a confirmation of such telecopy has been received
by the sender, (ii) if given by mail, five (5) days after such communication is
deposited in the mail, certified or registered with return receipt requested,
addressed as aforesaid, or (iii) if given by any other means, when delivered at
the addresses specified in this Section.
(c) In the event that any provision hereof shall be deemed to be
invalid or unenforceable by reason of the operation of any law or by reason of
the interpretation placed thereon by any court, this Agreement shall be
construed as not containing such provision, but only as to such locations where
such law or interpretation is operative, and the invalidity or unenforceability
of such provision shall not affect the validity of any remaining provisions
hereof, and any and all other provisions hereof which are otherwise lawful and
valid shall remain in full force and effect.
(d) This Agreement shall be deemed to have been made in the State of
Illinois and shall be governed by, and construed in accordance with, the laws of
the State of Illinois. All terms which are used in this Agreement which are
defined in the Code shall have the same meanings herein as said terms do in the
Code unless this Agreement shall otherwise specifically provide. The headings in
this Agreement are for convenience of reference only and shall not limit or
otherwise affect the meaning of any provision hereof.
(e) This Agreement may be executed in any number of counterparts and by
different parties hereto on separate counterpart signature pages, each
constituting an original, but all together one and the same instrument. The
Debtor acknowledges that this Agreement is and shall be effective upon its
execution and delivery by the Debtor to the Secured Party, and it shall not be
necessary for the Secured Party to execute this Agreement or any other
acceptance hereof or otherwise to signify or express its acceptance hereof.
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(f) The Debtor hereby submits to the non-exclusive jurisdiction of the
United States District Court for the Northern District of Illinois and of any
Illinois state court sitting in the City of Chicago for purposes of all legal
proceedings arising out of or relating to this Agreement or the transactions
contemplated hereby. The Debtor irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such proceeding brought in such a court and any claim that
any such proceeding brought in such a court has been brought in an inconvenient
form. THE DEBTOR AND THE SECURED PARTY EACH HEREBY IRREVOCABLY WAIVES ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
IN WITNESS WHEREOF, the Debtor has caused this Agreement to be duly
executed and delivered the day and year first above written.
CHAMPION FINANCIAL CORPORATION
By /s/ Stephen J Carder
-----------------------
Stephen J Carder,Executive Vice
President and
Secretary
EXHIBIT 10.33
SECURITY AGREEMENT
This Security Agreement (the "Agreement") is dated as of December 15,
1997, between CHAMPION FINANCIAL CORPORATION, a Utah corporation (the "Debtor"),
with its mailing address as set forth in Section 12(b) hereof, and HARRIS TRUST
AND SAVINGS BANK, an Illinois banking corporation (the "Secured Party"), with
its mailing address as set forth in Section 12(b) hereof.
PRELIMINARY STATEMENT
A. The Debtor has requested that the Secured Party extend credit or
otherwise make financial accommodations available to or for the account of the
Debtor.
B. As a condition to extending credit or otherwise making financial
accommodations available to or for the account of the Debtor, the Secured Party
requires, among other things, that the Debtor grant the Secured Party a security
interest in the Debtor's personal property described herein subject to the terms
and conditions hereof.
NOW, THEREFORE, in consideration of the benefits accruing to the
Debtor, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. Grant of Security Interest. The Debtor hereby grants to the
Secured Party a lien on and security interest in, and acknowledges and agrees
that the Secured Party has and shall continue to have a continuing lien on and
security interest in, any and all right, title and interest of the Debtor,
whether now owned or existing or hereafter created, acquired or arising, in and
to the following:
(a) Receivables. All Receivables, whether now owned or
existing or hereafter created, acquired or arising, and however
evidenced or acquired, or in which the Debtor now has or hereafter
acquires any rights (the term "Receivables" means and includes all
accounts, accounts receivable, contract rights, instruments, notes,
drafts, acceptances, documents, chattel paper, and all other forms of
obligations owing to the Debtor, any right of the Debtor to payment for
goods sold or leased or for services rendered, whether or not earned by
performance, and all of the Debtor's rights to any merchandise and
other goods (including, without limitation, any returned or repossessed
goods and the right of
<PAGE>
stoppage in transit) which is represented by, arises from or is related
to any of the foregoing);
(b) General Intangibles. All General Intangibles, whether now
owned or existing or hereafter created, acquired or arising, or in
which the Debtor now has or hereafter acquires any rights (the term
"General Intangibles" means and includes all general intangibles,
patents, patent applications, patent licenses, trademarks, trademark
registrations, trademark licenses, trade styles, trade names,
copyrights, copyright registrations, copyright licenses and other
licenses and similar intangibles, all customer, client and supplier
lists (in whatever form maintained), all rights in leases and other
agreements relating to real or personal property, all causes of action
and tax refunds of every kind and nature, all privileges, franchises,
immunities, licenses, permits and similar intangibles, all rights to
receive payments in connection with the termination of any pension plan
or employee stock ownership plan or trust established for the benefit
of employees of the Debtor, and all other personal property (including
things in action) not otherwise covered by this Agreement);
(c) Inventory. All Inventory, whether now owned or existing or
hereafter created, acquired or arising, or in which the Debtor now has
or hereafter acquires any rights, and all documents of title at any
time evidencing or representing any part thereof (the term "Inventory"
means and includes all inventory and any other goods which are held for
sale or lease or are to be furnished under contracts of service or
consumed in the Debtor's business, all goods which are raw materials,
work-in-process or finished goods, all goods which are returned or
repossessed goods, and all materials and supplies of every kind and
nature used or usable in connection with the acquisition, manufacture,
processing, supply, servicing, storing, packing, shipping, advertising,
selling, leasing or furnishing of the foregoing, and any constituents
or ingredients thereof;
(d) Equipment. All Equipment, whether now owned or existing or
hereafter created, acquired or arising, or in which the Debtor now has
or hereafter acquires any rights (the term "Equipment" means and
includes all equipment and any other machinery, tools, fixtures, trade
fixtures, furniture, furnishings, office equipment, vehicles (including
vehicles subject to a certificate of title law), and all other goods
now or hereafter used or usable in connection with the Debtor's
business, together with all parts, accessories and attachments relating
to any of the foregoing);
(e) Investment Property. All Investment Property, whether now
owned or existing or hereafter created, acquired or arising, or in
which the Debtor now has or hereafter acquires any rights (the term
"Investment Property" means and includes all investment property and
any other securities (whether certificated or uncertificated),
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security entitlements, securities accounts, commodity contracts and
commodity accounts, including all substitutions and additions thereto,
all dividends, distributions and sums distributable or payable from,
upon, or in respect of such property, and all rights and privileges
incident to such property);
(f) Deposits and Property in Possession. All deposit accounts
(whether general, special or otherwise) of the Debtor maintained with
the Secured Party and all sums now or hereafter on deposit therein or
payable thereon, and all other personal property and interests in
personal property of the Debtor of any kind or description now held by
the Secured Party or at any time hereafter transferred or delivered to,
or coming into the possession, custody or control of, the Secured
Party, or any agent or affiliate of the Secured Party, whether
expressly as collateral security or for any other purpose (whether for
safekeeping, custody, collection or otherwise), and all dividends and
distributions on or other rights in connection with any such property,
in each case whether now owned or existing or hereafter created,
acquired or arising;
(g) Records. All supporting evidence and documents relating to
any of the above-described property, whether now owned or existing or
hereafter created, acquired or arising, including, without limitation,
computer programs, disks, tapes and related electronic data processing
media, and all rights of the Debtor to retrieve the same from third
parties, written applications, credit information, account cards,
payment records, correspondence, delivery and installation
certificates, invoice copies, delivery receipts, notes and other
evidences of indebtedness, insurance certificates and the like,
together with all books of account, ledgers and cabinets in which the
same are reflected or maintained;
(h) Accessions and Additions. All accessions and additions to,
and substitutions and replacements of, any and all of the foregoing,
whether now owned or existing or hereafter created, acquired or
arising; and
(i) Proceeds and Products. All proceeds and products of the
foregoing and all insurance of the foregoing and proceeds thereof,
whether now owned or existing or hereafter created, acquired or
arising;
all of the foregoing being herein sometimes referred to as the "Collateral". All
terms which are used in this Agreement which are defined in the Uniform
Commercial Code of the State of Illinois ("UCC") shall have the same meanings
herein as such terms are defined in the UCC, unless this Agreement shall
otherwise specifically provide.
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2. Obligations Hereby Secured. The lien and security interest herein
granted and provided for is made and given to secure, and shall secure, the
payment and performance of (a) any and all indebtedness, obligations and
liabilities of whatsoever kind and nature of the Debtor to the Secured Party
(whether arising before or after the filing of a petition in bankruptcy),
whether direct or indirect, absolute or contingent, due or to become due, and
whether now existing or hereafter arising and howsoever held, evidenced or
acquired, and whether several, joint or joint and several and (b) any and all
expenses and charges, legal or otherwise, suffered or incurred by the Secured
Party in collecting or enforcing any of such indebtedness, obligations or
liabilities or in realizing on or protecting or preserving any security
therefor, including, without limitation, the lien and security interest granted
hereby (all of the foregoing being hereinafter referred to as the
"Obligations").
3. Covenants, Agreements, Representations and Warranties. The Debtor
hereby covenants and agrees with, and represents and warrants to, the Secured
Party that:
(a) The Debtor is a corporation duly organized and validly existing in
good standing under the laws of the State of Utah, is the sole and lawful owner
of the Collateral, and has full right, power and authority to enter into this
Agreement and to perform each and all of the matters and things herein provided
for. The execution and delivery of this Agreement, and the observance and
performance of each of the matters and things herein set forth, will not (i)
contravene or constitute a default under any provision of law or any judgment,
injunction, order or decree binding upon the Debtor or any provision of the
Debtor's articles of incorporation or by-laws or any covenant, indenture or
agreement of or affecting the Debtor or any of its property or (ii) result in
the creation or imposition of any lien or encumbrance on any property of the
Debtor except for the lien and security interest granted to the Secured Party
hereunder. The Debtor's Federal tax identification number is 88-0169547.
(b) The Debtor's chief executive office and principal place of business
is at, and the Debtor keeps and shall keep all of its books and records relating
to Receivables only at, 9495 East San Salvador Drive, Scottsdale, Arizona 85258;
and the Debtor has no other executive offices or places of business other than
those listed under Item 1 on Schedule A. The Collateral is and shall remain in
the Debtor's possession or control at the locations listed under Item 2 on
Schedule A attached hereto (collectively, the "Permitted Collateral Locations").
If for any reason any Collateral is at any time kept or located at a location
other than a Permitted Collateral Location, the Secured Party shall nevertheless
have and retain a lien on and security interest therein. The Debtor owns and
shall at all times own all Permitted Collateral Locations, except to the extent
otherwise disclosed under Item 2 on Schedule A. The Debtor shall not move its
chief executive office or maintain a place of business at a location other than
those specified under Item 1 on Schedule A or permit the Collateral to be
located at a location other than those specified under Item 2 on Schedule A, in
each case without first providing the Secured Party
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30 days' prior written notice of the Debtor's intent to do so; provided that the
Debtor shall at all times maintain its chief executive office and, unless
otherwise specifically agreed to in writing by the Secured Party, Permitted
Collateral Locations in the United States of America and, with respect to any
new chief executive office or place of business or location of Collateral, the
Debtor shall have taken all action requested by the Secured Party to maintain
the lien and security interest of the Secured Party in the Collateral at all
times fully perfected and in full force and effect.
(c) The Debtor has not invoiced Receivables or otherwise transacted
business at any time during the immediately preceding five-year period, and does
not currently invoice Receivables or otherwise transact business, under any
trade names other than the Debtor's name set forth in the introductory paragraph
of this Agreement. The Debtor shall not change its name or transact business
under any other trade name without first giving 30 days' prior written notice of
its intent to do so to the Secured Party.
(d) The Collateral and every part thereof is and shall be free and
clear of all security interests, liens (including, without limitation,
mechanics', laborers' and statutory liens), attachments, levies and encumbrances
of every kind, nature and description, whether voluntary or involuntary, except
for the lien and security interest of the Secured Party therein and as otherwise
permitted by Section 8.10 of that certain Credit Agreement dated as of even date
herewith between the Debtor and the Secured Party, as the same may be amended or
modified from time to time, including amendments and restatements of the same in
its entirety (hereinafter, the "Credit Agreement"). The Debtor shall warrant and
defend the Collateral against any claims and demands of all persons at any time
claiming the same or any interest in the Collateral adverse to the Secured
Party.
(e) The Debtor shall promptly pay when due all taxes, assessments and
governmental charges and levies upon or against the Debtor or any of the
Collateral, in each case before the same become delinquent and before penalties
accrue thereon, unless and to the extent that the same are being contested in
good faith by appropriate proceedings which prevent foreclosure or other
realization upon any of the Collateral and preclude interference with the
operation of the Debtor's business in the ordinary course, and the Debtor shall
have established adequate reserves therefor.
(f) The Debtor shall not use, manufacture, sell or distribute any
Collateral in violation of any statute, ordinance or other governmental
requirement. The Debtor shall not waste or destroy the Collateral or any part
thereof or be negligent in the care or use of any Collateral. The Debtor shall
perform in all material respects its obligations under any contract or other
agreement constituting part of the Collateral, it being understood and agreed
that the Secured Party has no responsibility to perform such obligations.
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(g) Subject to Sections 4(b), 6(b), 6(c), and 7(c) hereof, the Debtor
shall not, without the Secured Party's prior written consent, sell, assign,
mortgage, lease or otherwise dispose of the Collateral or any interest therein.
(h) The Debtor shall at all times insure the Collateral consisting of
tangible personal property against such risks and hazards as other persons
similarly situated insure against, and including in any event loss or damage by
fire, theft, burglary, pilferage, loss in transit and such other hazards as the
Secured Party may specify. All insurance required hereby shall be maintained in
amounts and under policies and with insurers reasonably acceptable to the
Secured Party, and all such policies shall contain loss payable clauses naming
the Secured Party as loss payee as its interest may appear (and, if the Secured
Party requests, naming the Secured Party as an additional insured therein) in a
form acceptable to the Secured Party. All premiums on such insurance shall be
paid by the Debtor. Certificates of insurance evidencing compliance with the
foregoing and, at the Secured Party's request, the policies of such insurance
shall be delivered by the Debtor to the Secured Party. All insurance required
hereby shall provide that any loss shall be payable to the Secured Party
notwithstanding any act or negligence of the Debtor, shall provide that no
cancellation thereof shall be effective until at least 30 days after receipt by
the Debtor and the Secured Party of written notice thereof, and shall be
satisfactory to the Secured Party in all other respects. In case of any material
loss, damage to or destruction of the Collateral or any part thereof, the Debtor
shall promptly give written notice thereof to the Secured Party generally
describing the nature and extent of such damage or destruction. In case of any
loss, damage to or destruction of the Collateral or any part thereof, the
Debtor, whether or not the insurance proceeds, if any, received on account of
such damage or destruction shall be sufficient for that purpose, at the Debtor's
cost and expense, shall promptly repair or replace the Collateral so lost,
damaged or destroyed, except to the extent such Collateral, prior to its loss,
damage or destruction, had become uneconomical, obsolete or worn out and is not
necessary for or of importance to the proper conduct of the Debtor's business in
the ordinary course. In the event the Debtor shall receive any proceeds of such
insurance, the Debtor shall immediately pay over such proceeds to the Secured
Party. The Debtor hereby authorizes the Secured Party, at the Secured Party's
option, to adjust, compromise and settle any losses under any insurance afforded
at any time during the existence of any Event of Default or any other event or
condition which with the lapse of time or the giving of notice, or both, would
constitute an Event of Default, and the Debtor does hereby irrevocably
constitute the Secured Party, and each of its nominees, officers, agents,
attorneys, and any other person whom the Secured Party may designate, as the
Debtor's attorneys-in-fact, with full power and authority to effect such
adjustment, compromise and/or settlement and to endorse any drafts drawn by an
insurer of the Collateral or any part thereof and to do everything necessary to
carry out such purposes and to receive and receipt for any unearned premiums due
under policies of such insurance. Unless the Secured Party elects to adjust,
compromise or settle losses as aforesaid, any adjustment, compromise and/or
settlement of any losses under any insurance shall be made by the Debtor subject
to final approval of the
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Secured Party (regardless of whether or not an Event of Default shall have
occurred) in the case of losses exceeding $100,000. Net insurance proceeds
received by the Secured Party under the provisions hereof or under any policy of
insurance covering the Collateral or any part thereof shall be applied to the
reduction of the Obligations (whether or not then due); provided, however, that
the Secured Party may in its sole discretion release any or all such insurance
proceeds to the Debtor. All insurance proceeds shall be subject to the lien and
security interest of the Secured Party hereunder.
UNLESS THE DEBTOR PROVIDES THE SECURED PARTY WITH EVIDENCE OF THE
INSURANCE COVERAGE REQUIRED BY THIS AGREEMENT, THE SECURED PARTY MAY PURCHASE
INSURANCE AT THE DEBTOR'S EXPENSE TO PROTECT THE SECURED PARTY'S INTERESTS IN
THE COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT THE DEBTOR'S INTERESTS
IN THE COLLATERAL. THE COVERAGE PURCHASED BY THE SECURED PARTY MAY NOT PAY ANY
CLAIMS THAT THE DEBTOR MAKES OR ANY CLAIM THAT IS MADE AGAINST THE DEBTOR IN
CONNECTION WITH THE COLLATERAL. THE DEBTOR MAY LATER CANCEL ANY SUCH INSURANCE
PURCHASED BY THE SECURED PARTY, BUT ONLY AFTER PROVIDING THE SECURED PARTY WITH
EVIDENCE THAT THE DEBTOR HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT.
IF THE SECURED PARTY PURCHASES INSURANCE FOR THE COLLATERAL, THE DEBTOR WILL BE
RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING INTEREST AND ANY OTHER
CHARGES THAT THE SECURED PARTY MAY IMPOSE IN CONNECTION WITH THE PLACEMENT OF
THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR EXPIRATION OF THE
INSURANCE. THE COSTS OF THE INSURANCE MAY BE ADDED TO THE OBLIGATIONS SECURED
HEREBY. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST OF INSURANCE THE
DEBTOR MAY BE ABLE TO OBTAIN ON ITS OWN.
(i) The Debtor shall at all times allow the Secured Party and its
representatives free access to and right of inspection of the Collateral.
(j) If any Collateral is in the possession or control of any of the
Debtor's agents or processors and the Secured Party so requests, the Debtor
agrees to notify such agents or processors in writing of the Secured Party's
security interest therein and instruct them to hold all such Collateral for the
Secured Party's account and subject to the Secured Party's instructions. The
Debtor shall, upon the request of the Secured Party, authorize and instruct all
bailees and other parties, if any, at any time processing, labeling, packaging,
holding, storing, shipping or transferring all or any part of the Collateral to
permit the Secured Party and its representatives to examine and inspect any of
the Collateral then in such party's possession and to verify from such party's
own books and records any information concerning the Collateral or any part
thereof which the Secured Party or its representatives may seek to verify. As to
any premises not owned by the Debtor wherein any of the Collateral is located,
the Debtor shall, unless the Secured Party requests otherwise, cause each party
having any right, title or interest in, or lien on, any of such
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premises to enter into an agreement (any such agreement to contain a legal
description of such premises) whereby such party disclaims any right, title and
interest in, and lien on, the Collateral and allows the removal of such
Collateral by the Secured Party and is otherwise in form and substance
acceptable to the Secured Party; provided, however, that no such agreement need
be obtained with respect to any one location wherein the value of the Collateral
as to which such agreement has not been obtained aggregates less than $100,000
at any one time.
(k) The Debtor agrees from time to time to deliver to the Secured Party
such evidence of the existence, identity and location of the Collateral and of
its availability as collateral security pursuant hereto (including, without
limitation, schedules describing all Receivables created or acquired by the
Debtor, copies of customer invoices or the equivalent and original shipping or
delivery receipts for all merchandise and other goods sold or leased or services
rendered, together with the Debtor's warranty of the genuineness thereof, and
reports stating the book value of Inventory and Equipment by major category and
location), in each case as the Secured Party may reasonably request. The Secured
Party shall have the right to verify all or any part of the Collateral in any
manner, and through any medium, which the Secured Party considers appropriate
(including, without limitation, the verification of Collateral by use of a
fictitious name), and the Debtor agrees to furnish all assistance and
information, and perform any acts, which the Secured Party may require in
connection therewith. The Debtor shall promptly notify the Secured Party of any
Collateral which the Debtor has determined to have been rendered obsolete,
stating the prior book value of such Collateral, its type and location.
(l) The Debtor shall comply in all material respects with the terms and
conditions of all leases, easements, right-of-way agreements and other similar
agreements binding upon the Debtor or affecting the Collateral or any part
thereof, and all orders, ordinances, laws and statutes of any city, state or
other governmental entity, department or agency having jurisdiction with respect
to the premises wherein such Collateral is located or the conduct of business
thereon.
(m) The Debtor agrees to execute and deliver to the Secured Party such
further agreements, assignments, instruments and documents and to do all such
other things as the Secured Party may deem necessary or appropriate to assure
the Secured Party its lien and security interest hereunder, including such
financing statements, and amendments thereof or supplements thereto, and such
other instruments and documents as the Secured Party may from time to time
require in order to comply with the UCC. The Debtor hereby agrees that a carbon,
photographic or other reproduction of this Agreement or any such financing
statement is sufficient for filing as a financing statement by the Secured Party
without notice thereof to the Debtor wherever the Secured Party in its sole
discretion desires to file the same. In the event for any reason the law of any
jurisdiction other than Illinois becomes or is applicable to the Collateral or
any part thereof, or to any of the Obligations, the Debtor agrees to execute and
deliver all such instruments and documents and to do all such other things as
the Secured Party in
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its sole discretion deems necessary or appropriate to preserve, protect and
enforce the lien and security interest of the Secured Party under the law of
such other jurisdiction. The Debtor agrees to mark its books and records to
reflect the lien and security interest of the Secured Party in the Collateral.
