<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1998
/ / 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: 0-19902
DAMARK INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-1551116
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7101 Winnetka Avenue North
Minneapolis, Minnesota 55428
(Address of principal executive offices)
(Zip code)
(612) 531-0066
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
On November 6, 1998, there were 6,360,217 shares of Class A Common Stock,
$.01 par value, of Damark International, Inc. outstanding.
<PAGE>
DAMARK INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1: Financial Statements
Consolidated Statements of Operations For the
Three and Nine Months ended September 26, 1998
and September 27, 1997 1
Consolidated Balance Sheets
As of September 26, 1998 and December 31, 1997 2
Consolidated Statements of Cash Flows
For the Nine Months ended September 26, 1998
and September 27, 1997 3
Notes to Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of
Results of Operations and Financial Condition 7
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 15
Signature 16
</TABLE>
<PAGE>
DAMARK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues. . . . . . . . . . . . . . . . . . . $ 93,959 $ 134,824 $ 344,740 $ 410,940
Cost of products and services . . . . . . . . . . 57,798 93,613 227,942 292,575
------------- ------------- ------------- -------------
Gross profit. . . . . . . . . . . . . . . . 36,161 41,211 116,798 118,365
Marketing and administrative expenses . . . . . . 43,891 39,435 128,644 112,235
Unusual expenses (Note 6) . . . . . . . . . . . . -- -- 767 --
------------- ------------- ------------- -------------
Operating (loss) income . . . . . . . . . . (7,730) 1,776 (12,613) 6,130
Interest expense, net . . . . . . . . . . . . . . (636) (602) (2,286) (1,057)
Other expense, net. . . . . . . . . . . . . . . . (169) (15) (410) (67)
------------- ------------- ------------- -------------
(Loss) income before income taxes . . . . . (8,535) 1,159 (15,309) 5,006
Income tax benefit (provision). . . . . . . . . . 2,902 (394) 5,205 (1,701)
------------- ------------- ------------- -------------
Net (loss) income . . . . . . . . . . . . . $(5,633) $765 $(10,104) $3,305
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Basic (loss) earnings per share . . . . . . . . . $ (.77) $.10 $(1.34) $.41
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted (loss) earnings per share . . . . . . . . $ (.77) $.09 $(1.34) $.39
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
DAMARK INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
September 26, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents. . . . . . . . . . . $ 38 $ 474
Trade accounts receivable, net . . . . . . . . 41,207 77,573
Merchandise inventories, net . . . . . . . . . 38,050 70,744
Deferred membership solicitation and catalog
costs . . . . . . . . . . . . . . . . . . . 12,601 9,849
Other current assets . . . . . . . . . . . . . 2,301 1,643
------------- ------------
Total current assets. . . . . . . . . . . 94,197 160,283
Property and equipment, net . . . . . . . . . . . 37,944 38,351
Other assets, net . . . . . . . . . . . . . . . . 7,045 7,555
------------- ------------
Total assets. . . . . . . . . . . . . . . $139,186 $206,189
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . $ 30,196 $ 49,532
Accrued liabilities. . . . . . . . . . . . . . 17,160 18,439
Deferred membership revenue, net . . . . . . . 16,921 20,938
Deferred income taxes. . . . . . . . . . . . . 2,675 2,675
Borrowings under revolving credit facility . . 19,253 44,400
------------- ------------
Total current liabilities . . . . . . . . . 86,205 135,984
Deferred income taxes . . . . . . . . . . . . . . 1,542 1,542
Shareholders' Equity:
Class A Common Stock, $.01 par, 20 million
shares authorized; 7,292,917 and 8,025,964
shares issued and outstanding at
September 26, 1998 and December 31, 1997,
respectively. . . . . . . . . . . . . . . . 73 80
Class B Common Stock, $.01 par, 2 million
shares authorized; none issued and
outstanding . . . . . . . . . . . . . . . . -- --
Paid-in capital. . . . . . . . . . . . . . . . 68,339 75,452
Accumulated deficit. . . . . . . . . . . . . . (16,973) (6,869)
------------- ------------
Total shareholders' equity. . . . . . . . . 51,439 68,663
------------- ------------
Total liabilities and shareholders'
equity. . . . . . . . . . . . . . . . . $139,186 $206,189
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
DAMARK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
September 26, September 27,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income. . . . . . . . . . . . . . . $(10,104) $ 3,305
Adjustments to reconcile net (loss) income
to net cash provided by (used for)
operations:
Depreciation and amortization . . . . . . . 8,022 6,202
Loss (gain) on disposal of property
and equipment . . . . . . . . . . . . . . 276 (152)
Changes in working capital items -
Trade accounts receivable, net. . . . . . . 36,366 (23,292)
Merchandise inventories, net. . . . . . . . 32,694 (13,013)
Deferred membership solicitation and
catalog costs and other current assets. . (3,410) (4,985)
Accounts payable and accrued liabilities. . (20,615) 12,807
Deferred membership revenue, net. . . . . (4,017) 1,064
------------- -------------
Net cash provided by (used for) operations . . 39,212 (18,064)
------------- -------------
INVESTING ACTIVITIES:
Property and equipment additions, net. . . . . (7,027) (6,829)
Other, net . . . . . . . . . . . . . . . . . . (354) (72)
------------- -------------
Net cash used for investing activities . . . . (7,381) (6,901)
------------- -------------
FINANCING ACTIVITIES:
(Payments) borrowings under revolving credit
facility, net . . . . . . . . . . . . . . . (25,147) 25,100
Repurchase and retirement of common stock. . . (7,707) (454)
Net proceeds from employee exercise of stock
options and issuance of stock . . . . . . . 587 368
------------- -------------
Net cash (used for) provided by financing
activities. . . . . . . . . . . . . . . . . (32,267) 25,014
------------- -------------
Net (decrease) increase in cash and cash
equivalents . . . . . . . . . . . . . . . . (436) 49
Cash and cash equivalents, beginning of period 474 2
------------- -------------
Cash and cash equivalents, end of period . . . $ 38 $ 51
------------- -------------
------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period. . . . . . . . $ 2,049 $ 717
Income taxes paid during the period. . . . . . $ 986 $ 728
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have
been prepared by Damark International, Inc. (the "Company") pursuant
to the Rules and Regulations of the Securities and Exchange Commission
("SEC"). The information furnished in these financial statements
includes normal recurring adjustments and reflects all adjustments,
which are, in the opinion of management, necessary for a fair
presentation of such financial statements. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
Although the Company believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that
these financial statements be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's 1997 Annual Report to Shareholders and the Form 10-K filed
with the SEC.
Due to the seasonality of the Company's business, net revenues and
operating results for the three and nine months ended September 26,
1998 are not necessarily indicative of the results to be expected for
the full year.
The Company's fiscal year ends on December 31; however, each quarter
ends on the last Saturday of a thirteen-week period. As a result, the
operating results for the nine months ended September 26, 1998 and
September 27, 1997 included 269 and 270 days, respectively. It is the
Company's opinion that the difference in days does not materially
affect the comparability of the financial results for the periods
presented.
(2) MEMBERSHIP FEE REVENUE AND EXPENSE RECOGNITION
On clubs in which the Company has a continuing obligation, net
deferred membership fees and initial direct acquisition related costs
are recorded when the trial period has elapsed and are amortized over
the membership period, generally twelve months. In August 1998, the
SEC required another company in the membership services industry to
defer the recognition of revenue from the sale of membership services
until the expiration of the period during which a full refund is
offered and to record the expenses of soliciting memberships as
incurred rather than deferring and recognizing the expenses over the
membership period. In September 1998, the SEC issued a press release
stating that the "SEC will formulate and augment new and existing
accounting rules and interpretations covering revenue recognition,
restructuring reserves, materiality, and disclosure" for all publicly
traded companies. The timeframe for issuance of, as well as the
specific requirements of the final SEC interpretation is uncertain. As
such, the impact such guidance will have on the Company's current
accounting practices cannot be quantified. However, if the Company is
required to adopt similar accounting treatment for revenue and expense
recognition as indicated above, it would have a material impact on the
Company's financial position and results of operations due to the
significant growth in the Company's membership services segment.
(3) EARNINGS PER COMMON SHARE
Basic earnings per common share ("EPS") is computed based on the
weighted average shares of common stock outstanding during the
applicable periods while diluted EPS assumes conversions of
potentially dilutive shares of common stock outstanding during the
applicable periods. Potential dilutive shares of common stock include
stock options, which have been granted to employees and directors of
the Company. For the three and nine months ended September 26, 1998,
approximately 1,859,000 options to purchase shares of common stock
were outstanding but were not included in the computation of diluted
EPS as their inclusion would have been antidilutive. Had the
inclusion of these options not been antidilutive, the Company would
have assumed conversion of stock options of approximately 142,000 and
284,000 for the three and nine months ended September 26, 1998.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) EARNINGS PER COMMON SHARE (CONTINUED)
The components of basic and diluted EPS for the three and nine months
ended September 26, 1998 and September 27, 1997 are as follows:
<TABLE>
(Amounts in thousands, except Three Months Ended Nine Months Ended
per share amounts) -------------------------------- -------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net (loss) income. . . . . . . . . . . . . . $(5,633) $765 $(10,104) $3,305
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average shares outstanding. . . . . 7,311 8,026 7,551 8,035
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Basic EPS . . . . . . . . . . . . . . . . $(.77) $.10 $(1.34) $.41
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average shares outstanding. . . . . 7,311 8,026 7,551 8,035
Assumed conversions of stock options . . . . -- 575 -- 449
------------- ------------- ------------- -------------
Common equivalent shares outstanding . . . . 7,311 8,601 7,551 8,484
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted EPS . . . . . . . . . . . . . . . $(.77) $.09 $(1.34) $.39
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
EPS as previously reported. . . . . . . . $.09 $.39
------------- -------------
------------- -------------
</TABLE>
(4) FINANCING ARRANGEMENTS
During the third quarter, the Company obtained a new $75 million
revolving line of credit and letter of credit facility to be used for
general working capital and other corporate purposes. Up to $20
million of the facility is available for stand-by and documentary
letters of credit. Borrowings outstanding under the line of credit
bear interest, at the Company's option, at the reference rate or LIBOR
plus a spread which is based on the Company's excess availability. At
September 26, 1998, the Company had borrowing capacity of
approximately $43 million of which $23.3 million was outstanding,
consisting of $19.3 million of borrowings and $4.0 million of letters
of credit. Borrowings under the facility are secured by certain
assets of the Company. At September 26, 1998, the Company was in
compliance with its covenants under its credit facility.
(5) COMMON STOCK AND STOCK OPTION TRANSACTIONS
During the nine months ended September 26, 1998, the Company
repurchased 804,000 of its Class A Common Stock ("Common Stock"), at
an aggregate cost of approximately $7.7 million. Approximately
784,000 shares were purchased under a series of Board authorized
private transactions as well as under the 400,000-share open-market
repurchase program, as authorized by the Company's Board of Directors
in 1996. During third quarter 1998, the Board of Directors authorized
a two million-share open-market repurchase program, under which the
Company repurchased 20,000 shares through September 26, 1998.
Subsequent to quarter end, the Company purchased approximately 933,000
shares at an aggregate cost of approximately $6.4 million under the
new repurchase program. During the first three quarters of 1997, the
Company, at an aggregate cost of approximately $454,000, repurchased
47,500 shares of Common Stock.
On April 15, 1998, the Board of Directors and shareholders approved an
amendment to the Company's 1991 Stock Option Plan which increased the
number of shares of the Company's Common Stock reserved for issuance
to 1,600,000. On June 12, 1998, the Company granted options under the
plan to selected employees of the Company to purchase 157,000 shares
of the Company's Common Stock at $8.25 per share. The options vest
over three years and expire 10 years from the date of grant. During
third quarter, the Company granted options to selected management of
the Company to purchase 162,000 shares of the Company's Common Stock
at a range of $6.50 to $7.94 per share. The options vest over three
years and expire 10 years from the date of grant.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(5) COMMON STOCK AND STOCK OPTION TRANSACTIONS (CONTINUED)
On January 30, 1998, the Company granted to Mark A. Cohn an option to
purchase 400,000 shares of the Company's Common Stock at $10.00 per
share. The option vests in five equal annual installments beginning
in 1999 and expires 10 years from the date of grant.
On January 30, 1998, the Company's Board of Directors approved a stock
purchase plan for non-employee directors consisting of 50,000 shares
of the Company's Common Stock. Under the plan, each director is
limited to purchasing a maximum of 5,000 shares per month. The option
price is equal to an average of the last reported sale price for the
Company's Common Stock for the twenty trading days prior to
notification.
(6) UNUSUAL EXPENSES
Operating income for the three quarters ended September 26, 1998
includes unusual expenses of approximately $767,000 ($.07 per share
after-tax) related to the temporary closing in second quarter of the
Company's Junction City call center as a result of a number of worker
illnesses in the facility and resulting hospitalizations. Included in
the expenses were amounts incurred related to rerouting incoming calls
to the Fayetteville and Brooklyn Center call centers, as well as to
three external vendors, hiring temporary labor pools to handle the
rerouted calls, setting up temporary-site locations in Junction City,
including trailer rentals and electrical installations for computer
and telephone equipment, and retention of health officials and
environmental specialists. The expenses also included the salaries,
wages and commissions of Junction City employees, corresponding to the
timeframe that the facility was closed and overtime costs incurred at
the other call centers as a result of the closing.
Although a cause was never identified, the Company reopened the call
center in mid-May after the Kansas Department of Health and
Environment, physicians from a local hospital and an external
environmental consulting firm declared the facility safe for use. The
Company undertook several precautionary measures upon reopening the
facility including the installation of various monitoring equipment,
such as carbon monoxide detectors, air turnover units and activated
charcoal filters, as well as the retention of on-site medical
professionals. These costs were included above in the total of
unusual expenses.
(7) ACCOUNTING PRONOUNCEMENTS
The Company will be adopting Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information," during the fourth quarter of
1998. SFAS 131 requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Operating segments are defined as the components of an
enterprise for which separate financial information is available and
is used by the chief operating decision maker in deciding how to
allocate resources or evaluate performance. In general, financial
information is required to be reported on the basis that it is used
internally by management for making operating decisions and assessing
performance. The Company has identified that it has two operating
segments, Retail Services and Membership Services. SFAS 131 is
effective for fiscal years beginning after December 15, 1997.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The selected financial data for each of the periods presented below is derived
from the Company's Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
($ in millions) September 26, 1998 September 27, 1997
------------------------- --------------------------
<S> <C> <C> <C> <C>
Net revenues. . . . . . . . . . . . . . . . . . . . $ 94.0 100.0 % $ 134.8 100.0%
Gross profit. . . . . . . . . . . . . . . . . . . . 36.2 38.5 41.2 30.6
Marketing and administrative expenses . . . . . . . 43.9 46.7 39.4 29.2
Operating (loss) income . . . . . . . . . . . . . . (7.7) (8.2) 1.8 1.3
Net (loss) income . . . . . . . . . . . . . . . . . $ (5.6) (6.0)% $ 0.8 0.6%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Nine Months Ended
-------------------------------------------------------------
($ in millions) September 26, 1998 September 27, 1997
------------------------- --------------------------
<S> <C> <C> <C> <C>
Net revenues. . . . . . . . . . . . . . . . . . . . $344.7 100.0% $410.9 100.0%
Gross profit. . . . . . . . . . . . . . . . . . . . 116.8 33.9 118.4 28.8
Marketing and administrative expenses . . . . . . . 128.6 37.3 112.2 27.3
Unusual expenses. . . . . . . . . . . . . . . . . . 0.8 0.2 -- --
Operating (loss) income . . . . . . . . . . . . . . (12.6) (3.7) 6.1 1.5
Net (loss) income . . . . . . . . . . . . . . . . . $(10.1) (2.9)% $ 3.3 0.8%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
NET (LOSS) INCOME
The Company reported a net loss of $5.6 million, or $.77 per share for third
quarter 1998, compared to net income of $765,000, or $.09 per share for third
quarter 1997. The Company reported a year-to-date net loss of $10.1 million,
or $1.34 per share, compared to net income of $3.3 million, or $.39 per share
for the comparable period in the prior year.
NET REVENUES
Net revenues of $94.0 million for the quarter ended September 26, 1998
decreased $40.9 million or 30.3% from net revenues for the comparable period
last year. This decrease reflects a 43.0% reduction in catalog circulation
offset by increased membership revenues resulting from the significant
investments made by the Company during 1998 in its membership services
segment. Although the investments towards membership expansion has
negatively impacted earnings during 1998, membership revenues have provided
cash flow that can further be invested in the membership segment or used for
other financing and strategic initiatives for the Company. On a 1998
year-to-date basis, net revenues of $344.7 million reflected a 16.1% decline
from net revenues for the first nine months of 1997. Net revenues include
membership services fees earned from the Company's clubs, net product sales,
shipping and handling revenue and list revenue.
MEMBERSHIP SERVICES FEE REVENUES
During 1998, the Company has invested in its membership services segment,
specifically in its client services channel. As a result, membership fees
increased 15.0% to $21.4 million in third quarter 1998, as compared to $18.6
million for third quarter 1997. For the three quarters ended, membership
fees of $62.2 million increased 30.6% over membership fees of $47.6 million
for the comparable period in the prior year. The increased revenues reflect
higher credit card denials and membership returns.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
NET REVENUES (CONTINUED)
MEMBERSHIP SERVICES FEE REVENUES (CONTINUED)
New members added to the Company's membership clubs exceeded third quarter
1997 new members by 128.5%. During the third quarter and nine-month period
then ended, approximately 484,000 and 1.2 million new members were added to
the Company's membership rolls. Of the third quarter 1998 additions, 58.7%
or approximately 284,000 new club members were added in the
direct-to-consumer channel, approximately 71,000 more members than were added
in third quarter 1997. Despite significant reductions in catalog mailings,
the Company was able to exceed its prior year acquisition efforts in this
channel through its outbound telemarketing campaigns and an expanded suite of
membership products. Although the Company continues to obtain new members
through the direct-to-consumer channel, the Company's long-term strategic
growth vehicle in its membership services segment is through the client
services channel, in which the Company markets its membership programs on
behalf of large, customer list-owners. Since this channel's inception, the
Company has secured client relationships with nationally recognized financial
institutions, such as Capital One Bank, Wachovia Bank Card Services,
Associates First Capital Corporation and Bank One Corporation. Due in large
part to this channel, the Company is no longer solely dependent upon catalog
mailings to acquire new members, as approximately 41.0% of total new members
added during third quarter were obtained through this channel as compared to
29.0% for the first half of 1998. The Company tested several new innovative
club concepts during the third quarter.
During third quarter 1998, club membership renewals of 212,000 increased
10.4% over the prior year comparable period, while renewals of 711,000 for
the three quarters ended September 26, 1998 increased 21.1% over renewals for
the three quarters ended September 27, 1997. As of September 26, 1998, club
membership of 1,520,000 members, including approximately 129,000 free-trial
members, was over 25.5% higher than club membership at September 27, 1997.
Following is a summary of membership statistics for the three and nine months
ended September 26, 1998 and September 27, 1997:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Nine Months Ended
-------------------------------- -------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
DIRECT-TO-CONSUMER CHANNEL:
New club members added.. . . . . . . . . . . . . . . . 284 213 817 578
Club members renewed . . . . . . . . . . . . . . . . . 212 192 711 587
Membership expirations & cancellations . . . . . . . . (527) (328) (1,633) (998)
Net membership, at period end. . . . . . . . . . . . . 1,241 1,211 1,241 1,211
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
CLIENT SERVICES CHANNEL:
New club members added.. . . . . . . . . . . . . . . . 200 -- 417 --
Club members renewed . . . . . . . . . . . . . . . . . -- -- -- --
Membership expirations & cancellations . . . . . . . . (92) -- (150) --
Net membership, at period end. . . . . . . . . . . . . 279 -- 279 --
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
TOTAL MEMBERSHIP, AT PERIOD END. . . . . . . . . . . . 1,520 1,211 1,520 1,211
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
NET REVENUES (CONTINUED)
RETAIL SERVICES REVENUES
This year, the Company resized its mature core catalog retail business by
reducing the catalog-mailing investments intended to acquire members as well
as to reactivate older catalog customers. Pursuant to this revised
circulation strategy, approximately 23.2 million and 92.5 million catalogs
were mailed during the quarter and the three quarters ended September 26,
1998 as compared to 40.8 million and 115.7 million catalogs for the
comparable periods in the prior year. Sales per catalog mailed for third
quarter 1998 were $3.74, reflecting a 10.7% increase over third quarter 1997.
On a year-to-date basis, sales per catalog mailed of $3.59 favorably
compared to sales per catalog mailed of $3.56 for the first three quarters of
1997. The increase in sales productivity reflects improved response to the
front-end prospect and non-member catalogs partially offset by soft response
to members only catalogs, which have the highest sales productivity rates.
The Company continues to evaluate and enhance its retail formula in an effort
to produce a more profitable catalog model, including initiatives aimed at
higher margin catalog buyers.
The following table reflects catalog statistics for the three and nine months
ended September 26, 1998 and September 27, 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Number of catalogs mailed (in thousands). . . . . . 23,200 40,800 92,500 115,700
Response rate - total company . . . . . . . . . . . 2.07% 1.99% 2.12% 2.09%
Sales per catalog:
Front-end prospect . . . . . . . . . . . . . . . $ 2.05 $ 1.74 $ 2.02 $ 1.85
Back-end customers . . . . . . . . . . . . . . . $ 3.46 $ 3.20 $ 3.42 $ 3.30
Back-end members . . . . . . . . . . . . . . . . $ 7.18 $ 7.33 $ 7.16 $ 7.66
Total company . . . . . . . . . . . . . . . . $ 3.74 $ 3.38 $ 3.59 $ 3.56
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Average order - total company . . . . . . . . . . . $ 181 $ 170 $ 171 $ 170
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The increase in the average order during third quarter as compared to the
prior year is due to the increased percentage of sales from back-end members,
who have the highest sales productivity. Return rates of 13.2% and 12.8% for
the quarter and three quarters ended September 26, 1998 were essentially flat
as compared to return rates of 13.4% and 14.5% for the comparable periods in
the prior year.
GROSS PROFIT
The growth in the membership services segment and margin recapture
initiatives by the retail services segment have provided significant gross
profit improvement over the prior year. The overall gross profit margin as a
percentage of net revenues for third quarter 1998 increased to 38.5%, as
compared to 30.6% for third quarter 1997. Despite a 30.3% decline in net
revenues for the quarter, gross profit margin dollars decreased by only
12.3%, reflecting a shift in mix to the higher margin membership services
products. On a year-to-date basis, 1998's gross profit margin of 33.9%
compared favorably to a gross profit margin of 28.8% for the prior year
comparable period.
The Company's overall product profit margin is affected by the mix of sales
among the Company's six primary product categories, the mix of sales to
Preferred Buyers' Club and Insiders members who receive a 10% discount, and
shipping and handling revenue generated from product shipments. More
restricted use of free shipping and handling as a catalog marketing promotion
resulted in the Company's first shipping and handling profit in four years.
Products such as computers, consumer electronics and home office products
typically have higher price points and lower percentage profit margins, yet
provide higher actual dollar margin contribution per unit. Conversely,
product categories with lower price points, such as home decor, home
improvements and sporting goods/fitness products, generally have higher
percentage profit margins, but provide less actual dollar margin contribution
per unit.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
GROSS PROFIT (CONTINUED)
The following table illustrates the customer and product mix for the three and
nine months ended September 26, 1998 and September 27, 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Percentage of Sales by Customer Type:
Front-end prospect . . . . . . . . . . . . . . . 27.0% 26.0% 29.0% 26.0%
Back-end customers . . . . . . . . . . . . . . . 16.0 27.0 21.0 25.0
Back-end members . . . . . . . . . . . . . . . . 57.0 47.0 50.0 49.0
------------- ------------- ------------- -------------
100.0% 100.0% 100.0% 100.0%
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Percentage of Sales by Product Type:
Computers. . . . . . . . . . . . . . . . . . . . 27.1% 29.5% 29.1% 31.3%
Consumer electronics . . . . . . . . . . . . . . 18.6 17.2 17.7 17.6
Home decor . . . . . . . . . . . . . . . . . . . 16.2 15.0 15.8 14.0
Home improvements. . . . . . . . . . . . . . . . 18.6 17.7 17.3 16.0
Home office. . . . . . . . . . . . . . . . . . . 13.2 14.6 14.2 14.8
Sporting goods/fitness . . . . . . . . . . . . . 6.3 6.0 5.9 6.3
------------- ------------- ------------- -------------
100.0% 100.0% 100.0% 100.0%
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
As indicated by the table above, 1998's percentage of sales derived from the
home decor and home improvements product categories reflected a substantial
increase over 1997's mix. This increase reflects the Company's successful
introduction of the HOME COMFORTS catalog and related home product offerings,
in conjunction with the introduction of the Essentials for Home club program.
The decline in computer sales as a percentage of total product mix reflects
industry wide softness in computer sales as well as the Company's strategic
decision to re-merchandise this category and shift the mix of product
offerings towards higher margin products, such as laptop computers.
MARKETING AND ADMINISTRATIVE EXPENSES
Marketing and administrative expenses totaled $43.9 million in third quarter
1998, compared to $39.4 million for third quarter 1997. For the nine-month
period ended September 26, 1998, marketing and administrative expenses,
excluding the unusual expenses of approximately $767,000 related to the
temporary closing of the Junction City call center, totaled $128.6 million as
compared to $112.2 million for the comparable period for the prior year. The
increase in marketing and administrative expenses reflects certain costs
incurred as the Company continues its expansion into the membership services
industry, including an increased usage of outbound telemarketing, increased
inbound phone costs for membership customer service, commissions paid to
clients, the opening of the Company's client services telemarketing center
and costs associated with the enhancement of the Company's infrastructure
capabilities and information technology resources. Management continues to
strive towards identifying opportunities for variable and fixed cost
reductions.
UNUSUAL EXPENSES
During second quarter, the Company's Junction City call center was abruptly
closed as a result of a number of worker illnesses in the facility and
resulting hospitalizations. As a result of the closing the Company incurred
expenses related to rerouting incoming calls to the Fayetteville and Brooklyn
Center call centers, as well as to three external vendors, hiring temporary
labor pools to handle the rerouted calls, setting up temporary-site locations
in Junction City, including trailer rentals and electrical installations for
computer and telephone equipment, and retention of health officials and
environmental specialists. During the shutdown, the Company continued to pay
the salaries, wages and commissions of Junction City employees and incurred
overtime costs at the other call centers.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
UNUSUAL EXPENSES (CONTINUED)
Although a cause was never identified, the Company reopened the call center
in mid-May after the Kansas Department of Health and Environment, physicians
from a local hospital and an external environmental consulting firm declared
the facility safe for use. The Company undertook several precautionary
measures upon reopening the facility including the installation of various
monitoring equipment, such as carbon monoxide detectors, air turnover units
and activated charcoal filters, as well as the retention of on-site medical
professionals.
INTEREST EXPENSE
Net interest expense for third quarter 1998 of $636,000 increased $34,000
over third quarter 1997, while net interest expense of $2.3 million for the
first nine months of 1998 was $1.2 million higher than the prior year
comparable period. The year over year increase for the nine month comparable
periods reflects increased borrowings, which occurred throughout 1997 under
the Company's revolving credit facility necessary to fund working capital
requirements primarily related to its installment billing plans. The Company
has limited its offerings of the longer-duration installment billing plans
and, as a result, the Company has realized interest reductions from both the
first and second quarters of 1998 and anticipates further decline in interest
costs for fourth quarter.
INCOME TAX (BENEFIT) PROVISION
The Company's effective tax rate was 34.0% for third quarter 1998 and 1997,
as well as for the nine-month periods then ended.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
The Company's liquidity, as measured by its net working capital, was $8.0
million at September 26, 1998, as compared with $24.3 million at December 31,
1997. The Company's current ratio was 1.1 to 1.0 at September 26, 1998 as
compared to 1.2 to 1.0 at December 31, 1997. The decline in the Company's
net working capital and current ratio from year-end reflects reductions of
inventory levels and receivables, in addition to the repurchases of the
Company's Common Stock.
Net cash provided by operations totaled $39.2 million for the three quarters
ended September 26, 1998 as compared with net cash used for operations of
$18.1 million for the same period in 1997. This improvement reflects the
reduction in receivables and merchandise inventories, partially offset by
decreases in accounts payable, accrued liabilities and increases in deferred
membership solicitation and catalog costs. In addition, net deferred
membership income and initial direct acquisition-related costs decreased to
$16.9 million at September 26, 1998 from $20.9 million at year-end 1997.
During the three quarters ended September 26, 1998, the Company made capital
expenditures of approximately $7.0 million, compared with $8.1 million for
the three quarters ended September 27, 1997. Capital expenditures in 1998
included costs associated with the opening of a new client services
telemarketing center in Brooklyn Center, MN and improvements made to the
Company's corporate headquarters. The Company has invested and will continue
to evaluate its needs for additional investments in information technology
and infrastructure capabilities to achieve operational efficiencies.
Management currently anticipates that it will spend an aggregate of
approximately $9 to $10 million on capital expenditures during 1998.
YEAR 2000 COMPLIANCE
The Company utilizes both information technology ("IT") and non-IT systems
that will be affected by the date change in the Year 2000. The Company has
designated key individuals from management to comprise a central project team
to lead the Year 2000 compliance initiative and is engaged in an extensive
review of its IT and non-IT systems, including assessing the affect of, and
developing the necessary steps towards, achieving Year 2000 compliance. The
Company's primary Year 2000 compliance objective is to mitigate the risk for
significant business interruption. To date, the Company has assessed the
exposure to its IT and non-IT systems, established areas of high risk, and
has identified, and corresponded with, key vendors, whose inability to
achieve Year 2000 compliance would negatively impact or disrupt the Company's
operations. The Company has also assessed the potential impact on its
operations, should key third parties not be successful in converting their
systems in a timely manner. In addition to the central project team, the
Company also will be investing in additional internal resources solely
dedicated towards achieving and ensuring Year 2000 compliance. The Company's
progress with regard to achieving Year 2000 compliance is monitored and
reported on a regular basis to its management and to its Board of Directors.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
YEAR 2000 COMPLIANCE (CONTINUED)
The Company has been, and will continue to exercise its best efforts in
identifying and remedying any potential Year 2000 exposures within its
control. The Company anticipates the largest risks to occur, however, should
the Company's external third parties fail to achieve Year 2000 compliance.
The Company has identified key external third parties who provide services
including, but not limited to, telecommunications, credit processing,
printing, funds transfer and utilities. In addition, while the Company
values its established relationships with its key vendors, it is identifying
secondary vendors in the event that certain of its business partners are
delayed in achieving Year 2000 compliance.
The Company has begun to incur expenses related to the evaluation and
implementation of solutions to resolve the Year 2000 issue and expects
certain expenditures to continue through the year 2000. In accordance with
the Company's financial policies, maintenance or modification costs incurred
by the Company have been expensed. The costs of new software (whether
purchased or internally developed) and hardware that primarily provides
enhanced functionality, beyond achieving Year 2000 compliance, will be
capitalized and amortized over their respective useful lives. The Company
anticipates total expenditures related to the Year 2000 issue of
approximately $3.5 million, of which $1.7 million has been incurred to date.
The Company believes that the risk of significant internal Year 2000 issues
in remaining IT systems is mitigated because a majority of the Company's
systems have been developed or modified within the last four to five years
with the Year 2000 issue in mind.
The costs of addressing the Year 2000 issue are not expected to materially
affect the Company's financial position, results of operations or cash flows
in future periods. However, the Company's current estimates of the amount of
time and costs necessary to modify and test its IT and non-IT systems are
based upon assumptions regarding future events. New developments may occur
that could affect the Company's estimates of the amount of time and costs
necessary to modify and test its systems for Year 2000 compliance and,
accordingly, there can be no assurance that Year 2000 related costs will not
be materially higher. While the Company believes its planning efforts are
adequate to address its Year 2000 concerns, the year 2000 readiness of the
Company's business partners may lag behind the Company's efforts and it is
uncertain as to what extent the Company could be impacted. During the
remainder of 1998, and in 1999, the Company will continually monitor its
progress against its Year 2000 plans and assess the feasibility and
appropriateness of such plans, in order to reduce its business interruption
and financial exposure with regard to Year 2000 related issues.
FINANCING
During the third quarter, the Company obtained a new $75 million revolving
line of credit and letter of credit facility to be used for general working
capital and other corporate purposes. Up to $20 million of the facility is
available for stand-by and documentary letters of credit. Borrowings
outstanding under the line of credit bear interest, at the Company's option,
at the reference rate or LIBOR plus a spread which is based on the Company's
excess availability. At September 26, 1998, the Company had borrowing
capacity of approximately $43 million of which $23.3 million was outstanding,
consisting of $19.3 million of borrowings and $4.0 million of letters of
credit. Borrowings under the facility are secured by certain assets of the
Company. At September 26, 1998, the Compnay was in compliance with its
covenants under its credit facility.
The Company offers its customers varying installment-billing plans with no
finance charges payable to the Company. As a result, the Company supported
installment plan receivables aggregating $20.2 million and $50.5 million at
September 26, 1998 and December 31, 1997, respectively. The Company's
receivable balance at any time is generally reflective of sales volume
fluctuations, as approximately 30% to 40% of its net revenues are financed by
customers on one of the Company's installment billing plans. The decline in
installment plan receivables from year-end reflects the Company's revised
strategy to limit its offerings of the longer-duration installment billing
plans. The Company will continue to offer certain short-term installment
billing plans to its customers, requiring the allocation of capital resources
expected to be funded from internal operations as well as availability under
the revolving credit facility.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
CAPITAL TRANSACTIONS
During the nine months ended September 26, 1998, the Company repurchased
804,000 of its Class A Common Stock ("Common Stock"), at an aggregate cost of
approximately $7.7 million. Approximately 784,000 shares were purchased
under a series of Board authorized private transactions as well as under the
400,000-share open-market repurchase program, as authorized by the Company's
Board of Directors in 1996. During third quarter 1998, the Board of
Directors authorized a two million-share open-market repurchase program,
under which the Company repurchased 20,000 shares through September 26, 1998.
Subsequent to quarter end, the Company purchased approximately 933,000
shares at an aggregate cost of approximately $6.4 million under the new
repurchase program. During the first three quarters of 1997, the Company, at
an aggregate cost of approximately $454,000, repurchased 47,500 shares of
Common Stock.
On April 15, 1998, the Board of Directors and shareholders approved an
amendment to the Company's 1991 Stock Option Plan which increased the number
of shares of the Company's Common Stock reserved for issuance to 1,600,000.
On June 12, 1998, the Company granted options under the plan to selected
management of the Company to purchase 157,000 shares of the Company's Common
Stock at $8.25 per share. The options vest over three years and expire 10
years from the date of grant. During third quarter, the Company granted
options to selected management of the Company to purchase 162,000 shares of
the Company's Common Stock at a range of $6.50 to $7.94 per share. The
options vest over three years and expire 10 years from the date of grant.
On January 30, 1998, the Company granted to Mark A. Cohn an option to
purchase 400,000 shares of the Company's Common Stock at $10.00 per share.
The option vests in five equal annual installments beginning in 1999 and
expires 10 years from the date of grant.
On January 30, 1998, the Company's Board of Directors approved a stock
purchase plan for non-employee directors consisting of 50,000 shares of the
Company's Common Stock. Under the plan, each director is limited to
purchasing a maximum of 5,000 shares per month. The option price is equal to
an average of the last reported sale price for the Company's Common Stock for
the twenty trading days prior to notification.
The Company expects to fund its operations, expected working capital
requirements and capital expenditures for the remainder of 1998 and
throughout 1999 from cash generated from operations and available borrowing
capacity under its credit facility.
SEASONALITY
The Company's retail services segment is subject to significant seasonal
variations in consumer demand, which the Company believes are generally
associated with the direct marketing and retail industries. Historically,
the Company's net retail revenues have been the largest during the fourth
calendar quarter and a significant portion of its earnings have been realized
during that period. The Company's operating results during this period may
be affected by holiday spending patterns, as well as the timing and
effectiveness of catalog mailings and general economic and other conditions.
In anticipation of its peak selling season, the Company hires additional
flex-time employees in its telemarketing, order processing and distribution
areas, increases its merchandise inventories and incurs significant catalog
production and mailing costs. The Company's annual operating results could
be adversely affected if, among other factors, the Company's revenues were to
be substantially below seasonal expectations during the October through
December timeframe, or if a sufficient number of qualified employees would
not be available on a flex-time or other non-permanent basis.
INFLATION
Excluding increases in postage and paper costs, inflation has not had, and
the Company does not expect it to have, a material impact on operating
results. There can be no assurances, however, that the Company's business
will not be affected by inflation in the future. The Company could be
adversely impacted by substantial cost increases for paper and postage, as
significant cost increases in these areas could have a material impact on
advertising and other promotional costs in future periods. For the remainder
of fiscal year 1998, no such increases are anticipated.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
ACCOUNTING PRONOUNCEMENTS
The Company will be adopting Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," during the fourth quarter of 1998. SFAS 131 requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. Operating segments are defined as the
components of an enterprise for which separate financial information is
available and is used by the chief operating decision maker in deciding how
to allocate resources or evaluate performance. In general, financial
information is required to be reported on the basis that it is used
internally by management for making operating decisions and assessing
performance. The Company has identified that it has two operating segments,
Retail Services and Membership Services. SFAS 131 is effective for fiscal
years beginning after December 15, 1997.
SEC PENDING INTERPRETATION
On clubs in which the Company has a continuing obligation, net deferred
membership fees and initial direct acquisition related costs are recorded
when the trial period has elapsed and are amortized over the membership
period, generally twelve months. In August 1998, the SEC required another
company in the membership services industry to defer the recognition of
revenue from the sale of membership services until the expiration of the
period during which a full refund is offered and to record the expenses of
soliciting memberships as incurred rather than deferring and recognizing the
expenses over the membership period. In September 1998, the SEC issued a
press release stating that the "SEC will formulate and augment new and
existing accounting rules and interpretations covering revenue recognition,
restructuring reserves, materiality, and disclosure" for all publicly traded
companies. The timeframe for issuance of, as well as the specific
requirements of the final SEC interpretation is uncertain. As such, the
impact such guidance will have on the Company's current accounting practices
cannot be quantified. However, if the Company is required to adopt similar
accounting treatment for revenue and expense recognition as indicated above,
it would have a material impact on the Company's financial position and
results of operations due to the significant growth in the Company's
membership services segment.
FORWARD-LOOKING INFORMATION
Forward-looking statements contained herein are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Certain important factors exist that could cause results to differ materially
from those anticipated by some of the statements made above. Investors are
cautioned that all forward-looking statements involve risks and uncertainty.
The factors, among others, that could cause actual results to differ
materially include: consumer spending and debt levels; interest rates;
failure of the Company or significant third parties to achieve year 2000
compliance, including material costs being incurred in connection with such
compliance; any changes mandated by the SEC with regard to membership
services revenue and expense recognition; changes or consumer perceptions of
changes in the domestic and/or international economic and political climates;
continuity of relationships with or purchases from major vendors; the
Company's ability to retain existing clients and attract new clients, the
Company's dependence on membership renewals, the Company's continuing ability
to develop new programs which generate consumer interest, arrangements with
list owners; changes in marketing strategy; labor shortages; changes in
product mix; higher than expected membership cancellations; telemarketing
center integration; competitive pressures on sales, pricing and membership
services; availability of financing on favorable terms; higher than expected
installment plan default rates; and increases in catalog production costs,
product costs, postage, shipping and other costs which cannot be recovered
through improved pricing of products and services.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
Exhibit 10 - Credit Agreement, dated as of August 10, 1998 by and
between the Registrant and Congress Financial Corp.
(Central), as Agent for the Banks named therein.
Exhibit 27 - Financial Data Schedule.
B. REPORTS ON FORM 8-K:
Registrant did not file any reports on Form 8-K during the
quarter ended September 26, 1998.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAMARK INTERNATIONAL, INC.
Date: November 10, 1998 By: /s/ Stephen P. Letak
-------------------------------
Stephen P. Letak
Executive Vice President -
Chief Financial Officer
16
<PAGE>
DRAFT: August 19, 1998 2:05pm
LOAN AND SECURITY AGREEMENT
BY AND AMONG
FIRST UNION NATIONAL BANK,
AS LENDER
CONGRESS FINANCIAL CORPORATION
(CENTRAL),
AS AGENT FOR LENDER
AND
DAMARK INTERNATIONAL, INC.
DAMARK FINANCIAL SERVICES, INC.,
AS BORROWERS
DATED: AUGUST 20, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. CREDIT FACILITIES. . . . . . . . . . . . . . . . . . . . . . . . . 13
2.1 Revolving Loans. . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.2 Letter of Credit Accommodations. . . . . . . . . . . . . . . . . . 14
2.3 Availability Reserves. . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 3. INTEREST AND FEES. . . . . . . . . . . . . . . . . . . . . . . . . 16
3.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.2 Closing Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.3 [Intentionally omitted]. . . . . . . . . . . . . . . . . . . . . . 17
3.4 [Intentionally omitted.] . . . . . . . . . . . . . . . . . . . . . 17
3.5 Unused Line Fee. . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.6 Changes in Laws and Increased Costs of Revolving Loans.. . . . . . 18
SECTION 4. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . 18
4.1 Conditions Precedent to Initial Revolving Loans and
Letter of Credit Accommodations. . . . . . . . . . . . . . . . . . 18
4.2 Conditions Precedent to All Revolving Loans and Letter
of Credit Accommodations . . . . . . . . . . . . . . . . . . . . . 20
SECTION 5. SECURITY INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 6. COLLECTION AND ADMINISTRATION. . . . . . . . . . . . . . . . . . . 21
6.1 Borrowers' Loan Account. . . . . . . . . . . . . . . . . . . . . . 21
6.2 Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.3 Collection of Accounts . . . . . . . . . . . . . . . . . . . . . . 22
6.4 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.5 Authorization to Make Revolving Loans and Provide Letter
of Credit Accommodations . . . . . . . . . . . . . . . . . . . . . 23
6.6 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.7 Sharing of Payments, Etc.. . . . . . . . . . . . . . . . . . . . . 24
6.8 Settlement Procedures. . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 7. COLLATERAL REPORTING AND COVENANTS . . . . . . . . . . . . . . . . 25
7.1 Collateral Reporting . . . . . . . . . . . . . . . . . . . . . . . 25
7.2 Accounts Covenants . . . . . . . . . . . . . . . . . . . . . . . . 25
7.3 Inventory Covenants. . . . . . . . . . . . . . . . . . . . . . . . 27
7.4 Equipment Covenants. . . . . . . . . . . . . . . . . . . . . . . . 27
7.5 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . . 27
7.6 Right to Cure. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.7 Access to Premises . . . . . . . . . . . . . . . . . . . . . . . . 28
(i)
<PAGE>
SECTION 8. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . 29
8.1 Corporate Existence, Power and Authority; Subsidiaries . . . . . . 29
8.2 Financial Statements; No Material Adverse Change.. . . . . . . . . 29
8.3 Chief Executive Office; Collateral Locations.. . . . . . . . . . . 29
8.4 Priority of Liens; Title to Properties . . . . . . . . . . . . . . 29
8.5 Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
8.6 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
8.7 Compliance with Other Agreements and Applicable Laws . . . . . . . 30
8.8 Environmental Compliance.. . . . . . . . . . . . . . . . . . . . . 30
8.9 Employee Benefits. . . . . . . . . . . . . . . . . . . . . . . . . 31
8.10 Bank Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.11 Accuracy and Completeness of Information . . . . . . . . . . . . . 32
8.12 Survival of Warranties; Cumulative . . . . . . . . . . . . . . . . 32
8.13 Credit Card Agreements . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS . . . . . . . . . . . . . . . . 33
9.1 Maintenance of Existence . . . . . . . . . . . . . . . . . . . . . 33
9.2 New Collateral Locations . . . . . . . . . . . . . . . . . . . . . 33
9.3 Compliance with Laws, Regulations, etc . . . . . . . . . . . . . . 33
9.4 Payment of Taxes and Claims. . . . . . . . . . . . . . . . . . . . 34
9.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9.6 Financial Statements and Other Information . . . . . . . . . . . . 35
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. . . . . . 36
9.8 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
9.9 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
9.10 Loans, Investments, Guarantees, Etc. . . . . . . . . . . . . . . . 37
9.11 Dividends and Redemptions. . . . . . . . . . . . . . . . . . . . . 38
9.12 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . 38
9.13 Adjusted Net Worth . . . . . . . . . . . . . . . . . . . . . . . . 38
9.14 Compliance with ERISA. . . . . . . . . . . . . . . . . . . . . . . 38
9.15 Additional Bank Accounts.. . . . . . . . . . . . . . . . . . . . . 39
9.16 Costs and Expenses. . . . . . . . . . . . . . . . . . . . . . . . 39
9.17 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . 39
9.18 Credit Card Agreements . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 10. EVENTS OF DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . 40
10.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . 40
10.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW . . . . . . . . . . . . . . . . . 43
11.1 Governing Law; Choice of Forum; Service of Process; Jury
Trial Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.2 Waiver of Notices. . . . . . . . . . . . . . . . . . . . . . . . . 44
11.3 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . 44
11.4 Waiver of Counterclaims. . . . . . . . . . . . . . . . . . . . . . 44
(ii)
<PAGE>
11.5 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 12. THE AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
12.1 Appointment, Powers and Immunities . . . . . . . . . . . . . . . . 45
12.2 Reliance by Agent. . . . . . . . . . . . . . . . . . . . . . . . . 45
12.3 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . 46
12.4 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . 46
12.5 Non-Reliance on Agent and Lender . . . . . . . . . . . . . . . . . 46
12.6 Failure to Act . . . . . . . . . . . . . . . . . . . . . . . . . . 47
12.7 Resignation of Agent . . . . . . . . . . . . . . . . . . . . . . . 47
12.8 Consents and Releases of Collateral under Financing
Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
12.9 Collateral Matters . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 13. TERM OF AGREEMENT; MISCELLANEOUS . . . . . . . . . . . . . . . . . 48
13.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
13.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
13.3 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . 50
13.4 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
13.5 Assignments and Participations . . . . . . . . . . . . . . . . . . 50
13.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 51
</TABLE>
(iii)
<PAGE>
INDEX TO
EXHIBITS AND SCHEDULES
<TABLE>
<C> <C>
Exhibit A Information Certificate
Schedule 6.3 Bank Accounts
Schedule 6.5 Designated Persons
Schedule 8.4 Existing Liens
Schedule 8.7 Permits
Schedule 8.8 Environmental Compliance
Schedule 8.13 Credit Card Agreements
Schedule 9.7 Real Property and Improvements
Schedule 9.9 Existing Indebtedness
Schedule 9.10 Loans, Investments, Guarantees
</TABLE>
(iv)
<PAGE>
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement dated August 20, 1998 is entered
into by and among FIRST UNION NATIONAL BANK, a national banking association
("Lender"), CONGRESS FINANCIAL CORPORATION (CENTRAL), an Illinois
corporation, in its capacity as administrative agent and collateral agent for
Lender (in such capacity, "Agent"), DAMARK INTERNATIONAL, INC., a Minnesota
corporation ("International") and DAMARK FINANCIAL SERVICES, INC., a
Minnesota corporation ("Financial"; together with International, individually
a "Borrower" and collectively, the "Borrowers").