(n) On failure of the Debtor to perform any of the covenants and
agreements herein contained, the Secured Party may, at its option, perform the
same and in so doing may expend such sums as the Secured Party may deem
advisable in the performance thereof, including, without limitation, the payment
of any insurance premiums, the payment of any taxes, liens and encumbrances,
expenditures made in defending against any adverse claims, and all other
expenditures which the Secured Party may be compelled to make by operation of
law or which the Secured Party may make by agreement or otherwise for the
protection of the security hereof. All such sums and amounts so expended shall
be repayable by the Debtor immediately without notice or demand, shall
constitute additional Obligations secured hereunder and shall bear interest from
the date said amounts are expended at the rate per annum (computed on the basis
of a 360-day year for the actual number of days elapsed) determined by adding 2%
to the rate per annum from time to time announced by Harris Trust and Savings
Bank as its prime commercial rate with any change in such rate per annum as so
determined by reason of a change in such prime commercial rate to be effective
on the date of such change in said prime commercial rate (such rate per annum as
so determined being hereinafter referred to as the "Default Rate"). No such
performance of any covenant or agreement by the Secured Party on behalf of the
Debtor, and no such advancement or expenditure therefor, shall relieve the
Debtor of any default under the terms of this Agreement or in any way obligate
the Secured Party to take any further or future action with respect thereto. The
Secured Party, in making any payment hereby authorized, may do so according to
any bill, statement or estimate procured from the appropriate public office or
holder of the claim to be discharged without inquiry into the accuracy of such
bill, statement or estimate or into the validity of any tax assessment, sale,
forfeiture, tax lien or title or claim. The Secured Party, in performing any act
hereunder, shall be the sole judge of whether the Debtor is required to perform
same under the terms of this Agreement. The Secured Party is hereby authorized
to charge any depository or other account of the Debtor maintained with the
Secured Party for the amount of such sums and amounts so expended.
4. Special Provisions Re: Receivables.
(a) As of the time any Receivable becomes subject to the security
interest provided for hereby, and at all times thereafter, the Debtor shall be
deemed to have warranted as to each and all of such Receivables that all
warranties of the Debtor set forth in this Agreement are true and correct with
respect to each such Receivable; that each Receivable and all papers and
documents relating thereto are genuine and in all respects what they purport to
be; that each Receivable is valid and subsisting and, if such Receivable is an
account, arises out of a bona fide
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sale of goods sold and delivered by the Debtor to, or in the process of being
delivered to, or out of and for services theretofore actually rendered by the
Debtor to, the account debtor named therein; that no such Receivable is
evidenced by any instrument or chattel paper unless such instrument or chattel
paper has theretofore been endorsed by the Debtor and delivered to the Secured
Party (except to the extent the Secured Party specifically requests the Debtor
not to do so with respect to any such instrument or chattel paper); that no
surety bond was required or given in connection with such Receivable or the
contracts or purchase orders out of which the same arose; that the amount of the
Receivable represented as owing is the correct amount actually and
unconditionally owing, except for normal cash discounts on normal trade terms in
the ordinary course of business if such Receivable is an account; and that the
amount of such Receivable represented as owing is not disputed and is not
subject to any set-offs, credits, deductions or countercharges other than those
arising in the ordinary course of the Debtor's business which are disclosed to
the Secured Party in writing promptly upon the Debtor becoming aware thereof.
Without limiting the foregoing, if any Receivable arises out of a contract with
the United States of America, or any state or political subdivision thereof, or
any department, agency or instrumentality of any of the foregoing, the Debtor
agrees to notify the Secured Party and execute whatever instruments and
documents are required by the Secured Party in order that such Receivable shall
be assigned to the Secured Party and that proper notice of such assignment shall
be given under the federal Assignment of Claims Act (or any successor statute)
or any similar state or local statute, as the case may be.
(b) Unless and until an Event of Default occurs, any merchandise or
other goods which are returned by a customer or account debtor or otherwise
recovered may be resold by the Debtor in the ordinary course of its business as
presently conducted in accordance with Section 6(b) hereof; and, during the
existence of any Event of Default, such merchandise and other goods shall be set
aside at the request of the Secured Party and held by the Debtor as trustee for
the Secured Party and shall remain part of the Secured Party's Collateral.
Unless and until an Event of Default occurs, the Debtor may settle and adjust
disputes and claims with its customers and account debtors, handle returns and
recoveries and grant discounts, credits and allowances in the ordinary course of
its business as presently conducted for amounts and on terms which the Debtor in
good faith considers advisable; and, during the existence of any Event of
Default, unless the Secured Party requests otherwise, the Debtor shall notify
the Secured Party promptly of all returns and recoveries and, on the Secured
Party's request, deliver any such merchandise or other goods to the Secured
Party. During the existence of any Event of Default, unless the Secured Party
requests otherwise, the Debtor shall also notify the Secured Party promptly of
all disputes and claims and settle or adjust them at no expense to the Secured
Party, but no discount, credit or allowance other than on normal trade terms in
the ordinary course of business as presently conducted shall be granted to any
customer or account debtor and no returns of merchandise or other goods shall be
accepted by the Debtor without the Secured Party's consent. The Secured Party
may, at all times during the existence of any Event of
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Default, settle or adjust disputes and claims directly with customers or account
debtors for amounts and upon terms which the Secured Party considers advisable.
5. Collection of Receivables.
(a) Except as otherwise provided in this Agreement, the Debtor shall
make collection of all Receivables and may use the same to carry on its business
in accordance with sound business practice and otherwise subject to the terms
hereof.
(b) Upon the occurrence of any Event of Default or of any event or
condition which with the lapse of time or the giving of notice, or both, would
constitute an Event of Default, whether or not the Secured Party has exercised
any or all of its rights under other provisions of this Section 5, in the event
the Secured Party requests the Debtor to do so:
(i) all instruments and chattel paper at any time constituting
part of the Receivables or any other Collateral (including any
postdated checks) shall, upon receipt by the Debtor, be immediately
endorsed to and deposited with the Secured Party; and/or
(ii) the Debtor shall instruct all customers and account
debtors to remit all payments in respect of Receivables or any other
Collateral to a lockbox or lockboxes under the sole custody and control
of the Secured Party and which are maintained at post office(s) in
Chicago, Illinois selected by the Secured Party.
(c) Upon the occurrence of any Event of Default or of any event or
condition which with the lapse of time or the giving of notice, or both, would
constitute an Event of Default, whether or not the Secured Party has exercised
any or all of its rights under other provisions of this Section 5, the Secured
Party or its designee may notify the Debtor's customers and account debtors at
any time that Receivables or any other Collateral have been assigned to the
Secured Party or of the Secured Party's security interest therein, and either in
its own name, or the Debtor's name, or both, demand, collect (including, without
limitation, through a lockbox analogous to that described in Section 5(b)(ii)
hereof), receive, receipt for, sue for, compound and give acquittance for any or
all amounts due or to become due on Receivables or any other Collateral, and in
the Secured Party's discretion file any claim or take any other action or
proceeding which the Secured Party may deem necessary or appropriate to protect
or realize upon the security interest of the Secured Party in the Receivables or
any other Collateral.
(d) Any proceeds of Receivables or other Collateral transmitted to or
otherwise received by the Secured Party pursuant to any of the provisions of
Sections 5(b) or 5(c) hereof may be handled and administered by the Secured
Party in and through a remittance account at the Secured Party, and the Debtor
acknowledges that the maintenance of such remittance account by
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the Secured Party is solely for the Secured Party's convenience and that the
Debtor does not have any right, title or interest in such remittance account or
any amounts at any time standing to the credit thereof. The Secured Party may,
after the occurrence and during the continuation of any Event of Default or of
any event or condition which with the lapse of time or the giving of notice, or
both, would constitute an Event of Default, apply all or any part of any
proceeds of Receivables or other Collateral received by it from any source to
the payment of the Obligations (whether or not then due and payable), such
applications to be made in such amounts, in such manner and order and at such
intervals as the Secured Party may from time to time in its discretion
determine, but not less often than once each week. The Secured Party need not
apply or give credit for any item included in proceeds of Receivables or other
Collateral until the Secured Party has received final payment therefor at its
office in cash or final solvent credits current in Chicago, Illinois, acceptable
to the Secured Party as such. However, if the Secured Party does give credit for
any item prior to receiving final payment therefor and the Secured Party fails
to receive such final payment or an item is charged back to the Secured Party
for any reason, the Secured Party may at its election in either instance charge
the amount of such item back against the remittance account or any depository
account of the Debtor maintained with the Secured Party, together with interest
thereon at the Default Rate. Concurrently with each transmission of any proceeds
of Receivables or other Collateral to the remittance account, the Debtor shall
furnish the Secured Party with a report in such form as the Secured Party shall
reasonably require identifying the particular Receivable or other Collateral
from which the same arises or relates. The Debtor hereby indemnifies the Secured
Party from and against all liabilities, damages, losses, actions, claims,
judgments, costs, expenses, charges and reasonable attorneys' fees suffered or
incurred by the Secured Party because of the maintenance of the foregoing
arrangements; provided, however, that the Debtor shall not be required to
indemnify the Secured Party for any of the foregoing to the extent they arise
solely from the gross negligence or willful misconduct of the Secured Party. The
Secured Party shall have no liability or responsibility to the Debtor for
accepting any check, draft or other order for payment of money bearing the
legend "payment in full" or words of similar import or any other restrictive
legend or endorsement whatsoever or be responsible for determining the
correctness of any remittance.
6. Special Provisions Re: Inventory and Equipment.
(a) The Debtor shall at its own cost and expense maintain, keep and
preserve the Inventory in good and merchantable condition and keep and preserve
the Equipment in good repair, working order and condition, ordinary wear and
tear excepted, and, without limiting the foregoing, make all necessary and
proper repairs, replacements and additions to the Equipment so that the
efficiency thereof shall be fully preserved and maintained.
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(b) The Debtor may, until an Event of Default has occurred and is
continuing and thereafter until otherwise notified by the Secured Party, use,
consume and sell the Inventory in the ordinary course of its business, but a
sale in the ordinary course of business shall not under any circumstance include
any transfer or sale in satisfaction, partial or complete, of a debt owing by
the Debtor.
(c) The Debtor may, until an Event of Default has occurred and is
continuing and thereafter until otherwise notified by the Secured Party, sell
obsolete, worn out or unusable Equipment which is concurrently replaced with
similar Equipment at least equal in quality and condition to that sold and owned
by the Debtor free of any lien, charge or encumbrance other than the security
interest granted hereby.
(d) As of the time any Inventory or Equipment becomes subject to the
security interest provided for hereby and at all times thereafter, the Debtor
shall be deemed to have warranted as to any and all of such Inventory and
Equipment that all warranties of the Debtor set forth in this Agreement are true
and correct with respect to such Inventory and Equipment; that all of such
Inventory and Equipment is located at a location set forth pursuant to Section
3(b) hereof; and that, in the case of Inventory, such Inventory is new and
unused and in good and merchantable condition. The Debtor warrants and agrees
that no Inventory is or will be consigned to any other person without the
Secured Party's prior written consent.
(e) Upon the Secured Party's request, the Debtor shall at its own cost
and expense cause the lien of the Secured Party in and to any portion of the
Collateral subject to a certificate of title law to be duly noted on such
certificate of title or to be otherwise filed in such manner as is prescribed by
law in order to perfect such lien and shall cause all such certificates of title
and evidences of lien to be deposited with the Secured Party.
(f) Except for Equipment from time to time located on the real estate
described on Schedule B attached hereto and as otherwise disclosed to the
Secured Party in writing, none of the Equipment is or will be attached to real
estate in such a manner that the same may become a fixture.
(g) If any of the Inventory is at any time evidenced by a document of
title, such document shall be promptly delivered by the Debtor to the Secured
Party except to the extent the Secured Party specifically requests the Debtor
not to do so with respect to any such document.
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Section 7. Special Provisions Re: Investment Property.
(a) Unless and until an Event of Default has occurred and is continuing
and thereafter until notified to the contrary by the Secured Party pursuant to
Section 9(d) hereof:
(i) The Debtor shall be entitled to exercise all voting and/or
consensual powers pertaining to the Investment Property or any part
thereof, for all purposes not inconsistent with the terms of this
Agreement or any other document evidencing or otherwise relating to any
Obligations; and
(ii) The Debtor shall be entitled to receive and retain all
cash dividends paid upon or in respect of the Investment Property.
(b) At the Secured Party's request, certificates for all securities now
or at any time constituting Investment Property shall be promptly delivered by
the Debtor to the Secured Party duly endorsed in blank for transfer or
accompanied by an appropriate assignment or assignments or an appropriate
undated stock power or powers, in every case sufficient to transfer title
thereto including, without limitation, all stock received in respect of a stock
dividend or resulting from a split-up, revision or reclassification of the
Investment Property or any part thereof or received in addition to, in
substitution of or in exchange for the Investment Property or any part thereof
as a result of a merger, consolidation or otherwise. With respect to any
Investment Property held by a securities intermediary, commodity intermediary,
or other financial intermediary of any kind, at the Secured Party's request, the
Debtor shall execute and deliver, and shall cause any such intermediary to
execute and deliver, an agreement among the Debtor, the Secured Party, and such
intermediary in form and substance reasonably satisfactory to the Secured Party
which provides, among other things, for the intermediary's agreement that it
shall comply with entitlement orders, and apply any value distributed on account
of any Investment Property maintained in an account with such intermediary, as
directed by the Secured Party without further consent by the Debtor at any time
after the occurrence and during the continuation of any Event of Default. The
Secured Party may at any time, after the occurrence of an Event of Default or an
event or condition which with the lapse of time or the giving of notice, or
both, would constitute an Event of Default, cause to be transferred into its
name or the name of its nominee or nominees all or any part of the Investment
Property hereunder.
(c) Unless and until an Event of Default has occurred and is
continuing, the Debtor may sell or otherwise dispose of any Investment Property,
provided that the Debtor shall not sell or otherwise dispose of any capital
stock of any direct or indirect subsidiary without the prior written consent of
the Secured Party. After the occurrence and during the continuation of any Event
of Default, the Debtor shall not sell all or any part of the Investment Property
without the prior written consent of the Secured Party.
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(d) The Debtor represents that on the date of this Agreement, none of
the Investment Property consists of margin stock (as such term is defined in
Regulation U of the Board of Governors of the Federal Reserve System) except to
the extent the Debtor has delivered to the Secured Party a duly executed and
completed Form U-1 with respect to such stock. If at any time the Investment
Property or any part thereof consists of margin stock, the Debtor shall promptly
so notify the Secured Party and deliver to the Secured Party a duly executed and
completed Form U-1 and such other instruments and documents reasonably requested
by the Secured Party in form and substance satisfactory to the Secured Party.
(e) Notwithstanding anything to the contrary contained herein, in the
event any Investment Property is subject to the terms of a separate security
agreement in favor of the Secured Party, the terms of such separate security
agreement shall govern and control unless otherwise agreed to in writing by the
Secured Party.
Section 8. Power of Attorney. In addition to any other powers of
attorney contained herein, the Debtor hereby appoints the Secured Party, its
nominee, and any other person whom the Secured Party may designate, as the
Debtor's attorney-in-fact, with full power to sign the Debtor's name on
verifications of accounts and other Collateral; to send requests for
verification of Collateral to the Debtor's customers, account debtors and other
obligors; to endorse the Debtor's name on any checks, notes, acceptances, money
orders, drafts and any other forms of payment or security that may come into the
Secured Party's possession or on any assignments, stock powers, or other
instruments of transfer relating to the Collateral or any part thereof; to sign
the Debtor's name on any invoice or bill of lading relating to any Collateral,
on claims to enforce collection of any Collateral, on notices to and drafts
against customers and account debtors and other obligors, on schedules and
assignments of Collateral, on notices of assignment and on public records; to
notify the post office authorities to change the address for delivery of the
Debtor's mail to an address designated by the Secured Party; to receive, open
and dispose of all mail addressed to the Debtor; and to do all things necessary
to carry out this Agreement. The Debtor hereby ratifies and approves all acts of
any such attorney and agrees that neither the Secured Party nor any such
attorney will be liable for any acts or omissions nor for any error of judgment
or mistake of fact or law other than such person's gross negligence or willful
misconduct. The Secured Party may file one or more financing statements
disclosing its security interest in any or all of the Collateral without the
Debtor's signature appearing thereon. The Debtor also hereby grants the Secured
Party a power of attorney to execute any such financing statements, or
amendments and supplements to financing statements, on behalf of the Debtor
without notice thereof to the Debtor. The foregoing powers of attorney, being
coupled with an interest, are irrevocable until the Obligations have been fully
paid and satisfied and all agreements of the Secured Party to extend credit to
or for the account of the Debtor have expired or otherwise have been terminated;
provided, however, that the Secured Party agrees, as a personal covenant to the
Debtor, not to exercise the powers of attorney set forth in this Section unless
an Event of Default exists.
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9. Defaults and Remedies.
(a) The occurrence of any one or more of the following events shall
constitute an "Event of Default" hereunder:
(i) default in the payment when due (whether by demand, lapse
of time, acceleration or otherwise) of the Obligations or any part
thereof; or
(ii) default in the observance or performance of any covenant
set forth in Sections 5(b), 5(c) or 7(b) hereof or of any provision
hereof requiring the maintenance of insurance on the Collateral or
dealing with the use or remittance of proceeds of Collateral; or
(iii) the occurrence of any event or the existence of any
condition which is specified as an "Event of Default" under the Credit
Agreement.
(b) Upon the occurrence and during the continuation of any Event of
Default, the Secured Party shall have, in addition to all other rights provided
herein or by law, the rights and remedies of a secured party under the UCC
(regardless of whether the UCC is the law of the jurisdiction where the rights
or remedies are asserted and regardless of whether the UCC applies to the
affected Collateral), and further the Secured Party may, without demand and
without advertisement, notice, hearing or process of law, all of which the
Debtor hereby waives, at any time or times, sell and deliver all or any part of
the Collateral (and any other property of the Debtor attached thereto or found
therein) held by or for it at public or private sale, for cash, upon credit or
otherwise, at such prices and upon such terms as the Secured Party deems
advisable, in its sole discretion. In addition to all other sums due the Secured
Party hereunder, the Debtor shall pay the Secured Party all costs and expenses
incurred by the Secured Party, including reasonable attorneys' fees and court
costs, in obtaining, liquidating or enforcing payment of Collateral or the
Obligations or in the prosecution or defense of any action or proceeding by or
against the Secured Party or the Debtor concerning any matter arising out of or
connected with this Agreement or the Collateral or the Obligations, including,
without limitation, any of the foregoing arising in, arising under or related to
a case under the United States Bankruptcy Code (or any successor statute). Any
requirement of reasonable notice shall be met if such notice is personally
served on or mailed, postage prepaid, to the Debtor in accordance with Section
12(b) hereof at least 10 days before the time of sale or other event giving rise
to the requirement of such notice; provided however, no notification need be
given to the Debtor if the Debtor has signed, after an Event of Default has
occurred, a statement renouncing any right to notification of sale or other
intended disposition. The Secured Party shall not be obligated to make any sale
or other disposition of the Collateral regardless of notice having been given.
The Secured Party may be the purchaser at any such sale. The Debtor hereby
waives all of its rights of redemption
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from any such sale. The Secured Party may postpone or cause the postponement of
the sale of all or any portion of the Collateral by announcement at the time and
place of such sale, and such sale may, without further notice, be made at the
time and place to which the sale was postponed or the Secured Party may further
postpone such sale by announcement made at such time and place.
(c) Without in any way limiting the foregoing, upon the occurrence and
during the continuation of any Event of Default, the Secured Party shall have
the right, in addition to all other rights provided herein or by law, to take
physical possession of any and all of the Collateral and anything found therein,
the right for that purpose to enter without legal process any premises where the
Collateral may be found (provided such entry be done lawfully), and the right to
maintain such possession on the Debtor's premises (the Debtor hereby agreeing to
lease such premises without cost or expense to the Secured Party or its designee
if the Secured Party so requests) or to remove the Collateral or any part
thereof to such other places as the Secured Party may desire. Upon the
occurrence and during the continuation of any Event of Default, the Secured
Party shall have the right to exercise any and all rights with respect to
deposit accounts of the Debtor maintained with the Secured Party, including,
without limitation, the right to collect, withdraw and receive all amounts due
or to become due or payable under each such deposit account. Upon the occurrence
and during the continuation of any Event of Default, the Debtor shall, upon the
Secured Party's demand, assemble the Collateral and make it available to the
Secured Party at a place designated by the Secured Party. If the Secured Party
exercises its right to take possession of the Collateral, the Debtor shall also
at its expense perform any and all other steps requested by the Secured Party to
preserve and protect the security interest hereby granted in the Collateral,
such as placing and maintaining signs indicating the security interest of the
Secured Party, appointing overseers for the Collateral and maintaining
Collateral records.
(d) Without in any way limiting the foregoing, upon the occurrence and
during the continuation of any Event of Default, all rights of the Debtor to
exercise the voting and/or consensual powers which it is entitled to exercise
pursuant to Section 7(a)(i) hereof and/or to receive and retain the
distributions which it is entitled to receive and retain pursuant to Section
7(a)(ii) hereof, shall, at the option of the Secured Party, cease and thereupon
become vested in the Secured Party, which, in addition to all other rights
provided herein or by law, shall then be entitled solely and exclusively to
exercise all voting and other consensual powers pertaining to the Investment
Property and/or to receive and retain the distributions which the Debtor would
otherwise have been authorized to retain pursuant to Section 7(a)(ii) hereof and
shall then be entitled solely and exclusively to exercise any and all rights of
conversion, exchange or subscription or any other rights, privileges or options
pertaining to any Investment Property as if the Secured Party were the absolute
owner thereof. Without limiting the foregoing, the Secured Party shall have the
right to exchange, at its discretion, any and all of the Investment Property
upon the merger, consolidation, reorganization, recapitalization or other
readjustment of
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the respective issuer thereof or upon the exercise by or on behalf of any such
issuer or the Secured Party of any right, privilege or option pertaining to any
Investment Property and, in connection therewith, to deposit and deliver any and
all of the Investment Property with any committee, depositary, transfer agent,
registrar or other designated agency upon such terms and conditions as the
Secured Party may determine. In the event the Secured Party in good faith
believes any of the Collateral constitutes restricted securities within the
meaning of any applicable securities laws, any disposition thereof in compliance
with such laws shall not render the disposition commercially unreasonable.
(e) Without in any way limiting the foregoing, the Debtor hereby grants
to the Secured Party a royalty-free irrevocable license and right to use all of
the Debtor's patents, patent applications, patent licenses, trademarks,
trademark registrations, trademark licenses, trade names, trade styles,
copyrights, copyright applications, copyright licenses, and similar intangibles
in connection with any foreclosure or other realization by the Secured Party on
all or any part of the Collateral. The license and right granted the Secured
Party hereby shall be without any royalty or fee or charge whatsoever.
(f) The powers conferred upon the Secured Party hereunder are solely to
protect its interest in the Collateral and shall not impose on it any duty to
exercise such powers. The Secured Party shall be deemed to have exercised
reasonable care in the custody and preservation of Investment Property in its
possession if such Collateral is accorded treatment substantially equivalent to
that which the Secured Party accords its own property, consisting of similar
type assets, it being understood, however, that the Secured Party shall have no
responsibility for ascertaining or taking any action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relating to any
such Collateral, whether or not the Secured Party has or is deemed to have
knowledge of such matters. This Agreement constitutes an assignment of rights
only and not an assignment of any duties or obligations of the Debtor in any way
related to the Collateral, and the Secured Party shall have no duty or
obligation to discharge any such duty or obligation. The Secured Party shall
have no responsibility for taking any necessary steps to preserve rights against
any parties with respect to any Collateral or initiating any action to protect
the Collateral against the possibility of a decline in market value. Neither the
Secured Party nor any party acting as attorney for the Secured Party shall be
liable for any acts or omissions or for any error of judgment or mistake of fact
or law other than their gross negligence or willful misconduct.
(g) Failure by the Secured Party to exercise any right, remedy or
option under this Agreement or any other agreement between the Debtor and the
Secured Party or provided by law, or delay by the Secured Party in exercising
the same, shall not operate as a waiver; and no waiver by the Secured Party
shall be effective unless it is in writing and then only to the extent
specifically stated. The rights and remedies of the Secured Party under this
Agreement shall be
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cumulative and not exclusive of any other right or remedy which the Secured
Party may have. For purposes of this Agreement, an Event of Default shall be
construed as continuing after its occurrence until the same is waived in writing
by the Secured Party.
10. Application of Proceeds. The proceeds and avails of the Collateral
at any time received by the Secured Party after the occurrence and during the
continuation of any Event of Default shall, when received by the Secured Party
in cash or its equivalent, be applied by the Secured Party as follows:
(i) First, to the payment and satisfaction of all sums paid
and costs and expenses incurred by the Secured Party hereunder or
otherwise in connection herewith, including such monies paid or
incurred in connection with protecting, preserving or realizing upon
the Collateral or enforcing any of the terms hereof, including
reasonable attorneys' fees and court costs, together with any interest
thereon (but without preference or priority of principal over interest
or of interest over principal), to the extent the Secured Party is not
reimbursed therefor by the Debtor; and
(ii) Second, to the payment and satisfaction of the remaining
Obligations, whether or not then due (in whatever order the Secured
Party elects), both for interest and principal.
The Debtor shall remain liable to the Secured Party for any deficiency. Any
surplus remaining after the full payment and satisfaction of the foregoing shall
be returned to the Debtor or to whomsoever the Secured Party reasonably
determines is lawfully entitled thereto.
11. Continuing Agreement. This Agreement shall be a continuing
agreement in every respect and shall remain in full force and effect until all
of the Obligations, both for principal and interest, have been fully paid and
satisfied and all agreements of the Secured Party to extend credit to or for the
account of the Debtor have expired or otherwise have been terminated. Upon such
termination of this Agreement, the Secured Party shall, upon the request and at
the expense of the Debtor, forthwith release its security interest hereunder.
12. Miscellaneous.
(a) This Agreement cannot be changed or terminated orally. All of the
rights, privileges, remedies and options given to the Secured Party hereunder
shall inure to the benefit of its successors and assigns, and all the terms,
conditions, covenants, agreements, representations and warranties of and in this
Agreement shall bind the Debtor and its legal representatives, successors and
assigns, provided that the Debtor may not assign its rights or delegate its
duties hereunder without the Secured Party's prior written consent.
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(b) Except as otherwise specified herein, all notices hereunder shall
be in writing (including, without limitation, notice by telecopy) and shall be
given to the relevant party at its address or telecopier number set forth below
(or, if no such address is set forth below, at the address of the Debtor as
shown on the records of the Secured Party), or such other address or telecopier
number as such party may hereafter specify by notice to the other given by
United States certified or registered mail, by telecopy or by other
telecommunication device capable of creating a written record of such notice and
its receipt. Notices hereunder shall be addressed:
to the Debtor at: to the Secured Party at:
Champion Financial Corporation Harris Trust and Savings Bank
9495 East San Salvador Drive 111 West Monroe Street
Scottsdale, Arizona 85258 Chicago, Illinois 60690
Attention:Stephen Carder, Attention: Christopher Randall,
Chief Financial Officer Tax-Exempt Institutions Division
Telephone: (602) 614-4285 Telephone: (312) 461-5068
Telecopy: (602) 451-9087 Telecopy: (312) 461-7365
Each such notice, request or other communication shall be effective (i) if given
by telecopier, when such telecopy is transmitted to the telecopier number
specified in this Section and a confirmation of such telecopy has been received
by the sender, (ii) if given by mail, five (5) days after such communication is
deposited in the mail, certified or registered with return receipt requested,
addressed as aforesaid or (iii) if given by any other means, when delivered at
the addresses specified in this Section.
(c) In the event and to the extent that any provision hereof shall be
deemed to be invalid or unenforceable by reason of the operation of any law or
by reason of the interpretation placed thereon by any court, this Agreement
shall to such extent be construed as not containing such provision, but only as
to such locations where such law or interpretation is operative, and the
invalidity or unenforceability of such provision shall not affect the validity
of any remaining provisions hereof, and any and all other provisions hereof
which are otherwise lawful and valid shall remain in full force and effect.
(d) This Agreement shall be deemed to have been made in the State of
Illinois and shall be governed by, and construed in accordance with, the laws of
the State of Illinois. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning of any
provision hereof.
(e) The Debtor acknowledges that this Agreement is and shall be
effective upon its execution and delivery by the Debtor to the Secured Party,
and it shall not be necessary for the
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Secured Party to execute this Agreement or any other acceptance hereof or
otherwise to signify or express its acceptance hereof.
(f) The Debtor hereby submits to the non-exclusive jurisdiction of the
United States District Court for the Northern District of Illinois and of any
Illinois state court sitting in the City of Chicago for purposes of all legal
proceedings arising out of or relating to this Agreement or the transactions
contemplated hereby. The Debtor irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such proceeding brought in such a court and any claim that
any such proceeding brought in such a court has been brought in an inconvenient
form. THE DEBTOR AND THE SECURED PARTY EACH HEREBY IRREVOCABLY WAIVES ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
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IN WITNESS WHEREOF, the Debtor has caused this Agreement to be duly
executed and delivered as of this 15th day of December, 1997.
CHAMPION FINANCIAL CORPORATION
By /s/ Stephen J Carder
-----------------------
Its Executive Vice President
EXHIBIT 10.34
SECURITY AGREEMENT
This Security Agreement (the "Agreement") is dated as of December 15,
1997, between HEALTHSTAR, INC., an Illinois corporation (the "Debtor"), with its
mailing address as set forth in Section 12(b) hereof, and HARRIS TRUST AND
SAVINGS BANK, an Illinois banking corporation (the "Secured Party"), with its
mailing address as set forth in Section 12(b) hereof.
PRELIMINARY STATEMENT
A. The Champion Financial Corporation, a Utah corporation (the
"Borrower"), has requested that the Secured Party extend credit or otherwise
make financial accommodations available to or for the account of the Borrower.
B. As a condition to extending credit or otherwise making financial
accommodations available to or for the account of the Borrower, the Secured
Party requires, among other things, that the Debtor guarantee all of the
indebtedness, obligations, and liabilities of the Borrower to the Bank and grant
the Secured Party a security interest in the Debtor's personal property
described herein subject to the terms and conditions hereof.
C. The Borrower owns, directly or indirectly, all or substantially all
of the equity interests in the Debtor and the Borrower provides the Debtor with
financial, management, administrative, and technical support which enables the
Debtor to conduct its business in an orderly and efficient manner in the
ordinary course.
D. The Debtor will benefit, directly or indirectly, from credit and
other financial accommodations extended by the Bank to the Borrower.
NOW, THEREFORE, in consideration of the benefits accruing to the
Debtor, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. Grant of Security Interest. The Debtor hereby grants to the
Secured Party a lien on and security interest in, and acknowledges and agrees
that the Secured Party has and shall continue to have a continuing lien on and
security interest in, any and all right, title and
<PAGE>
interest of the Debtor, whether now owned or existing or hereafter created,
acquired or arising, in and to the following:
(a) Receivables. All Receivables, whether now owned or
existing or hereafter created, acquired or arising, and however
evidenced or acquired, or in which the Debtor now has or hereafter
acquires any rights (the term "Receivables" means and includes all
accounts, accounts receivable, contract rights, instruments, notes,
drafts, acceptances, documents, chattel paper, and all other forms of
obligations owing to the Debtor, any right of the Debtor to payment for
goods sold or leased or for services rendered, whether or not earned by
performance, and all of the Debtor's rights to any merchandise and
other goods (including, without limitation, any returned or repossessed
goods and the right of stoppage in transit) which is represented by,
arises from or is related to any of the foregoing);
(b) General Intangibles. All General Intangibles, whether now
owned or existing or hereafter created, acquired or arising, or in
which the Debtor now has or hereafter acquires any rights (the term
"General Intangibles" means and includes all general intangibles,
patents, patent applications, patent licenses, trademarks, trademark
registrations, trademark licenses, trade styles, trade names,
copyrights, copyright registrations, copyright licenses and other
licenses and similar intangibles, all customer, client and supplier
lists (in whatever form maintained), all rights in leases and other
agreements relating to real or personal property, all causes of action
and tax refunds of every kind and nature, all privileges, franchises,
immunities, licenses, permits and similar intangibles, all rights to
receive payments in connection with the termination of any pension plan
or employee stock ownership plan or trust established for the benefit
of employees of the Debtor, and all other personal property (including
things in action) not otherwise covered by this Agreement);
(c) Inventory. All Inventory, whether now owned or existing or
hereafter created, acquired or arising, or in which the Debtor now has
or hereafter acquires any rights, and all documents of title at any
time evidencing or representing any part thereof (the term "Inventory"
means and includes all inventory and any other goods which are held for
sale or lease or are to be furnished under contracts of service or
consumed in the Debtor's business, all goods which are raw materials,
work-in-process or finished goods, all goods which are returned or
repossessed goods, and all materials and supplies of every kind and
nature used or usable in connection with the acquisition, manufacture,
processing, supply, servicing, storing, packing, shipping, advertising,
selling, leasing or furnishing of the foregoing, and any constituents
or ingredients thereof;
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(d) Equipment. All Equipment, whether now owned or existing or
hereafter created, acquired or arising, or in which the Debtor now has
or hereafter acquires any rights (the term "Equipment" means and
includes all equipment and any other machinery, tools, fixtures, trade
fixtures, furniture, furnishings, office equipment, vehicles (including
vehicles subject to a certificate of title law), and all other goods
now or hereafter used or usable in connection with the Debtor's
business, together with all parts, accessories and attachments relating
to any of the foregoing);
(e) Investment Property. All Investment Property, whether now
owned or existing or hereafter created, acquired or arising, or in
which the Debtor now has or hereafter acquires any rights (the term
"Investment Property" means and includes all investment property and
any other securities (whether certificated or uncertificated), security
entitlements, securities accounts, commodity contracts and commodity
accounts, including all substitutions and additions thereto, all
dividends, distributions and sums distributable or payable from, upon,
or in respect of such property, and all rights and privileges incident
to such property);
(f) Deposits and Property in Possession. All deposit accounts
(whether general, special or otherwise) of the Debtor maintained with
the Secured Party and all sums now or hereafter on deposit therein or
payable thereon, and all other personal property and interests in
personal property of the Debtor of any kind or description now held by
the Secured Party or at any time hereafter transferred or delivered to,
or coming into the possession, custody or control of, the Secured
Party, or any agent or affiliate of the Secured Party, whether
expressly as collateral security or for any other purpose (whether for
safekeeping, custody, collection or otherwise), and all dividends and
distributions on or other rights in connection with any such property,
in each case whether now owned or existing or hereafter created,
acquired or arising;
(g) Records. All supporting evidence and documents relating to
any of the above-described property, whether now owned or existing or
hereafter created, acquired or arising, including, without limitation,
computer programs, disks, tapes and related electronic data processing
media, and all rights of the Debtor to retrieve the same from third
parties, written applications, credit information, account cards,
payment records, correspondence, delivery and installation
certificates, invoice copies, delivery receipts, notes and other
evidences of indebtedness, insurance certificates and the like,
together with all books of account, ledgers and cabinets in which the
same are reflected or maintained;
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(h) Accessions and Additions. All accessions and additions to,
and substitutions and replacements of, any and all of the foregoing,
whether now owned or existing or hereafter created, acquired or
arising; and
(i) Proceeds and Products. All proceeds and products of the
foregoing and all insurance of the foregoing and proceeds thereof,
whether now owned or existing or hereafter created, acquired or
arising;
all of the foregoing being herein sometimes referred to as the "Collateral". All
terms which are used in this Agreement which are defined in the Uniform
Commercial Code of the State of Illinois ("UCC") shall have the same meanings
herein as such terms are defined in the UCC, unless this Agreement shall
otherwise specifically provide.
2. Obligations Hereby Secured. The lien and security interest herein
granted and provided for is made and given to secure, and shall secure, the
payment and performance of (a) any and all indebtedness, obligations and
liabilities of whatsoever kind and nature of the Debtor to the Secured Party
(whether arising before or after the filing of a petition in bankruptcy),
whether direct or indirect, absolute or contingent, due or to become due, and
whether now existing or hereafter arising and howsoever held, evidenced or
acquired, and whether several, joint or joint and several, (b) any and all
indebtedness, obligations and liabilities of whatsoever kind and nature of the
Borrower to the Secured Party (whether arising before or after the filing of a
petition in bankruptcy), whether direct or indirect, absolute or contingent, due
or to become due, and whether now existing or hereafter arising and howsoever
held, evidenced or acquired, and whether several, joint or joint and several and
(c) any and all expenses and charges, legal or otherwise, suffered or incurred
by the Secured Party in collecting or enforcing any of such indebtedness,
obligations or liabilities or in realizing on or protecting or preserving any
security therefor, including, without limitation, the lien and security interest
granted hereby (all of the foregoing being hereinafter referred to as the
"Obligations"). Notwithstanding anything herein to the contrary, the right of
recovery hereunder against the Debtor with respect to the Obligations shall be
limited to $1 less than the amount of the lowest claim hereunder against the
Collateral which would render this Agreement void or voidable under applicable
law.
3. Covenants, Agreements, Representations and Warranties. The Debtor
hereby covenants and agrees with, and represents and warrants to, the Secured
Party that:
(a) The Debtor is a corporation duly organized and validly existing in
good standing under the laws of the State of Illinois, is the sole and lawful
owner of the Collateral, and has full right, power and authority to enter into
this Agreement and to perform each and all of the matters and things herein
provided for. The execution and delivery of this Agreement, and the observance
and performance of each of the matters and things herein set forth, will not
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(i) contravene or constitute a default under any provision of law or any
judgment, injunction, order or decree binding upon the Debtor or any provision
of the Debtor's articles of incorporation or by-laws or any covenant, indenture
or agreement of or affecting the Debtor or any of its property or (ii) result in
the creation or imposition of any lien or encumbrance on any property of the
Debtor except for the lien and security interest granted to the Secured Party
hereunder. The Debtor's Federal tax identification number is 36-3146167.
(b) The Debtor's chief executive office and principal place of business
is at, and the Debtor keeps and shall keep all of its books and records relating
to Receivables only at, 8745 West Higgins Road, Suite 300, Chicago, Illinois
60631; and the Debtor has no other executive offices or places of business other
than those listed under Item 1 on Schedule A. The Collateral is and shall remain
in the Debtor's possession or control at the locations listed under Item 2 on
Schedule A attached hereto (collectively, the "Permitted Collateral Locations").
If for any reason any Collateral is at any time kept or located at a location
other than a Permitted Collateral Location, the Secured Party shall nevertheless
have and retain a lien on and security interest therein. The Debtor owns and
shall at all times own all Permitted Collateral Locations, except to the extent
otherwise disclosed under Item 2 on Schedule A. The Debtor shall not move its
chief executive office or maintain a place of business at a location other than
those specified under Item 1 on Schedule A or permit the Collateral to be
located at a location other than those specified under Item 2 on Schedule A, in
each case without first providing the Secured Party 30 days' prior written
notice of the Debtor's intent to do so; provided that the Debtor shall at all
times maintain its chief executive office and, unless otherwise specifically
agreed to in writing by the Secured Party, Permitted Collateral Locations in the
United States of America and, with respect to any new chief executive office or
place of business or location of Collateral, the Debtor shall have taken all
action requested by the Secured Party to maintain the lien and security interest
of the Secured Party in the Collateral at all times fully perfected and in full
force and effect.
(c) The Debtor has not invoiced Receivables or otherwise transacted
business at any time during the immediately preceding five-year period, and does
not currently invoice Receivables or otherwise transact business, under any
trade names other than the Debtor's name set forth in the introductory paragraph
of this Agreement. The Debtor shall not change its name or transact business
under any other trade name without first giving 30 days' prior written notice of
its intent to do so to the Secured Party.
(d) The Collateral and every part thereof is and shall be free and
clear of all security interests, liens (including, without limitation,
mechanics', laborers' and statutory liens), attachments, levies and encumbrances
of every kind, nature and description, whether voluntary or involuntary, except
for the lien and security interest of the Secured Party therein and as otherwise
permitted by Section 8.10 of that certain Credit Agreement dated as of even date
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herewith between the Borrower and the Secured Party, as the same may be amended
or modified from time to time, including amendments and restatements of the same
in its entirety (hereinafter, the "Credit Agreement"). The Debtor shall warrant
and defend the Collateral against any claims and demands of all persons at any
time claiming the same or any interest in the Collateral adverse to the Secured
Party.
(e) The Debtor shall promptly pay when due all taxes, assessments and
governmental charges and levies upon or against the Debtor or any of the
Collateral, in each case before the same become delinquent and before penalties
accrue thereon, unless and to the extent that the same are being contested in
good faith by appropriate proceedings which prevent foreclosure or other
realization upon any of the Collateral and preclude interference with the
operation of the Debtor's business in the ordinary course, and the Debtor shall
have established adequate reserves therefor.
(f) The Debtor shall not use, manufacture, sell or distribute any
Collateral in violation of any statute, ordinance or other governmental
requirement. The Debtor shall not waste or destroy the Collateral or any part
thereof or be negligent in the care or use of any Collateral. The Debtor shall
perform in all material respects its obligations under any contract or other
agreement constituting part of the Collateral, it being understood and agreed
that the Secured Party has no responsibility to perform such obligations.
(g) Subject to Sections 4(b), 6(b), 6(c), and 7(c) hereof, the Debtor
shall not, without the Secured Party's prior written consent, sell, assign,
mortgage, lease or otherwise dispose of the Collateral or any interest therein.
(h) The Debtor shall at all times insure the Collateral consisting of
tangible personal property against such risks and hazards as other persons
similarly situated insure against, and including in any event loss or damage by
fire, theft, burglary, pilferage, loss in transit and such other hazards as the
Secured Party may specify. All insurance required hereby shall be maintained in
amounts and under policies and with insurers reasonably acceptable to the
Secured Party, and all such policies shall contain loss payable clauses naming
the Secured Party as loss payee as its interest may appear (and, if the Secured
Party requests, naming the Secured Party as an additional insured therein) in a
form acceptable to the Secured Party. All premiums on such insurance shall be
paid by the Debtor. Certificates of insurance evidencing compliance with the
foregoing and, at the Secured Party's request, the policies of such insurance
shall be delivered by the Debtor to the Secured Party. All insurance required
hereby shall provide that any loss shall be payable to the Secured Party
notwithstanding any act or negligence of the Debtor, shall provide that no
cancellation thereof shall be effective until at least 30 days after receipt by
the Debtor and the Secured Party of written notice thereof, and shall be
satisfactory to the Secured Party in all other respects. In case of any material
loss, damage to or destruction of the Collateral
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or any part thereof, the Debtor shall promptly give written notice thereof to
the Secured Party generally describing the nature and extent of such damage or
destruction. In case of any loss, damage to or destruction of the Collateral or
any part thereof, the Debtor, whether or not the insurance proceeds, if any,
received on account of such damage or destruction shall be sufficient for that
purpose, at the Debtor's cost and expense, shall promptly repair or replace the
Collateral so lost, damaged or destroyed, except to the extent such Collateral,
prior to its loss, damage or destruction, had become uneconomical, obsolete or
worn out and is not necessary for or of importance to the proper conduct of the
Debtor's business in the ordinary course. In the event the Debtor shall receive
any proceeds of such insurance, the Debtor shall immediately pay over such
proceeds to the Secured Party. The Debtor hereby authorizes the Secured Party,
at the Secured Party's option, to adjust, compromise and settle any losses under
any insurance afforded at any time during the existence of any Event of Default
or any other event or condition which with the lapse of time or the giving of
notice, or both, would constitute an Event of Default, and the Debtor does
hereby irrevocably constitute the Secured Party, and each of its nominees,
officers, agents, attorneys, and any other person whom the Secured Party may
designate, as the Debtor's attorneys-in-fact, with full power and authority to
effect such adjustment, compromise and/or settlement and to endorse any drafts
drawn by an insurer of the Collateral or any part thereof and to do everything
necessary to carry out such purposes and to receive and receipt for any unearned
premiums due under policies of such insurance. Unless the Secured Party elects
to adjust, compromise or settle losses as aforesaid, any adjustment, compromise
and/or settlement of any losses under any insurance shall be made by the Debtor
subject to final approval of the Secured Party (regardless of whether or not an
Event of Default shall have occurred) in the case of losses exceeding $100,000.
Net insurance proceeds received by the Secured Party under the provisions hereof
or under any policy of insurance covering the Collateral or any part thereof
shall be applied to the reduction of the Obligations (whether or not then due);
provided, however, that the Secured Party may in its sole discretion release any
or all such insurance proceeds to the Debtor. All insurance proceeds shall be
subject to the lien and security interest of the Secured Party hereunder.