W I T N E S S E T H:
WHEREAS, Borrowers have requested that Lender enter into certain
financing arrangements with Borrowers pursuant to which Lender may make loans
and provide other financial accommodations to Borrowers; and
WHEREAS, Lender has requested that Agent act as Agent for Lender in
connection with its financing arrangements with Borrowers pursuant to which
Agent may make loans and advances and provide other financial accommodations
on behalf of Lender to Borrowers; and
WHEREAS, Lender is willing to agree to make such loans and provide
such financial accommodations to Borrowers on the terms and conditions set
forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties
hereto agree as follows:
SECTION 1. DEFINITIONS
All terms used herein which are defined in Article 1 or Article 9 of
the Uniform Commercial Code shall have the meanings given therein unless
otherwise defined in this Agreement. All references to the plural herein
shall also mean the singular and to the singular shall also mean the plural
unless the context otherwise requires. All references to Borrowers pursuant
to the definition set forth in the recitals hereto, unless the context
otherwise requires, shall mean each and all of them, and their respective
successors and assigns, individually and collectively, jointly and severally.
All references to Agent and Lender pursuant to the definitions set forth in
the recitals hereto, or to any other person herein, shall include their
respective successors and assigns. The words "hereof", "herein",
"hereunder", "this Agreement" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not any particular
provision of this Agreement and as this Agreement now exists or may hereafter
be amended, modified, supplemented, extended, renewed, restated or replaced.
The word "including" when used in this Agreement shall mean "including,
without limitation". An Event of Default shall exist or continue or be
continuing until such Event of Default is waived in accordance with Section
11.3 or cured, if such Event of Default is capable of being cured. Any
accounting term used herein unless otherwise defined in this Agreement shall
have the meanings customarily given to such term in accordance with GAAP.
For purposes of this Agreement, the following terms shall have the respective
meanings given to them below:
1.1 "Accounts" shall mean all present and future rights of each
Borrower to payment for
<PAGE>
goods sold or for services rendered, which are not evidenced by instruments
or chattel paper, and whether or not earned by performance.
1.2 "Adjusted Eurodollar Rate" shall mean, with respect to each
Interest Period for any Eurodollar Rate Loan, the rate per annum (rounded
upwards, if necessary, to the next one-sixteenth (1/16) of one (1%) percent)
determined by dividing (a) the Eurodollar Rate for such Interest Period by
(b) a percentage equal to: (i) one (1) minus (ii) the Reserve Percentage.
For purposes hereof, "Reserve Percentage" shall mean the reserve percentage,
expressed as a decimal, prescribed by any United States or foreign banking
authority for determining the reserve requirement which is or would be
applicable to deposits of United States dollars in a non-United States or an
international banking office of Reference Bank used to fund a Eurodollar Rate
Loan or any Eurodollar Rate Loan made with the proceeds of such deposit,
whether or not the Reference Bank actually holds or has made any such
deposits or loans. The Adjusted Eurodollar Rate shall be adjusted on and as
of the effective day of any change in the Reserve Percentage.
1.3 "Adjusted Net Worth" shall mean as to any Person, at any
time, in accordance with GAAP (except as otherwise specifically set forth
below), on a consolidated basis for such Person and its subsidiaries (if
any), the amount equal to the difference between:(a) the aggregate net book
value of all assets of such Person and its subsidiaries, calculating the book
value of inventory for this purpose principally on a first-in-first-out
basis, after deducting from such book values all appropriate reserves in
accordance with GAAP (including all reserves for doubtful receivables,
obsolescence, depreciation and amortization), MINUS (b) the aggregate amount
of the indebtedness and other liabilities of such Person and its subsidiaries
(including tax and other proper accruals) PLUS (c) all amounts paid by
International from and after the date hereof in accordance with Section 9.11
to purchase, redeem, retire or defease any class of Capital Stock.
1.4 "Agent" shall mean Congress in its capacity as agent on
behalf of Lender pursuant to the terms hereof and any replacement or
successor Agent hereunder.
1.5 "Availability Reserves" shall mean, as of any date of
determination, such amounts as Agent may from time to time establish and
revise in good faith reducing the amount of Revolving Loans and Letter of
Credit Accommodations that would otherwise be available to Borrowers under
the lending formula(s) provided for herein: (a) to reflect events,
conditions, contingencies or risks that, as determined by Agent in good
faith, do or may adversely affect either (i) the Collateral, or its value, or
(ii) the security interests and other rights in the Collateral of Agent held
for the benefit of Lender (including the enforceability, perfection and
priority thereof), or (b) to reflect Agent's good faith belief that any
collateral report or financial information furnished by or on behalf of any
Borrower or any Obligor to Agent is or may have been incomplete, inaccurate
or misleading in any material respect or (c) in respect of any state of facts
which Agent determines in good faith constitutes an Event of Default or may,
with notice or passage of time or both, constitute an Event of Default, or
(d) to reflect outstanding Letter of Credit Accommodations as provided in
Section 2.2 hereof or (e) as otherwise provided in Section 2.3 hereof.
1.6 "Average Loan Termination Balance" shall mean, as of the
Termination Date, the average monthly balance of the outstanding Revolving
Loans and Letters of Credit Accommodations calculated for the twelve (12)
calendar months (or part thereof) immediately preceding the Termination Date;
EXCEPT THAT, if the Termination Date occurs during the first year of this
Agreement, then the Average Loan Termination Balance shall be the average
monthly balance of the outstanding Revolving Loans and Letters of Credit
Accommodations calculated from the date hereof through the Termination Date.
2
<PAGE>
1.7 "Blocked Accounts" shall have the meaning set forth in
Section 6.3 hereof.
1.8 "Business Day" shall mean any day other than a Saturday,
Sunday, or other day on which commercial banks are authorized or required to
close under the laws of the State of Illinois or the State of North Carolina,
and a day on which the Reference Bank and Agent are open for the transaction
of business, except that if a determination of a Business Day shall relate to
any Eurodollar Rate Loans, the term Business Day shall also exclude any day
on which banks are closed for dealings in dollar deposits in the London
interbank market or other applicable Eurodollar Rate market.
1.9 "Capital Stock" shall mean any and all shares, interests,
participations, or other equivalents (however designated) of corporate stock
or partnership interests and any options or warrants with respect to any of
the foregoing.
1.10 "C Goods Inventory" shall mean all of International's
Inventory consisting of obsolete Inventory, Inventory to be returned to
vendors and Inventory that will be liquidated, including, without limitation,
all such Inventory which is segregated by International at 7101 Winnetka
Avenue North, Brooklyn Park, Minnesota 55428 or which is, consistent with the
International's practices as of the date hereof, excluded from the
International's perpetual Inventory reports.
1.11 "Code" shall mean the Internal Revenue Code of 1986, as the
same now exists or may from time to time hereafter be amended, modified,
recodified or supplemented, together with all rules, regulations and
interpretations thereunder or related thereto.
1.12 "Collateral" shall have the meaning set forth in Section 5
hereof.
1.13 "Cost" shall mean, as to the Inventory as of any date, the
cost of such Inventory as of such date, determined on a first-in-first-out
basis in accordance with GAAP.
1.14 "Credit Card Acknowledgments" shall mean, individually and
collectively, the agreements by Credit Card Issuers or Credit Card Processors
who are parties to Credit Card Agreements in favor of Lender and Agent
acknowledging the first priority security interest of Agent, for itself and
the benefit of Lender, in the monies due and to become due to any Borrower
(including, without limitation, credits and reserves) under the Credit Card
Agreements, and agreeing to transfer all such amounts to the Blocked
Accounts, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.15 "Credit Card Agreements" shall mean all agreements now or
hereafter entered into by any Borrower with any Credit Card Issuer or any
Credit Card Processor, as the same now exist or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
1.16 "Credit Card Issuer" shall mean any Person (other than
Borrowers) who issues or whose members issue credit cards, including, without
limitation, MasterCard or VISA bank credit or debit cards or other bank
credit or debit cards issued through MasterCard International, Inc., Visa,
U.S.A., Inc. or Visa International and American Express, Discover, and other
non-bank credit or debit cards
1.17 "Credit Card Processor" shall mean any servicing or
processing agent or any factor or financial intermediary who facilitates,
services, processes or manages the credit authorization, billing
3
<PAGE>
transfer and/or payment procedures with respect to any of Borrowers' sales
transactions involving credit card or debit card purchases by customers using
credit cards or debit cards issued by any Credit Card Issuer.
1.18 "Credit Card Receivables" shall mean collectively, (a) all
present and future rights of Borrowers to payment from any Credit Card
Issuer, Credit Card Processor or other third party arising from sales of
goods or rendition of services to customers who have purchased such goods or
services using a credit or debit card and (b) all present and future rights
of Borrowers to payment from any Credit Card Issuer, Credit Card Processor or
other third party in connection with the sale or transfer of Accounts arising
pursuant to the sale of goods or rendition of services to customers who have
purchased such goods or services using a credit card or a debit card,
including, but not limited to, all amounts at any time due or to become due
from any Credit Card Issuer or Credit Card Processor under the Credit Card
Agreements or otherwise.
1.19 "Credit Facility" shall mean, collectively, the secured
Revolving Loans and Letter of Credit Accommodations provided for hereunder
and under the other Financing Agreements.
1.20 "Eligible Credit Card Receivables" shall mean Credit Card
Receivables of Borrowers which are and continue to be acceptable to Lender
based on the criteria set forth below. In general, Credit Card Receivables
shall be Eligible Credit Card Receivables if:
(a) such Credit Card Receivables arise from the actual
and BONA FIDE sale and delivery of goods or services by Borrowers in the
ordinary course of the business of Borrowers which transactions are completed
in accordance with the terms and provisions contained in any documents
binding on Borrowers or the other party or parties thereto related thereto
(but as to such other party or parties only to the extent of the documents
executed and/or delivered or issued in connection with such transactions);
(b) such Credit Card Receivables comply with the
applicable terms and conditions contained in Section 7.2 of this Agreement;
(c) such Credit Card Receivables do not arise from sales
on consignment;
(d) the Credit Card Issuer or Credit Card Processor with
respect to such Credit Card Receivables has not asserted a counterclaim,
defense or dispute and does not have, and does not engage in transactions
which may give rise to, any right of setoff against such Credit Card
Receivables, other than in the ordinary course of business in accordance with
the terms of the Credit Card Agreements and for which Lender has established
Availability Reserves as set forth in Section 1.5;
(e) there are no facts, events or occurrences which would
impair the validity, enforceability or collectability of such Credit Card
Receivables or reduce the amount payable or delay payment thereunder, other
than in the ordinary course of the business of Borrowers in accordance with
the terms of the Credit Card Agreements and for which Lender has established
Availability Reserves as set forth in Section 1.5;
(f) such Credit Card Receivables are subject to the first
priority, valid and perfected security interest of Lender and any goods
giving rise thereto are not, and were not at the time of the sale thereof,
subject to any liens except those permitted in this Agreement;
(g) Lender shall have received, in form and substance
reasonably satisfactory to
4
<PAGE>
Lender, a Credit Card Acknowledgement duly authorized, executed and delivered
by the Credit Card Issuer or Credit Card Processor for the credit card or
debit card used in the sale which gave rise to such Credit Card Receivable;
(h) such Credit Card Receivables are owed by Credit Card
Issuers or Credit Card Processors deemed creditworthy at all times by
Borrowers and who are reasonably acceptable to Lender;
(i) to Borrowers' knowledge after due investigation, no
default or event of default has occurred under the Credit Card Agreement of
Borrowers with the Credit Card Issuer or Credit Card Processor who has issued
the credit card or debit card or handles payments under the credit card or
debit card used in the sale which gave rise to such Credit Card Receivables
which default gives such Credit Card Issuer or Credit Card Processor the
right to cease or suspend payments to Borrowers and such Credit Card
Agreements are otherwise in full force and effect; and
(j) the Credit Card Issuer or Credit Card Processor has
not sent any notice of default and/or of its intention to cease or suspend
payments to Borrowers in respect of such Credit Card Receivables.
General criteria for Eligible Credit Card Receivables may be established and
revised from time to time by Agent in good faith based on an event, condition
or other circumstance arising after the date hereof, or existing on the date
hereof to the extent Agent has no notice thereof, which adversely affected or
could reasonably be expected to adversely affect the Credit Card Receivables
in the good faith determination of Agent. Agent will not establish new
criteria for Eligible Credit Card Receivables if Agent has established an
Availability Reserve for the same purpose and Agent will use its best efforts
to promptly notify Borrowers of any new criteria established by Agent. Any
Credit Card Receivables which are not Eligible Credit Card Receivables shall
nevertheless be part of the Collateral.
1.21 "Eligible Installment Accounts" shall mean Accounts of
Borrowers arising from sales of merchandise offered for sale under an
Installment Billing Program, and which Accounts are and continue to be
acceptable to Agent based on the criteria set forth below. In general, an
Account shall be an Eligible Installment Account if:
(a) such Account arises from the actual and BONA FIDE
sale and delivery to a customer by Borrowers of merchandise in the ordinary
course of business, which sale is completed in accordance with an Installment
Billing Program and pursuant to the terms and provisions contained in any
agreements between the Borrowers and their customer related thereto;
(b) (i) from the date hereof up to and including
March 31, 1999, upon the placement of an order by such customer, Borrowers
verify that the customer has a valid credit card or debit card, and Borrowers
verify that such customer's credit card or debit card is valid and that such
customer has sufficient credit available at such time to be charged the
amount of the applicable first installment; and (ii) from and after April 1,
1999, upon the placement of an order by such customer, Borrowers verify that
the customer has a valid credit card, even if the customer also has a valid
debit card, and Borrowers verify with the applicable Credit Card Issuer or
its agent that such customer's credit card is valid and that such customer
has sufficient credit available at such time to be charged the amount of the
applicable first installment;
(c) no installment remains unpaid for more than thirty
(30) days after the due date of such installment.
5
<PAGE>
(d) such Accounts do not arise from sales on consignment;
(e) the customer has not asserted a counterclaim, defense
or dispute and does not have, and does not engage in transactions which may
give rise to, any right of setoff against such Accounts, other than in the
ordinary course of business in accordance with the terms of the such
Installment Billing Program;
(f) there are no facts, events or occurrences which would
impair the validity, enforceability or collectability of such Accounts or
reduce the amount payable or delay payment thereunder, other than in the
ordinary course of the business of Borrowers in accordance with the terms of
the Installment Billing Program;
(g) such Accounts are subject to the first priority,
valid and perfected security interest of Lender and any goods giving rise
thereto are not, and were not at the time of the sale thereof, subject to any
liens except those permitted in this Agreement;
(h) Lender shall have received, in form and substance
reasonably satisfactory to Lender, a Credit Card Acknowledgement duly
authorized, executed and delivered by the Credit Card Issuer or Credit Card
Processor for the credit card used in the sale which gave rise to such
Account and such Credit Card Issuer or Credit Card Processor shall be deemed
creditworthy at all times by Borrowers and shall be reasonably acceptable to
Lender;
(i) such Accounts do not arise in respect of or relate to
the payment of any membership fees or dues (whether initiation, renewal or
otherwise) or any "free" trial offer or similar program extended or offered
to Borrowers' customers;
(j) to Borrowers' knowledge after due investigation, no
default or event of default has occurred with the Credit Card Issuer or
Credit Card Processor who has issued the credit card or handles payments
under the credit card used in the sale which gave rise to such Accounts which
default gives such Credit Card Issuer or Credit Card Processor the right to
cease or suspend payments to Borrowers; and
(k) the Credit Card Issuer or Credit Card Processor has
not sent any notice of default and/or of its intention to cease or suspend
payments to Borrowers in respect of such Accounts.
General criteria for Eligible Installment Accounts may be established and
revised from time to time by Agent in good faith based on an event, condition
or other circumstance arising after the date hereof, or existing on the date
hereof to the extent Agent has no notice thereof, which adversely affected or
could reasonably be expected to adversely affect Accounts which arise under
an Installment Billing Program in the good faith determination of Agent.
Agent will not establish new criteria for Eligible Installment Accounts if
Agent has established an Availability Reserve for the same purpose and Agent
will use its best efforts to promptly notify Borrowers of any new criteria
established by Agent. Any Accounts which arise under an Installment Billing
Program and which are not Eligible Installment Accounts shall nevertheless be
part of the Collateral.
1.22 "Eligible Inventory" shall mean Inventory consisting of
finished goods held for resale in the ordinary course of the business of
International which are acceptable to Agent based on the criteria set forth
below. In general, Eligible Inventory shall not include (a) raw materials
and work-in-process; (b)
6
<PAGE>
components which are not part of finished goods;(c) spare parts for
equipment;(d) packaging and shipping materials;(e) supplies used or consumed
in International's business;(f) Inventory at premises other than those owned
and controlled by International, except if Agent shall have received an
agreement in writing from the person in possession of such Inventory and/or
the owner or operator of such premises in form and substance satisfactory to
Agent acknowledging Agent's first priority security interest in the
Inventory, waiving security interests and claims by such person against the
Inventory and permitting Agent access to, and the right to remain on the
premises so as to exercise the right and remedies of Agent, for the benefit
of Lender, and otherwise deal with the Collateral;(g) Inventory subject to a
security interest or lien in favor of any person other than Agent except
those permitted in this Agreement;(h) Inventory which is not subject to the
first priority, valid and perfected security interest of Agent;(i) damaged
and/or defective Inventory;(j) Inventory purchased or sold on consignment;(k)
Inventory subject to deposits made by customers for sales of Inventory that
has not been delivered; and (l) C Goods Inventory.
General criteria for Eligible Inventory may be established and revised from
time to time by Agent in good faith based on an event, condition or other
circumstance arising after the date hereof, or existing on the date hereof to
the extent Agent has no notice thereof, which adversely affected or could
reasonably be expected to adversely affect the Inventory in the good faith
determination of Agent. Agent will not establish new criteria for Eligible
Inventory if Agent has established an Availability Reserve for the same
purpose and Agent will use its best efforts to promptly notify Borrowers of
any new criteria established by Agent. Any Inventory which is not Eligible
Inventory shall nevertheless be part of the Collateral.
1.23 "Environmental Laws" shall mean all foreign, Federal, State
and local laws (including common law), legislation, rules, codes, licenses,
permits (including any conditions imposed therein), authorizations, judicial
or administrative decisions, injunctions or agreements between Borrowers and
any governmental authority,(a) relating to pollution and the protection,
preservation or restoration of the environment (including air, water vapor,
surface water, ground water, drinking water, drinking water supply, surface
land, subsurface land, plant and animal life or any other natural resource),
or to human health or safety, (b) relating to the exposure to, or the use,
storage, recycling, treatment, generation, manufacture, processing,
distribution, transportation, handling, labeling, production, release or
disposal, or threatened release, of Hazardous Materials, or (c) relating to
all laws with regard to recordkeeping, notification, disclosure and reporting
requirements respecting Hazardous Materials. The term "Environmental Laws"
includes (i) the Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, the Federal Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Water Act, the Federal Clean Air Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid
Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal
Toxic Substances Control Act, the Federal Insecticide, Fungicide and
Rodenticide Act, and the Federal Safe Drinking Water Act of 1974, (ii)
applicable state counterparts to such laws, and (iii) any common law or
equitable doctrine that may impose liability or obligations for injuries or
damages due to, or threatened as a result of, the presence of or exposure to
any Hazardous Materials.
1.24 "Equipment" shall mean all of Borrowers' now owned and
hereafter acquired equipment, machinery, computers and computer hardware and
software (whether owned or licensed), vehicles, tools, furniture, fixtures,
all attachments, accessions and property now or hereafter affixed thereto or
used in connection therewith, and substitutions and replacements thereof,
wherever located.
1.25 "ERISA" shall mean the United States Employee Retirement
Income Security Act of 1974, as the same now exists or may hereafter from
time to time be amended, modified, recodified or
7
<PAGE>
supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
1.26 "ERISA Affiliate" shall mean any person required to be
aggregated with International or any of its subsidiaries under Sections
414(b), 414(c), 414(m) or 414(o) of the Code.
1.27 "Eurodollar Rate" shall mean with respect to the Interest
Period for a Eurodollar Rate Loan, the interest rate per annum equal to the
arithmetic average of the rates of interest per annum (rounded upwards, if
necessary, to the next one-sixteenth (1/16) of one (1%) percent) at which
Reference Bank is offered deposits of United States dollars in the London
interbank market (or other Eurodollar Rate market selected by Borrowers and
approved by Agent) on or about 9:00 a.m. (Chicago, Illinois time) two (2)
Business Days prior to the commencement of such Interest Period in amounts
substantially equal to the principal amount of the Eurodollar Rate Loans
requested by and available to Borrowers in accordance with this Agreement,
with a maturity of comparable duration to the Interest Period selected by
Borrowers.
1.28 "Eurodollar Rate Loans" shall mean any Revolving Loans or
portion thereof on which interest is payable based on the Adjusted Eurodollar
Rate in accordance with the terms hereof.
1.29 "Excess Availability" shall mean the amount, as determined by
Agent, calculated at any time, equal to:(a) the lesser of (i) the amount of
the Revolving Loans available to Borrowers as of such time based on the
applicable lending formulas set forth in Section 2.1(a), as determined by
Agent, and subject to the sublimits and Availability Reserves from time to
time established by Agent hereunder and (ii) the Maximum Credit, MINUS (b)
the sum of: (i) the amount of all then outstanding and unpaid Obligations,
plus (ii) the aggregate amount of all trade payables of Borrowers which are
more than sixty (60) days past the due date thereof as of such time.
1.30 "Event of Default" shall mean the occurrence or existence of
any event or condition described in Section 10.1 hereof.
1.31 "Financing Agreements" shall mean, collectively, this
Agreement and all notes, guarantees, security agreements and other
agreements, documents and instruments now or at any time hereafter executed
and/or delivered by any Borrower or any Obligor in connection with this
Agreement, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.32 "GAAP" shall mean generally accepted accounting principles in
the United States of America as in effect from time to time as set forth in
the opinions and pronouncements of the Accounting Principles Board and the
American Institute of Certified Public Accountants and the statements and
pronouncements of the Financial Accounting Standards Boards which are
applicable to the circumstances as of the date of determination consistently
applied, except that, for purposes of Section 9.13 hereof, GAAP shall be
determined on the basis of such principles in effect on the date hereof and
consistent with those used in the preparation of the audited financial
statements delivered to Agent prior to the date hereof.
1.33 "Hazardous Materials" shall mean any hazardous, toxic or
dangerous substances, materials and wastes, including hydrocarbons (including
naturally occurring or man-made petroleum and hydrocarbons), flammable
explosives, asbestos, urea formaldehyde insulation, radioactive materials,
biological substances, polychlorinated biphenyls, pesticides, herbicides and
any other kind and/or type of pollutants or contaminants (including materials
which include hazardous constituents), sewage, sludge, industrial slag,
solvents and/or any other similar substances, materials, or wastes and
including any other
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substances, materials or wastes that are or become regulated under any
Environmental Law (including any that are or become classified as hazardous
or toxic under any Environmental Law).
1.34 "Information Certificate" shall mean the Information
Certificate of each Borrower constituting Exhibit A hereto containing
material information with respect to Borrowers, their business and assets
provided by or on behalf of Borrowers to Agent in connection with the
preparation of this Agreement and the other Financing Agreements and the
financing arrangements provided for herein.
1.35 "Installment Billing Program" shall mean an installment
billing program from time to time made available by Borrowers to their
customers who wish to purchase merchandise from Borrowers offered for sale in
their mail order catalogs pursuant to which customer shall be permitted to
purchase merchandise on an installment purchase basis, PROVIDED THAT, such
purchase price is paid in ten (10) or fewer equal consecutive monthly
installments.
1.36 "Interest Period" shall mean for any Eurodollar Rate Loan, a
period of approximately one (1), two (2), or three (3) months duration as
Borrowers may elect, the exact duration to be determined in accordance with
the customary practice in the applicable Eurodollar Rate market; PROVIDED,
THAT, Borrowers may not elect an Interest Period which will end after the
last day of the then-current term of this Agreement.
1.37 "Interest Rate" shall mean:
(a) as to Prime Rate Loans, commencing as of the date
hereof through and including September 30, 1998, a rate equal to the Prime
Rate; and thereafter, for any given month,
(i) if the Monthly Excess Availability for the
immediately preceding calendar month is equal to or greater than $15,000,000,
a rate equal to the Prime Rate,
(ii) if the Monthly Excess Availability for the
immediately preceding month is equal to or greater than $10,000,000, but less
than $15,000,000, a rate equal to one-quarter (1/4%) percent per annum in
excess of the Prime Rate,
(iii) if the Monthly Excess Availability for the
immediately preceding month is equal to or greater than $5,000,000, but less
than $10,000,000, a rate equal to three-eighths (3/8%) percent per annum in
excess of the Prime Rate, and
(iv) if the Monthly Excess Availability for the
immediately preceding calendar month is less than $5,000,000, a rate equal to
one-half (1/2%) percent per annum in excess of the Prime Rate, and
(b) as to each Eurodollar Rate Loan, commencing as of the
date hereof through and including September 30, 1998, a rate equal to two
(2%) percent per annum in excess of the Adjusted Eurodollar Rate, and,
thereafter, a rate of:
(i) if the Monthly Excess Availability for the
calendar month immediately preceding the Effective Eurodollar Rate
Determination Date (as defined below) with respect to such Eurodollar Rate
Loan is equal to or greater than $25,000,000, a rate of one and seven-eighths
(1 7/8%) percent per annum in excess of the Adjusted Eurodollar Rate,
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(ii) if the Monthly Excess Availability for the
calendar month immediately preceding the Effective Eurodollar Rate
Determination Date with respect to such Eurodollar Rate Loan is equal to or
greater than $20,000,000, but less than $25,000,000, a rate of two (2%)
percent per annum in excess of the Adjusted Eurodollar Rate,
(iii) if the Monthly Excess Availability for the
calendar month immediately preceding the Effective Eurodollar Rate
Determination Date with respect to such Eurodollar Rate Loan is equal to or
greater than $15,000,000, but less than $20,000,000, a rate of two and
one-eighth (2 1/8%) percent per annum in excess of the Adjusted Eurodollar
Rate,
(iv) if the Monthly Excess Availability for the
calendar month immediately preceding the Effective Eurodollar Rate
Determination Date with respect to such Eurodollar Rate Loan is equal to or
greater than $10,000,000, but less than $15,000,000, a rate of two and
one-quarter (2 1/4%) percent per annum in excess of the Adjusted Eurodollar
Rate,
(v) if the Monthly Excess Availability for the
calendar month immediately preceding the Effective Eurodollar Rate
Determination Date with respect to such Eurodollar Rate Loan is equal to or
greater than $5,000,000, but less than $10,000,000, a rate of two and
three-eighths (2 3/8%) percent per annum in excess of the Adjusted Eurodollar
Rate, and
(vi) if the Monthly Excess Availability for the
calendar month immediately preceding the Effective Eurodollar Rate
Determination Date with respect to such Eurodollar Rate Loan is less than
$5,000,000, a rate of two-and-one-half (2 1/2%) percent per annum in excess
of the Adjusted Eurodollar Rate (the Adjusted Eurodollar Rate, in the case of
each Eurodollar Rate Loan, being based on the Eurodollar Rate applicable for
the Interest Period selected by Borrowers as in effect two (2) Business Days
after the date of receipt by Agent of the request of Borrowers for such
Eurodollar Rate Loans in accordance with the terms hereof, whether such rate
is higher or lower than any rate previously quoted to Borrowers);
(c) Notwithstanding anything to the contrary contained in
clauses (a) and (b) above, the Interest Rate specified in clause (a) above
with respect to Prime Rate Loans and in clause (b) above with respect to
Eurodollar Rate Loans shall be increased, in each case, by two (2%) percent,
at Agent's option, without notice,(i) for the period (A) from and after the
date of termination or non-renewal hereof until Agent and Lender have
received full and final payment of all obligations (notwithstanding entry of
a judgment against Borrowers) and (B) from and after the date of the
occurrence of an Event of Default for so long as such Event of Default is
continuing as determined by Agent, and (ii) on the Revolving Loans at any
time outstanding in excess of the amounts available to Borrowers under
Section 2 (whether made before or after an Event of Default), except to the
extent that such excess amounts are expressly consented and agreed to by
Agent in writing.
(d) For the purposes hereof, the "Effective Eurodollar
Rate Determination Date" shall mean, with respect to each Eurodollar Rate
Loan, the day on which the Eurodollar Rate is determined under Section 1.27
of this Agreement for such Eurodollar Rate Loan and, thereafter, the first
day of each calendar month during the Interest Period with respect to such
Eurodollar Rate Loan.
1.38 "Inventory" shall mean all of Borrowers' now owned and
hereafter existing or acquired raw materials, work in process, finished goods
and all other inventory of whatsoever kind or nature, wherever located.
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1.39 "Inventory Appraisal" shall have the meaning set forth in
Section 7.3 of this Agreement.
1.40 "Letter of Credit Accommodations" shall mean the letters of
credit, merchandise purchase or other guaranties which are from time to time
either (a) issued or opened by Agent for the account of any Borrower or any
Obligor or (b) with respect to which Agent has agreed to indemnify the issuer
or guaranteed to the issuer the performance by Borrowers of their obligations
to such issuer.
1.41 "Maximum Credit" shall mean $75,000,000.
1.42 "Membership Fee Reimbursement Obligations" shall mean
Borrowers' membership fees due or which may be due to any customer (net of
any discounts received by such customer) to the extent such reimbursement
obligations relate to customers with outstanding account balances due under
any Installment Billing Program.
1.43 "Monthly Excess Availability" shall mean, for any calendar
month, the sum of the Excess Availability for each calendar week during such
calendar month, divided by the total number of calendar weeks during such
calendar month.
1.44 "Net Amount of Eligible Credit Card Receivables" shall mean
the gross amount of Eligible Credit Card Receivables less discounts and fees
payable by Borrowers to the Credit Card Issuers and Credit Card Processors in
respect of such Credit Card Receivables.
1.45 "Net Amount of Eligible Installment Accounts" shall mean the
gross amount of Eligible Installment Accounts less discounts and fees payable
by Borrowers to the Credit Card Issuers and Credit Card Processors in respect
of such Eligible Installment Accounts and less the Borrowers' Membership Fee
Reimbursement Obligations.
1.46 "Obligations" shall mean any and all Revolving Loans, Letter
of Credit Accommodations and all other obligations, liabilities and
indebtedness of every kind, nature and description owing by Borrowers to
Agent and/or Lender and/or any of their affiliates, including principal,
interest, charges, fees, costs and expenses, however evidenced, whether as
principal, surety, endorser, guarantor or otherwise, whether arising under
this Agreement or otherwise, whether now existing or hereafter arising,
whether arising before, during or after the initial or any renewal term of
this Agreement or after the commencement of any case with respect to
Borrowers under the United States Bankruptcy Code or any similar statute
(including, without limitation, the payment of interest and other amounts
which would accrue and become due but for the commencement of such case,
whether or not such amounts are allowed or allowable in whole or in part in
such case), whether direct or indirect, absolute or contingent, joint or
several, due or not due, primary or secondary, liquidated or unliquidated,
secured or unsecured, and however acquired by Agent or Lender.
1.47 "Obligor" shall mean any guarantor of the Obligations.
1.48 "Payment Account" shall have the meaning set forth in Section
6.3 hereof.
1.49 "Permits" shall have the meaning set forth in Section 8.7
hereof.
1.50 "Person" or "person" shall mean any individual, sole
proprietorship, partnership,
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corporation (including, without limitation, any corporation which elects
subchapter S status under the Code), limited liability company, limited
liability partnership, business trust, unincorporated association, joint
stock corporation, trust, joint venture or other entity or any government or
any agency or instrumentality or political subdivision thereof.
1.51 "Prime Rate" shall mean the rate from time to time publicly
announced by First Union National Bank, or its successors, at its office in
Philadelphia, Pennsylvania, as its prime rate, whether or not such announced
rate is the best rate available at such bank.
1.52 "Prime Rate Loans" shall mean any Revolving Loans or portion
thereof on which interest is payable based on the Prime Rate in accordance
with the terms hereof.
1.53 "Real Estate Availability" shall mean, as of the date hereof,
the amount of $6,500,000, and commencing with the month immediately following
the date hereof, such amount shall be reduced each month by an amount equal
to $108,334 per month.
1.54 "Real Property" shall mean all now owned and hereafter
acquired real property of Borrowers, including leasehold interests, together
with all buildings, structures, and other improvements located thereon and
all licenses, easements and appurtenances relating thereto, wherever located.
1.55 "Records" shall mean all of Borrowers' present and future
books of account of every kind or nature, purchase and sale agreements,
invoices, ledger cards, bills of lading and other shipping evidence,
statements, correspondence, memoranda, credit files and other data relating
to the Collateral or any account debtor, together with the tapes, disks,
diskettes and other data and software storage media and devices, file
cabinets or containers in or on which the foregoing are stored (including any
rights of Borrowers with respect to the foregoing maintained with or by any
other person).
1.56 "Reference Bank" shall mean First Union National Bank, or
such other bank as Agent may designate from time to time.
1.57 "Renewal Date" shall have the meaning set forth in Section
13.1 hereof.
1.58 "Revolving Loans" shall mean the loans now or hereafter made
by Agent to or for the benefit of Borrowers (involving advances, repayments
and readvances) as set forth in Section 2.1 hereof.
1.59 "Termination Date" shall have the meaning set forth in
Section 13.1 hereof.
1.60 "Value" shall mean, as determined by Agent in good faith,
with respect to Inventory, the lower of (a) Cost or (b) market value.
SECTION 2. CREDIT FACILITIES
2.1 REVOLVING LOANS.
(a) Subject to, and upon the terms and conditions
contained herein, Lender agrees to fund the Revolving Loans to Borrowers from
time to time in amounts requested by Borrowers up to the amount equal to:
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(i) Seventy-five (75%) percent of the Net
Amount of Eligible Credit Card
Receivables, PLUS
(ii) Seventy-five (75%) percent of the Net
Amount of Eligible Installment Accounts,
PLUS
(iii) the lesser of (A) seventy (70%) percent of the
Value of Eligible Inventory consisting of
finished goods or (B) ninety (90%) percent of
the median net recovery Value of Eligible
Inventory, as determined from time to time using
a methodology and assumptions similar to the
methodology and assumptions set forth in the
then current Inventory Appraisal delivered to
Lender pursuant to the terms hereof, PLUS
(iv) the Real Estate Availability, LESS
(v) any Availability Reserves.
(b) Agent, for the benefit of Lender, may, in its
discretion, from time to time, upon not less than five (5) days prior notice
to Borrowers, reduce the lending formula:(i) with respect to Eligible Credit
Card Receivables and Net Amount of Eligible Installment Accounts, as the case
may be, to the extent that Agent, for the benefit of Lender, determines in
good faith that:(A) the dilution with respect to the Net Amount of Eligible
Credit Card Receivables and Eligible Installment Accounts, as the case may
be, for any period (based on the ratio of (1) the aggregate amount of
reductions in the Net Amount of Credit Card Receivables and Net Amount of
Eligible Installment Accounts, as the case may be, other than as a result of
payments in cash to (2)the aggregate amount of total product sales) has
increased or may be anticipated to increase above historical levels, or (B)
the general creditworthiness of account debtors has declined; and (ii) reduce
the lending formula(s) with respect to Eligible Inventory to the extent that
Agent, for the benefit of Lender, determines in good faith that: (A) the
number of days of the turnover of the Inventory for any period has changed in
any material respect or (B) the liquidation value of the Eligible Inventory,
or any category thereof, has decreased, or (C) the nature and quality of the
Inventory has deteriorated. In determining whether to reduce the lending
formula(s), Agent may consider events, conditions, contingencies or risks
which are also considered in determining Eligible Credit Card Receivables,
Eligible Installment Accounts, Eligible Inventory or in establishing
Availability Reserves.
To the extent Lender shall have established an Availability
Reserve which is sufficient to address any event, condition or matter in a
manner satisfactory to Lender in good faith, Lender shall not exercise its
rights under this Section 2.1(b) to reduce the lending formulas to address
such event, condition or matter. The amount of any reduction in the lending
formula by Lender pursuant to this Section 2.1(b) shall have a reasonable
relationship to the matter which is the basis for such a reduction.
(c) Except in Agent's discretion, the aggregate amount of
the Revolving Loans and the Letter of Credit Accommodations outstanding at
any time shall not exceed the Maximum Credit. In the event that the
outstanding amount of any component of the Revolving Loans, or the aggregate
amount of the outstanding Revolving Loans and Letter of Credit
Accommodations, exceed the amounts available under the lending formulas, the
sublimits for Letter of Credit Accommodations set forth in Section 2.2(d) or
the Maximum Credit, as applicable, such event shall not limit, waive or
otherwise affect any rights of Agent, for the benefit of Lender, in that
circumstance or on any future occasions and Borrowers shall, upon demand by
Agent, which may be made at any time or from time to time, immediately repay
to Agent, for
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the benefit of Lender, the entire amount of any such excess(es) for which
payment is demanded.
2.2 LETTER OF CREDIT ACCOMMODATIONS.
(a) Subject to, and upon the terms and conditions
contained herein, at the request of Borrowers, Agent agrees, for the risk of
Lender, to provide or arrange for Letter of Credit Accommodations for the
account of Borrowers containing terms and conditions acceptable to Agent and
the issuer thereof. Any payments made by Agent, for the risk of Lender, to
any issuer thereof and/or related parties in connection with the Letter of
Credit Accommodations shall constitute additional Revolving Loans to
Borrowers pursuant to this Section 2.
(b) In addition to any charges, fees or expenses charged
by any bank or issuer in connection with the Letter of Credit Accommodations,
Borrowers shall pay to Agent, for the benefit of Lender, a letter of credit
fee at a rate equal to one and one-half (1 1/2%) percent per annum on the
daily outstanding balance of the Letter of Credit Accommodations for the
immediately preceding month (or part thereof), payable in arrears as of the
first day of each succeeding month, except that Borrowers shall pay to Agent,
for the benefit of Lender, such letter of credit fee, at Agent's option,
without notice, at a rate equal to three and one-half (3 1/2%) percent per
annum for (i) the period from and after the date of termination or non-renewal
hereof until Agent, for the benefit of Lender, has received full and final
payment of all Obligations (notwithstanding entry of a judgment against
Borrowers) and (ii) the period from and after the date of the occurrence of
an Event of Default and for so long as such Event of Default is continuing.
Such letter of credit fee shall be calculated on the basis of a three hundred
sixty (360) day year and actual days elapsed and the obligation of Borrowers
to pay such fee shall survive the termination or non-renewal of this
Agreement.
(c) No Letter of Credit Accommodations shall be available
unless on the date of the proposed issuance of any Letter of Credit
Accommodations, the Revolving Loans available to Borrowers (subject to the
Maximum Credit and any Availability Reserves) are equal to or greater than
(i) if the proposed Letter of Credit Accommodation is for the purpose of
purchasing Eligible Inventory, the sum of (A) the percentage equal to one
hundred (100%) percent minus the then applicable percentage set forth in
Section 2.1(a) above multiplied by the Value of such Eligible Inventory, plus
(B) freight, taxes, duty and other amounts which Agent estimates must be paid
in connection with such Inventory upon arrival and for delivery to one of
Borrowers' locations for Eligible Inventory; and (ii) if the proposed Letter
of Credit Accommodation is for any other purpose an amount equal to one
hundred (100%) percent of the face amount thereof and all other commitments
and obligations made or incurred by Agent or Lender with respect thereto.
Effective on the issuance of each Letter of Credit Accommodation, an
Availability Reserve shall be established in the applicable amount set forth
in Section 2.2(c)(i) or Section 2.2(c)(ii).
(d) Except in Agent's discretion, the amount of all
outstanding Letter of Credit Accommodations and all other commitments and
obligations made or incurred by Agent or Lender in connection therewith,
shall not at any time exceed $20,000,000. At any time an Event of Default
exists or has occurred and is continuing, upon Agent's request, Borrowers
will either furnish cash collateral to secure the reimbursement obligations
to the issuer in connection with any Letter of Credit Accommodations or
furnish cash collateral to Agent, for the benefit of Lender, for the Letter
of Credit Accommodations, and in either case, the Revolving Loans otherwise
available to Borrowers shall not be reduced as provided in Section to 2.2(c)
to the extent of such cash collateral.
(e) Borrowers shall indemnify and hold Agent and Lender
harmless from and against
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any and all losses, claims, damages, liabilities, costs and expenses which
Agent or Lender may suffer or incur in connection with any Letter of Credit
Accommodations and any documents, drafts or acceptances relating thereto,
including, but not limited to, any losses, claims, damages, liabilities,
costs and expenses due to any action taken by any issuer or correspondent
with respect to any Letter of Credit Accommodation, except for any losses,
claims, damages, liabilities, costs and expenses as a result of the gross
negligence or willful misconduct of Lender as determined pursuant to a final
non-appealable order of a court of competent jurisdiction. Borrowers assume
all risks with respect to the acts or omissions of the drawer under or
beneficiary of any Letter of Credit Accommodation and for such purposes the
drawer or beneficiary shall be deemed Borrowers' agent. Borrowers assume all
risks for, and agrees to pay, all foreign, Federal, State and local taxes,
duties and levies relating to any goods subject to any Letter of Credit
Accommodations or any documents, drafts or acceptances thereunder. Borrowers
hereby release and hold Agent and Lender harmless from and against any acts,
waivers, errors, delays or omissions whether caused by Borrowers, by any
issuer or correspondent or otherwise with respect to or relating to any
Letter of Credit Accommodation except for any losses, claims, damages,
liabilities, costs and expenses as a result of the gross negligence or
willful misconduct of Lender as determined pursuant to a final non-appealable
order of a court of competent jurisdiction. The provisions of this Section
2.2(e) shall survive the payment of Obligations and the termination or
non-renewal of this Agreement.
(f) Nothing contained herein shall be deemed or construed
to grant Borrowers any right or authority to pledge the credit of Agent or
Lender in any manner. Agent and Lender shall have no liability of any kind
with respect to any Letter of Credit Accommodation provided by an issuer
other than Agent or Lender unless Agent has duly executed and delivered to
such issuer the application or a guarantee or indemnification in writing with
respect to such Letter of Credit Accommodation. Borrowers shall be bound by
any interpretation made in good faith by Agent or Lender, or any other issuer
or correspondent under or in connection with any Letter of Credit
Accommodation or any documents, drafts or acceptances thereunder,
notwithstanding that such interpretation may be inconsistent with any
instructions of Borrowers. Agent shall have the sole and exclusive right and
authority, for the benefit of Lender, to, and Borrowers shall not: at any
time an Event of Default exists or has occurred and is continuing,(i) approve
or resolve any questions of non-compliance of documents,(ii) give any
instructions as to acceptance or rejection of any documents or goods,(iii)
execute any and all applications for steamship or airway guaranties,
indemnities or delivery orders,(iv) grant any extensions of the maturity of,
time of payment for, or time of presentation of, any drafts, acceptances, or
documents, or (v) agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of
any of the applications, Letter of Credit Accommodations, or documents,
drafts or acceptances thereunder or any letters of credit included in the
Collateral. Agent may take such actions either in its own name, Lender' name,
or in Borrowers' name.
(g) Any rights, remedies, duties or obligations granted
or undertaken by Borrowers to any issuer or correspondent in any application
for any Letter of Credit Accommodation, or any other agreement in favor of
any issuer or correspondent relating to any Letter of Credit Accommodation,
shall be deemed to have been granted or undertaken by Borrowers to Agent, for
the benefit of Lender. Any duties or obligations undertaken by Agent to any
issuer or correspondent in any application for any Letter of Credit
Accommodation, or any other agreement by Agent in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation, shall be deemed
to have been undertaken by Borrowers to Agent, for the benefit of Lender, and
to apply in all respects to Borrowers.
2.3 AVAILABILITY RESERVES. All Revolving Loans otherwise
available to Borrowers pursuant to the lending formulas and subject to the
Maximum Credit and other applicable limits hereunder, shall be
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subject to Agent's continuing right to establish and revise Availability
Reserves. Without limiting any other rights or remedies of Agent and Lender
under this Agreement or any of the other Financing Agreements with respect to
the establishment of Availability Reserves or otherwise, Agent may establish
and revise Availability Reserves to reflect:(a) inventory shrinkage;(b)
reserves in respect of markdowns and cost variances;(c) amounts due or to
become due in respect of sales, use and/or withholding taxes; or (d) amounts
owing by Borrowers to Credit Card Issuers or Credit Card Processors in
connection with the Credit Card Agreements (other than discounts and fees
deducted in determining the Net Amount of Eligible Credit Card Receivables).