UNLESS THE DEBTOR PROVIDES THE SECURED PARTY WITH EVIDENCE OF THE
INSURANCE COVERAGE REQUIRED BY THIS AGREEMENT, THE SECURED PARTY MAY PURCHASE
INSURANCE AT THE DEBTOR'S EXPENSE TO PROTECT THE SECURED PARTY'S INTERESTS IN
THE COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT THE DEBTOR'S INTERESTS
IN THE COLLATERAL. THE COVERAGE PURCHASED BY THE SECURED PARTY MAY NOT PAY ANY
CLAIMS THAT THE DEBTOR MAKES OR ANY CLAIM THAT IS MADE AGAINST THE DEBTOR IN
CONNECTION WITH THE COLLATERAL. THE DEBTOR MAY LATER CANCEL ANY SUCH INSURANCE
PURCHASED BY THE SECURED PARTY, BUT ONLY AFTER PROVIDING THE SECURED PARTY WITH
EVIDENCE THAT THE DEBTOR HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT.
IF THE SECURED PARTY PURCHASES INSURANCE FOR THE COLLATERAL, THE DEBTOR WILL BE
RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING INTEREST
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AND ANY OTHER CHARGES THAT THE SECURED PARTY MAY IMPOSE IN CONNECTION WITH THE
PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR
EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE MAY BE ADDED TO THE
OBLIGATIONS SECURED HEREBY. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST
OF INSURANCE THE DEBTOR MAY BE ABLE TO OBTAIN ON ITS OWN.
(i) The Debtor shall at all times allow the Secured Party and its
representatives free access to and right of inspection of the Collateral.
(j) If any Collateral is in the possession or control of any of the
Debtor's agents or processors and the Secured Party so requests, the Debtor
agrees to notify such agents or processors in writing of the Secured Party's
security interest therein and instruct them to hold all such Collateral for the
Secured Party's account and subject to the Secured Party's instructions. The
Debtor shall, upon the request of the Secured Party, authorize and instruct all
bailees and other parties, if any, at any time processing, labeling, packaging,
holding, storing, shipping or transferring all or any part of the Collateral to
permit the Secured Party and its representatives to examine and inspect any of
the Collateral then in such party's possession and to verify from such party's
own books and records any information concerning the Collateral or any part
thereof which the Secured Party or its representatives may seek to verify. As to
any premises not owned by the Debtor wherein any of the Collateral is located,
the Debtor shall, unless the Secured Party requests otherwise, cause each party
having any right, title or interest in, or lien on, any of such premises to
enter into an agreement (any such agreement to contain a legal description of
such premises) whereby such party disclaims any right, title and interest in,
and lien on, the Collateral and allows the removal of such Collateral by the
Secured Party and is otherwise in form and substance acceptable to the Secured
Party; provided, however, that no such agreement need be obtained with respect
to any one location wherein the value of the Collateral as to which such
agreement has not been obtained aggregates less than $100,000 at any one time.
(k) The Debtor agrees from time to time to deliver to the Secured Party
such evidence of the existence, identity and location of the Collateral and of
its availability as collateral security pursuant hereto (including, without
limitation, schedules describing all Receivables created or acquired by the
Debtor, copies of customer invoices or the equivalent and original shipping or
delivery receipts for all merchandise and other goods sold or leased or services
rendered, together with the Debtor's warranty of the genuineness thereof, and
reports stating the book value of Inventory and Equipment by major category and
location), in each case as the Secured Party may reasonably request. The Secured
Party shall have the right to verify all or any part of the Collateral in any
manner, and through any medium, which the Secured Party considers appropriate
(including, without limitation, the verification of Collateral by use of a
fictitious name), and the Debtor agrees to furnish all assistance and
information, and perform any acts, which the Secured Party may require in
connection therewith. The Debtor shall promptly notify
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the Secured Party of any Collateral which the Debtor has determined to have been
rendered obsolete, stating the prior book value of such Collateral, its type and
location.
(l) The Debtor shall comply in all material respects with the terms and
conditions of all leases, easements, right-of-way agreements and other similar
agreements binding upon the Debtor or affecting the Collateral or any part
thereof, and all orders, ordinances, laws and statutes of any city, state or
other governmental entity, department or agency having jurisdiction with respect
to the premises wherein such Collateral is located or the conduct of business
thereon.
(m) The Debtor agrees to execute and deliver to the Secured Party such
further agreements, assignments, instruments and documents and to do all such
other things as the Secured Party may deem necessary or appropriate to assure
the Secured Party its lien and security interest hereunder, including such
financing statements, and amendments thereof or supplements thereto, and such
other instruments and documents as the Secured Party may from time to time
require in order to comply with the UCC. The Debtor hereby agrees that a carbon,
photographic or other reproduction of this Agreement or any such financing
statement is sufficient for filing as a financing statement by the Secured Party
without notice thereof to the Debtor wherever the Secured Party in its sole
discretion desires to file the same. In the event for any reason the law of any
jurisdiction other than Illinois becomes or is applicable to the Collateral or
any part thereof, or to any of the Obligations, the Debtor agrees to execute and
deliver all such instruments and documents and to do all such other things as
the Secured Party in its sole discretion deems necessary or appropriate to
preserve, protect and enforce the lien and security interest of the Secured
Party under the law of such other jurisdiction. The Debtor agrees to mark its
books and records to reflect the lien and security interest of the Secured Party
in the Collateral.
(n) On failure of the Debtor to perform any of the covenants and
agreements herein contained, the Secured Party may, at its option, perform the
same and in so doing may expend such sums as the Secured Party may deem
advisable in the performance thereof, including, without limitation, the payment
of any insurance premiums, the payment of any taxes, liens and encumbrances,
expenditures made in defending against any adverse claims, and all other
expenditures which the Secured Party may be compelled to make by operation of
law or which the Secured Party may make by agreement or otherwise for the
protection of the security hereof. All such sums and amounts so expended shall
be repayable by the Debtor immediately without notice or demand, shall
constitute additional Obligations secured hereunder and shall bear interest from
the date said amounts are expended at the rate per annum (computed on the basis
of a 360-day year for the actual number of days elapsed) determined by adding 2%
to the rate per annum from time to time announced by Harris Trust and Savings
Bank as its prime commercial rate with any change in such rate per annum as so
determined by reason of a change in such prime commercial rate to be effective
on the date of such change in said prime commercial rate
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(such rate per annum as so determined being hereinafter referred to as the
"Default Rate"). No such performance of any covenant or agreement by the Secured
Party on behalf of the Debtor, and no such advancement or expenditure therefor,
shall relieve the Debtor of any default under the terms of this Agreement or in
any way obligate the Secured Party to take any further or future action with
respect thereto. The Secured Party, in making any payment hereby authorized, may
do so according to any bill, statement or estimate procured from the appropriate
public office or holder of the claim to be discharged without inquiry into the
accuracy of such bill, statement or estimate or into the validity of any tax
assessment, sale, forfeiture, tax lien or title or claim. The Secured Party, in
performing any act hereunder, shall be the sole judge of whether the Debtor is
required to perform same under the terms of this Agreement. The Secured Party is
hereby authorized to charge any depository or other account of the Debtor
maintained with the Secured Party for the amount of such sums and amounts so
expended.
4. Special Provisions Re: Receivables.
(a) As of the time any Receivable becomes subject to the security
interest provided for hereby, and at all times thereafter, the Debtor shall be
deemed to have warranted as to each and all of such Receivables that all
warranties of the Debtor set forth in this Agreement are true and correct with
respect to each such Receivable; that each Receivable and all papers and
documents relating thereto are genuine and in all respects what they purport to
be; that each Receivable is valid and subsisting and, if such Receivable is an
account, arises out of a bona fide sale of goods sold and delivered by the
Debtor to, or in the process of being delivered to, or out of and for services
theretofore actually rendered by the Debtor to, the account debtor named
therein; that no such Receivable is evidenced by any instrument or chattel paper
unless such instrument or chattel paper has theretofore been endorsed by the
Debtor and delivered to the Secured Party (except to the extent the Secured
Party specifically requests the Debtor not to do so with respect to any such
instrument or chattel paper); that no surety bond was required or given in
connection with such Receivable or the contracts or purchase orders out of which
the same arose; that the amount of the Receivable represented as owing is the
correct amount actually and unconditionally owing, except for normal cash
discounts on normal trade terms in the ordinary course of business if such
Receivable is an account; and that the amount of such Receivable represented as
owing is not disputed and is not subject to any set-offs, credits, deductions or
countercharges other than those arising in the ordinary course of the Debtor's
business which are disclosed to the Secured Party in writing promptly upon the
Debtor becoming aware thereof. Without limiting the foregoing, if any Receivable
arises out of a contract with the United States of America, or any state or
political subdivision thereof, or any department, agency or instrumentality of
any of the foregoing, the Debtor agrees to notify the Secured Party and execute
whatever instruments and documents are required by the Secured Party in order
that such Receivable shall be assigned to the Secured Party and that proper
notice of such assignment shall
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be given under the federal Assignment of Claims Act (or any successor statute)
or any similar state or local statute, as the case may be.
(b) Unless and until an Event of Default occurs, any merchandise or
other goods which are returned by a customer or account debtor or otherwise
recovered may be resold by the Debtor in the ordinary course of its business as
presently conducted in accordance with Section 6(b) hereof; and, during the
existence of any Event of Default, such merchandise and other goods shall be set
aside at the request of the Secured Party and held by the Debtor as trustee for
the Secured Party and shall remain part of the Secured Party's Collateral.
Unless and until an Event of Default occurs, the Debtor may settle and adjust
disputes and claims with its customers and account debtors, handle returns and
recoveries and grant discounts, credits and allowances in the ordinary course of
its business as presently conducted for amounts and on terms which the Debtor in
good faith considers advisable; and, during the existence of any Event of
Default, unless the Secured Party requests otherwise, the Debtor shall notify
the Secured Party promptly of all returns and recoveries and, on the Secured
Party's request, deliver any such merchandise or other goods to the Secured
Party. During the existence of any Event of Default, unless the Secured Party
requests otherwise, the Debtor shall also notify the Secured Party promptly of
all disputes and claims and settle or adjust them at no expense to the Secured
Party, but no discount, credit or allowance other than on normal trade terms in
the ordinary course of business as presently conducted shall be granted to any
customer or account debtor and no returns of merchandise or other goods shall be
accepted by the Debtor without the Secured Party's consent. The Secured Party
may, at all times during the existence of any Event of Default, settle or adjust
disputes and claims directly with customers or account debtors for amounts and
upon terms which the Secured Party considers advisable.
5. Collection of Receivables.
(a) Except as otherwise provided in this Agreement, the Debtor shall
make collection of all Receivables and may use the same to carry on its business
in accordance with sound business practice and otherwise subject to the terms
hereof.
(b) Upon the occurrence of any Event of Default or of any event or
condition which with the lapse of time or the giving of notice, or both, would
constitute an Event of Default, whether or not the Secured Party has exercised
any or all of its rights under other provisions of this Section 5, in the event
the Secured Party requests the Debtor to do so:
(i) all instruments and chattel paper at any time constituting
part of the Receivables or any other Collateral (including any
postdated checks) shall, upon receipt by the Debtor, be immediately
endorsed to and deposited with the Secured Party; and/or
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(ii) the Debtor shall instruct all customers and account
debtors to remit all payments in respect of Receivables or any other
Collateral to a lockbox or lockboxes under the sole custody and control
of the Secured Party and which are maintained at post office(s) in
Chicago, Illinois selected by the Secured Party.
(c) Upon the occurrence of any Event of Default or of any event or
condition which with the lapse of time or the giving of notice, or both, would
constitute an Event of Default, whether or not the Secured Party has exercised
any or all of its rights under other provisions of this Section 5, the Secured
Party or its designee may notify the Debtor's customers and account debtors at
any time that Receivables or any other Collateral have been assigned to the
Secured Party or of the Secured Party's security interest therein, and either in
its own name, or the Debtor's name, or both, demand, collect (including, without
limitation, through a lockbox analogous to that described in Section 5(b)(ii)
hereof), receive, receipt for, sue for, compound and give acquittance for any or
all amounts due or to become due on Receivables or any other Collateral, and in
the Secured Party's discretion file any claim or take any other action or
proceeding which the Secured Party may deem necessary or appropriate to protect
or realize upon the security interest of the Secured Party in the Receivables or
any other Collateral.
(d) Any proceeds of Receivables or other Collateral transmitted to or
otherwise received by the Secured Party pursuant to any of the provisions of
Sections 5(b) or 5(c) hereof may be handled and administered by the Secured
Party in and through a remittance account at the Secured Party, and the Debtor
acknowledges that the maintenance of such remittance account by the Secured
Party is solely for the Secured Party's convenience and that the Debtor does not
have any right, title or interest in such remittance account or any amounts at
any time standing to the credit thereof. The Secured Party may, after the
occurrence and during the continuation of any Event of Default or of any event
or condition which with the lapse of time or the giving of notice, or both,
would constitute an Event of Default, apply all or any part of any proceeds of
Receivables or other Collateral received by it from any source to the payment of
the Obligations (whether or not then due and payable), such applications to be
made in such amounts, in such manner and order and at such intervals as the
Secured Party may from time to time in its discretion determine, but not less
often than once each week. The Secured Party need not apply or give credit for
any item included in proceeds of Receivables or other Collateral until the
Secured Party has received final payment therefor at its office in cash or final
solvent credits current in Chicago, Illinois, acceptable to the Secured Party as
such. However, if the Secured Party does give credit for any item prior to
receiving final payment therefor and the Secured Party fails to receive such
final payment or an item is charged back to the Secured Party for any reason,
the Secured Party may at its election in either instance charge the amount of
such item back against the remittance account or any depository account of the
Debtor maintained with the Secured Party, together with interest thereon at the
Default Rate. Concurrently with each transmission of any proceeds of Receivables
or other Collateral to the remittance account, the
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Debtor shall furnish the Secured Party with a report in such form as the Secured
Party shall reasonably require identifying the particular Receivable or other
Collateral from which the same arises or relates. The Debtor hereby indemnifies
the Secured Party from and against all liabilities, damages, losses, actions,
claims, judgments, costs, expenses, charges and reasonable attorneys' fees
suffered or incurred by the Secured Party because of the maintenance of the
foregoing arrangements; provided, however, that the Debtor shall not be required
to indemnify the Secured Party for any of the foregoing to the extent they arise
solely from the gross negligence or willful misconduct of the Secured Party. The
Secured Party shall have no liability or responsibility to the Debtor for
accepting any check, draft or other order for payment of money bearing the
legend "payment in full" or words of similar import or any other restrictive
legend or endorsement whatsoever or be responsible for determining the
correctness of any remittance.
6. Special Provisions Re: Inventory and Equipment.
(a) The Debtor shall at its own cost and expense maintain, keep and
preserve the Inventory in good and merchantable condition and keep and preserve
the Equipment in good repair, working order and condition, ordinary wear and
tear excepted, and, without limiting the foregoing, make all necessary and
proper repairs, replacements and additions to the Equipment so that the
efficiency thereof shall be fully preserved and maintained.
(b) The Debtor may, until an Event of Default has occurred and is
continuing and thereafter until otherwise notified by the Secured Party, use,
consume and sell the Inventory in the ordinary course of its business, but a
sale in the ordinary course of business shall not under any circumstance include
any transfer or sale in satisfaction, partial or complete, of a debt owing by
the Debtor.
(c) The Debtor may, until an Event of Default has occurred and is
continuing and thereafter until otherwise notified by the Secured Party, sell
obsolete, worn out or unusable Equipment which is concurrently replaced with
similar Equipment at least equal in quality and condition to that sold and owned
by the Debtor free of any lien, charge or encumbrance other than the security
interest granted hereby.
(d) As of the time any Inventory or Equipment becomes subject to the
security interest provided for hereby and at all times thereafter, the Debtor
shall be deemed to have warranted as to any and all of such Inventory and
Equipment that all warranties of the Debtor set forth in this Agreement are true
and correct with respect to such Inventory and Equipment; that all of such
Inventory and Equipment is located at a location set forth pursuant to Section
3(b) hereof; and that, in the case of Inventory, such Inventory is new and
unused and in good and
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merchantable condition. The Debtor warrants and agrees that no Inventory is or
will be consigned to any other person without the Secured Party's prior written
consent.
(e) Upon the Secured Party's request, the Debtor shall at its own cost
and expense cause the lien of the Secured Party in and to any portion of the
Collateral subject to a certificate of title law to be duly noted on such
certificate of title or to be otherwise filed in such manner as is prescribed by
law in order to perfect such lien and shall cause all such certificates of title
and evidences of lien to be deposited with the Secured Party.
(f) Except for Equipment from time to time located on the real estate
described on Schedule B attached hereto and as otherwise disclosed to the
Secured Party in writing, none of the Equipment is or will be attached to real
estate in such a manner that the same may become a fixture.
(g) If any of the Inventory is at any time evidenced by a document of
title, such document shall be promptly delivered by the Debtor to the Secured
Party except to the extent the Secured Party specifically requests the Debtor
not to do so with respect to any such document.
Section 7. Special Provisions Re: Investment Property.
(a) Unless and until an Event of Default has occurred and is continuing
and thereafter until notified to the contrary by the Secured Party pursuant to
Section 9(d) hereof:
(i) The Debtor shall be entitled to exercise all voting and/or
consensual powers pertaining to the Investment Property or any part
thereof, for all purposes not inconsistent with the terms of this
Agreement or any other document evidencing or otherwise relating to any
Obligations; and
(ii) The Debtor shall be entitled to receive and retain all
cash dividends paid upon or in respect of the Investment Property.
(b) At the Secured Party's request, certificates for all securities now
or at any time constituting Investment Property shall be promptly delivered by
the Debtor to the Secured Party duly endorsed in blank for transfer or
accompanied by an appropriate assignment or assignments or an appropriate
undated stock power or powers, in every case sufficient to transfer title
thereto including, without limitation, all stock received in respect of a stock
dividend or resulting from a split-up, revision or reclassification of the
Investment Property or any part thereof or received in addition to, in
substitution of or in exchange for the Investment Property or any part thereof
as a result of a merger, consolidation or otherwise. With respect to any
Investment Property held by a securities intermediary, commodity intermediary,
or other financial intermediary of any kind, at
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the Secured Party's request, the Debtor shall execute and deliver, and shall
cause any such intermediary to execute and deliver, an agreement among the
Debtor, the Secured Party, and such intermediary in form and substance
reasonably satisfactory to the Secured Party which provides, among other things,
for the intermediary's agreement that it shall comply with entitlement orders,
and apply any value distributed on account of any Investment Property maintained
in an account with such intermediary, as directed by the Secured Party without
further consent by the Debtor at any time after the occurrence and during the
continuation of any Event of Default. The Secured Party may at any time, after
the occurrence of an Event of Default or an event or condition which with the
lapse of time or the giving of notice, or both, would constitute an Event of
Default, cause to be transferred into its name or the name of its nominee or
nominees all or any part of the Investment Property hereunder.
(c) Unless and until an Event of Default has occurred and is
continuing, the Debtor may sell or otherwise dispose of any Investment Property,
provided that the Debtor shall not sell or otherwise dispose of any capital
stock of any direct or indirect subsidiary without the prior written consent of
the Secured Party. After the occurrence and during the continuation of any Event
of Default, the Debtor shall not sell all or any part of the Investment Property
without the prior written consent of the Secured Party.
(d) The Debtor represents that on the date of this Agreement, none of
the Investment Property consists of margin stock (as such term is defined in
Regulation U of the Board of Governors of the Federal Reserve System) except to
the extent the Debtor has delivered to the Secured Party a duly executed and
completed Form U-1 with respect to such stock. If at any time the Investment
Property or any part thereof consists of margin stock, the Debtor shall promptly
so notify the Secured Party and deliver to the Secured Party a duly executed and
completed Form U-1 and such other instruments and documents reasonably requested
by the Secured Party in form and substance satisfactory to the Secured Party.
(e) Notwithstanding anything to the contrary contained herein, in the
event any Investment Property is subject to the terms of a separate security
agreement in favor of the Secured Party, the terms of such separate security
agreement shall govern and control unless otherwise agreed to in writing by the
Secured Party.
Section 8. Power of Attorney. In addition to any other powers of
attorney contained herein, the Debtor hereby appoints the Secured Party, its
nominee, and any other person whom the Secured Party may designate, as the
Debtor's attorney-in-fact, with full power to sign the Debtor's name on
verifications of accounts and other Collateral; to send requests for
verification of Collateral to the Debtor's customers, account debtors and other
obligors; to endorse the Debtor's name on any checks, notes, acceptances, money
orders, drafts and any other forms of payment or security that may come into the
Secured Party's possession or on any assignments, stock powers, or other
instruments of transfer relating to the Collateral or any part
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thereof; to sign the Debtor's name on any invoice or bill of lading relating to
any Collateral, on claims to enforce collection of any Collateral, on notices to
and drafts against customers and account debtors and other obligors, on
schedules and assignments of Collateral, on notices of assignment and on public
records; to notify the post office authorities to change the address for
delivery of the Debtor's mail to an address designated by the Secured Party; to
receive, open and dispose of all mail addressed to the Debtor; and to do all
things necessary to carry out this Agreement. The Debtor hereby ratifies and
approves all acts of any such attorney and agrees that neither the Secured Party
nor any such attorney will be liable for any acts or omissions nor for any error
of judgment or mistake of fact or law other than such person's gross negligence
or willful misconduct. The Secured Party may file one or more financing
statements disclosing its security interest in any or all of the Collateral
without the Debtor's signature appearing thereon. The Debtor also hereby grants
the Secured Party a power of attorney to execute any such financing statements,
or amendments and supplements to financing statements, on behalf of the Debtor
without notice thereof to the Debtor. The foregoing powers of attorney, being
coupled with an interest, are irrevocable until the Obligations have been fully
paid and satisfied and all agreements of the Secured Party to extend credit to
or for the account of the Borrower have expired or otherwise have been
terminated; provided, however, that the Secured Party agrees, as a personal
covenant to the Debtor, not to exercise the powers of attorney set forth in this
Section unless an Event of Default exists.