SECTION 3. INTEREST AND FEES
3.1 INTEREST.
(a) Borrowers shall pay to Agent, for the benefit of
Lender, interest on the outstanding principal amount of the Revolving Loans
at the Interest Rate. All interest accruing hereunder on and after the date
of any Event of Default or termination or non-renewal hereof shall be payable
on demand.
(b) Borrowers may from time to time request that Prime
Rate Loans be converted to Eurodollar Rate Loans or that any existing
Eurodollar Rate Loans continue for an additional Interest Period. Such
request from Borrowers shall specify the amount of the Prime Rate Loans which
will constitute Eurodollar Rate Loans (subject to the limits set forth below)
and the Interest Period to be applicable to such Eurodollar Rate Loans.
Subject to the terms and conditions contained herein, two (2) Business Days
after receipt by Agent of such a request from Borrowers, such Prime Rate
Loans shall be converted to Eurodollar Rate Loans or such Eurodollar Rate
Loans shall continue, as the case may be, PROVIDED, THAT, as of such date
each of the following conditions is satisfied as determined by Agent: (i) no
Event of Default, or event which with notice or passage of time or both would
constitute an Event of Default exists or has occurred and is continuing, (ii)
no party hereto shall have sent any notice of termination or non-renewal of
this Agreement, (iii) Borrowers shall have complied with such customary
procedures as are established by Agent and specified by Agent to Borrowers
from time to time for requests by Borrowers for Eurodollar Rate Loans, (iv)
no more than six (6) Interest Periods may be in effect at any one time, (v)
the amount of each of the Eurodollar Rate Loans must be in an amount not less
than $3,000,000 or an integral multiple of $500,000 in excess thereof, (vi)
the maximum amount of the Eurodollar Rate Loans at any time requested by
Borrowers shall not exceed the amount equal to ninety (90%) percent of the
lowest principal amount of the Revolving Loans which it is anticipated will
be outstanding during the applicable Interest Period, in each case as
determined by Agent (but with no obligation of Agent, on behalf of Lender,
and Lender to make such Revolving Loans except as herein specifically
provided) and (vii) Agent shall have determined that the Interest Period or
Adjusted Eurodollar Rate is available to Agent through the Reference Bank and
can be readily determined as of the date of the request for such Eurodollar
Rate Loan by Borrowers. Any request by Borrowers to convert Prime Rate Loans
to Eurodollar Rate Loans or to continue any existing Eurodollar Rate Loans
shall be irrevocable. Notwithstanding anything to the contrary contained
herein, Agent, Lender and Reference Bank shall not be required to purchase
United States Dollar deposits in the London interbank market or other
applicable Eurodollar Rate market to fund any Eurodollar Rate Loans, but the
provisions hereof shall be deemed to apply as if Agent, Lender and Reference
Bank had purchased such deposits to fund the Eurodollar Rate Loans.
(c) Any Eurodollar Rate Loans shall automatically convert to
Prime Rate Loans upon the last day of the applicable Interest Period, unless
Agent has received and approved a request to continue such Eurodollar Rate Loan
at least two (2) Business Days prior to such last day in accordance with the
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terms hereof. Any Eurodollar Rate Loans shall, at Agent's option, upon
notice by Agent to Borrowers, convert to Prime Rate Loans in the event that
(i) an Event of Default or act, condition or event which with the notice or
passage of time or both would constitute an Event of Default, shall exist or
have occurred, (ii) this Agreement shall terminate or not be renewed, or
(iii) the aggregate principal amount of the Prime Rate Loans which have
previously been converted to Eurodollar Rate Loans or existing Eurodollar
Rate Loans continued, as the case may be, at the beginning of an Interest
Period shall at any time during such Interest Period exceed either (A) the
aggregate principal amount of the Revolving Loans then outstanding, or (B)
the Revolving Loans then available to Borrowers under Section 2 hereof.
Borrowers shall pay to Agent, for the benefit of Lender, upon demand by Agent
(or Agent may, at its option, charge any loan account of Borrowers) any
amounts required to compensate Agent, Lender, the Reference Bank or any
Participant (as hereinafter defined) for any loss (including loss of
anticipated profits), cost or expense incurred by such person, as a result of
the conversion of Eurodollar Rate Loans to Prime Rate Loans pursuant to any
of the foregoing.
(d) Interest shall be payable by Borrowers to Agent, for
the benefit of Lender, monthly in arrears not later than the first day of
each calendar month and shall be calculated on the basis of a three hundred
sixty (360) day year and actual days elapsed. The interest rate on Revolving
Loans (other than Eurodollar Rate Loans) shall increase or decrease by an
amount equal to each increase or decrease in the Prime Rate effective on the
first day of the month after any change in such Prime Rate is announced based
on the Prime Rate in effect on the last day of the month in which any such
change occurs. In no event shall charges constituting interest payable by
Borrowers to Agent exceed the maximum amount or the rate permitted under any
applicable law or regulation, and if any such part or provision of this
Agreement is in contravention of any such law or regulation, such part or
provision shall be deemed amended to conform thereto.
3.2 CLOSING FEE. Borrowers shall pay to Agent, for the benefit
of Lender, as a closing fee the amount of $375,000 which shall be fully
earned as of and payable on the date hereof.
3.3 [Intentionally omitted].
3.4 [Intentionally omitted.]
3.5 UNUSED LINE FEE. Borrowers shall pay to Agent, for the
benefit of Lender, monthly an unused line fee at a rate equal to one-quarter
of one (1/4%) percent per annum calculated upon the amount by which
$70,000,000 exceeds the average daily principal balance of the outstanding
Revolving Loans and Letter of Credit Accommodations during the immediately
preceding month (or part thereof) while this Agreement is in effect and for
so long thereafter as any of the Obligations are outstanding, which fee shall
be payable on the first day of each month in arrears.
3.6 CHANGES IN LAWS AND INCREASED COSTS OF REVOLVING LOANS.
(a) Notwithstanding anything to the contrary contained
herein, all Eurodollar Rate Loans shall, upon notice by Agent to Borrowers,
convert to Prime Rate Loans in the event that (i) any change in applicable
law or regulation (or the interpretation or administration thereof) shall
either (A) make it unlawful for Agent, Lender, Reference Bank or any
Participant to make or maintain Eurodollar Rate Loans or to comply with the
terms hereof in connection with the Eurodollar Rate Loans, or (B) shall
result in the increase in the costs to Agent, Lender, Reference Bank or any
Participant of making or maintaining any Eurodollar Rate Loans or by an
amount deemed by Agent to be material, or (C) reduce the amounts
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received or receivable by Agent, for the benefit of Lender, in respect
thereof, by an amount deemed by Agent to be material or (ii) the cost to
Agent, Lender, Reference Bank or any Participant of making or maintaining any
Eurodollar Rate Loans shall otherwise increase by an amount deemed by Agent
to be material. Borrowers shall pay to Agent, for the benefit of Lender, upon
demand by Agent (or Agent may, at its option, charge any loan account of
Borrowers) any amounts required to compensate Agent, Lender, the Reference
Bank or any Participant for any loss (including loss of anticipated profits),
cost or expense incurred by such person as a result of the foregoing,
including, without limitation, any such loss, cost or expense incurred by
reason of the liquidation or reemployment of deposits or other funds acquired
by such person to make or maintain the Eurodollar Rate Loans or any portion
thereof. A certificate of Agent setting forth the basis for the
determination of such amount necessary to compensate Agent as aforesaid shall
be delivered to Borrowers and shall be conclusive, absent manifest error.
(b) If any payments or prepayments in respect of the
Eurodollar Rate Loans are received by Agent other than on the last day of the
applicable Interest Period (whether pursuant to acceleration, upon maturity
or otherwise), including any payments pursuant to the application of
collections under Section 6.3 or any other payments made with the proceeds of
Collateral, Borrowers shall pay to Agent upon demand by Agent (or Agent may,
at its option, charge any loan account of Borrowers) any amounts required to
compensate Agent, Lender, the Reference Bank or any Participant for any
additional loss (including loss of anticipated profits), cost or expense
incurred by such person as a result of such prepayment or payment, including,
without limitation, any loss, cost or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by such
person to make or maintain such Eurodollar Rate Loans or any portion thereof.
SECTION 4. CONDITIONS PRECEDENT
4.1 CONDITIONS PRECEDENT TO INITIAL REVOLVING LOANS AND LETTER OF
CREDIT ACCOMMODATIONS. Each of the following is a condition precedent to
Lender (or Agent on behalf of Lender) making the initial Revolving Loans and
providing the initial Letter of Credit Accommodations hereunder:
(a) Agent shall have received, in form and substance
satisfactory to Agent, all releases, terminations and such other documents as
Agent may request to evidence and effectuate the termination by U.S. Bank,
National Association of its financing arrangements with Borrowers and the
termination and release by it of any interest in and to any assets and
properties of Borrowers and each Obligor, duly authorized, executed and
delivered by it, including, but not limited to, (i) UCC termination
statements for all UCC financing statements previously filed by it or its
predecessors, as secured party and Borrowers or any Obligor, as debtor and
(ii) satisfactions and discharges of any mortgages, deeds of trust or deeds
to secure debt by Borrowers or any Obligor in favor of U.S. Bank National
Association or a trustee acting on its behalf, in form acceptable for
recording in the appropriate governmental office;
(b) Agent shall have received evidence, in form and
substance satisfactory to Agent, that Agent has valid perfected and first
priority security interests in and liens upon the Collateral and any other
property which is intended to be security for the Obligations or the
liability of any Obligor in respect thereof, subject only to the security
interests and liens permitted herein or in the other Financing Agreements;
(c) all requisite corporate action and proceedings in
connection with this Agreement and the other Financing Agreements shall be
satisfactory in form and substance to Agent, and Agent shall have received
all information and copies of all documents, including, without limitation,
records of requisite
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corporate action and proceedings which Agent may have requested in connection
therewith, such documents where requested by Agent or its counsel to be
certified by appropriate corporate officers or governmental authorities;
(d) no material adverse change shall have occurred in the
assets, business or prospects of Borrowers since the date of Agent's latest
field examination and no change or event shall have occurred which would
impair, in a material respect, the ability of Borrowers or any Obligor to
perform its obligations hereunder or under any of the other Financing
Agreements to which it is a party or of Agent to enforce the Obligations or
realize upon the Collateral;
(e) Agent shall have completed a field review of the
Records and such other information with respect to the Collateral as Agent
may require to determine the amount of Revolving Loans available to Borrowers
including, without limitation, current agings of receivables, current
perpetual inventory records and/or roll-forwards of Accounts and Inventory
through the date of closing, together with such supporting documentation as
may be necessary or appropriate, and other documents and information that
will enable Agent to accurately identify and verify the Collateral, the
results of which shall be satisfactory to Agent, not more than three (3)
Business Days prior to the date hereof;
(f) Agent shall have received, in form and substance
satisfactory to Agent, all consents, waivers, acknowledgments and other
agreements from third persons which Agent may deem necessary or desirable in
order to permit, protect and perfect its security interests in and liens upon
the Collateral or to effectuate the provisions or purposes of this Agreement
and the other Financing Agreements, including, without limitation,
acknowledgements by lessors, mortgagees and warehousemen of Agent's security
interests in the Collateral, waivers by such persons of any security
interests, liens or other claims by such persons to the Collateral and
agreements permitting Agent's access to, and the right to remain on, the
premises to exercise its rights and remedies and otherwise deal with the
Collateral;
(g) Borrowers shall have established the Blocked Accounts
and Agent shall have received, in form and substance satisfactory to Agent,
all agreements with the depository banks and Borrowers with respect to such
Blocked Accounts as Agent may require pursuant to Section 6.3 hereof, duly
authorized, executed and delivered by such depository banks and Borrowers;
(h) Agent shall have received Credit Card
Acknowledgements in each case, duly authorized, executed and delivered by the
Credit Card Issuers and Credit Card Processors;
(i) the Excess Availability as determined by Agent, as of
the date hereof, shall not be less than $5,000,000 after giving effect to the
initial Revolving Loans made or to be made and Letter of Credit
Accommodations issued or to be issued in connection with the initial
transactions hereunder;
(j) Agent shall have received evidence of insurance and
loss payee endorsements required hereunder and under the other Financing
Agreements, in form and substance satisfactory to Agent, and certificates of
insurance policies and/or endorsements naming Agent and Lender as loss payee;
(k) Agent shall have received, in form and substance
satisfactory to Agent, the opinion letter of counsel(s) to Borrowers with
respect to the Financing Agreements and the security interests and liens of
Agent with respect to the Collateral and such other matters as Agent may
request;
(l) Lender shall have received an appraisal and a Phase I
environmental site
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assessment with respect to International's real property located in Brooklyn
Park, Minnesota, which shall be satisfactory in all respects to Agent; and
(m) the other Financing Agreements and all instruments
and documents hereunder and thereunder shall have been duly executed and
delivered to Agent, in form and substance satisfactory to Agent.
4.2 CONDITIONS PRECEDENT TO ALL REVOLVING LOANS AND LETTER OF
CREDIT ACCOMMODATIONS. Each of the following is an additional condition
precedent to Lender (or Agent on behalf of Lender) making Revolving Loans
and/or providing Letter of Credit Accommodations to Borrowers, including the
initial Revolving Loans and Letter of Credit Accommodations and any future
Revolving Loans and Letter of Credit Accommodations:
(a) all representations and warranties contained herein
and in the other Financing Agreements shall be true and correct in all
material respects with the same effect as though such representations and
warranties had been made on and as of the date of the making of each such
Revolving Loan or providing each such Letter of Credit Accommodation and
after giving effect thereto; and
(b) no Event of Default and no event or condition which,
with notice or passage of time or both, would constitute an Event of Default,
shall exist or have occurred and be continuing on and as of the date of the
making of such Revolving Loan or providing each such Letter of Credit
Accommodation and after giving effect thereto.
SECTION 5. SECURITY INTEREST
To secure payment and performance of all Obligations, each Borrower
hereby grants to Agent, for itself and the benefit of Lender, a continuing
security interest in, a lien upon, and a right of set off against, and hereby
assigns to Agent, for itself and the benefit of Lender, as security, the
following property and interests in property of such Borrower, whether now
owned or hereafter acquired or existing, and wherever located (collectively,
the "Collateral"):
5.1 Accounts;
5.2 all present and future contract rights, general intangibles
(including, but not limited to, tax and duty refunds, registered and
unregistered patents, trademarks, service marks, copyrights, trade names,
applications for the foregoing, trade secrets, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or licensee, choses
in action and other claims and existing and future leasehold interests in
equipment, real estate and fixtures), chattel paper, documents, instruments,
securities and other investment property, credit card sales drafts, credit
card sales slips or charge slips or receipts and other forms of store
receipts, letters of credit, bankers' acceptances and guaranties;
5.3 all present and future monies, securities, credit balances,
deposits, deposit accounts and other property of such Borrower now or hereafter
held or received by or in transit to Lender or Agent or their respective
affiliates or at any other depository or other institution from or for the
account of such Borrower, whether for safekeeping, pledge, custody,
transmission, collection or otherwise, and all present and future liens,
security interests, rights, remedies, title and interest in, to and in respect
of Accounts and other Collateral, including, without limitation,(i) rights and
remedies under or relating to guaranties, contracts of suretyship, letters of
credit and credit and other insurance related to the Collateral,(ii) rights of
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stoppage in transit, replevin, repossession, reclamation and other rights and
remedies of an unpaid vendor, lienor or secured party,(iii) goods described
in invoices, documents, credit card sales drafts, credit card sales slips or
charge slips or receipts and other forms of store receipts, contracts or
instruments with respect to, or otherwise representing or evidencing,
Accounts or other Collateral, including, without limitation, returned,
repossessed and reclaimed goods, and (iv) deposits by and property of account
debtors or other persons securing the obligations of account debtors;
5.4 Inventory;
5.5 Equipment;
5.6 Real Property;
5.7 Records; and
5.8 all products and proceeds of the foregoing, in any form,
including, without limitation, insurance proceeds and all claims against
third parties for loss or damage to or destruction of any or all of the
foregoing.
SECTION 6. COLLECTION AND ADMINISTRATION
6.1 BORROWERS' LOAN ACCOUNT. Agent shall maintain one or more
loan account(s) on its books in which shall be recorded (a) all Revolving
Loans, Letter of Credit Accommodations and other Obligations and the
Collateral,(b) all payments made by or on behalf of Borrowers and (c) all
other appropriate debits and credits as provided in this Agreement,
including, without limitation, fees, charges, costs, expenses and interest.
All entries in the loan account(s) shall be made in accordance with Agent's
customary practices as in effect from time to time.
6.2 STATEMENTS. Agent shall render to Borrowers each month a
statement setting forth the balance in the Borrowers' loan account(s)
maintained by Agent for Borrowers pursuant to the provisions of this
Agreement, including principal, interest, fees, costs and expenses. Each
such statement shall be subject to subsequent adjustment by Agent but shall,
absent manifest errors or omissions, be considered correct and deemed
accepted by Borrowers and conclusively binding upon Borrowers as an account
stated except to the extent that Agent receives a written notice from
Borrowers of any specific exceptions of Borrowers thereto within thirty (30)
days after the date such statement has been mailed by Agent. Until such time
as Agent shall have rendered to Borrowers a written statement as provided
above, the balance in Borrowers' loan account(s) shall be presumptive
evidence of the amounts due and owing to Agent by Borrowers.
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6.3 COLLECTION OF ACCOUNTS.
(a) Borrowers shall establish and maintain, at their
expense, blocked accounts or lockboxes and related blocked accounts (in
either case, "Blocked Accounts"), as Agent may specify, with such banks as
are acceptable to Agent into which Borrowers shall promptly deposit and
direct their account debtors to directly remit all payments on Accounts and
all payments constituting proceeds of Inventory or other Collateral in the
identical form in which such payments are made, whether by cash, check,
credit card sales drafts, credit card sales or charge slips or other manner.
The banks at which the Blocked Accounts are established shall enter into an
agreement, in form and substance satisfactory to Agent, providing that all
items received or deposited in the Blocked Accounts are the property of
Agent, that the depository bank has no lien upon, or right to setoff against,
the Blocked Accounts, the items received for deposit therein, or the funds
from time to time on deposit therein and that the depository bank will wire,
or otherwise transfer, in immediately available funds, on a daily basis, at
such time as Agent shall direct, all funds received or deposited into the
Blocked Accounts to such bank account of Agent as Agent may from time to time
designate for such purpose ("Payment Account"). Agent shall instruct the
depository banks at which the Blocked Accounts are maintained to transfer the
funds on deposit in the Blocked Accounts to such operating bank account of
Borrowers as Borrowers may specify in writing to Agent (the "Operating
Account") until such time as Agent shall notify the depository bank
otherwise. Agent may instruct the depository banks at which the Blocked
Accounts are maintained to transfer all funds received or deposited into the
Blocked Accounts to the Payment Account at any time from and after the
occurrence of:(i) an Event of Default, or event which with notice or passage
of time or both would constitute an Event of Default, shall exist or have
occurred, or (ii) Borrowers have Excess Availability of less than $7,500,000.
Borrowers agree that all payment made to such Blocked Accounts or other
funds received and collected by Agent, whether on the Accounts or as proceeds
of Inventory or other Collateral or otherwise shall be the property of Agent.
(b) For purposes of calculating the amount of the
Revolving Loans available to Borrowers such payments will be applied
(conditional upon final collection) to the Obligations on the Business Day of
receipt by Agent of immediately available funds in the Payment Account
provided such payments and notice thereof are received in accordance with
Agent's usual and customary practices as in effect from time to time and
within sufficient time to credit Borrowers' loan account on such day, and if
not, then on the next Business Day. Until the date Agent notifies the
depository banks at which the Blocked Accounts are maintained to direct
payment to the Payment Account in accordance with Section 6.3(a), Agent shall
be entitled to charge Borrowers an administrative fee equivalent to the
interest Agent would have received for the Collection Period (as defined
below) had the funds deposited in the Blocked Account on such day been
transferred from the Blocked Account to the Payment Account on such day. If
Agent notifies the depository banks at which the Blocked Accounts are
maintained to direct payment to the Payment Account in accordance with the
terms of Section 6.3(a), then, for purposes of calculating interest on the
Obligations, such payments or other funds received in the Payment Account
will be applied (conditional upon final collection) to the Obligations one
(1) Business Day following the date of receipt of immediately available funds
by Agent in the Payment Account (the "Collection Period") provided such
payments or other funds and notice thereof are received in accordance with
Agent's usual and customary practices as in effect from time to time and
within sufficient time to credit Borrowers' loan account on such day, and if
not, then on the next Business Day. Prior to the Agent notifying the
depository banks at which the Blocked Accounts are maintained to direct
payment to the Payment Account in accordance with Section 6.3(a), for
purposes of calculating interest on the Obligations, payments or other funds
received in the Payment Account will be applied (conditional upon final
collection) to the Obligations on the Business Day
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of receipt of immediately available funds by Agent in the Payment Account
provided such payments or other funds and notice thereof are received in
accordance with Agent's usual and customary practices as in effect from time
to time and within sufficient time to credit Borrowers' loan account on such
day, and if not, then on the next Business Day. The economic benefit of the
Collection Period shall be for Agent's sole account.
(c) Borrowers and all of their affiliates, subsidiaries,
shareholders, directors, employees or agents shall, acting as trustee for
Agent, receive, as the property of Agent, for the benefit of Lender, any
monies, checks, notes, drafts or any other payment relating to and/or
proceeds of Accounts or other Collateral which come into their possession or
under their control and immediately upon receipt thereof, shall deposit or
cause the same to be deposited in the Blocked Accounts, or remit the same or
cause the same to be remitted, in kind, to Agent, for the benefit of Lender.
In no event shall the same be commingled with Borrowers' own funds.
Borrowers agree to reimburse Agent on demand for any amounts owed or paid to
any bank at which a Blocked Account is established or any other bank or
person involved in the transfer of funds to or from the Blocked Accounts
arising out of Agent's payments to or indemnification of such bank or person.
The obligation of Borrowers to reimburse Agent, for the benefit of Lender,
for such amounts pursuant to this Section 6.3 shall survive the termination
or non-renewal of this Agreement.
6.4 PAYMENTS. All Obligations shall be payable to the Payment
Account as provided in Section 6.3 or such other place as Agent may designate
from time to time. Agent may apply payments received or collected from
Borrowers or for the account of Borrowers (including, without limitation, the
monetary proceeds of collections or of realization upon any Collateral) to
such of the Obligations, whether or not then due, in such order and manner as
Agent determines. At Agent's option, all principal, interest, fees, costs,
expenses and other charges provided for in this Agreement or the other
Financing Agreements may be charged directly to the loan account(s) of
Borrowers. Borrowers shall make all payments to Agent, for the benefit of
Lender, on the Obligations free and clear of, and without deduction or
withholding for or on account of, any setoff, counterclaim, defense, duties,
taxes, levies, imposts, fees, deductions, withholding, restrictions or
conditions of any kind. If after receipt of any payment of, or proceeds of
Collateral applied to the payment of, any of the Obligations, Agent is
required to surrender or return such payment or proceeds to any Person for
any reason, then the Obligations intended to be satisfied by such payment or
proceeds shall be reinstated and continue and this Agreement shall continue
in full force and effect as if such payment or proceeds had not been received
by Agent. Borrowers shall be liable to pay to Agent, for the benefit of
Lender, and does hereby indemnify and hold Agent and Lender harmless for the
amount of any payments or proceeds surrendered or returned. This Section 6.4
shall remain effective notwithstanding any contrary action which may be taken
by Agent in reliance upon such payment or proceeds. This Section 6.4 shall
survive the payment of the Obligations and the termination or non-renewal of
this Agreement.
6.5 AUTHORIZATION TO MAKE REVOLVING LOANS AND PROVIDE LETTER OF
CREDIT ACCOMMODATIONS. Agent, for the benefit of Lender, is authorized to
make the Revolving Loans and provide the Letter of Credit Accommodations, for
the account and risk of Lender, based upon telephonic or other instructions
received from anyone purporting to be an authorized person as set forth on
Schedule 6.5 hereto, or, at the discretion of Agent, if such Revolving Loans
are necessary to satisfy any Obligations. All requests for Revolving Loans
or Letter of Credit Accommodations hereunder shall specify the date on which
the requested advance is to be made or Letter of Credit Accommodations
established (which day shall be a Business Day) and the amount of the
requested Revolving Loan. Requests received after 11:00 a.m. (Chicago,
Illinois time) on any day shall be deemed to have been made as of the opening
of business on the immediately following Business Day. All Revolving Loans
and Letter of Credit Accommodations under this Agreement shall be
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conclusively presumed to have been made to, and at the request of and for the
benefit of, Borrowers when deposited to the credit of Borrowers or otherwise
disbursed or established in accordance with the instructions of Borrowers or
in accordance with the terms and conditions of this Agreement.
6.6 USE OF PROCEEDS. Borrowers shall use the initial proceeds of
the Revolving Loans provided by Agent, for the account and risk of Lender, to
Borrowers hereunder only for: (a) payments to each of the persons listed in
the disbursement direction letter furnished by Borrowers to Agent on or about
the date hereof and (b) costs, expenses and fees in connection with the
preparation, negotiation, execution and delivery of this Agreement and the
other Financing Agreements. All other Revolving Loans made or Letter of
Credit Accommodations provided by Agent to Borrowers pursuant to the
provisions hereof shall be used by Borrowers only for general operating,
working capital and other proper corporate purposes of Borrowers not
otherwise prohibited by the terms hereof. None of the proceeds will be used,
directly or indirectly, for the purpose of purchasing or carrying any margin
security or for the purposes of reducing or retiring any indebtedness which
was originally incurred to purchase or carry any margin security or for any
other purpose which might cause any of the Revolving Loans to be considered a
"purpose credit" within the meaning of Regulation U of the Board of Governors
of the Federal Reserve System, as amended.
6.7 SHARING OF PAYMENTS, ETC. Borrowers agree that, in addition
to (and without limitation of) any right of setoff, banker's lien or
counterclaim Agent or Lender may otherwise have, Lender shall be entitled, at
its option (but subject, as among Agent and Lender, to the provisions of
Section 12.3(b) hereof), to offset balances held by it for the account of
Borrowers at any of its offices, in dollars or in any other currency, against
any principal of or interest on any Revolving Loans owed to Lender or any
other amount payable to Lender hereunder, that is not paid when due
(regardless of whether such balances are then due to Borrowers), in which
case it shall promptly notify Borrowers and Agent thereof; PROVIDED, THAT,
Lender's failure to give such notice shall not affect the validity thereof.
6.8 SETTLEMENT PROCEDURES. In order to administer the Revolving
Loans and Letter of Credit Accommodations in an efficient manner and to
minimize the transfer of funds between Agent and Lender, Agent shall, subject
to the terms of this Section 7.8, make available, on behalf of Lender, the
full amount of the Revolving Loans requested or charged to Borrowers' loan
account(s) or otherwise to be advanced by Lender pursuant to the terms
hereof, without any requirement of prior notice to Lender of the proposed
Revolving Loans. Agent and Lender shall settle between them at such times
and in such manner as Agent and Lender may agree. The obligation of Lender
to transfer funds to Agent and effect such settlement shall be irrevocable
and unconditional and without recourse to or warranty by Agent. In lieu of
settlements, Agent may at any time require Lender to provide Agent with
immediately available funds for each Revolving Loan, prior to Agent's
disbursement of such Revolving Loan to Borrowers.
6.9 APPOINTMENT OF INTERNATIONAL AS AGENT FOR BORROWERS.
Borrowers hereby irrevocably appoint International, and each officer thereof,
as their agent and attorney-in-fact to request Revolving Loans and Letter of
Credit Accommodations on their behalf, at Agent's option, to receive
disbursements of Revolving Loans on their behalf (which may be made to the
same account of International to which disbursements of Revolving Loans to
International are made), to receive notices and statements of account from
Agent, to take such other actions on their behalf as is provided hereunder or
under any of the other Financing Agreements and generally to deal with Agent
or Lender on their behalf, for all matters pertaining to the financing
arrangements under this Agreement and the other Financing Agreements.
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SECTION 7. COLLATERAL REPORTING AND COVENANTS
7.1 COLLATERAL REPORTING. Borrowers shall provide Agent with the
following documents in a form satisfactory to Agent:(a) on a weekly basis or
more frequently as Agent may request,(i) perpetual inventory reports by
category and age and identifying items of Inventory in transit to Borrowers
related to the applicable documentary letter of credit and/or bill of lading
number,(ii) report showing the Value of C Goods Inventory, and (iii)a report
of all Credit Card Receivables and Accounts arising from sales of merchandise
offered for sale under any Installment Billing Program, sufficient to enable
Lender to monitor the Credit Card Receivables and Accounts arising from sales
of merchandise offered for sale under any Installment Billing Program,
including, without limitation, any past due installments under the
Installment Billing Program,(b) on a monthly basis or more frequently as
Agent may request,(i) agings of accounts payable;(ii) reports of sales for
each category of Inventory, reports of aggregate inventory purchases
(including all costs related thereto such as freight, duty and taxes) and
reports of all credits and collections, and (iii) a report of Borrowers'
Membership Fee Reimbursement Obligations; ;(c) upon Agent's request (i)
reports on sales and use tax collections, deposits and payments, including
monthly sales and use tax accruals,(ii) copies of remittance advices and
reports and copies of deposit slips and bank statements,(iii) copies of
shipping and delivery documents, (iv) copies of purchase orders, invoices and
delivery documents for Inventory and Equipment acquired by Borrowers; and (v)
the monthly statements received by Borrowers from any Credit Card Issuers or
Credit Card Processors, together with such additional information with
respect thereto as shall be sufficient to enable Agent to monitor the
transactions pursuant to the Credit Card Agreements; and (d) such other
reports as to the Collateral as Agent shall request from time to time. If
any of Borrowers' records or reports of the Collateral are prepared or
maintained by an accounting service, contractor, shipper or other Agent,
Borrowers hereby irrevocably authorize such service, contractor, shipper or
Agent to deliver such records, reports, and related documents to Agent and to
follow Agent's instructions with respect to further services at any time that
an Event of Default exists or has occurred and is continuing.
7.2 ACCOUNTS COVENANTS.
(a) No credit, discount, allowance or extension or
agreement for any of the foregoing shall be granted to any account debtor,
Credit Card Issuer or Credit Card Processor except in the ordinary course of
Borrowers' business in accordance with the current practices of Borrowers as
in effect on the date hereof. So long as no Event of Default exists or has
occurred and is continuing, Borrowers shall settle, adjust or compromise any
claim, offset, counterclaim or dispute with any account debtor, Credit Card
Issuer, Credit Card Processor. At any time that an Event of Default exists
or has occurred and is continuing, Agent shall, at its option, have the
exclusive right to settle, adjust or compromise any claim, offset,
counterclaim or dispute with account debtors, Credit Card Issuers or Credit
Card Processors or grant any credits, discounts or allowances.
(b) Borrowers shall notify Agent promptly of: (i) any
notice of a material default by Borrowers under any of the Credit Card
Agreements or of any default which might result in the Credit Card Issuer or
Credit Card Processor ceasing to make payments or suspending payments to
Borrowers, (ii) any notice from any Credit Card Issuer or Credit Card
Processor that such person is ceasing or suspending, or will cease or
suspend, any present or future payments due or to become due to Borrowers
from such person, or that such person is terminating or will terminate any of
the Credit Card Agreements, and (iii) the failure of Borrowers to comply with
any material terms of the Credit Card Agreements or any terms thereof which
might result in the Credit Card Issuer or Credit Card Processor ceasing or
suspending payments to Borrowers.
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(c) With respect to each Account: (i) the amounts shown
on any invoice delivered to Agent or schedule thereof delivered to Agent
shall be true and complete in all material respects, (ii) no payments shall
be made thereon except payments delivered to Agent, for the benefit of
Lender, pursuant to the terms of this Agreement, (iii) no credit, discount,
allowance or extension or agreement for any of the foregoing shall be granted
to any account debtor, Credit Card Issuer or Credit Card Processor, except as
reported to Agent in accordance with this Agreement and except for credits,
discounts, allowances or extensions made or given in the ordinary course of
Borrowers' business in accordance with practices and policies previously
disclosed to Agent and (iv) none of the transactions giving rise thereto will
violate any applicable State or Federal Laws or regulations, all
documentation relating thereto will be legally sufficient under such laws and
regulations and all such documentation will be legally enforceable in
accordance with its terms.
(d) Agent may, at any time or times that an Event of
Default exists or has occurred and is continuing, (i) notify any or all
account debtors, Credit Card Issuers and Credit Card Processors that the
Accounts have been assigned to Agent and that Agent has a security interest
therein and Agent may direct any or all account debtors, Credit Card Issuers
and Credit Card Processors to make payments of Accounts directly to Agent,
(ii) extend the time of payment of, compromise, settle or adjust for cash,
credit, return of merchandise or otherwise, and upon any terms or conditions,
any and all Accounts or other obligations included in the Collateral and
thereby discharge or release the account debtor or any other party or parties
in any way liable for payment thereof without affecting any of the
Obligations, (iii) demand, collect or enforce payment of any Accounts or such
other obligations, but without any duty to do so, and Agent shall not be
liable for its failure to collect or enforce the payment thereof nor for the
negligence of its agents or attorneys with respect thereto and (iv) take
whatever other action Agent may deem necessary or desirable for the
protection of its interests. At any time that an Event of Default exists or
has occurred and is continuing, at Agent's request, all invoices and
statements sent to any account debtor, Credit Card Issuer or Credit Card
Processor shall state that the Accounts due from such account debtor, Credit
Card Issuer or Credit Card Processor and such other obligations have been
assigned to Agent and are payable directly and only to Agent and Borrowers
shall deliver to Agent such originals of documents evidencing the sale and
delivery of goods or the performance of services giving rise to any Accounts
as Agent may require.
(e) Agent shall have the right at any time or times, in
Agent's name or in the name of a nominee of Agent, to verify the validity,
amount or any other matter relating to any Account or other Collateral, by
mail, telephone, facsimile transmission or otherwise.
(f) Borrowers shall deliver or cause to be delivered to
Agent, with appropriate endorsement and assignment, with full recourse to
Borrowers, all chattel paper and instruments which Borrowers now own or may
at any time acquire immediately upon Borrowers' receipt thereof, except as
Agent may otherwise agree.
7.3 INVENTORY COVENANTS. With respect to the Inventory:
(a) Borrowers shall at all times maintain inventory records reasonably
satisfactory to Agent, keeping correct and accurate records itemizing and
describing the kind, type, quality and quantity of Inventory, Borrowers' cost
therefor and daily withdrawals therefrom and additions thereto;(b) Borrowers
shall conduct a periodic cycle count of the Inventory in a manner that is
acceptable to Borrowers' independent certified public accountants, and, at
any time or times as Agent may request on or after an Event of Default,
conduct a physical count of the Inventory, and promptly following such
physical inventory shall supply Agent with a report in the form and with such
specificity as may be reasonably satisfactory to Agent concerning such
physical count;(c) Borrowers shall not remove any Inventory from the
locations set forth or permitted herein, without the prior
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written consent of Agent, except for sales of Inventory in the ordinary
course of Borrowers' business and except to move Inventory directly from one
location set forth or permitted herein to another such location;(d) at
Agent's request, Borrowers shall, at their expense on no more than two (2)
occasions in any twelve month period, and at Agent's own expense on the third
and all subsequent occasions during such period, deliver or cause to be
delivered to Agent written reports or appraisals as to the Inventory in form,
scope and methodology acceptable to Agent and by Buxbaum, Ginsberg &
Associates, Inc. or another appraiser acceptable to Agent, addressed to Agent
or upon which Agent is expressly permitted to rely (the "Inventory
Appraisal"), PROVIDED, THAT, from and after the occurrence and during the
continuance of an Event of Default, all Inventory Appraisals requested by
Agent shall be delivered at Borrowers' sole cost and expense;(e) Borrowers
shall produce, use, store and maintain the Inventory, with all reasonable
care and caution and in accordance with applicable standards of any insurance
and in conformity with applicable laws (including, but not limited to, the
requirements of the Federal Fair Labor Standards Act of 1938, as amended and
all rules, regulations and orders related thereto);(f) Borrowers assume all
responsibility and liability arising from or relating to the production, use,
sale or other disposition of the Inventory;(g) Borrowers shall keep the
Inventory in good and marketable condition; and (h) Borrowers shall not,
without prior written notice to Agent, acquire or accept any Inventory on
consignment or approval.
7.4 EQUIPMENT COVENANTS. With respect to the Equipment: (a)upon
Agent's request, Borrowers shall, at their expense, at any time or times as
Agent may request on or after an Event of Default, deliver or cause to be
delivered to Agent written reports or appraisals as to the Equipment in form,
scope and methodology acceptable to Agent and by an appraiser acceptable to
Agent;(b) Borrowers shall keep the Equipment in good order, repair, running
and marketable condition (ordinary wear and tear excepted);(c) Borrowers
shall use the Equipment with all reasonable care and caution and in
accordance with applicable standards of any insurance and in conformity with
all applicable laws;(d) the Equipment is and shall be used in Borrowers'
business and not for personal, family, household or farming use; (e)
Borrowers shall not remove any Equipment from the locations set forth or
permitted herein, except to the extent necessary to have any Equipment
repaired or maintained in the ordinary course of the business of Borrowers or
to move Equipment directly from one location set forth or permitted herein to
another such location and except for the movement of motor vehicles used by
or for the benefit of Borrowers in the ordinary course of business; (f)the
Equipment is now and shall remain personal property and Borrowers shall not
permit any of the Equipment to be or become a part of or affixed to real
property; and (g) Borrowers assume all responsibility and liability arising
from the use of the Equipment.
7.5 POWER OF ATTORNEY. Each Borrower hereby irrevocably
designates and appoints Agent (and all persons designated by Agent) as such
Borrower's true and lawful attorney-in-fact, and authorizes Agent, in such
Borrower's or Agent's name, to:(a) at any time an Event of Default or event
which with notice or passage of time or both would constitute an Event of
Default exists or has occurred and is continuing (i) demand payment on
Accounts or other proceeds of Inventory or other Collateral;(ii) enforce
payment of Accounts by legal proceedings or otherwise; (iii)exercise all of
such Borrower's rights and remedies to collect any Account or other
Collateral;(iv) sell or assign any Account upon such terms, for such amount
and at such time or times as the Agent deems advisable;(v) settle, adjust,
compromise, extend or renew an Account;(vi) discharge and release any
Account;(vii) prepare, file and sign such Borrower's name on any proof of
claim in bankruptcy or other similar document against an account
debtor;(viii) notify the post office authorities to change the address for
delivery of such Borrower's mail to an address designated by Agent, and open
and dispose of all mail addressed to Borrowers;(ix) sign such Borrower's name
on any verification of Accounts and notices thereof to account debtors, and
(x) do all acts and things which are necessary, in Agent's determination, to
fulfill such Borrower's obligations under this Agreement and the other
Financing Agreements; and (b) at any time after the earlier of (x) the
occurrence of an Event
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of Default and (y) the date Agent instructs the depository bank where the
Blocked Accounts are located to transfer all funds to the Payment Account:(i)
take control in any manner of any item of payment or proceeds thereof;(ii)
have access to any lockbox or postal box into which any proceeds of
Collateral is deposited; (iii)endorse such Borrower's name upon any items of
payment or proceeds thereof and deposit the same in the Agent's account for
application to the Obligations, and (iv) endorse such Borrower's name upon
any chattel paper, document, instrument, invoice, or similar document or
agreement relating to any Account or any goods pertaining thereto or any
other Collateral; and (c) at any time, execute in such Borrower's name and
file any UCC financing statements or amendments thereto. Borrowers hereby
release Agent and its officers, employees and designees from any liabilities
arising from any act or acts under this power of attorney and in furtherance
thereof, whether of omission or commission, except as a result of Agent's own
gross negligence or wilful misconduct as determined pursuant to a final
non-appealable order of a court of competent jurisdiction.
7.6 RIGHT TO CURE. Agent may, at its option,(a) after the
occurrence of an Event of Default, cure any default by Borrowers under any
agreement with a third party or pay or bond on appeal any judgment entered
against Borrowers,(b) discharge taxes, liens, security interests or other
encumbrances at any time levied on or existing with respect to the Collateral
and (c) pay any amount, incur any expense or perform any act which, in
Agent's judgment, is necessary or appropriate to preserve, protect, insure or
maintain the Collateral and the rights of Agent, for the benefit of Lender,
with respect thereto. Agent may add any amounts so expended to the
Obligations and charge Borrowers' account therefor, such amounts to be
repayable by Borrowers on demand. Agent shall be under no obligation to
effect such cure, payment or bonding and shall not, by doing so, be deemed to
have assumed any obligation or liability of Borrowers. Any payment made or
other action taken by Agent under this Section shall be without prejudice to
any right to assert an Event of Default hereunder and to proceed accordingly.
7.7 ACCESS TO PREMISES. From time to time as requested by Agent,
at the cost and expense of Borrowers,(a) Agent or its designee shall have
complete access to all of Borrowers' premises during normal business hours
and after notice to Borrowers, or at any time and without notice to Borrowers
if an Event of Default exists or has occurred and is continuing, for the
purposes of inspecting, verifying and auditing the Collateral and all of
Borrowers' books and records, including, without limitation, the Records, and
(b) Borrowers shall promptly furnish to Agent such copies of such books and
records or extracts therefrom as Agent may request, and (c) use during normal
business hours such of Borrowers' personnel, equipment, supplies and premises
as may be reasonably necessary for the foregoing and if an Event of Default
exists or has occurred and is continuing for the collection of Accounts and
realization of other Collateral.
SECTION 8. REPRESENTATIONS AND WARRANTIES
Borrowers hereby, jointly and severally, represent and warrant to
Agent and Lender the following (which shall survive the execution and
delivery of this Agreement), the truth and accuracy of which are a continuing
condition of the making of Revolving Loans and providing Letter of Credit
Accommodations to Borrowers:
8.1 CORPORATE EXISTENCE, POWER AND AUTHORITY; SUBSIDIARIES. Each
Borrower is a corporation duly organized and in good standing under the laws
of its state of incorporation and is duly qualified as a foreign corporation
and in good standing in all states or other jurisdictions where the nature
and extent of the business transacted by it or the ownership of assets makes
such qualification necessary, except for those jurisdictions in which the
failure to so qualify would not have a material adverse effect on such
Borrower's financial condition, results of operation or business or the
rights of Agent or Lender in or to any of the
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Collateral. The execution, delivery and performance of this Agreement, the
other Financing Agreements and the transactions contemplated hereunder and
thereunder are all within such Borrower's corporate powers, have been duly
authorized and are not in contravention of law or the terms of such
Borrower's certificate of incorporation, by-laws, or other organizational
documentation, or any indenture, agreement or undertaking to which such
Borrower is a party or by which such Borrower or its property are bound.
This Agreement and the other Financing Agreements constitute legal, valid and
binding obligations of Borrowers enforceable in accordance with their
respective terms. Borrowers do not have any subsidiaries except as set forth
on the Information Certificate.
8.2 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. All
financial statements relating to Borrowers which have been or may hereafter
be delivered by Borrowers to Agent or Lender have been prepared in accordance
with GAAP and fairly present the financial condition and the results of
operation of Borrowers as at the dates and for the periods set forth therein.
Except as disclosed in any interim financial statements furnished by
Borrowers to Agent or Lender prior to the date of this Agreement, there has
been no material adverse change in the assets, liabilities, properties and
condition, financial or otherwise, of Borrowers, since the date of the most
recent audited financial statements furnished by Borrowers to Agent or Lender
prior to the date of this Agreement.
8.3 CHIEF EXECUTIVE OFFICE; COLLATERAL LOCATIONS. The chief
executive office of each Borrower and each Borrower's Records concerning
Accounts and Inventory are located only at the address set forth below and
its only other places of business and the only other locations of Collateral,
if any, are the addresses set forth in the Information Certificate, subject
to the right of each Borrower to establish new locations in accordance with
Section 9.2 below. The Information Certificate correctly identifies any of
such locations which are not owned by Borrowers and sets forth the owners
and/or operators thereof and to the best of Borrowers' knowledge, the holders
of any mortgages on such locations.
8.4 PRIORITY OF LIENS; TITLE TO PROPERTIES. The security
interests and liens granted to Agent, for itself and the benefit of Lender,
under this Agreement and the other Financing Agreements constitute valid and
perfected first priority liens and security interests in and upon the
Collateral subject only to the liens indicated on Schedule 8.4 hereto and the
other liens permitted under Section 9.8 hereof. Each Borrower has good and
marketable title to all of its properties and assets subject to no liens,
mortgages, pledges, security interests, encumbrances or charges of any kind,
except those granted to Agent, for the benefit of Lender, and such others as
are specifically listed on Schedule 8.4 hereto or permitted under Section 9.8
hereof.
8.5 TAX RETURNS. Each Borrower has filed, or caused to be filed,
in a timely manner all tax returns, reports and declarations which are
required to be filed by it (without requests for extension except as
previously disclosed in writing to Agent). All information in such tax
returns, reports and declarations is complete and accurate in all material
respects. Each Borrower has paid or caused to be paid all taxes due and
payable or claimed due and payable in any assessment received by it, except
taxes the validity of which are being contested in good faith by appropriate
proceedings diligently pursued and available to such Borrower and with
respect to which adequate reserves have been set aside on its books.
Adequate provision has been made for the payment of all accrued and unpaid
Federal, State, county, local, foreign and other taxes whether or not yet due
and payable and whether or not disputed.