9. Defaults and Remedies.
(a) The occurrence of any one or more of the following events shall
constitute an "Event of Default" hereunder:
(i) default in the payment when due (whether by demand, lapse
of time, acceleration or otherwise) of the Obligations or any part
thereof; or
(ii) default in the observance or performance of any covenant
set forth in Sections 5(b), 5(c) or 7(b) hereof or of any provision
hereof requiring the maintenance of insurance on the Collateral or
dealing with the use or remittance of proceeds of Collateral; or
(iii) the occurrence of any event or the existence of any
condition which is specified as an "Event of Default" under the Credit
Agreement.
(b) Upon the occurrence and during the continuation of any Event of
Default, the Secured Party shall have, in addition to all other rights provided
herein or by law, the rights and remedies of a secured party under the UCC
(regardless of whether the UCC is the law of the jurisdiction where the rights
or remedies are asserted and regardless of whether the UCC applies
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to the affected Collateral), and further the Secured Party may, without demand
and without advertisement, notice, hearing or process of law, all of which the
Debtor hereby waives, at any time or times, sell and deliver all or any part of
the Collateral (and any other property of the Debtor attached thereto or found
therein) held by or for it at public or private sale, for cash, upon credit or
otherwise, at such prices and upon such terms as the Secured Party deems
advisable, in its sole discretion. In addition to all other sums due the Secured
Party hereunder, the Debtor shall pay the Secured Party all costs and expenses
incurred by the Secured Party, including reasonable attorneys' fees and court
costs, in obtaining, liquidating or enforcing payment of Collateral or the
Obligations or in the prosecution or defense of any action or proceeding by or
against the Secured Party or the Debtor concerning any matter arising out of or
connected with this Agreement or the Collateral or the Obligations, including,
without limitation, any of the foregoing arising in, arising under or related to
a case under the United States Bankruptcy Code (or any successor statute). Any
requirement of reasonable notice shall be met if such notice is personally
served on or mailed, postage prepaid, to the Debtor in accordance with Section
12(b) hereof at least 10 days before the time of sale or other event giving rise
to the requirement of such notice; provided however, no notification need be
given to the Debtor if the Debtor has signed, after an Event of Default has
occurred, a statement renouncing any right to notification of sale or other
intended disposition. The Secured Party shall not be obligated to make any sale
or other disposition of the Collateral regardless of notice having been given.
The Secured Party may be the purchaser at any such sale. The Debtor hereby
waives all of its rights of redemption from any such sale. The Secured Party may
postpone or cause the postponement of the sale of all or any portion of the
Collateral by announcement at the time and place of such sale, and such sale
may, without further notice, be made at the time and place to which the sale was
postponed or the Secured Party may further postpone such sale by announcement
made at such time and place.
(c) Without in any way limiting the foregoing, upon the occurrence and
during the continuation of any Event of Default, the Secured Party shall have
the right, in addition to all other rights provided herein or by law, to take
physical possession of any and all of the Collateral and anything found therein,
the right for that purpose to enter without legal process any premises where the
Collateral may be found (provided such entry be done lawfully), and the right to
maintain such possession on the Debtor's premises (the Debtor hereby agreeing to
lease such premises without cost or expense to the Secured Party or its designee
if the Secured Party so requests) or to remove the Collateral or any part
thereof to such other places as the Secured Party may desire. Upon the
occurrence and during the continuation of any Event of Default, the Secured
Party shall have the right to exercise any and all rights with respect to
deposit accounts of the Debtor maintained with the Secured Party, including,
without limitation, the right to collect, withdraw and receive all amounts due
or to become due or payable under each such deposit account. Upon the occurrence
and during the continuation of any Event of Default, the Debtor shall, upon the
Secured Party's demand, assemble the Collateral and make it available to
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the Secured Party at a place designated by the Secured Party. If the Secured
Party exercises its right to take possession of the Collateral, the Debtor shall
also at its expense perform any and all other steps requested by the Secured
Party to preserve and protect the security interest hereby granted in the
Collateral, such as placing and maintaining signs indicating the security
interest of the Secured Party, appointing overseers for the Collateral and
maintaining Collateral records.
(d) Without in any way limiting the foregoing, upon the occurrence and
during the continuation of any Event of Default, all rights of the Debtor to
exercise the voting and/or consensual powers which it is entitled to exercise
pursuant to Section 7(a)(i) hereof and/or to receive and retain the
distributions which it is entitled to receive and retain pursuant to Section
7(a)(ii) hereof, shall, at the option of the Secured Party, cease and thereupon
become vested in the Secured Party, which, in addition to all other rights
provided herein or by law, shall then be entitled solely and exclusively to
exercise all voting and other consensual powers pertaining to the Investment
Property and/or to receive and retain the distributions which the Debtor would
otherwise have been authorized to retain pursuant to Section 7(a)(ii) hereof and
shall then be entitled solely and exclusively to exercise any and all rights of
conversion, exchange or subscription or any other rights, privileges or options
pertaining to any Investment Property as if the Secured Party were the absolute
owner thereof. Without limiting the foregoing, the Secured Party shall have the
right to exchange, at its discretion, any and all of the Investment Property
upon the merger, consolidation, reorganization, recapitalization or other
readjustment of the respective issuer thereof or upon the exercise by or on
behalf of any such issuer or the Secured Party of any right, privilege or option
pertaining to any Investment Property and, in connection therewith, to deposit
and deliver any and all of the Investment Property with any committee,
depositary, transfer agent, registrar or other designated agency upon such terms
and conditions as the Secured Party may determine. In the event the Secured
Party in good faith believes any of the Collateral constitutes restricted
securities within the meaning of any applicable securities laws, any disposition
thereof in compliance with such laws shall not render the disposition
commercially unreasonable.
(e) Without in any way limiting the foregoing, the Debtor hereby grants
to the Secured Party a royalty-free irrevocable license and right to use all of
the Debtor's patents, patent applications, patent licenses, trademarks,
trademark registrations, trademark licenses, trade names, trade styles,
copyrights, copyright applications, copyright licenses, and similar intangibles
in connection with any foreclosure or other realization by the Secured Party on
all or any part of the Collateral. The license and right granted the Secured
Party hereby shall be without any royalty or fee or charge whatsoever.
(f) The powers conferred upon the Secured Party hereunder are solely to
protect its interest in the Collateral and shall not impose on it any duty to
exercise such powers. The Secured Party shall be deemed to have exercised
reasonable care in the custody and preservation
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of Investment Property in its possession if such Collateral is accorded
treatment substantially equivalent to that which the Secured Party accords its
own property, consisting of similar type assets, it being understood, however,
that the Secured Party shall have no responsibility for ascertaining or taking
any action with respect to calls, conversions, exchanges, maturities, tenders or
other matters relating to any such Collateral, whether or not the Secured Party
has or is deemed to have knowledge of such matters. This Agreement constitutes
an assignment of rights only and not an assignment of any duties or obligations
of the Debtor in any way related to the Collateral, and the Secured Party shall
have no duty or obligation to discharge any such duty or obligation. The Secured
Party shall have no responsibility for taking any necessary steps to preserve
rights against any parties with respect to any Collateral or initiating any
action to protect the Collateral against the possibility of a decline in market
value. Neither the Secured Party nor any party acting as attorney for the
Secured Party shall be liable for any acts or omissions or for any error of
judgment or mistake of fact or law other than their gross negligence or willful
misconduct.
(g) Failure by the Secured Party to exercise any right, remedy or
option under this Agreement or any other agreement between the Debtor and the
Secured Party or provided by law, or delay by the Secured Party in exercising
the same, shall not operate as a waiver; and no waiver by the Secured Party
shall be effective unless it is in writing and then only to the extent
specifically stated. The rights and remedies of the Secured Party under this
Agreement shall be cumulative and not exclusive of any other right or remedy
which the Secured Party may have. For purposes of this Agreement, an Event of
Default shall be construed as continuing after its occurrence until the same is
waived in writing by the Secured Party.
10. Application of Proceeds. The proceeds and avails of the Collateral
at any time received by the Secured Party after the occurrence and during the
continuation of any Event of Default shall, when received by the Secured Party
in cash or its equivalent, be applied by the Secured Party as follows:
(i) First, to the payment and satisfaction of all sums paid
and costs and expenses incurred by the Secured Party hereunder or
otherwise in connection herewith, including such monies paid or
incurred in connection with protecting, preserving or realizing upon
the Collateral or enforcing any of the terms hereof, including
reasonable attorneys' fees and court costs, together with any interest
thereon (but without preference or priority of principal over interest
or of interest over principal), to the extent the Secured Party is not
reimbursed therefor by the Debtor; and
(ii) Second, to the payment and satisfaction of the remaining
Obligations, whether or not then due (in whatever order the Secured
Party elects), both for interest and principal.
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The Debtor shall remain liable to the Secured Party for any deficiency. Any
surplus remaining after the full payment and satisfaction of the foregoing shall
be returned to the Debtor or to whomsoever the Secured Party reasonably
determines is lawfully entitled thereto.
11. Continuing Agreement. This Agreement shall be a continuing
agreement in every respect and shall remain in full force and effect until all
of the Obligations, both for principal and interest, have been fully paid and
satisfied and all agreements of the Secured Party to extend credit to or for the
account of the Borrower have expired or otherwise have been terminated. Upon
such termination of this Agreement, the Secured Party shall, upon the request
and at the expense of the Debtor, forthwith release its security interest
hereunder.
12. Miscellaneous.
(a) This Agreement cannot be changed or terminated orally. All of the
rights, privileges, remedies and options given to the Secured Party hereunder
shall inure to the benefit of its successors and assigns, and all the terms,
conditions, covenants, agreements, representations and warranties of and in this
Agreement shall bind the Debtor and its legal representatives, successors and
assigns, provided that the Debtor may not assign its rights or delegate its
duties hereunder without the Secured Party's prior written consent.
(b) Except as otherwise specified herein, all notices hereunder shall
be in writing (including, without limitation, notice by telecopy) and shall be
given to the relevant party at its address or telecopier number set forth below
(or, if no such address is set forth below, at the address of the Debtor as
shown on the records of the Secured Party), or such other address or telecopier
number as such party may hereafter specify by notice to the other given by
United States certified or registered mail, by telecopy or by other
telecommunication device capable of creating a written record of such notice and
its receipt. Notices hereunder shall be addressed:
to the Debtor at: to the Secured Party at:
HealthStar, Inc. Harris Trust and Savings Bank
9495 East San Salvador Drive 111 West Monroe Street
Scottsdale, Arizona 85258 Chicago, Illinois 60690
Attention: Stephen Carder, Attention: Christopher Randall,
Chief Financial Officer Tax-Exempt Institutions Division
Telephone: (602) 614-4285 Telephone: (312) 461-5068
Telecopy: (602) 451-9087 Telecopy: (312) 461-7365
with a copy to:
HealthStar, Inc.
8745 West Higgins Road
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Suite 300
Chicago, Illinois 60631
Attention: Controller
Each such notice, request or other communication shall be effective (i) if given
by telecopier, when such telecopy is transmitted to the telecopier number
specified in this Section and a confirmation of such telecopy has been received
by the sender, (ii) if given by mail, five (5) days after such communication is
deposited in the mail, certified or registered with return receipt requested,
addressed as aforesaid or (iii) if given by any other means, when delivered at
the addresses specified in this Section.
(c) The lien and security herein created and provided for stand as
direct and primary security for the Obligations. No application of any sums
received by the Bank in respect of the Collateral or any disposition thereof to
the reduction of the Obligations or any portion thereof shall in any manner
entitle the Debtor to any right, title or interest in or to the Obligations or
any collateral security therefor, whether by subrogation or otherwise, unless
and until all Obligations have been fully paid and satisfied and any commitment
of the Bank to extend credit to the Borrower shall have expired. The Debtor
acknowledges and agrees that the lien and security hereby created and provided
for are absolute and unconditional and shall not in any manner be affected or
impaired by any acts or omissions whatsoever of the Bank or any other holder of
any of the Obligations, and without limiting the generality of the foregoing,
the lien and security hereof shall not be impaired by any acceptance by the Bank
or any holder of any of the Obligations of any other security for or guarantors
upon any of the Obligations or by any failure, neglect or omission on the part
of the Bank or any other holder of any of the Obligations to realize upon or
protect any of the Obligations or any collateral security therefor. The lien and
security hereof shall not in any manner be impaired or affected by (and the
Bank, without notice to anyone, is hereby authorized to make from time to time)
any sale, pledge, surrender, compromise, settlement, release, renewal,
extension, indulgence, alteration, substitution, exchange, change in,
modification or disposition of any of the Obligations, or of any collateral
security therefor, or of any guaranty thereof or of any obligor thereon. The
Bank may at its discretion at any time grant credit to the Borrower without
notice to the Debtor in such amounts and on such terms as the Bank may elect
(all of such to constitute additional Obligations) without in any manner
impairing the lien and security hereby created and provided for. In order to
foreclose or otherwise realize hereon and to exercise the rights granted the
Bank hereunder and under applicable law, there shall be no obligation on the
part of the Bank or any other holder of any of the Obligations at any time to
first resort for payment to the Borrower or to any guaranty of the Obligations
or any portion thereof or to resort to any other collateral security, property,
liens or any other rights or remedies whatsoever, and the Bank shall have the
right to enforce this instrument irrespective of whether or not other
proceedings or steps are pending seeking resort to or realization upon or from
any of the foregoing.
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<PAGE>
(d) In the event and to the extent that any provision hereof shall be
deemed to be invalid or unenforceable by reason of the operation of any law or
by reason of the interpretation placed thereon by any court, this Agreement
shall to such extent be construed as not containing such provision, but only as
to such locations where such law or interpretation is operative, and the
invalidity or unenforceability of such provision shall not affect the validity
of any remaining provisions hereof, and any and all other provisions hereof
which are otherwise lawful and valid shall remain in full force and effect.
(e) This Agreement shall be deemed to have been made in the State of
Illinois and shall be governed by, and construed in accordance with, the laws of
the State of Illinois. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning of any
provision hereof.
(f) The Debtor acknowledges that this Agreement is and shall be
effective upon its execution and delivery by the Debtor to the Secured Party,
and it shall not be necessary for the Secured Party to execute this Agreement or
any other acceptance hereof or otherwise to signify or express its acceptance
hereof.
(g) The Debtor hereby submits to the non-exclusive jurisdiction of the
United States District Court for the Northern District of Illinois and of any
Illinois state court sitting in the City of Chicago for purposes of all legal
proceedings arising out of or relating to this Agreement or the transactions
contemplated hereby. The Debtor irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such proceeding brought in such a court and any claim that
any such proceeding brought in such a court has been brought in an inconvenient
form. THE DEBTOR AND THE SECURED PARTY EACH HEREBY IRREVOCABLY WAIVES ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
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<PAGE>
IN WITNESS WHEREOF, the Debtor has caused this Agreement to be duly
executed and delivered as of this 15th day of December, 1997.
HEALTHSTAR, INC.
By /s/ Stephen J Carder
Its Executive Vice President
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EXHIBIT 10.35
SECURITY AGREEMENT
This Security Agreement (the "Agreement") is dated as of December 15,
1997, between NATIONAL HEALTH BENEFIT & CASUALTY CORPORATION, a Nevada
corporation (the "Debtor"), with its mailing address as set forth in Section
12(b) hereof, and HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation
(the "Secured Party"), with its mailing address as set forth in Section 12(b)
hereof.
PRELIMINARY STATEMENT
A. The Champion Financial Corporation, a Utah corporation (the
"Borrower"), has requested that the Secured Party extend credit or otherwise
make financial accommodations available to or for the account of the Borrower.
B. As a condition to extending credit or otherwise making financial
accommodations available to or for the account of the Borrower, the Secured
Party requires, among other things, that the Debtor guarantee all of the
indebtedness, obligations, and liabilities of the Borrower to the Bank and grant
the Secured Party a security interest in the Debtor's personal property
described herein subject to the terms and conditions hereof.
C. The Borrower owns, directly or indirectly, all or substantially all
of the equity interests in the Debtor and the Borrower provides the Debtor with
financial, management, administrative, and technical support which enables the
Debtor to conduct its business in an orderly and efficient manner in the
ordinary course.
D. The Debtor will benefit, directly or indirectly, from credit and
other financial accommodations extended by the Bank to the Borrower.
NOW, THEREFORE, in consideration of the benefits accruing to the
Debtor, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. Grant of Security Interest. The Debtor hereby grants to the
Secured Party a lien on and security interest in, and acknowledges and agrees
that the Secured Party has and
<PAGE>
shall continue to have a continuing lien on and security interest in, any and
all right, title and interest of the Debtor, whether now owned or existing or
hereafter created, acquired or arising, in and to the following:
(a) Receivables. All Receivables, whether now owned or
existing or hereafter created, acquired or arising, and however
evidenced or acquired, or in which the Debtor now has or hereafter
acquires any rights (the term "Receivables" means and includes all
accounts, accounts receivable, contract rights, instruments, notes,
drafts, acceptances, documents, chattel paper, and all other forms of
obligations owing to the Debtor, any right of the Debtor to payment for
goods sold or leased or for services rendered, whether or not earned by
performance, and all of the Debtor's rights to any merchandise and
other goods (including, without limitation, any returned or repossessed
goods and the right of stoppage in transit) which is represented by,
arises from or is related to any of the foregoing);
(b) General Intangibles. All General Intangibles, whether now
owned or existing or hereafter created, acquired or arising, or in
which the Debtor now has or hereafter acquires any rights (the term
"General Intangibles" means and includes all general intangibles,
patents, patent applications, patent licenses, trademarks, trademark
registrations, trademark licenses, trade styles, trade names,
copyrights, copyright registrations, copyright licenses and other
licenses and similar intangibles, all customer, client and supplier
lists (in whatever form maintained), all rights in leases and other
agreements relating to real or personal property, all causes of action
and tax refunds of every kind and nature, all privileges, franchises,
immunities, licenses, permits and similar intangibles, all rights to
receive payments in connection with the termination of any pension plan
or employee stock ownership plan or trust established for the benefit
of employees of the Debtor, and all other personal property (including
things in action) not otherwise covered by this Agreement);
(c) Inventory. All Inventory, whether now owned or existing or
hereafter created, acquired or arising, or in which the Debtor now has
or hereafter acquires any rights, and all documents of title at any
time evidencing or representing any part thereof (the term "Inventory"
means and includes all inventory and any other goods which are held for
sale or lease or are to be furnished under contracts of service or
consumed in the Debtor's business, all goods which are raw materials,
work-in-process or finished goods, all goods which are returned or
repossessed goods, and all materials and supplies of every kind and
nature used or usable in connection with the acquisition, manufacture,
processing, supply, servicing, storing, packing, shipping, advertising,
selling, leasing or furnishing of the foregoing, and any constituents
or ingredients thereof;
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<PAGE>
(d) Equipment. All Equipment, whether now owned or existing or
hereafter created, acquired or arising, or in which the Debtor now has
or hereafter acquires any rights (the term "Equipment" means and
includes all equipment and any other machinery, tools, fixtures, trade
fixtures, furniture, furnishings, office equipment, vehicles (including
vehicles subject to a certificate of title law), and all other goods
now or hereafter used or usable in connection with the Debtor's
business, together with all parts, accessories and attachments relating
to any of the foregoing);
(e) Investment Property. All Investment Property, whether now
owned or existing or hereafter created, acquired or arising, or in
which the Debtor now has or hereafter acquires any rights (the term
"Investment Property" means and includes all investment property and
any other securities (whether certificated or uncertificated), security
entitlements, securities accounts, commodity contracts and commodity
accounts, including all substitutions and additions thereto, all
dividends, distributions and sums distributable or payable from, upon,
or in respect of such property, and all rights and privileges incident
to such property);
(f) Deposits and Property in Possession. All deposit accounts
(whether general, special or otherwise) of the Debtor maintained with
the Secured Party and all sums now or hereafter on deposit therein or
payable thereon, and all other personal property and interests in
personal property of the Debtor of any kind or description now held by
the Secured Party or at any time hereafter transferred or delivered to,
or coming into the possession, custody or control of, the Secured
Party, or any agent or affiliate of the Secured Party, whether
expressly as collateral security or for any other purpose (whether for
safekeeping, custody, collection or otherwise), and all dividends and
distributions on or other rights in connection with any such property,
in each case whether now owned or existing or hereafter created,
acquired or arising;
(g) Records. All supporting evidence and documents relating to
any of the above-described property, whether now owned or existing or
hereafter created, acquired or arising, including, without limitation,
computer programs, disks, tapes and related electronic data processing
media, and all rights of the Debtor to retrieve the same from third
parties, written applications, credit information, account cards,
payment records, correspondence, delivery and installation
certificates, invoice copies, delivery receipts, notes and other
evidences of indebtedness, insurance certificates and the like,
together with all books of account, ledgers and cabinets in which the
same are reflected or maintained;
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<PAGE>
(h) Accessions and Additions. All accessions and additions to,
and substitutions and replacements of, any and all of the foregoing,
whether now owned or existing or hereafter created, acquired or
arising; and
(i) Proceeds and Products. All proceeds and products of the
foregoing and all insurance of the foregoing and proceeds thereof,
whether now owned or existing or hereafter created, acquired or
arising;
all of the foregoing being herein sometimes referred to as the "Collateral". All
terms which are used in this Agreement which are defined in the Uniform
Commercial Code of the State of Illinois ("UCC") shall have the same meanings
herein as such terms are defined in the UCC, unless this Agreement shall
otherwise specifically provide.
2. Obligations Hereby Secured. The lien and security interest herein
granted and provided for is made and given to secure, and shall secure, the
payment and performance of (a) any and all indebtedness, obligations and
liabilities of whatsoever kind and nature of the Debtor to the Secured Party
(whether arising before or after the filing of a petition in bankruptcy),
whether direct or indirect, absolute or contingent, due or to become due, and
whether now existing or hereafter arising and howsoever held, evidenced or
acquired, and whether several, joint or joint and several, (b) any and all
indebtedness, obligations and liabilities of whatsoever kind and nature of the
Borrower to the Secured Party (whether arising before or after the filing of a
petition in bankruptcy), whether direct or indirect, absolute or contingent, due
or to become due, and whether now existing or hereafter arising and howsoever
held, evidenced or acquired, and whether several, joint or joint and several and
(c) any and all expenses and charges, legal or otherwise, suffered or incurred
by the Secured Party in collecting or enforcing any of such indebtedness,
obligations or liabilities or in realizing on or protecting or preserving any
security therefor, including, without limitation, the lien and security interest
granted hereby (all of the foregoing being hereinafter referred to as the
"Obligations"). Notwithstanding anything herein to the contrary, the right of
recovery hereunder against the Debtor with respect to the Obligations shall be
limited to $1 less than the amount of the lowest claim hereunder against the
Collateral which would render this Agreement void or voidable under applicable
law.