8.6 LITIGATION. Except as set forth on the Information
Certificate, there is no present investigation by any governmental agency
pending, or to the best of Borrowers' knowledge threatened, against or
affecting Borrowers, their assets or business and there is no action, suit,
proceeding or claim by
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any Person pending, or to the best of Borrowers' knowledge threatened,
against Borrowers or their assets or goodwill, or against or affecting any
transactions contemplated by this Agreement, which if adversely determined
against Borrowers would result in any material adverse change in the assets,
business or prospects of Borrowers or would impair the ability of Borrowers
to perform their obligations hereunder or under any of the other Financing
Agreements to which it is a party or of Agent to enforce any Obligations or
realize upon any Collateral.
8.7 COMPLIANCE WITH OTHER AGREEMENTS AND APPLICABLE LAWS.
(a) Each Borrower is not in default in any material
respect under, or in violation in any respect of any of the terms of, any
material agreement, contract, instrument, lease or other commitment to which
it is a party or by which it or any of its assets are bound and each Borrower
is in compliance in all material respects with all applicable provisions of
laws, rules, regulations, licenses, permits, approvals of any foreign,
Federal or State or local governmental authority.
(b) Each Borrower has obtained all material permits,
licenses, approvals, consents, certificates, orders or authorizations of any
governmental agency required for the lawful conduct of its business. Schedule
8.7 hereto sets forth all material permits, licenses, approvals, consents,
certificates, orders or authorizations (the "Permits") issued to or held by
Borrowers as of the date hereof by any federal, state or local governmental
agency and any applications pending by Borrowers with such federal, state or
local governmental agency. The Permits constitute all permits, licenses,
approvals, consents, certificates, orders or authorizations necessary for
Borrowers to own and operate their business as presently conducted or
proposed to be conducted where the failure to have such Permits would have a
material adverse effect on the business, performance, operations or
properties of Borrowers or the legality, validity or enforceability of this
Agreement or the other Financing Agreements or the ability of Borrowers to
perform their obligations under the Agreement or any of the other Financing
Agreements or the rights and remedies of Agent, for the benefit of Lender,
under this Agreement or any of the other Financing Agreements. All of the
Permits are valid and subsisting and in full force and effect. There are no
actions, claims or proceedings pending or threatened that seek the
revocation, cancellation, suspension or modification of any of the Permits.
8.8 ENVIRONMENTAL COMPLIANCE.
(a) Except as set forth on Schedule 8.8 hereto, Borrowers
have not generated, used, stored, treated, transported, manufactured,
handled, produced or disposed of any Hazardous Materials, on or off its
premises (whether or not owned by it) in any manner which at any time
violates any applicable Environmental Law in any material respect or any
license, permit, certificate, approval or similar authorization issued to
Borrowers thereunder and the operations of Borrowers comply in all material
respects with all applicable Environmental Laws and all licenses, permits,
certificates, approvals and similar authorizations thereunder.
(b) Except as set forth on Schedule 8.8 hereto, there is
no investigation, proceeding, complaint, order, directive, claim, citation or
notice by any governmental authority or any other person pending or to the
best of Borrowers' knowledge threatened, with respect to any non-compliance
with or violation of the requirements of any applicable Environmental Law by
Borrowers nor has there been any release, spill or discharge, overtly
threatened or actual, of any Hazardous Material on any properties of
Borrowers, or to the best of Borrowers' knowledge, releases, spills or
discharges from any properties at which Borrowers have transported, stored or
disposed of any Hazardous Materials.
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(c) Except as set forth in Schedule 8.8 hereto, Borrowers
have no material liability (contingent or otherwise) in connection with a
release, spill or discharge, threatened or actual, of any Hazardous Materials
or the generation, use, storage, treatment, transportation, manufacture,
handling, production or disposal of any Hazardous Materials.
(d) Each Borrower has all licenses, permits,
certificates, approvals or similar authorizations required to be obtained or
filed in connection with the operations of Borrowers under any Environmental
Law and all of such licenses, permits, certificates, approvals or similar
authorizations are valid and in full force and effect.
8.9 EMPLOYEE BENEFITS.
(a) Borrowers have not engaged in any transaction in
connection with which Borrowers or any of their ERISA Affiliates could be
subject to either a civil penalty assessed pursuant to ERISA or a tax imposed
by the Code, including any accumulated funding deficiency described in
Section 8.9(c) hereof and any deficiency with respect to vested accrued
benefits described in Section 8.9(d) hereof.
(b) No liability to the Pension Benefit Guaranty
Corporation has been or is expected by Borrowers to be incurred with respect
to any employee benefit plan of Borrowers or any of their ERISA Affiliates.
There has been no reportable event (within the meaning of ERISA) or any other
event or condition with respect to any employee benefit plan of Borrowers or
any of their ERISA Affiliates which presents a risk of termination of any
such plan by the Pension Benefit Guaranty Corporation.
(c) Full payment has been made of all amounts which
Borrowers or any of their ERISA Affiliates is required under ERISA and the
Code to have paid under the terms of each employee benefit plan as
contributions to such plan as of the last day of the most recent fiscal year
of such plan ended prior to the date hereof, and no accumulated funding
deficiency (as defined in ERISA and the Code), whether or not waived, exists
with respect to any employee pension benefit plan, including any penalty or
tax described in Section 8.9(a) hereof and any deficiency with respect to
vested accrued benefits described in Section 8.9(d) hereof.
(d) The current value of all vested accrued benefits
under all employee pension benefit plans maintained by Borrowers that are
subject to Title IV of ERISA does not exceed the current value of the assets
of such plans allocable to such vested accrued benefits, including any
penalty or tax described in Section 8.9(a) hereof and any accumulated funding
deficiency described in Section 8.9(c) hereof. The terms "current value" and
"accrued benefit" have the meanings specified in ERISA.
(e) Neither Borrowers nor any of their ERISA Affiliates
is or has ever been obligated to contribute to any "multiemployer plan" (as
such term is defined in ERISA) that is subject to Title IV of ERISA.
8.10 BANK ACCOUNTS. All of the deposit accounts, investment
accounts or other accounts in the name of or used by Borrowers maintained at
any bank or other financial institution are set forth on Schedule 6.3 hereto,
subject to the right of Borrowers to establish new accounts in accordance
with Section 9.15 below.
8.11 ACCURACY AND COMPLETENESS OF INFORMATION. All information
furnished by or on behalf of Borrowers in writing to Agent or Lender in
connection with this Agreement or any of the other Financing
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Agreements or any transaction contemplated hereby or thereby, including,
without limitation, all information on the Information Certificate is true
and correct in all material respects on the date as of which such information
is dated or certified and does not omit any material fact necessary in order
to make such information not misleading. No event or circumstance has
occurred which has had or could reasonably be expected to have a material
adverse affect on the business, assets or prospects of Borrowers, which has
not been fully and accurately disclosed to Agent or Lender in writing.
8.12 SURVIVAL OF WARRANTIES; CUMULATIVE. All representations and
warranties contained in this Agreement or any of the other Financing
Agreements shall survive the execution and delivery of this Agreement and
shall be deemed to have been made again to Agent and Lender on the date of
each additional borrowing or other credit accommodation hereunder and shall
be conclusively presumed to have been relied on by Agent and Lender
regardless of any investigation made or information possessed by Agent and
Lender. The representations and warranties set forth herein shall be
cumulative and in addition to any other representations or warranties which
Borrowers shall now or hereafter give, or cause to be given, to Agent and
Lender.
8.13 CREDIT CARD AGREEMENTS. Set forth in Schedule 8.13 hereto is
a correct and complete list of (a) all of the Credit Card Agreements and all
other agreements, documents and instruments existing as of the date hereof
between or among Borrowers, any of their affiliates, the Credit Card Issuers,
the Credit Card Processors and any of their affiliates, (b) the percentage of
each sale payable to the Credit Card Issuer or Credit Card Processor under
the terms of the Credit Card Agreements, (c) all other fees and charges
payable by Borrowers under or in connection with the Credit Card Agreements
and (d) the term of such Credit Card Agreements. The Credit Card Agreements
constitute all of such agreements necessary for Borrowers to operate their
business as presently conducted with respect to credit cards and debit cards
and no Accounts of Borrowers arise from purchases by customers of Inventory
with credit cards or debit cards, other than those which are issued by Credit
Card Issuers with whom Borrowers have entered into one of the Credit Card
Agreements set forth on Schedule 8.13 hereto or with whom Borrowers have
entered into a Credit Card Agreement in accordance with Section 9.18 hereof.
Each of the Credit Card Agreements constitutes the legal, valid and binding
obligations of Borrowers and, to the best of Borrowers' knowledge, the other
parties thereto, enforceable in accordance with their respective terms and is
in full force and effect. No default or event of default, or act, condition
or event which after notice or passage of time or both, would constitute a
default or an event of default by Borrowers under any of the Credit Card
Agreements exists or has occurred. Borrowers and, to the knowledge of
Borrowers, the other parties thereto have complied with all of the terms and
conditions of the Credit Card Agreements to the extent necessary for
Borrowers to be entitled to receive all payments thereunder.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
9.1 MAINTENANCE OF EXISTENCE. Each Borrower shall at all times
preserve, renew and keep in full, force and effect its corporate existence
and rights and franchises with respect thereto and maintain in full force and
effect all permits, licenses, trademarks, tradenames, approvals,
authorizations, leases and contracts necessary to carry on the business as
presently or proposed to be conducted. Each Borrower shall give Agent thirty
(30) days prior written notice of any proposed change in its corporate name,
which notice shall set forth the new name and such Borrower shall deliver to
Agent a copy of the amendment to the Certificate of Incorporation of such
Borrower providing for the name change certified by the Secretary of State of
the jurisdiction of incorporation of such Borrower as soon as it is available.
9.2 NEW COLLATERAL LOCATIONS. Each Borrower may open any new
location within the
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continental United States provided such Borrower (a) gives Agent thirty (30)
days prior written notice of the intended opening of any such new location
and (b) executes and delivers, or causes to be executed and delivered, to
Agent such agreements, documents, and instruments as Agent may deem
reasonably necessary or desirable to protect its interests in the Collateral
at such location, including UCC financing statements.
9.3 COMPLIANCE WITH LAWS, REGULATIONS, ETC.
(a) Each Borrower shall, at all times, comply in all
material respects with all laws, rules, regulations, licenses, permits,
approvals and orders applicable to it and duly observe all requirements of
any Federal, State or local governmental authority, including the Employee
Retirement Security Act of 1974, as amended, the Occupational Safety and
Health Act of 1970, as amended, the Fair Labor Standards Act of 1938, as
amended, and all statutes, rules, regulations, orders, permits and
stipulations relating to environmental pollution and employee health and
safety, including all of the Environmental Laws.
(b) Each Borrower shall establish and maintain, at its
expense, a system to assure and monitor its continued compliance with all
Environmental Laws in all of its operations, which system shall include
annual reviews of such compliance by employees or agents of such Borrower who
are familiar with the requirements of the Environmental Laws. Copies of all
environmental surveys, audits, assessments, feasibility studies and results
of remedial investigations shall be promptly furnished, or caused to be
furnished, by Borrowers to Agent. Borrowers shall take prompt and
appropriate action to respond to any non-compliance with any of the
Environmental Laws and shall regularly report to Agent on such response.
(c) Each Borrower shall give both oral and written notice
to Agent immediately upon such Borrower's receipt of any notice of, or such
Borrower's otherwise obtaining knowledge of, (i) the occurrence of any event
involving the release, spill or discharge, threatened or actual, of any
Hazardous Material or (ii) any investigation, proceeding, complaint, order,
directive, claims, citation or notice with respect to: (A) any non-compliance
with or violation of any Environmental Law by such Borrower or (B) the
release, spill or discharge, threatened or actual, of any Hazardous Material
or (C) the generation, use, storage, treatment, transportation, manufacture,
handling, production or disposal of any Hazardous Materials or (D) any other
environmental, health or safety matter, which affects such Borrower or its
business, operations or assets or any properties at which such Borrower
transported, stored or disposed of any Hazardous Materials.
(d) Without limiting the generality of the foregoing,
whenever Agent reasonably determines that there is non-compliance, or any
condition which requires any action by or on behalf of Borrower in order to
avoid any material non-compliance, with any Environmental Law, Borrowers
shall, at Agent's request and Borrowers' expense: (i) cause an independent
environmental engineer acceptable to Agent to conduct such tests of the site
where Borrowers' non-compliance or alleged non-compliance with such
Environmental Laws has occurred as to such non-compliance and prepare and
deliver to Agent a report as to such non-compliance setting forth the results
of such tests, a proposed plan for responding to any environmental problems
described therein, and an estimate of the costs thereof and (ii) provide to
Agent a supplemental report of such engineer whenever the scope of such
non-compliance, or Borrowers' response thereto or the estimated costs
thereof, shall change in any material respect.
(e) Each Borrower shall indemnify and hold harmless Agent
and Lender, its directors, officers, employees, agents, invitees,
representatives, successors and assigns, from and against any and all losses,
claims, damages, liabilities, costs, and expenses (including attorneys' fees and
legal expenses) directly or indirectly arising out of or attributable to the
use, generation, manufacture, reproduction, storage,
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release, threatened release, spill, discharge, disposal or presence of a
Hazardous Material, including the costs of any required or necessary repair,
cleanup or other remedial work with respect to any property of such Borrower
and the preparation and implementation of any closure, remedial or other
required plans. All representations, warranties, covenants and
indemnifications in this Section 9.3 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
9.4 PAYMENT OF TAXES AND CLAIMS. Each Borrower shall duly pay
and discharge all taxes, assessments, contributions and governmental charges
upon or against it or its properties or assets, except for taxes the validity
of which are being contested in good faith by appropriate proceedings
diligently pursued and available to such Borrower and with respect to which
adequate reserves have been set aside on its books. Borrowers agree to
indemnify and hold Agent and Lender harmless with respect to any tax or
penalty imposed on Agent or Lender with respect to the Borrowers' failure to
pay any of the foregoing and to repay to Agent and Lender on demand the
amount thereof, and until paid by such Borrower such amount shall be added
and deemed part of the Revolving Loans. The foregoing indemnity shall survive
the payment of the Obligations and the termination or non-renewal of this
Agreement.
9.5 INSURANCE. Each Borrower shall, at all times, maintain with
financially sound and reputable insurers insurance with respect to the
Collateral against loss or damage and all other insurance of the kinds and in
the amounts customarily insured against or carried by corporations of
established reputation engaged in the same or similar businesses and
similarly situated. Said policies of insurance shall be satisfactory to
Agent as to form, amount and insurer. Borrowers shall furnish certificates,
policies or endorsements to Agent as Agent shall require as proof of such
insurance, and, if Borrowers fail to do so, Agent is authorized, but not
required, to obtain such insurance at the expense of Borrowers. All policies
shall provide for at least thirty (30) days prior written notice to Agent of
any cancellation or reduction of coverage and that Agent may act as attorney
for Borrowers in obtaining, and at any time an Event of Default exists or has
occurred and is continuing, adjusting, settling, amending and canceling such
insurance. Borrowers shall cause Agent and Lender to be named as a loss
payee and an additional insured (but without any liability for any premiums)
under such insurance policies and Borrowers shall obtain non-contributory
lender's loss payable endorsements to all insurance policies in form and
substance satisfactory to Agent. Such lender's loss payable endorsements
shall specify that the proceeds of such insurance shall be payable to Agent,
for the benefit of Lender, as its interests may appear and further specify
that Agent be paid regardless of any act or omission by Borrowers or any of
their affiliates. At its option, Agent may apply any insurance proceeds
received by Agent at any time to the cost of repairs or replacement of
Collateral and/or to payment of the Obligations, whether or not then due, in
any order and in such manner as Agent may determine.
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9.6 FINANCIAL STATEMENTS AND OTHER INFORMATION.
(a) Each Borrower shall keep proper books and records in
which true and complete entries shall be made of all dealings or transactions
of or in relation to the Collateral and the business of such Borrower and its
subsidiaries (if any) and International shall, in accordance with GAAP,
furnish or cause to be furnished to Agent: (i) within thirty (30) days after
the end of each fiscal month, monthly unaudited consolidated financial
statements, and, if Borrowers have any subsidiaries, unaudited consolidating
financial statements (including in each case balance sheets, statements of
income and loss and statements of cash flow), all in reasonable detail,
fairly presenting the financial position and the results of the operations of
Borrowers and their subsidiaries as of the end of and through such fiscal
month and (ii) within ninety (90) days after the end of each fiscal year,
audited consolidated financial statements and, if Borrowers have any
subsidiaries, audited consolidating financial statements of Borrowers and
their subsidiaries (including in each case balance sheets, statements of
income and loss, statements of cash flow and statements of shareholders'
equity), and the accompanying notes thereto, all in reasonable detail, fairly
presenting the financial position and the results of the operations of
Borrowers and their subsidiaries as of the end of and for such fiscal year,
together with the unqualified opinion of independent certified public
accountants, which accountants shall be an independent accounting firm
selected by Borrowers and reasonably acceptable to Agent, that such financial
statements have been prepared in accordance with GAAP, and present fairly the
results of operations and financial condition of Borrowers and their
subsidiaries as of the end of and for the fiscal year then ended.
(b) Borrowers shall promptly notify Agent in writing of
the details of (i) any loss, damage, investigation, action, suit, proceeding
or claim relating to the Collateral or any other property which is security
for the Obligations or which would result in any material adverse change in
Borrowers' business, properties, assets, goodwill or condition, financial or
otherwise and (ii) the occurrence of any Event of Default or act, condition
or event which, with the passage of time or giving of notice or both, would
constitute an Event of Default.
(c) Borrowers shall promptly after the sending or filing
thereof furnish or cause to be furnished to Agent copies of all reports which
Borrowers send to their stockholders generally and copies of all reports and
registration statements which Borrowers file with the Securities and Exchange
Commission, any national securities exchange or the National Association of
Securities Dealers, Inc.
(d) Borrowers shall furnish or cause to be furnished to
Agent such budgets, forecasts, projections and other information respecting
the Collateral and the business of Borrowers, as Agent may, from time to
time, reasonably request. Agent and Lender are hereby authorized to deliver
a copy of any financial statement or any other information relating to the
business of Borrowers to any court or other government agency or to any
participant or assignee or prospective participant or assignee. Each
Borrower hereby irrevocably authorizes and directs all accountants or
auditors to deliver to Agent, at Borrower's expense, copies of the financial
statements of Borrowers and any reports or management letters prepared by
such accountants or auditors on behalf of Borrowers and to disclose to Agent
such information as they may have regarding the business of Borrowers. Any
documents, schedules, invoices or other papers delivered to Agent may be
destroyed or otherwise disposed of by Agent one (1) year after the same are
delivered to Agent, except as otherwise designated by Borrowers to Agent in
writing.
9.7 SALE OF ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ETC.
Borrowers shall not, directly or indirectly:
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(a) merge into or with or consolidate with any other
Person or permit any other Person to merge into or with or consolidate with
it, or
(b) sell, assign, lease, transfer, abandon or otherwise
dispose of any stock or indebtedness to any other Person or any of their
assets to any other Person, EXCEPT FOR:
(i) sales of Inventory in the ordinary course of
business,
(ii) the disposition of worn-out or obsolete
Equipment so long as (A) if an Event of Default
exists or has occurred and is continuing, any
proceeds are paid to Agent, for the benefit of
Lender, and (B) such sales do not involve
Equipment having an aggregate fair market value
in excess of $1,000,000 for all such Equipment
disposed of in any fiscal year of Borrowers,
(iii) redemption, retirement, defeasance, purchase or
acquisition of stock as permitted in Section
9.11,
(c) form or acquire any subsidiaries, or
(d) wind up, liquidate or dissolve, or
(e) agree to do any of the foregoing.
Notwithstanding anything to the contrary contained in this Section 9.7,
Borrowers shall be permitted to sell the Real Property together with the
improvements thereon as described on Schedule 9.7, PROVIDED THAT,(i) no Event
of Default exists and is continuing,(ii) the transaction is an arm's length
transaction and is for a net purchase price to Borrowers of not less than the
amount of the Real Estate Availability then provided to Borrowers under
Section 2.1,(iii) the net proceeds of such sale are remitted to Agent, for
the benefit of Lender, for application against the Obligations and (iv) the
sale of such Real Property will not have a material adverse effect upon the
Collateral or the conduct of the Borrowers' businesses. Agent agrees to
release any mortgage lien upon such Real Property, PROVIDED THAT,
contemporaneously therewith, Agent receives the net proceeds of sale as
provided for above. From and after the date of the sale of such Real
Property, the Real Estate Availability as provided for in Section 2.1(a)
shall be $0.
9.8 ENCUMBRANCES. Borrowers shall not create, incur, assume or
suffer to exist any security interest, mortgage, pledge, lien, charge or
other encumbrance of any nature whatsoever on any of their assets or
properties, including, without limitation, the Collateral, EXCEPT: (a) liens
and security interests of Agent, for the benefit of Lender;(b) liens securing
the payment of taxes, either not yet overdue or the validity of which are
being contested in good faith by appropriate proceedings diligently pursued
and available to Borrowers and with respect to which adequate reserves have
been set aside on their books;(c) non-consensual statutory liens (other than
liens securing the payment of taxes) arising in the ordinary course of
Borrowers' business to the extent:(i) such liens secure indebtedness which is
not overdue or (ii) such liens secure indebtedness relating to claims or
liabilities which are fully insured and being defended at the sole cost and
expense and at the sole risk of the insurer or being contested in good faith
by appropriate proceedings diligently pursued and available to Borrowers, in
each case prior to the commencement of foreclosure or other similar
proceedings and with respect to which adequate reserves have been set aside
on their books; (d) purchase money security interests in Equipment (including
capital leases) and purchase money mortgages on real estate not to exceed
$2,000,000 in the aggregate for Borrowers at any time
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outstanding so long as such security interests and mortgages do not apply to
any property of Borrowers other than the Equipment or real estate so
acquired, and the indebtedness secured thereby does not exceed the cost of
the Equipment or real estate so acquired, as the case may be; and (e) the
security interests and liens set forth on Schedule 8.4 hereto.
9.9 INDEBTEDNESS. Borrowers shall not incur, create, assume,
become or be liable in any manner with respect to, or permit to exist, any
obligations or indebtedness, except:
(a) the Obligations;
(b) trade obligations and normal accruals in the ordinary
course of business, or with respect to which Borrowers are contesting in good
faith the amount or validity thereof by appropriate proceedings diligently
pursued and available to Borrowers and with respect to which adequate
reserves have been set aside on their books;
(c) purchase money indebtedness (including capital
leases) to the extent not incurred or secured by liens (including capital
leases) in violation of any other provision of this Agreement;
(d) obligations or indebtedness existing as of the date
hereof set forth on Schedule 9.9 hereto, PROVIDED, THAT, (i) Borrowers may
only make regularly scheduled payments of principal and interest in respect
of such indebtedness in accordance with the terms of the agreement or
instrument evidencing or giving rise to such indebtedness as in effect on the
date hereof, (ii) Borrowers shall not, directly or indirectly, (A) amend,
modify, alter or change the terms of such indebtedness or any agreement,
document or instrument related thereto as in effect on the date hereof, or
(B) redeem, retire, defease, purchase or otherwise acquire such indebtedness,
or set aside or otherwise deposit or invest any sums for such purpose, and
(iii) Borrowers shall furnish to Agent all notices or demands in connection
with such indebtedness either received by Borrowers or on their behalf,
promptly after the receipt thereof, or sent by Borrowers or on their behalf,
concurrently with the sending thereof, as the case may be.