3. Covenants, Agreements, Representations and Warranties. The Debtor
hereby covenants and agrees with, and represents and warrants to, the Secured
Party that:
(a) The Debtor is a corporation duly organized and validly existing in
good standing under the laws of the State of Nevada, is the sole and lawful
owner of the Collateral, and has full right, power and authority to enter into
this Agreement and to perform each and all of the matters and things herein
provided for. The execution and delivery of this Agreement, and the observance
and performance of each of the matters and things herein set forth, will not
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<PAGE>
(i) contravene or constitute a default under any provision of law or any
judgment, injunction, order or decree binding upon the Debtor or any provision
of the Debtor's articles of incorporation or by-laws or any covenant, indenture
or agreement of or affecting the Debtor or any of its property or (ii) result in
the creation or imposition of any lien or encumbrance on any property of the
Debtor except for the lien and security interest granted to the Secured Party
hereunder. The Debtor's Federal tax identification number is 86-0831112.
(b) The Debtor's chief executive office and principal place of business
is at, and the Debtor keeps and shall keep all of its books and records relating
to Receivables only at, 9495 East San Salvador Drive, Scottsdale, Arizona 85258;
and the Debtor has no other executive offices or places of business other than
those listed under Item 1 on Schedule A. The Collateral is and shall remain in
the Debtor's possession or control at the locations listed under Item 2 on
Schedule A attached hereto (collectively, the "Permitted Collateral Locations").
If for any reason any Collateral is at any time kept or located at a location
other than a Permitted Collateral Location, the Secured Party shall nevertheless
have and retain a lien on and security interest therein. The Debtor owns and
shall at all times own all Permitted Collateral Locations, except to the extent
otherwise disclosed under Item 2 on Schedule A. The Debtor shall not move its
chief executive office or maintain a place of business at a location other than
those specified under Item 1 on Schedule A or permit the Collateral to be
located at a location other than those specified under Item 2 on Schedule A, in
each case without first providing the Secured Party 30 days' prior written
notice of the Debtor's intent to do so; provided that the Debtor shall at all
times maintain its chief executive office and, unless otherwise specifically
agreed to in writing by the Secured Party, Permitted Collateral Locations in the
United States of America and, with respect to any new chief executive office or
place of business or location of Collateral, the Debtor shall have taken all
action requested by the Secured Party to maintain the lien and security interest
of the Secured Party in the Collateral at all times fully perfected and in full
force and effect.
(c) The Debtor has not invoiced Receivables or otherwise transacted
business at any time during the immediately preceding five-year period, and does
not currently invoice Receivables or otherwise transact business, under any
trade names other than the Debtor's name set forth in the introductory paragraph
of this Agreement. The Debtor shall not change its name or transact business
under any other trade name without first giving 30 days' prior written notice of
its intent to do so to the Secured Party.
(d) The Collateral and every part thereof is and shall be free and
clear of all security interests, liens (including, without limitation,
mechanics', laborers' and statutory liens), attachments, levies and encumbrances
of every kind, nature and description, whether voluntary or involuntary, except
for the lien and security interest of the Secured Party therein and as otherwise
permitted by Section 8.10 of that certain Credit Agreement dated as of even date
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<PAGE>
herewith between the Borrower and the Secured Party, as the same may be amended
or modified from time to time, including amendments and restatements of the same
in its entirety (hereinafter, the "Credit Agreement"). The Debtor shall warrant
and defend the Collateral against any claims and demands of all persons at any
time claiming the same or any interest in the Collateral adverse to the Secured
Party.
(e) The Debtor shall promptly pay when due all taxes, assessments and
governmental charges and levies upon or against the Debtor or any of the
Collateral, in each case before the same become delinquent and before penalties
accrue thereon, unless and to the extent that the same are being contested in
good faith by appropriate proceedings which prevent foreclosure or other
realization upon any of the Collateral and preclude interference with the
operation of the Debtor's business in the ordinary course, and the Debtor shall
have established adequate reserves therefor.
(f) The Debtor shall not use, manufacture, sell or distribute any
Collateral in violation of any statute, ordinance or other governmental
requirement. The Debtor shall not waste or destroy the Collateral or any part
thereof or be negligent in the care or use of any Collateral. The Debtor shall
perform in all material respects its obligations under any contract or other
agreement constituting part of the Collateral, it being understood and agreed
that the Secured Party has no responsibility to perform such obligations.
(g) Subject to Sections 4(b), 6(b), 6(c), and 7(c) hereof, the Debtor
shall not, without the Secured Party's prior written consent, sell, assign,
mortgage, lease or otherwise dispose of the Collateral or any interest therein.
(h) The Debtor shall at all times insure the Collateral consisting of
tangible personal property against such risks and hazards as other persons
similarly situated insure against, and including in any event loss or damage by
fire, theft, burglary, pilferage, loss in transit and such other hazards as the
Secured Party may specify. All insurance required hereby shall be maintained in
amounts and under policies and with insurers reasonably acceptable to the
Secured Party, and all such policies shall contain loss payable clauses naming
the Secured Party as loss payee as its interest may appear (and, if the Secured
Party requests, naming the Secured Party as an additional insured therein) in a
form acceptable to the Secured Party. All premiums on such insurance shall be
paid by the Debtor. Certificates of insurance evidencing compliance with the
foregoing and, at the Secured Party's request, the policies of such insurance
shall be delivered by the Debtor to the Secured Party. All insurance required
hereby shall provide that any loss shall be payable to the Secured Party
notwithstanding any act or negligence of the Debtor, shall provide that no
cancellation thereof shall be effective until at least 30 days after receipt by
the Debtor and the Secured Party of written notice thereof, and shall be
satisfactory to the Secured Party in all other respects. In case of any material
loss, damage to or destruction of the Collateral
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<PAGE>
or any part thereof, the Debtor shall promptly give written notice thereof to
the Secured Party generally describing the nature and extent of such damage or
destruction. In case of any loss, damage to or destruction of the Collateral or
any part thereof, the Debtor, whether or not the insurance proceeds, if any,
received on account of such damage or destruction shall be sufficient for that
purpose, at the Debtor's cost and expense, shall promptly repair or replace the
Collateral so lost, damaged or destroyed, except to the extent such Collateral,
prior to its loss, damage or destruction, had become uneconomical, obsolete or
worn out and is not necessary for or of importance to the proper conduct of the
Debtor's business in the ordinary course. In the event the Debtor shall receive
any proceeds of such insurance, the Debtor shall immediately pay over such
proceeds to the Secured Party. The Debtor hereby authorizes the Secured Party,
at the Secured Party's option, to adjust, compromise and settle any losses under
any insurance afforded at any time during the existence of any Event of Default
or any other event or condition which with the lapse of time or the giving of
notice, or both, would constitute an Event of Default, and the Debtor does
hereby irrevocably constitute the Secured Party, and each of its nominees,
officers, agents, attorneys, and any other person whom the Secured Party may
designate, as the Debtor's attorneys-in-fact, with full power and authority to
effect such adjustment, compromise and/or settlement and to endorse any drafts
drawn by an insurer of the Collateral or any part thereof and to do everything
necessary to carry out such purposes and to receive and receipt for any unearned
premiums due under policies of such insurance. Unless the Secured Party elects
to adjust, compromise or settle losses as aforesaid, any adjustment, compromise
and/or settlement of any losses under any insurance shall be made by the Debtor
subject to final approval of the Secured Party (regardless of whether or not an
Event of Default shall have occurred) in the case of losses exceeding $100,000.
Net insurance proceeds received by the Secured Party under the provisions hereof
or under any policy of insurance covering the Collateral or any part thereof
shall be applied to the reduction of the Obligations (whether or not then due);
provided, however, that the Secured Party may in its sole discretion release any
or all such insurance proceeds to the Debtor. All insurance proceeds shall be
subject to the lien and security interest of the Secured Party hereunder.
UNLESS THE DEBTOR PROVIDES THE SECURED PARTY WITH EVIDENCE OF THE
INSURANCE COVERAGE REQUIRED BY THIS AGREEMENT, THE SECURED PARTY MAY PURCHASE
INSURANCE AT THE DEBTOR'S EXPENSE TO PROTECT THE SECURED PARTY'S INTERESTS IN
THE COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT THE DEBTOR'S INTERESTS
IN THE COLLATERAL. THE COVERAGE PURCHASED BY THE SECURED PARTY MAY NOT PAY ANY
CLAIMS THAT THE DEBTOR MAKES OR ANY CLAIM THAT IS MADE AGAINST THE DEBTOR IN
CONNECTION WITH THE COLLATERAL. THE DEBTOR MAY LATER CANCEL ANY SUCH INSURANCE
PURCHASED BY THE SECURED PARTY, BUT ONLY AFTER PROVIDING THE SECURED PARTY WITH
EVIDENCE THAT THE DEBTOR HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT.
IF THE SECURED PARTY PURCHASES INSURANCE FOR THE COLLATERAL, THE DEBTOR WILL BE
RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING INTEREST
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<PAGE>
AND ANY OTHER CHARGES THAT THE SECURED PARTY MAY IMPOSE IN CONNECTION WITH THE
PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR
EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE MAY BE ADDED TO THE
OBLIGATIONS SECURED HEREBY. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST
OF INSURANCE THE DEBTOR MAY BE ABLE TO OBTAIN ON ITS OWN.
(i) The Debtor shall at all times allow the Secured Party and its
representatives free access to and right of inspection of the Collateral.
(j) If any Collateral is in the possession or control of any of the
Debtor's agents or processors and the Secured Party so requests, the Debtor
agrees to notify such agents or processors in writing of the Secured Party's
security interest therein and instruct them to hold all such Collateral for the
Secured Party's account and subject to the Secured Party's instructions. The
Debtor shall, upon the request of the Secured Party, authorize and instruct all
bailees and other parties, if any, at any time processing, labeling, packaging,
holding, storing, shipping or transferring all or any part of the Collateral to
permit the Secured Party and its representatives to examine and inspect any of
the Collateral then in such party's possession and to verify from such party's
own books and records any information concerning the Collateral or any part
thereof which the Secured Party or its representatives may seek to verify. As to
any premises not owned by the Debtor wherein any of the Collateral is located,
the Debtor shall, unless the Secured Party requests otherwise, cause each party
having any right, title or interest in, or lien on, any of such premises to
enter into an agreement (any such agreement to contain a legal description of
such premises) whereby such party disclaims any right, title and interest in,
and lien on, the Collateral and allows the removal of such Collateral by the
Secured Party and is otherwise in form and substance acceptable to the Secured
Party; provided, however, that no such agreement need be obtained with respect
to any one location wherein the value of the Collateral as to which such
agreement has not been obtained aggregates less than $100,000 at any one time.
(k) The Debtor agrees from time to time to deliver to the Secured Party
such evidence of the existence, identity and location of the Collateral and of
its availability as collateral security pursuant hereto (including, without
limitation, schedules describing all Receivables created or acquired by the
Debtor, copies of customer invoices or the equivalent and original shipping or
delivery receipts for all merchandise and other goods sold or leased or services
rendered, together with the Debtor's warranty of the genuineness thereof, and
reports stating the book value of Inventory and Equipment by major category and
location), in each case as the Secured Party may reasonably request. The Secured
Party shall have the right to verify all or any part of the Collateral in any
manner, and through any medium, which the Secured Party considers appropriate
(including, without limitation, the verification of Collateral by use of a
fictitious name), and the Debtor agrees to furnish all assistance and
information, and perform any acts, which the Secured Party may require in
connection therewith. The Debtor shall promptly notify
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<PAGE>
the Secured Party of any Collateral which the Debtor has determined to have been
rendered obsolete, stating the prior book value of such Collateral, its type and
location.
(l) The Debtor shall comply in all material respects with the terms and
conditions of all leases, easements, right-of-way agreements and other similar
agreements binding upon the Debtor or affecting the Collateral or any part
thereof, and all orders, ordinances, laws and statutes of any city, state or
other governmental entity, department or agency having jurisdiction with respect
to the premises wherein such Collateral is located or the conduct of business
thereon.
(m) The Debtor agrees to execute and deliver to the Secured Party such
further agreements, assignments, instruments and documents and to do all such
other things as the Secured Party may deem necessary or appropriate to assure
the Secured Party its lien and security interest hereunder, including such
financing statements, and amendments thereof or supplements thereto, and such
other instruments and documents as the Secured Party may from time to time
require in order to comply with the UCC. The Debtor hereby agrees that a carbon,
photographic or other reproduction of this Agreement or any such financing
statement is sufficient for filing as a financing statement by the Secured Party
without notice thereof to the Debtor wherever the Secured Party in its sole
discretion desires to file the same. In the event for any reason the law of any
jurisdiction other than Illinois becomes or is applicable to the Collateral or
any part thereof, or to any of the Obligations, the Debtor agrees to execute and
deliver all such instruments and documents and to do all such other things as
the Secured Party in its sole discretion deems necessary or appropriate to
preserve, protect and enforce the lien and security interest of the Secured
Party under the law of such other jurisdiction. The Debtor agrees to mark its
books and records to reflect the lien and security interest of the Secured Party
in the Collateral.
(n) On failure of the Debtor to perform any of the covenants and
agreements herein contained, the Secured Party may, at its option, perform the
same and in so doing may expend such sums as the Secured Party may deem
advisable in the performance thereof, including, without limitation, the payment
of any insurance premiums, the payment of any taxes, liens and encumbrances,
expenditures made in defending against any adverse claims, and all other
expenditures which the Secured Party may be compelled to make by operation of
law or which the Secured Party may make by agreement or otherwise for the
protection of the security hereof. All such sums and amounts so expended shall
be repayable by the Debtor immediately without notice or demand, shall
constitute additional Obligations secured hereunder and shall bear interest from
the date said amounts are expended at the rate per annum (computed on the basis
of a 360-day year for the actual number of days elapsed) determined by adding 2%
to the rate per annum from time to time announced by Harris Trust and Savings
Bank as its prime commercial rate with any change in such rate per annum as so
determined by reason of a change in such prime commercial rate to be effective
on the date of such change in said prime commercial rate
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<PAGE>
(such rate per annum as so determined being hereinafter referred to as the
"Default Rate"). No such performance of any covenant or agreement by the Secured
Party on behalf of the Debtor, and no such advancement or expenditure therefor,
shall relieve the Debtor of any default under the terms of this Agreement or in
any way obligate the Secured Party to take any further or future action with
respect thereto. The Secured Party, in making any payment hereby authorized, may
do so according to any bill, statement or estimate procured from the appropriate
public office or holder of the claim to be discharged without inquiry into the
accuracy of such bill, statement or estimate or into the validity of any tax
assessment, sale, forfeiture, tax lien or title or claim. The Secured Party, in
performing any act hereunder, shall be the sole judge of whether the Debtor is
required to perform same under the terms of this Agreement. The Secured Party is
hereby authorized to charge any depository or other account of the Debtor
maintained with the Secured Party for the amount of such sums and amounts so
expended.
4. Special Provisions Re: Receivables.
(a) As of the time any Receivable becomes subject to the security
interest provided for hereby, and at all times thereafter, the Debtor shall be
deemed to have warranted as to each and all of such Receivables that all
warranties of the Debtor set forth in this Agreement are true and correct with
respect to each such Receivable; that each Receivable and all papers and
documents relating thereto are genuine and in all respects what they purport to
be; that each Receivable is valid and subsisting and, if such Receivable is an
account, arises out of a bona fide sale of goods sold and delivered by the
Debtor to, or in the process of being delivered to, or out of and for services
theretofore actually rendered by the Debtor to, the account debtor named
therein; that no such Receivable is evidenced by any instrument or chattel paper
unless such instrument or chattel paper has theretofore been endorsed by the
Debtor and delivered to the Secured Party (except to the extent the Secured
Party specifically requests the Debtor not to do so with respect to any such
instrument or chattel paper); that no surety bond was required or given in
connection with such Receivable or the contracts or purchase orders out of which
the same arose; that the amount of the Receivable represented as owing is the
correct amount actually and unconditionally owing, except for normal cash
discounts on normal trade terms in the ordinary course of business if such
Receivable is an account; and that the amount of such Receivable represented as
owing is not disputed and is not subject to any set-offs, credits, deductions or
countercharges other than those arising in the ordinary course of the Debtor's
business which are disclosed to the Secured Party in writing promptly upon the
Debtor becoming aware thereof. Without limiting the foregoing, if any Receivable
arises out of a contract with the United States of America, or any state or
political subdivision thereof, or any department, agency or instrumentality of
any of the foregoing, the Debtor agrees to notify the Secured Party and execute
whatever instruments and documents are required by the Secured Party in order
that such Receivable shall be assigned to the Secured Party and that proper
notice of such assignment shall
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be given under the federal Assignment of Claims Act (or any successor statute)
or any similar state or local statute, as the case may be.
(b) Unless and until an Event of Default occurs, any merchandise or
other goods which are returned by a customer or account debtor or otherwise
recovered may be resold by the Debtor in the ordinary course of its business as
presently conducted in accordance with Section 6(b) hereof; and, during the
existence of any Event of Default, such merchandise and other goods shall be set
aside at the request of the Secured Party and held by the Debtor as trustee for
the Secured Party and shall remain part of the Secured Party's Collateral.
Unless and until an Event of Default occurs, the Debtor may settle and adjust
disputes and claims with its customers and account debtors, handle returns and
recoveries and grant discounts, credits and allowances in the ordinary course of
its business as presently conducted for amounts and on terms which the Debtor in
good faith considers advisable; and, during the existence of any Event of
Default, unless the Secured Party requests otherwise, the Debtor shall notify
the Secured Party promptly of all returns and recoveries and, on the Secured
Party's request, deliver any such merchandise or other goods to the Secured
Party. During the existence of any Event of Default, unless the Secured Party
requests otherwise, the Debtor shall also notify the Secured Party promptly of
all disputes and claims and settle or adjust them at no expense to the Secured
Party, but no discount, credit or allowance other than on normal trade terms in
the ordinary course of business as presently conducted shall be granted to any
customer or account debtor and no returns of merchandise or other goods shall be
accepted by the Debtor without the Secured Party's consent. The Secured Party
may, at all times during the existence of any Event of Default, settle or adjust
disputes and claims directly with customers or account debtors for amounts and
upon terms which the Secured Party considers advisable.
5. Collection of Receivables.
(a) Except as otherwise provided in this Agreement, the Debtor shall
make collection of all Receivables and may use the same to carry on its business
in accordance with sound business practice and otherwise subject to the terms
hereof.
(b) Upon the occurrence of any Event of Default or of any event or
condition which with the lapse of time or the giving of notice, or both, would
constitute an Event of Default, whether or not the Secured Party has exercised
any or all of its rights under other provisions of this Section 5, in the event
the Secured Party requests the Debtor to do so:
(i) all instruments and chattel paper at any time constituting
part of the Receivables or any other Collateral (including any
postdated checks) shall, upon receipt by the Debtor, be immediately
endorsed to and deposited with the Secured Party; and/or
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(ii) the Debtor shall instruct all customers and account
debtors to remit all payments in respect of Receivables or any other
Collateral to a lockbox or lockboxes under the sole custody and control
of the Secured Party and which are maintained at post office(s) in
Chicago, Illinois selected by the Secured Party.
(c) Upon the occurrence of any Event of Default or of any event or
condition which with the lapse of time or the giving of notice, or both, would
constitute an Event of Default, whether or not the Secured Party has exercised
any or all of its rights under other provisions of this Section 5, the Secured
Party or its designee may notify the Debtor's customers and account debtors at
any time that Receivables or any other Collateral have been assigned to the
Secured Party or of the Secured Party's security interest therein, and either in
its own name, or the Debtor's name, or both, demand, collect (including, without
limitation, through a lockbox analogous to that described in Section 5(b)(ii)
hereof), receive, receipt for, sue for, compound and give acquittance for any or
all amounts due or to become due on Receivables or any other Collateral, and in
the Secured Party's discretion file any claim or take any other action or
proceeding which the Secured Party may deem necessary or appropriate to protect
or realize upon the security interest of the Secured Party in the Receivables or
any other Collateral.
(d) Any proceeds of Receivables or other Collateral transmitted to or
otherwise received by the Secured Party pursuant to any of the provisions of
Sections 5(b) or 5(c) hereof may be handled and administered by the Secured
Party in and through a remittance account at the Secured Party, and the Debtor
acknowledges that the maintenance of such remittance account by the Secured
Party is solely for the Secured Party's convenience and that the Debtor does not
have any right, title or interest in such remittance account or any amounts at
any time standing to the credit thereof. The Secured Party may, after the
occurrence and during the continuation of any Event of Default or of any event
or condition which with the lapse of time or the giving of notice, or both,
would constitute an Event of Default, apply all or any part of any proceeds of
Receivables or other Collateral received by it from any source to the payment of
the Obligations (whether or not then due and payable), such applications to be
made in such amounts, in such manner and order and at such intervals as the
Secured Party may from time to time in its discretion determine, but not less
often than once each week. The Secured Party need not apply or give credit for
any item included in proceeds of Receivables or other Collateral until the
Secured Party has received final payment therefor at its office in cash or final
solvent credits current in Chicago, Illinois, acceptable to the Secured Party as
such. However, if the Secured Party does give credit for any item prior to
receiving final payment therefor and the Secured Party fails to receive such
final payment or an item is charged back to the Secured Party for any reason,
the Secured Party may at its election in either instance charge the amount of
such item back against the remittance account or any depository account of the
Debtor maintained with the Secured Party, together with interest thereon at the
Default Rate. Concurrently with each transmission of any proceeds of Receivables
or other Collateral to the remittance account, the
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Debtor shall furnish the Secured Party with a report in such form as the Secured
Party shall reasonably require identifying the particular Receivable or other
Collateral from which the same arises or relates. The Debtor hereby indemnifies
the Secured Party from and against all liabilities, damages, losses, actions,
claims, judgments, costs, expenses, charges and reasonable attorneys' fees
suffered or incurred by the Secured Party because of the maintenance of the
foregoing arrangements; provided, however, that the Debtor shall not be required
to indemnify the Secured Party for any of the foregoing to the extent they arise
solely from the gross negligence or willful misconduct of the Secured Party. The
Secured Party shall have no liability or responsibility to the Debtor for
accepting any check, draft or other order for payment of money bearing the
legend "payment in full" or words of similar import or any other restrictive
legend or endorsement whatsoever or be responsible for determining the
correctness of any remittance.
6. Special Provisions Re: Inventory and Equipment.
(a) The Debtor shall at its own cost and expense maintain, keep and
preserve the Inventory in good and merchantable condition and keep and preserve
the Equipment in good repair, working order and condition, ordinary wear and
tear excepted, and, without limiting the foregoing, make all necessary and
proper repairs, replacements and additions to the Equipment so that the
efficiency thereof shall be fully preserved and maintained.
(b) The Debtor may, until an Event of Default has occurred and is
continuing and thereafter until otherwise notified by the Secured Party, use,
consume and sell the Inventory in the ordinary course of its business, but a
sale in the ordinary course of business shall not under any circumstance include
any transfer or sale in satisfaction, partial or complete, of a debt owing by
the Debtor.
(c) The Debtor may, until an Event of Default has occurred and is
continuing and thereafter until otherwise notified by the Secured Party, sell
obsolete, worn out or unusable Equipment which is concurrently replaced with
similar Equipment at least equal in quality and condition to that sold and owned
by the Debtor free of any lien, charge or encumbrance other than the security
interest granted hereby.
(d) As of the time any Inventory or Equipment becomes subject to the
security interest provided for hereby and at all times thereafter, the Debtor
shall be deemed to have warranted as to any and all of such Inventory and
Equipment that all warranties of the Debtor set forth in this Agreement are true
and correct with respect to such Inventory and Equipment; that all of such
Inventory and Equipment is located at a location set forth pursuant to Section
3(b) hereof; and that, in the case of Inventory, such Inventory is new and
unused and in good and
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merchantable condition. The Debtor warrants and agrees that no Inventory is or
will be consigned to any other person without the Secured Party's prior written
consent.
(e) Upon the Secured Party's request, the Debtor shall at its own cost
and expense cause the lien of the Secured Party in and to any portion of the
Collateral subject to a certificate of title law to be duly noted on such
certificate of title or to be otherwise filed in such manner as is prescribed by
law in order to perfect such lien and shall cause all such certificates of title
and evidences of lien to be deposited with the Secured Party.
(f) Except for Equipment from time to time located on the real estate
described on Schedule B attached hereto and as otherwise disclosed to the
Secured Party in writing, none of the Equipment is or will be attached to real
estate in such a manner that the same may become a fixture.
(g) If any of the Inventory is at any time evidenced by a document of
title, such document shall be promptly delivered by the Debtor to the Secured
Party except to the extent the Secured Party specifically requests the Debtor
not to do so with respect to any such document.
Section 7. Special Provisions Re: Investment Property.
(a) Unless and until an Event of Default has occurred and is continuing
and thereafter until notified to the contrary by the Secured Party pursuant to
Section 9(d) hereof:
(i) The Debtor shall be entitled to exercise all voting and/or
consensual powers pertaining to the Investment Property or any part
thereof, for all purposes not inconsistent with the terms of this
Agreement or any other document evidencing or otherwise relating to any
Obligations; and
(ii) The Debtor shall be entitled to receive and retain all
cash dividends paid upon or in respect of the Investment Property.
(b) At the Secured Party's request, certificates for all securities now
or at any time constituting Investment Property shall be promptly delivered by
the Debtor to the Secured Party duly endorsed in blank for transfer or
accompanied by an appropriate assignment or assignments or an appropriate
undated stock power or powers, in every case sufficient to transfer title
thereto including, without limitation, all stock received in respect of a stock
dividend or resulting from a split-up, revision or reclassification of the
Investment Property or any part thereof or received in addition to, in
substitution of or in exchange for the Investment Property or any part thereof
as a result of a merger, consolidation or otherwise. With respect to any
Investment Property held by a securities intermediary, commodity intermediary,
or other financial intermediary of any kind, at
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the Secured Party's request, the Debtor shall execute and deliver, and shall
cause any such intermediary to execute and deliver, an agreement among the
Debtor, the Secured Party, and such intermediary in form and substance
reasonably satisfactory to the Secured Party which provides, among other things,
for the intermediary's agreement that it shall comply with entitlement orders,
and apply any value distributed on account of any Investment Property maintained
in an account with such intermediary, as directed by the Secured Party without
further consent by the Debtor at any time after the occurrence and during the
continuation of any Event of Default. The Secured Party may at any time, after
the occurrence of an Event of Default or an event or condition which with the
lapse of time or the giving of notice, or both, would constitute an Event of
Default, cause to be transferred into its name or the name of its nominee or
nominees all or any part of the Investment Property hereunder.
(c) Unless and until an Event of Default has occurred and is
continuing, the Debtor may sell or otherwise dispose of any Investment Property,
provided that the Debtor shall not sell or otherwise dispose of any capital
stock of any direct or indirect subsidiary without the prior written consent of
the Secured Party. After the occurrence and during the continuation of any Event
of Default, the Debtor shall not sell all or any part of the Investment Property
without the prior written consent of the Secured Party.
(d) The Debtor represents that on the date of this Agreement, none of
the Investment Property consists of margin stock (as such term is defined in
Regulation U of the Board of Governors of the Federal Reserve System) except to
the extent the Debtor has delivered to the Secured Party a duly executed and
completed Form U-1 with respect to such stock. If at any time the Investment
Property or any part thereof consists of margin stock, the Debtor shall promptly
so notify the Secured Party and deliver to the Secured Party a duly executed and
completed Form U-1 and such other instruments and documents reasonably requested
by the Secured Party in form and substance satisfactory to the Secured Party.
(e) Notwithstanding anything to the contrary contained herein, in the
event any Investment Property is subject to the terms of a separate security
agreement in favor of the Secured Party, the terms of such separate security
agreement shall govern and control unless otherwise agreed to in writing by the
Secured Party.
Section 8. Power of Attorney. In addition to any other powers of
attorney contained herein, the Debtor hereby appoints the Secured Party, its
nominee, and any other person whom the Secured Party may designate, as the
Debtor's attorney-in-fact, with full power to sign the Debtor's name on
verifications of accounts and other Collateral; to send requests for
verification of Collateral to the Debtor's customers, account debtors and other
obligors; to endorse the Debtor's name on any checks, notes, acceptances, money
orders, drafts and any other forms of payment or security that may come into the
Secured Party's possession or on any assignments, stock powers, or other
instruments of transfer relating to the Collateral or any part
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thereof; to sign the Debtor's name on any invoice or bill of lading relating to
any Collateral, on claims to enforce collection of any Collateral, on notices to
and drafts against customers and account debtors and other obligors, on
schedules and assignments of Collateral, on notices of assignment and on public
records; to notify the post office authorities to change the address for
delivery of the Debtor's mail to an address designated by the Secured Party; to
receive, open and dispose of all mail addressed to the Debtor; and to do all
things necessary to carry out this Agreement. The Debtor hereby ratifies and
approves all acts of any such attorney and agrees that neither the Secured Party
nor any such attorney will be liable for any acts or omissions nor for any error
of judgment or mistake of fact or law other than such person's gross negligence
or willful misconduct. The Secured Party may file one or more financing
statements disclosing its security interest in any or all of the Collateral
without the Debtor's signature appearing thereon. The Debtor also hereby grants
the Secured Party a power of attorney to execute any such financing statements,
or amendments and supplements to financing statements, on behalf of the Debtor
without notice thereof to the Debtor. The foregoing powers of attorney, being
coupled with an interest, are irrevocable until the Obligations have been fully
paid and satisfied and all agreements of the Secured Party to extend credit to
or for the account of the Borrower have expired or otherwise have been
terminated; provided, however, that the Secured Party agrees, as a personal
covenant to the Debtor, not to exercise the powers of attorney set forth in this
Section unless an Event of Default exists.
9. Defaults and Remedies.
(a) The occurrence of any one or more of the following events shall
constitute an "Event of Default" hereunder:
(i) default in the payment when due (whether by demand, lapse
of time, acceleration or otherwise) of the Obligations or any part
thereof; or
(ii) default in the observance or performance of any covenant
set forth in Sections 5(b), 5(c) or 7(b) hereof or of any provision
hereof requiring the maintenance of insurance on the Collateral or
dealing with the use or remittance of proceeds of Collateral; or
(iii) the occurrence of any event or the existence of any
condition which is specified as an "Event of Default" under the Credit
Agreement.
(b) Upon the occurrence and during the continuation of any Event of
Default, the Secured Party shall have, in addition to all other rights provided
herein or by law, the rights and remedies of a secured party under the UCC
(regardless of whether the UCC is the law of the jurisdiction where the rights
or remedies are asserted and regardless of whether the UCC applies
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to the affected Collateral), and further the Secured Party may, without demand
and without advertisement, notice, hearing or process of law, all of which the
Debtor hereby waives, at any time or times, sell and deliver all or any part of
the Collateral (and any other property of the Debtor attached thereto or found
therein) held by or for it at public or private sale, for cash, upon credit or
otherwise, at such prices and upon such terms as the Secured Party deems
advisable, in its sole discretion. In addition to all other sums due the Secured
Party hereunder, the Debtor shall pay the Secured Party all costs and expenses
incurred by the Secured Party, including reasonable attorneys' fees and court
costs, in obtaining, liquidating or enforcing payment of Collateral or the
Obligations or in the prosecution or defense of any action or proceeding by or
against the Secured Party or the Debtor concerning any matter arising out of or
connected with this Agreement or the Collateral or the Obligations, including,
without limitation, any of the foregoing arising in, arising under or related to
a case under the United States Bankruptcy Code (or any successor statute). Any
requirement of reasonable notice shall be met if such notice is personally
served on or mailed, postage prepaid, to the Debtor in accordance with Section
12(b) hereof at least 10 days before the time of sale or other event giving rise
to the requirement of such notice; provided however, no notification need be
given to the Debtor if the Debtor has signed, after an Event of Default has
occurred, a statement renouncing any right to notification of sale or other
intended disposition. The Secured Party shall not be obligated to make any sale
or other disposition of the Collateral regardless of notice having been given.
The Secured Party may be the purchaser at any such sale. The Debtor hereby
waives all of its rights of redemption from any such sale. The Secured Party may
postpone or cause the postponement of the sale of all or any portion of the
Collateral by announcement at the time and place of such sale, and such sale
may, without further notice, be made at the time and place to which the sale was
postponed or the Secured Party may further postpone such sale by announcement
made at such time and place.
(c) Without in any way limiting the foregoing, upon the occurrence
and during the continuation of any Event of Default, the Secured Party shall
have the right, in addition to all other rights provided herein or by law, to
take physical possession of any and all of the Collateral and anything found
therein, the right for that purpose to enter without legal process any premises
where the Collateral may be found (provided such entry be done lawfully), and
the right to maintain such possession on the Debtor's premises (the Debtor
hereby agreeing to lease such premises without cost or expense to the Secured
Party or its designee if the Secured Party so requests) or to remove the
Collateral or any part thereof to such other places as the Secured Party may
desire. Upon the occurrence and during the continuation of any Event of Default,
the Secured Party shall have the right to exercise any and all rights with
respect to deposit accounts of the Debtor maintained with the Secured Party,
including, without limitation, the right to collect, withdraw and receive all
amounts due or to become due or payable under each such deposit account. Upon
the occurrence and during the continuation of any Event of Default, the Debtor
shall, upon the Secured Party's demand, assemble the Collateral and make it
available to
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the Secured Party at a place designated by the Secured Party. If the Secured
Party exercises its right to take possession of the Collateral, the Debtor shall
also at its expense perform any and all other steps requested by the Secured
Party to preserve and protect the security interest hereby granted in the
Collateral, such as placing and maintaining signs indicating the security
interest of the Secured Party, appointing overseers for the Collateral and
maintaining Collateral records.
(d) Without in any way limiting the foregoing, upon the occurrence and
during the continuation of any Event of Default, all rights of the Debtor to
exercise the voting and/or consensual powers which it is entitled to exercise
pursuant to Section 7(a)(i) hereof and/or to receive and retain the
distributions which it is entitled to receive and retain pursuant to Section
7(a)(ii) hereof, shall, at the option of the Secured Party, cease and thereupon
become vested in the Secured Party, which, in addition to all other rights
provided herein or by law, shall then be entitled solely and exclusively to
exercise all voting and other consensual powers pertaining to the Investment
Property and/or to receive and retain the distributions which the Debtor would
otherwise have been authorized to retain pursuant to Section 7(a)(ii) hereof and
shall then be entitled solely and exclusively to exercise any and all rights of
conversion, exchange or subscription or any other rights, privileges or options
pertaining to any Investment Property as if the Secured Party were the absolute
owner thereof. Without limiting the foregoing, the Secured Party shall have the
right to exchange, at its discretion, any and all of the Investment Property
upon the merger, consolidation, reorganization, recapitalization or other
readjustment of the respective issuer thereof or upon the exercise by or on
behalf of any such issuer or the Secured Party of any right, privilege or option
pertaining to any Investment Property and, in connection therewith, to deposit
and deliver any and all of the Investment Property with any committee,
depositary, transfer agent, registrar or other designated agency upon such terms
and conditions as the Secured Party may determine. In the event the Secured
Party in good faith believes any of the Collateral constitutes restricted
securities within the meaning of any applicable securities laws, any disposition
thereof in compliance with such laws shall not render the disposition
commercially unreasonable.
(e) Without in any way limiting the foregoing, the Debtor hereby grants
to the Secured Party a royalty-free irrevocable license and right to use all of
the Debtor's patents, patent applications, patent licenses, trademarks,
trademark registrations, trademark licenses, trade names, trade styles,
copyrights, copyright applications, copyright licenses, and similar intangibles
in connection with any foreclosure or other realization by the Secured Party on
all or any part of the Collateral. The license and right granted the Secured
Party hereby shall be without any royalty or fee or charge whatsoever.
(f) The powers conferred upon the Secured Party hereunder are solely to
protect its interest in the Collateral and shall not impose on it any duty to
exercise such powers. The Secured Party shall be deemed to have exercised
reasonable care in the custody and preservation
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of Investment Property in its possession if such Collateral is accorded
treatment substantially equivalent to that which the Secured Party accords its
own property, consisting of similar type assets, it being understood, however,
that the Secured Party shall have no responsibility for ascertaining or taking
any action with respect to calls, conversions, exchanges, maturities, tenders or
other matters relating to any such Collateral, whether or not the Secured Party
has or is deemed to have knowledge of such matters. This Agreement constitutes
an assignment of rights only and not an assignment of any duties or obligations
of the Debtor in any way related to the Collateral, and the Secured Party shall
have no duty or obligation to discharge any such duty or obligation. The Secured
Party shall have no responsibility for taking any necessary steps to preserve
rights against any parties with respect to any Collateral or initiating any
action to protect the Collateral against the possibility of a decline in market
value. Neither the Secured Party nor any party acting as attorney for the
Secured Party shall be liable for any acts or omissions or for any error of
judgment or mistake of fact or law other than their gross negligence or willful
misconduct.
(g) Failure by the Secured Party to exercise any right, remedy or
option under this Agreement or any other agreement between the Debtor and the
Secured Party or provided by law, or delay by the Secured Party in exercising
the same, shall not operate as a waiver; and no waiver by the Secured Party
shall be effective unless it is in writing and then only to the extent
specifically stated. The rights and remedies of the Secured Party under this
Agreement shall be cumulative and not exclusive of any other right or remedy
which the Secured Party may have. For purposes of this Agreement, an Event of
Default shall be construed as continuing after its occurrence until the same is
waived in writing by the Secured Party.
10. Application of Proceeds. The proceeds and avails of the Collateral
at any time received by the Secured Party after the occurrence and during the
continuation of any Event of Default shall, when received by the Secured Party
in cash or its equivalent, be applied by the Secured Party as follows:
(i) First, to the payment and satisfaction of all sums paid
and costs and expenses incurred by the Secured Party hereunder or
otherwise in connection herewith, including such monies paid or
incurred in connection with protecting, preserving or realizing upon
the Collateral or enforcing any of the terms hereof, including
reasonable attorneys' fees and court costs, together with any interest
thereon (but without preference or priority of principal over interest
or of interest over principal), to the extent the Secured Party is not
reimbursed therefor by the Debtor; and
(ii) Second, to the payment and satisfaction of the remaining
Obligations, whether or not then due (in whatever order the Secured
Party elects), both for interest and principal.
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The Debtor shall remain liable to the Secured Party for any deficiency. Any
surplus remaining after the full payment and satisfaction of the foregoing shall
be returned to the Debtor or to whomsoever the Secured Party reasonably
determines is lawfully entitled thereto.
11. Continuing Agreement. This Agreement shall be a continuing
agreement in every respect and shall remain in full force and effect until all
of the Obligations, both for principal and interest, have been fully paid and
satisfied and all agreements of the Secured Party to extend credit to or for the
account of the Borrower have expired or otherwise have been terminated. Upon
such termination of this Agreement, the Secured Party shall, upon the request
and at the expense of the Debtor, forthwith release its security interest
hereunder.
12. Miscellaneous.
(a) This Agreement cannot be changed or terminated orally. All of the
rights, privileges, remedies and options given to the Secured Party hereunder
shall inure to the benefit of its successors and assigns, and all the terms,
conditions, covenants, agreements, representations and warranties of and in this
Agreement shall bind the Debtor and its legal representatives, successors and
assigns, provided that the Debtor may not assign its rights or delegate its
duties hereunder without the Secured Party's prior written consent.
(b) Except as otherwise specified herein, all notices hereunder shall
be in writing (including, without limitation, notice by telecopy) and shall be
given to the relevant party at its address or telecopier number set forth below
(or, if no such address is set forth below, at the address of the Debtor as
shown on the records of the Secured Party), or such other address or telecopier
number as such party may hereafter specify by notice to the other given by
United States certified or registered mail, by telecopy or by other
telecommunication device capable of creating a written record of such notice and
its receipt. Notices hereunder shall be addressed:
to the Debtor at: to the Secured Party at:
National Health Benefit & Harris Trust and Savings Bank
Casualty Corporation
111 West Monroe Street
9495 East San Salvador Drive Chicago, Illinois 60690
Scottsdale, Arizona 85258 Attention: Christopher Randall,
Attention: Stephen Carder, Tax-Exempt Institutions Division
Chief Financial Officer Telephone: (312) 461-5068
Telephone: (602) 614-4285 Telecopy: (312) 461-7365
Telecopy: (602) 451-9087
Each such notice, request or other communication shall be effective (i) if given
by telecopier, when such telecopy is transmitted to the telecopier number
specified in this Section and a
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confirmation of such telecopy has been received by the sender, (ii) if given by
mail, five (5) days after such communication is deposited in the mail, certified
or registered with return receipt requested, addressed as aforesaid or (iii) if
given by any other means, when delivered at the addresses specified in this
Section.
(c) The lien and security herein created and provided for stand as
direct and primary security for the Obligations. No application of any sums
received by the Bank in respect of the Collateral or any disposition thereof to
the reduction of the Obligations or any portion thereof shall in any manner
entitle the Debtor to any right, title or interest in or to the Obligations or
any collateral security therefor, whether by subrogation or otherwise, unless
and until all Obligations have been fully paid and satisfied and any commitment
of the Bank to extend credit to the Borrower shall have expired. The Debtor
acknowledges and agrees that the lien and security hereby created and provided
for are absolute and unconditional and shall not in any manner be affected or
impaired by any acts or omissions whatsoever of the Bank or any other holder of
any of the Obligations, and without limiting the generality of the foregoing,
the lien and security hereof shall not be impaired by any acceptance by the Bank
or any holder of any of the Obligations of any other security for or guarantors
upon any of the Obligations or by any failure, neglect or omission on the part
of the Bank or any other holder of any of the Obligations to realize upon or
protect any of the Obligations or any collateral security therefor. The lien and
security hereof shall not in any manner be impaired or affected by (and the
Bank, without notice to anyone, is hereby authorized to make from time to time)
any sale, pledge, surrender, compromise, settlement, release, renewal,
extension, indulgence, alteration, substitution, exchange, change in,
modification or disposition of any of the Obligations, or of any collateral
security therefor, or of any guaranty thereof or of any obligor thereon. The
Bank may at its discretion at any time grant credit to the Borrower without
notice to the Debtor in such amounts and on such terms as the Bank may elect
(all of such to constitute additional Obligations) without in any manner
impairing the lien and security hereby created and provided for. In order to
foreclose or otherwise realize hereon and to exercise the rights granted the
Bank hereunder and under applicable law, there shall be no obligation on the
part of the Bank or any other holder of any of the Obligations at any time to
first resort for payment to the Borrower or to any guaranty of the Obligations
or any portion thereof or to resort to any other collateral security, property,
liens or any other rights or remedies whatsoever, and the Bank shall have the
right to enforce this instrument irrespective of whether or not other
proceedings or steps are pending seeking resort to or realization upon or from
any of the foregoing.
(d) In the event and to the extent that any provision hereof shall be
deemed to be invalid or unenforceable by reason of the operation of any law or
by reason of the interpretation placed thereon by any court, this Agreement
shall to such extent be construed as not containing such provision, but only as
to such locations where such law or interpretation is operative, and the
invalidity or unenforceability of such provision shall not affect the validity
of any remaining
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provisions hereof, and any and all other provisions hereof which are otherwise
lawful and valid shall remain in full force and effect.
(e) This Agreement shall be deemed to have been made in the State of
Illinois and shall be governed by, and construed in accordance with, the laws of
the State of Illinois. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning of any
provision hereof.
(f) The Debtor acknowledges that this Agreement is and shall be
effective upon its execution and delivery by the Debtor to the Secured Party,
and it shall not be necessary for the Secured Party to execute this Agreement or
any other acceptance hereof or otherwise to signify or express its acceptance
hereof.
(g) The Debtor hereby submits to the non-exclusive jurisdiction of the
United States District Court for the Northern District of Illinois and of any
Illinois state court sitting in the City of Chicago for purposes of all legal
proceedings arising out of or relating to this Agreement or the transactions
contemplated hereby. The Debtor irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such proceeding brought in such a court and any claim that
any such proceeding brought in such a court has been brought in an inconvenient
form. THE DEBTOR AND THE SECURED PARTY EACH HEREBY IRREVOCABLY WAIVES ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
-22-
<PAGE>
IN WITNESS WHEREOF, the Debtor has caused this Agreement to be duly
executed and delivered as of this 15th day of December, 1997.
NATIONAL HEALTH BENEFIT &
CASUALTY CORPORATION
By /s/ Stephen J Carder
Its Executive Vice President
-23-
<PAGE>
SCHEDULE A
LOCATIONS
Item 1. Places of Business (including Debtor's chief executive office and
principal place of business):
ADDRESS
9495 East San Salvador Drive
Scottsdale, Arizona 85258
Item 2. Permitted Collateral Locations:
ADDRESS OWNER OF PREMISES
9495 East San Salvador Drive Scottsdale Property
Scottsdale, Arizona 85258 Management, L.L.C.
-24-
<PAGE>
SCHEDULE B
REAL ESTATE LEGAL DESCRIPTIONS
NONE
-25-
Exhibit 10.4
AGREEMENT
---------
By this Agreement, entered into as of this ___ day of April, 1998, the parties
identified below state, confirm, represent, warrant and agree as follows:
1. PARTIES
1.1. Champion. Champion Financial Corporation ("Champion") is a
corporation organized and existing under and by virtue of the
laws of the State of Utah, with its principal place of
business in Scottsdale, Arizona.
1.2. Caliendo. Paul F. Caliendo ("Caliendo") is, and was at all
times material hereto, a resident of Maricopa County, Arizona.
1.3. Carder. Stephen J. Carder ("Carder") is, and was at all times
material hereto, a resident of Maricopa County, Arizona.
1.4. Engelbrecht. Zirk Engelbrecht ("Zirk") and Marcy Engelbrecht
("Marcy") (hereinafter sometimes collectively referred to as
"Engelbrecht") are, and at all times material hereto, were
residents of the State of Maryland.
1.5. InfoPlan. InfoPlan Partners LLC is, and was at all times
material hereto, a limited liability company for which
InfoPlan Inc., serves as the managing member. At all times
material hereto, Engelbrecht has controlled, and at this time
controls, InfoPlan Partners LLC through their control of
InfoPlan Inc.
1.6. Pension Trust. The Law Office of Marcy M. Hallock Pension Plan
("Pension Trust") is, and was at all times material hereto,
the beneficial owner of 200,000 shares of the common stock of
Champion.
1.7. RRG: Risk Resolution Group ("RRG') was, at certain times
material hereto, the beneficial owner of up to 1.5 million
shares of the common stock of Champion.
1.8. InfoPlan Parties. Engelbrecht, InfoPlan Partners, LLC,
InfoPlan, Inc., Pension Trust and RRG shall hereunder
sometimes be referred to as the "InfoPlan Parties."
2. RECITALS
2.1. Merger Agreement. On or about January 6, 1997, Champion
entered into an Agreement and Plan of Merger with National
Health Benefits and Casualty Corporation ("NHBC") pursuant to
which NHBC became a wholly owned subsidiary of Champion and
Carder and Caliendo, as the sole shareholders of NHBC, each
received 1.1 million shares of the common stock of Champion
(the "NHBC Merger'). Pursuant to the Agreement and Plan of
Merger, Carder and Caliendo were elected to the Board of
Directors of Champion, Caliendo was appointed to serve as
Champion's President and Chief Executive Officer and Carder
was appointed to serve as Champion's Executive Vice President
and Chief Financial Officer.
Page 1
<PAGE>
2.2. RRG Proxy. On or about January 8, 1997, RRG, acting through
its authorized agent, Zirk, executed and delivered to Carder
and Caliendo an irrevocable proxy granting to Carder and
Caliendo the right to vote 1.5 million shares of the common
stock of Champion beneficially owned by RRG. A copy of that
proxy is attached hereto and incorporated herein as Exhibit
"A."
2.3. InfoPlan Proxy. On or about April 1, 1997, InfoPlan LLC,
acting through its authorized agent Zirk, executed and
delivered to Carder and Caliendo an irrevocable proxy with
respect to 1 million shares of the common stock of Champion
and beneficially held by InfoPlan Partners LLC, in the form
attached hereto and incorporated herein as Exhibit "B."
2.4. Pension Trust Proxy. On or about May 29, 1997, the Pension
Trust, acting through its authorized agent Marcy, executed and
delivered to Caliendo a proxy with respect to 200,000 shares
of the common stock of Champion, in the form attached hereto
and incorporated herein as Exhibit "C."
2.5. Subscription Agreement. On or about October 24, 1997, InfoPlan
Inc. executed and delivered to Champion a Subscription
Agreement which provided for the purchase by InfoPlan LLC of
500,000 shares of the common stock of Champion at $6.00 per
share, in the form attached hereto and incorporated herein as
Exhibit "D."
2.6. Stock Trading Activity. At various times since the NHBC
Merger, Caliendo, Carder, InfoPlan and Engelbrecht have
engaged in one or more transactions with respect to the common
stock of Champion owned by each of them.
2.7. Proxy Solicitation Activity. At various times since the NHBC
Merger, the InfoPlan Parties and their affiliates and agents,
have obtained and/or attempted to obtain proxy appointments
for purposes of permitting them to vote a majority of the
outstanding issued common stock of Champion.
2.8. January 20, 1998 Letter; Board of Directors Inquiry. On or
about January 20, 1998, InfoPlan Partners LLC, acting through
its authorized agents, Engelbrecht, executed and delivered to
Caliendo, the letter which is attached hereto and incorporated
herein as Exhibit "E." As a result of that letter, the Board
of Directors of Champion has undertaken a formal inquiry into
the allegations and statements made in that letter.
2.9. Stateman Transaction. The InfoPlan Parties have entered into
certain agreements with Thomas Stateman and/or his affiliates
with respect to the registration rights of certain common
stock of Champion held by Thomas Stateman (the "Stateman
Agreement') and may have entered into agreements with other
third parties relating to Champion and its securities.
2.10. Purpose of Agreement. Various disputes have arisen between and
among the parties to this Agreement concerning the NHBC
Merger, the RRG Proxy, the InfoPlan Proxy, the Pension Trust
Proxy, certain stock transactions and certain proxy
solicitation activity, as well as with respect to the
management of the business affairs of Champion. Without
admitting or denying the existence of any past violations of
any law or regulation or any liability one to the other, the
parties desire to enter into this Agreement for the purpose of
resolving their disputes to assure that their future actions
with respect to Champion are conducted in strict conformity
with all federal and state laws applicable to Champion and its
securities.
Page 2
<PAGE>
2.11. Recitals Part of Agreement. The matters set forth in Articles
1 and 2 of this Agreement are and shall be deemed to be
material and operative provisions of this Agreement and not
mere recitals.
3. TERMS OF AGREEMENT
3.1. Changes in the Management of Champion. Effective immediately,
Champion, acting through its Board of Directors, shall effect
certain management and personnel changes. Specifically,
Caliendo resigned as Chairman and a Director of Champion
immediately after the adjournment of the April 9, 1998 Board
of Directors' meeting. Carder shall immediately become the
President and Chief Executive Officer of Champion. Champion
agrees to pay Caliendo a severance payment of $294,000 payable
in twenty-four (24) equal payments of $12,250.00, with the
first payment due May 1, 1998 and a like payment on the first
day of each of the next succeeding twenty-three (23) months.
Caliendo's current medical insurance coverage shall continue
and be paid through Champion up to and including April 30,
1999. Caliendo will be on paid vacation through April 30,
1998. Champion and Caliendo agree that Caliendo will not be
re-employed or re-appointed to the Champion Board of Directors
so long as the Proxy granted in Section 3.6 remains in effect.
3.2. Stock Transfers. Caliendo and Carder shall each immediately
request transfer of and promptly cause delivery to InfoPlan
LLC 25,000 shares of common stock of Champion. In recognition
for all services performed and consideration granted or
claimed to be performed or granted by InfoPlan Partners in
connection with Champion's recent HealthStar acquisition,
Champion shall immediately issue to InfoPlan Partners LLC
100,000 shares of its common stock, which shall, upon
issuance, be fully paid and non-assessable.
3.3. Legend. InfoPlan Partners LLC and the other InfoPlan Parties
acknowledge that the shares to be transferred pursuant to
Section 3.2 will be "restricted shares" and that they will
bear the following legend:
The securities represented by this Certificate have
not been registered under the Securities Act of 1933
or any state securities law. Such securities may not
be sold or transferred in the absence of such
registration unless an exemption from registration is
available.
3.4. Retention of Appropriate Advisors. Champion will use its best
efforts to retain within one hundred twenty (120) days such
investment banking and investment relations advisory
professionals as the Board of Directors, in its discretion,
deems necessary and appropriate.
3.5. No Proxy Contest. In consideration for the commitments,
undertakings and stock transfers provided for herein, the
InfoPlan Parties agree that neither they, nor any of their
respective Affiliates, directors, agents, members,
shareholders or beneficial owners will, either alone, or in
concert with each other or any other person or entity,
solicit, induce, encourage or seek to obtain, or cause,
solicit, encourage or induce any other person or entity to
solicit or seek to obtain, a proxy or other authority to vote
with respect to any securities of Champion, including but not
limited to the common stock of Champion, until the earlier of
(i) a date which is two (2) years from the date of this
Agreement; or (ii) the date which is ninety days
Page 3
<PAGE>
prior to the third annual meeting of shareholders of Champion
held following the date of this Agreement. Notwithstanding the
foregoing, nothing in this Agreement shall prohibit InfoPlan
Parties from engaging in communications which encourage other
shareholders of Champion to grant their proxy to vote Champion
securities to those persons appointed by the Board of
Directors of Champion to solicit proxies in connection with
any meeting of Champion shareholders.
3.6. Grant of Proxy. InfoPlan Partners LLC, InfoPlan Inc., RRG,
Engelbrecht and the Pension Trust, hereby irrevocably appoint
the Board of Directors of Champion, or its designees, with
full power of substitution, as their proxy agent(s) ("Proxy
Agent") with the authority to vote any and all shares of the
common stock of Champion held by them or any Affiliate (as
hereinunder defined) on this date, or on any record date
established by the Board of Directors with respect to the
Annual Meeting of the Shareholders of Champion to be conducted
during calendar year 1998 ("1998 Annual Meeting"), or any
adjournments thereof with respect to any and all matters to be
submitted to the shareholders at such meeting, including but
not limited to, the election of directors, the ratification of
auditors, the adoption of one or more stock option or other
benefit plans, reincorporation of Champion in a state other
than Utah pursuant to a change of domicile merger, and any
shareholder proposals, or any other matter to be presented at
such 1998 Annual Meeting. The InfoPlan Parties further agree
to execute and deliver upon request and without the payment of
additional consideration, such additional documentation as the
Board of Directors of Champion may deem necessary and
appropriate to effectuate the foregoing proxy appointment,
including but not limited to the execution of separate proxy
documentation. Notwithstanding the foregoing commitment to
execute such additional documentation, the parties hereto
agree that a copy of this Agreement may be presented to the
Inspector of Elections appointed in connection with the 1998
Annual Meeting for purposes of evidencing the grant of the
proxy contained herein. InfoPlan Partners LLC, InfoPlan Inc.,
RRG, Engelbrecht, and the Pension Trust hereby agree to waive
any right that they or any Affiliate may have to cancel this
irrevocable proxy at any time prior to the 1998 Annual Meeting
and further acknowledge and agree that the irrevocable proxy
granted hereby meets the standards for irrevocability under
Utah Code Annotated Section 16-10(a)-722 and that it is
coupled with an interest. For purposes of this Agreement, as
it relates to the InfoPlan Parties, the term "Affiliate" shall
mean (i) any person or entity who controls, who is controlled
by, or is under common control with any of the InfoPlan
Parties; or (ii) any person who has a contract, agreement,
arrangement or understanding with any of the InfoPlan Parties,
with respect to the voting, acquisition or disposition of
Champion Securities.
3.7. Securities Compliance. The InfoPlan Parties hereby agree to
conduct all future activities with respect to the sale,
purchase, or transfer of the securities of Champion and/or the
solicitation of proxies with respect to voting rights of
Champion securities in strict compliance with all federal and
state securities laws. Without limiting the generality of the
foregoing, the InfoPlan parties agree to immediately amend the
Report on Form 13D previously filed by some of such parties
with respect to the securities of Champion to accurately
reflect the relationships between and among the InfoPlan
Parties, and to accurately describe the provisions of Sections
3.5 and 3.6 of this Agreement as they may affect voting rights
of the InfoPlan Parties with respect to the common stock of
Champion. Additionally, the InfoPlan parties agree that they
will file and keep current all reports required by Section 16
of the Securities and Exchange Act of 1934.
3.8. Limitations on Company Communications. The InfoPlan parties
agree that, for purposes of assisting them in their compliance
with federal and state securities laws, that all future
Page 4
<PAGE>
communications between the InfoPlan Parties and Champion shall
be made through Champion's General Counsel, Kevin J. Ryan,
Esq. or any successor appointed by the Board of Directors for
such purpose but pursuant to Notice given in accordance with
Section 5.1 herein.
3.9. Limitation on Activities. From and after the date of this
Agreement, the InfoPlan Parties agree that they will refrain,
and will cause their respective directors officers, members
and Affiliates to refrain from, engaging in investment
banking, shareholder relations, investor relations, market
relations or any other similar activities for or on behalf of
Champion and that the only communications or activities that
they will engage in with respect to Champion or its securities
will be those activities appropriate for a non-employee
shareholder of a public company.
3.10. Availability of Equitable Relief. The InfoPlan Parties
acknowledge and agree that the obligations undertaken by them
under this Agreement are special, unique and of an
extraordinary character, and that Champion and it
shareholders, officers and directors could not be adequately
compensated by money damages for a breach of any of the
provisions of this Agreement by the InfoPlan Parties. In the
event that any provision of this Agreement is breached by the
InfoPlan Parties, Champion shall be entitled to obtain (i) an
injunction restraining such breach or threatened breach; (ii)
specific performance of any provision of this Agreement
including but not limited to the provisions of Sections 3.5,
3.6, 3.7, 3.8 and 3.9 or (iii) an order in the nature of a
declaratory judgment declaring that the proxy granted by
Section 3.6 is valid and irrevocable, in addition to any other
right or remedy available to Champion. The InfoPlan Parties
agree that a bond or other security shall not be a condition
to the issuance of such injunction and/or for the ordering of
such specific performance.
3.11. Stateman Agreement. The InfoPlan Parties acknowledge that they
shall have sole responsibility to Stateman for the Stateman
Agreement and that they will hold Champion and its officers,
directors, agents and affiliates harmless from any and all
costs, expenses and damages relating thereto, or to any other
agreements, arrangements or understandings between any of The
InfoPlan parties and any other person or entity.
3.12. Relief. The InfoPlan parties hereby release and discharge
Champion, Caliendo and Carder, and their present and future
directors, officers, representatives, employees, attorneys,
advisors, agents, affiliates, subsidiaries, associates,
predecessors, heirs, executors, administrators, successors and
assigns from any and all claims, actions, complaints, causes
of action, debts, liabilities, demands or suits (each
individually a "Claim" and collectively "Claims") at law or in
equity, known or unknown, fixed or contingent, contract or
tort, which they now have or could assert by reason of
actions, events or transactions in any way relating to the
Subscription Agreement, the InfoPlan Proxy, the RRG Proxy, or
the Pension Trust Proxy. Champion, Carder and Caliendo hereby
release and discharge the InfoPlan parties and their
respective present, former and future directors, officers,
members, representatives, employees, agents, attorneys,
advisors, affiliates, associates, predecessors, heirs,
executors, administrators, successors and assigns from any and
all Claims at law or in equity, known or unknown, fixed or
contingent, contract or tort, which they now have or could
assert by reason of actions, events or transactions, in any
way relating to the Subscription Agreement, the InfoPlan
Proxy, the RRG Proxy, or the Pension Trust Proxy.
Champion hereby releases and discharges Caliendo from any and
all claims, in any way relating to Champion and its
subsidiaries, on or prior to the date of this Agreement,
including any claims relating to Caliendo's acting as a
director or officer of Champion. Champion agrees to indemnify
and hold Caliendo harmless from any Claims made against
Page 5
<PAGE>
him arising from acts as an Officer or Director of Champion
provided such acts were done in good faith and did not
constitute gross negligence or willful misconduct. Caliendo
hereby releases Champion and its subsidiaries and their
respective present, former and future directors, officers,
members, representatives, employees, agents, attorneys,
advisors, affiliates, associates, predecessors, heirs,
executors, administrators, successors and assigns from any and
all claims, in any way relating to National Health Benefits
Corporation, an Arizona corporation, including any claim by
Rob Galloway against National Health Benefits Corporation.
3.13. No Disparagement. The InfoPlan Parties, Caliendo, Carder and
Champion each agree that none of the parties shall make any
disparaging or negative statement (or statements construed to
be such), oral or written to anyone concerning or in any way
relating to the issues covered in this Agreement.
4. GENERAL
4.1. Notices. Any notice or other communication relating to this
Agreement and any and all communications which might become
necessary to effectuate the purposes of this Agreement, shall
be delivered to the parties by certified mail, facsimile, a
recognized overnight national delivery service, at the
following addresses:
If to any of the
InfoPlan Parties: Zirk Engelbrecht, President
InfoPlan Inc.
19 Hillsyde Court
Cockeysville, Maryland 21030
Fax: (410) 628-1112
If to Champion: Champion Financial Corporation
9495 East San Salvador Drive
Scottsdale, Arizona 85258
Fax: (602) 451-9624
Attention: President
with copies to: Kevin J. Ryan, Esq.
Vice President & General Counsel
Champion Financial Corporation
8745 West Higgins Road
Suite 300
Chicago, Illinois 60631
Fax: (773) 693-7908
and: Bryan Cave LLP
2800 North Central Avenue
Suite 2100
Phoenix, Arizona 85004
Fax: (602) 266-5938
If to Caliendo: Paul F. Caliendo
8075 East Dale Lane
Scottsdale, Arizona 85262
Fax: (602) 473-3089
Page 6
<PAGE>
If to Carder: Stephen J. Carder
Champion Financial Corporation
9495 East San Salvador Drive
Scottsdale, Arizona 85258
Fax: (602) 451-9624
4.2. Parties Benefited. This Agreement is made for the benefit and
protection of the parties hereto. No other person or
organization shall have any right of action or defense based
hereon.
4.3. Modifications. No modification or amendment to this Agreement
shall be valid, unless in writing and signed by the parties to
this Agreement.
4.4. Parties Bound. This Agreement shall be binding on and inure to
the benefit of the heirs, personal representatives,
predecessors, successors and assigns of the parties hereto.
4.5. Revocation of Prior Proxies. This Agreement shall serve as a
revocation of, and a consent to the revocation of, the RRG
Proxy, the InfoPlan Proxy and the Pension Trust Proxy by all
parties thereto and hereto.
4.6. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their
respective successors and legal representatives.
4.7. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the
State of Arizona applicable to agreements made or to be
performed entirely within such state, without regard to the
conflict of law principles of such state.
4.8. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall together be considered one
and the same agreement, and shall become effective when one or
more of such counterparts have been signed by each of the
parties.
4.9. Severability. In the event that any terminal provision of this
Agreement is declared to be invalid or illegal, for any
reason, this Agreement shall remain in full force and effect
and the same shall be interpreted as though such invalid or
illegal provision was not a part hereof.
4.10. Attorneys' Fees. In the event that any party hereto is
required to commence or otherwise participate in an action or
other proceeding to enforce any right arising under this
Agreement, the party prevailing in such action or other
proceeding shall be entitled to recover all costs and
attorneys' fees, such fees to be set by the court or other
tribunal, and not by the jury.
4.11. Additional Instruments and Actions. The parties hereto
expressly agree to execute any or further additional
instruments as may be required, or to perform any other act
necessary to effectuate and carry out the purposes of this
Agreement, without the payment of additional consideration.
4.12. Integration. This Agreement and its exhibits, together with
any documents executed and delivered pursuant hereto, embody
the full and complete understanding and agreement of the
parties hereto with respect to the matters addressed herein
and supersedes all prior understandings or agreements, whether
oral or in writing, and all contemporaneous oral
understandings or agreements.
Page 7
<PAGE>
4.13. Headings; Interpretation. The headings used herein are used
for convenience and reference only and are not intended to
define, limit or describe the scope or intent of any provision
of this Agreement.
Page 8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly and
delivered as of the date hereof.
CHAMPION FINANCIAL CORPORATION
By:
----------------------------
Its
--------------------------
Acting President and Chief
Operating Officer
PAUL F. CALIENDO
-------------------------------
STEPHEN J. CARDER
-------------------------------
ZIRK ENGELBRECHT
-------------------------------
MARCY ENGELBRECHT
-------------------------------
INFOPLAN PARTNERS LLC, by
INFOPLAN PARTNERS INC.
By:
----------------------------
Its
--------------------------
INFOPLAN INC.
By:
----------------------------
Its
--------------------------
RISK RESOLUTION GROUP
By:
----------------------------
Its
--------------------------
LAW OFFICE OF MARCY M. HALLOCK PENSION PLAN
By:
----------------------------
Its
--------------------------
Page 9
EXHIBIT 21
Subsidiaries of the Registrant
Name State of Incorporation
---- ----------------------
HealthStar, Inc. Illinois
National Health Benefits & Casualty Corporation Nevada
Three Rivers Provider Network Nevada
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MARCH 31, 1998, AND STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDING
MARCH 31, 1998, OF CHAMPION FINANCIAL CORPORATION AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 199,466
<SECURITIES> 0
<RECEIVABLES> 2,762,446
<ALLOWANCES> 250,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,781,038
<PP&E> 3,140,507
<DEPRECIATION> 288,550
<TOTAL-ASSETS> 15,448,663
<CURRENT-LIABILITIES> 4,033,419
<BONDS> 0
0
0
<COMMON> 5,856
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 7,853,996
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,365,586
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 488,410
<INCOME-TAX> 184,305
<INCOME-CONTINUING> 304,105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 304,105
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0
</TABLE>