9.10 LOANS, INVESTMENTS, GUARANTEES, ETC. Borrowers shall not,
directly or indirectly, make any loans or advance money or property to any
person, or invest in (by capital contribution, dividend or otherwise) or
purchase or repurchase the stock (other than the Capital Stock of Borrowers
as permitted hereunder) or indebtedness or all or a substantial part of the
assets or property of any person, or guarantee, assume, endorse, or otherwise
become responsible for (directly or indirectly) the indebtedness,
performance, obligations or dividends of any Person or agree to do any of the
foregoing, EXCEPT:(a) loans or advances of money (other than salary) to
officers, directors or employees for valid business purposes in the ordinary
course of business consistent with past practices not to exceed at any one
time outstanding, $100,000, individually, or $1,000,000, in the aggregate;(b)
the endorsement of instruments for collection or deposit in the ordinary
course of business;(c) investments in: (i)short-term direct obligations of
the United States Government,(ii) negotiable certificates of deposit issued
by any bank satisfactory to Agent, payable to the order of the Borrowers or
to bearer and delivered to Agent,(iii) commercial paper rated A1 or P1,(iv)
money market funds, and (v) other investment property in an aggregate amount
not to exceed $1,000,000; PROVIDED, THAT, as to any of the foregoing, unless
waived in writing by Agent, Borrowers shall take such actions as are deemed
necessary by Agent to perfect the security interest of Agent, for the benefit
of Lender, in such investments and (d) the existing loans, advances and
guarantees by Borrowers outstanding as of the date hereof as set forth on
Schedule 9.10 hereto; PROVIDED, THAT, as to such loans, advances and
guarantees, (i) Borrowers shall not, directly or indirectly, (A) amend,
modify, alter or change the terms of such loans, advances or guarantees or
any agreement, document or instrument related thereto, or (B) as to such
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guarantees, redeem, retire, defease, purchase or otherwise acquire such
guarantee or set aside or otherwise deposit or invest any sums for such
purpose and (ii) Borrowers shall furnish to Agent all notices, demands or
other materials in connection with such loans, advances or guarantees either
received by Borrowers or on their behalf, promptly after the receipt thereof,
or sent by Borrowers or on their behalf, concurrently with the sending
thereof, as the case may be.
9.11 DIVIDENDS AND REDEMPTIONS. Borrowers shall not, directly or
indirectly, declare or pay any dividends on account of any shares of class of
Capital Stock of Borrowers now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of Capital
Stock (or set aside or otherwise deposit or invest any sums for such purpose)
for any consideration other than common stock or apply or set apart any sum,
or make any other distribution (by reduction of capital or otherwise) in
respect of any such shares or agree to do any of the foregoing; EXCEPT THAT,
so long as no Event of Default exists and is continuing, Borrowers shall be
permitted to redeem, retire, defease, purchase or otherwise acquire any
shares of any class of Capital Stock.
9.12 TRANSACTIONS WITH AFFILIATES. Borrowers shall not directly
or indirectly, (a) purchase, acquire or lease any property from, or sell,
transfer or lease any property to, any officer, employee, shareholder,
director, agent or any other person affiliated with Borrowers, except in the
ordinary course of and pursuant to the reasonable requirements of Borrowers'
business and upon fair and reasonable terms no less favorable to the
Borrowers than Borrowers would obtain in a comparable arm's length
transaction with an unaffiliated person or (b) make any payments of
management, consulting or other fees for management or similar services, or
of any indebtedness owing to any officer, employee, shareholder, director or
other person affiliated with Borrowers except reasonable compensation to
officers, employees and directors for services rendered to Borrowers in the
ordinary course of business.
9.13 ADJUSTED NET WORTH. Borrowers shall, at all times, maintain
Adjusted Net Worth of not less than $45,000,000.
9.14 COMPLIANCE WITH ERISA.
(a) Borrowers shall not with respect to any "employee
benefit plans" maintained by Borrowers or any of their ERISA Affiliates: (i)
terminate any of such employee pension plans so as to incur any liability to
the Pension Benefit Guaranty Corporation established pursuant to ERISA,(ii)
allow or suffer to exist any prohibited transaction involving any of such
employee benefit plans or any trust created thereunder which would subject
Borrowers or such ERISA Affiliate to a tax or penalty, other liability, in a
material amount, on prohibited transactions imposed under the Code or
ERISA,(iii) fail to pay to any such employee benefit plan any contribution
which it is obligated to pay under ERISA, the Code or the terms of such plan,
(iv) allow or suffer to exist any accumulated funding deficiency, whether or
not waived, with respect to any such employee benefit plan,(v) allow or
suffer to exist any occurrence of a reportable event or any other event or
condition which presents a material risk of termination by the Pension
Benefit Guaranty Corporation of any such employee benefit plan that is a
single employer plan, which termination could result in any liability to the
Pension Benefit Guaranty Corporation or (vi) incur any withdrawal liability
with respect to any multiemployer pension plan.
(b) As used in this Section 9.14, the term "employee
pension benefit plans," "employee benefit plans", "accumulated funding
deficiency" and "reportable event" shall have the respective meanings
assigned to them in ERISA, and the term "prohibited transaction" shall have
the
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meaning assigned to it in the Code and ERISA.
9.15 ADDITIONAL BANK ACCOUNTS. Borrowers shall not, directly or
indirectly, open, establish or maintain any deposit account, investment
account or any other account with any bank or other financial institution,
other than the Blocked Accounts and the accounts set forth in Schedule 6.3
hereto, except: (a) as to any new or additional Blocked Accounts and other
such new or additional accounts which contain any Collateral or proceeds
thereof, with the prior written consent of Agent and subject to such
conditions thereto as Agent may establish and (b) as to any accounts used by
Borrowers to make payments of payroll, taxes or other obligations to third
parties, after prior written notice to Agent.
9.16 COSTS AND EXPENSES. Borrowers shall pay to Agent, for the
benefit of Lender, on demand all costs, expenses, filing fees and taxes paid
or payable in connection with the preparation, negotiation, execution,
delivery, recording, administration, collection, liquidation, enforcement and
defense of the Obligations, the rights of Agent, for the benefit of Lender,
in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments,
supplements or consents which may hereafter be contemplated (whether or not
executed) or entered into in respect hereof and thereof, including: (a) all
costs and expenses of filing or recording (including Uniform Commercial Code
financing statement filing taxes and fees, documentary taxes, intangibles
taxes and mortgage recording taxes and fees, if applicable); (b) costs and
expenses and fees for insurance premiums, environmental audits, surveys,
assessments, engineering reports and inspections, appraisal fees and search
fees; (c) costs and expenses of remitting loan proceeds, collecting checks
and other items of payment, and establishing and maintaining the Blocked
Accounts, together with Agent's customary charges and fees with respect
thereto; (d) charges, fees or expenses charged by any bank or issuer in
connection with the Letter of Credit Accommodations; (e) costs and expenses
of preserving and protecting the Collateral; (f) costs and expenses paid or
incurred in connection with obtaining payment of the Obligations, enforcing
the security interests and liens of Agent, for the benefit of Lender, selling
or otherwise realizing upon the Collateral, and otherwise enforcing the
provisions of this Agreement and the other Financing Agreements or defending
any claims made or threatened against Agent and/or Lender arising out of the
transactions contemplated hereby and thereby (including preparations for and
consultations concerning any such matters); (g) all out-of-pocket expenses
and costs heretofore and from time to time hereafter incurred by Agent during
the course of periodic field examinations of the Collateral and Borrowers'
operations, plus a per diem charge at the rate of $600 per person per day for
Agent's examiners in the field and office; and (h) the fees and disbursements
of counsel (including legal assistants) to Agent and Lender in connection
with any of the foregoing.
9.17 FURTHER ASSURANCES. At the request of Agent, Borrowers
shall, at their expense, duly execute and deliver, or cause to be duly
executed and delivered, such further agreements, documents and instruments,
and do or cause to be done such further acts as may be necessary or proper to
evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions
or purposes of this Agreement or any of the other Financing Agreements.
Agent may at any time and from time to time request a certificate from an
officer of Borrowers representing that all conditions precedent to the making
of Revolving Loans and providing Letter of Credit Accommodations contained
herein are satisfied. In the event of such request by Agent, Agent, on
behalf of Borrowers, may, at its option, cease to make any further Revolving
Loans or provide any further Letter of Credit Accommodations until Agent has
received such certificate and, in addition, Agent has determined that such
conditions are satisfied. Where permitted by law, each Borrower hereby
authorizes Agent to execute and file one or more UCC financing statements
signed only by Agent.
9.18 CREDIT CARD AGREEMENTS. Borrowers shall (a) observe and perform
all material terms,
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covenants, conditions and provisions of the Credit Card Agreements to be
observed and performed by it at the times set forth therein; (b) not do,
permit, suffer or refrain from doing anything, as a result of which there
could be a default under or breach of any of the terms of any of the Credit
Card Agreements, after giving effect to any applicable grace periods, and (c)
at all times maintain in full force and effect the Credit Card Agreements and
not terminate, cancel, surrender, modify, amend, waive or release any of the
Credit Card Agreements, or consent to or permit to occur any of the
foregoing; except, that, (i) Borrowers may terminate or cancel any of the
Credit Card Agreements in the ordinary course of the business of Borrowers;
PROVIDED, THAT, Borrowers shall give Agent not less than fifteen (15) days
prior written notice of their intention to so terminate or cancel any of the
Credit Card Agreements; (d) not enter into any new Credit Card Agreements
with any new Credit Card Issuer unless (i) Agent shall have received not less
than fifteen (15) days prior written notice of the intention of Borrowers to
enter into such agreement (together with such other information with respect
thereto as Agent may request) and (ii) Borrowers delivers, or causes to be
delivered to Agent, a Credit Card Acknowledgment in favor of Agent, for the
benefit of Lender; (e) give Agent immediate written notice of any Credit Card
Agreement entered into by Borrowers after the date hereof, together with a
true, correct and complete copy thereof and such other information with
respect thereto as Agent may request; and (f) furnish to Agent, promptly upon
the request of Agent, such information and evidence as Agent may require from
time to time concerning the observance, performance and compliance by
Borrowers or the other party or parties thereto with the terms, covenants or
provisions of the Credit Card Agreements.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
10.1 EVENTS OF DEFAULT. The occurrence or existence of any one or
more of the following events are referred to herein individually as an "Event
of Default", and collectively as "Events of Default":
(a) (i) Borrowers fail to pay any of the Obligations when
due; or (ii) any Borrower or any Obligor fails to perform any of the
covenants contained in this Agreement or any of the other Financing
Agreements other than as described in Section 10.1(a)(i) and such failure
shall continue for twenty (20) days; PROVIDED, THAT, such twenty (20) day
period shall not apply in the case of (A) any failure to observe any such
covenant which is not capable of being cured at all or within such ten (10)
day period or which has been the subject of a prior failure within a six (6)
month period or (B) an intentional breach of any Borrower or any Obligor of
any such covenant or (C) the failure to observe or perform any of the
covenants or provisions contained in Section 9.2, 9.7, 9.8, 9.9, 9.10, 9.11,
9.12, 9.13, 9.15, 9.16 or 9.18 of this Agreement or any covenants or
agreements covering substantially the same matter as such sections in any of
the other Financing Agreements or (iii) any Borrower fails to perform any of
the terms, covenants, conditions or provisions contained in this Agreement or
any of the other Financing Agreements other than those described in Sections
10.1(a)(i) and 10.1(a)(ii) above;
(b) any representation, warranty or statement of fact
made by any Borrower to Agent or Lender in this Agreement, the other
Financing Agreements or any other agreement, schedule, confirmatory
assignment or otherwise shall when made or deemed made be false or misleading
in any material respect;
(c) any Obligor revokes, terminates or fails to perform
any of the terms, covenants, conditions or provisions of any guarantee,
endorsement or other agreement of such party in favor of Agent, for the
benefit of Lender;
(d) any judgment for the payment of money is rendered
against any Borrower or any
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Obligor in excess of $50,000 in any one case or in excess of $100,000 in the
aggregate and shall remain undischarged or unvacated for a period in excess
of thirty (30) days or execution shall at any time not be effectively stayed,
or any judgment other than for the payment of money, or injunction,
attachment, garnishment or execution is rendered against any Borrower or any
Obligor or any of their assets;
(e) any Borrower or any Obligor dissolves or suspends or
discontinues doing business;
(f) any Borrower or any Obligor becomes insolvent
(however defined or evidenced), makes an assignment for the benefit of
creditors, makes or sends notice of a bulk transfer or calls a meeting of its
creditors or principal creditors for the purposes of the restructuring of the
obligations owed to such creditors;
(g) a case or proceeding under the bankruptcy laws of the
United States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction now or hereafter in effect
(whether at law or in equity) is filed against any Borrower or any Obligor or
all or any part of its properties and such petition or application is not
dismissed within thirty (30) days after the date of its filing or any
Borrower or any Obligor shall file any answer admitting or not contesting
such petition or application or indicates its consent to, acquiescence in or
approval of, any such action or proceeding or the relief requested is granted
sooner;
(h) a case or proceeding under the bankruptcy laws of the
United States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction now or hereafter in effect
(whether at a law or equity) is filed by any Borrower or any Obligor or for
all or any part of its property; or
(i) any default by any Borrower or any Obligor under any
agreement, document or instrument relating to any indebtedness for borrowed
money owing to any person other than Agent or Lender, or any capitalized
lease obligations, contingent indebtedness in connection with any guarantee,
letter of credit, indemnity or similar type of instrument in favor of any
person other than Agent or Lender, in any case in an amount in excess of
$100,000, which default continues for more than the applicable cure period,
if any, with respect thereto, or any default by any Borrower or any Obligor
under any material contract, lease, license or other obligation to any person
other than Agent or Lender, which default continues for more than the
applicable cure period, if any, with respect thereto;
(j) the commencement of proceedings against any Borrower
or any Obligor under any statute pursuant to which statute or proceedings the
penalties or remedies sought or available include forfeiture of any of the
property of any Borrower or such Obligor;
(k) there shall, after the date hereof, be a material
adverse change (i) in the assets of Borrowers or any Obligor, or (ii) in the
Collateral, or in the value thereof, or (iii) the rights and remedies of Agent
or Lender under this Agreement or any of the other Financing Agreements so as
to prevent Agent or Lender from being able to realize upon the practical
benefits of such rights and remedies; or
(l) there shall be an event of default under any of the
other Financing Agreements.
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10.2 REMEDIES.
(a) At any time an Event of Default exists or has
occurred and is continuing, Agent and Lender shall have all rights and
remedies provided in this Agreement, the other Financing Agreements, the
Uniform Commercial Code and other applicable law, all of which rights and
remedies may be exercised without notice to or consent by any Borrower or any
Obligor, except as such notice or consent is expressly provided for hereunder
or required by applicable law. All rights, remedies and powers granted to
Agent and Lender, hereunder, under any of the other Financing Agreements, the
Uniform Commercial Code or other applicable law, are cumulative, not
exclusive and enforceable, in Agent's discretion, alternatively,
successively, or concurrently on any one or more occasions, and shall
include, without limitation, the right to apply to a court of equity for an
injunction to restrain a breach or threatened breach by any Borrower of this
Agreement or any of the other Financing Agreements. Agent and Lender, may,
at any time or times, proceed directly against any Borrower or any Obligor to
collect the Obligations without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event
of Default exists or has occurred and is continuing, Agent, for the benefit
of Lender, may, in its discretion and without limitation,(i) accelerate the
payment of all Obligations and demand immediate payment thereof to Agent, for
the benefit of Lender, (PROVIDED, THAT, upon the occurrence of any Event of
Default described in Sections 10.1(g) and 10.1(h), all Obligations shall
automatically become immediately due and payable),(ii) with or without
judicial process or the aid or assistance of others, enter upon any premises
on or in which any of the Collateral may be located and take possession of
the Collateral or complete processing, manufacturing and repair of all or any
portion of the Collateral,(iii) require Borrowers, at Borrowers' expense, to
assemble and make available to Agent any part or all of the Collateral at any
place and time designated by Agent,(iv) collect, foreclose, receive,
appropriate, setoff and realize upon any and all Collateral,(v) remove any or
all of the Collateral from any premises on or in which the same may be
located for the purpose of effecting the sale, foreclosure or other
disposition thereof or for any other purpose,(vi) sell, lease, transfer,
assign, deliver or otherwise dispose of any and all Collateral (including,
without limitation, entering into contracts with respect thereto, public or
private sales at any exchange, broker's board, at any office of Agent or
elsewhere) at such prices or terms as Agent may deem reasonable, for cash,
upon credit or for future delivery, with Agent or Lender having the right to
purchase the whole or any part of the Collateral at any such public sale, all
of the foregoing being free from any right or equity of redemption of
Borrowers, which right or equity of redemption is hereby expressly waived and
released by Borrowers and/or (vii) terminate this Agreement. If any of the
Collateral is sold or leased by Agent upon credit terms or for future
delivery, the Obligations shall not be reduced as a result thereof until
payment therefor is finally collected by Agent, for the benefit of Lender.
If notice of disposition of Collateral is required by law, five (5) days
prior notice by Agent to Borrowers designating the time and place of any
public sale or the time after which any private sale or other intended
disposition of Collateral is to be made, shall be deemed to be reasonable
notice thereof and Borrowers waive any other notice. In the event Agent
institutes an action to recover any Collateral or seeks recovery of any
Collateral by way of prejudgment remedy, Borrowers waive the posting of any
bond which might otherwise be required.
(c) Agent may apply the cash proceeds of Collateral
actually received by Agent, for the benefit of Lender, from any sale, lease,
foreclosure or other disposition of the Collateral to payment of the
Obligations, in whole or in part and in such order as Agent may elect,
whether or not then due. Borrowers shall remain liable to Agent and Lender
for the payment of any deficiency with interest at the highest rate provided
for herein and all costs and expenses of collection or enforcement, including
attorneys' fees and legal expenses.
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(d) Without limiting the foregoing, upon the occurrence
of an Event of Default or an event which with notice or passage of time or
both would constitute an Event of Default, Agent and Lender, at their option,
without notice,(i) cease making Revolving Loans or arranging for Letter of
Credit Accommodations or reduce the lending formulas or amounts of Revolving
Loans and Letter of Credit Accommodations available to Borrowers and/or (ii)
terminate any provision of this Agreement providing for any future Revolving
Loans or Letter of Credit Accommodations to be made by Agent and Lender, to
Borrowers.
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW
11.1 GOVERNING LAW; CHOICE OF FORUM; SERVICE OF PROCESS; JURY
TRIAL WAIVER.
(a) The validity, interpretation and enforcement of this
Agreement and the other Financing Agreements and any dispute arising out of
the relationship between the parties hereto, whether in contract, tort,
equity or otherwise, shall be governed by the internal laws of the State of
Illinois (without giving effect to principles of conflicts of law).
(b) Each Borrower, Agent and Lender irrevocably consent
and submit to the non-exclusive jurisdiction of the Circuit Court of Cook
County, Illinois and the United States District Court for the Northern
District of Illinois and waive any objection based on venue or FORUM NON
CONVENIENS with respect to any action instituted therein arising under this
Agreement or any of the other Financing Agreements or in any way connected
with or related or incidental to the dealings of the parties hereto in
respect of this Agreement or any of the other Financing Agreements or the
transactions related hereto or thereto, in each case whether now existing or
hereafter arising, and whether in contract, tort, equity or otherwise, and
agree that any dispute with respect to any such matters shall be heard only
in the courts described above (except that Agent or Lender shall have the
right to bring any action or proceeding against any Borrower or its property
in the courts of any other jurisdiction which Agent deems necessary or
appropriate in order to realize on the Collateral or to otherwise enforce its
rights against any Borrower or its property).
(c) Each Borrower hereby waives personal service of any
and all process upon it and consents that all such service of process may be
made by certified mail (return receipt requested) directed to its address set
forth on the signature pages hereof and service so made shall be deemed to be
completed five (5) days after the same shall have been so deposited in the
U.S. mails, or, at Agent or Lender's option, by service upon such Borrower in
any other manner provided under the rules of any such courts. Within thirty
(30) days after such service, such Borrower shall appear in answer to such
process, failing which such Borrower shall be deemed in default and judgment
may be entered by Agent or Lender against such Borrower for the amount of the
claim and other relief requested.
(d) EACH BORROWER, AGENT AND LENDER EACH HEREBY WAIVES
ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION
(i) ARISING UNDER THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR
(ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF
THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING
AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER
NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN
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CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWERS, AGENT AND LENDER EACH HEREBY
AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION
SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWERS, AGENT OR
LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER
OF THEIR RIGHT TO TRIAL BY JURY.
(e) Neither Agent nor Lender shall have any liability to
Borrowers (whether in tort, contract, equity or otherwise) for losses
suffered by Borrowers in connection with, arising out of, or in any way
related to the transactions or relationships contemplated by this Agreement,
or any act, omission or event occurring in connection herewith, unless it is
determined by a final and non-appealable judgment or court order binding on
Agent and Lender, that the losses were the result of acts or omissions
constituting gross negligence or willful misconduct.
11.2 WAIVER OF NOTICES. Each Borrower hereby expressly waives
demand, presentment, protest and notice of protest and notice of dishonor
with respect to any and all instruments and commercial paper, included in or
evidencing any of the Obligations or the Collateral, and any and all other
demands and notices of any kind or nature whatsoever with respect to the
Obligations, the Collateral and this Agreement, except such as are expressly
provided for herein. No notice to or demand on Borrowers which Agent may
elect to give shall entitle Borrowers to any other or further notice or
demand in the same, similar or other circumstances.
11.3 AMENDMENTS AND WAIVERS. Neither this Agreement nor any
provision hereof shall be amended, modified, waived or discharged orally or
by course of conduct, but only by a written agreement signed by an authorized
officer of Agent, and as to amendments, as also signed by an authorized
officer of Borrowers. Agent shall not, by any act, delay, omission or
otherwise be deemed to have expressly or impliedly waived any of its rights,
powers and/or remedies unless such waiver shall be in writing and signed by
an authorized officer of Agent. Any such waiver shall be enforceable only to
the extent specifically set forth therein. A waiver by Agent or Lender of
any right, power and/or remedy on any one occasion shall not be construed as
a bar to or waiver of any such right, power and/or remedy which Agent or
Lender would otherwise have on any future occasion, whether similar in kind
or otherwise.
11.4 WAIVER OF COUNTERCLAIMS. Each Borrower waives all rights to
interpose any claims, deductions, setoffs or counterclaims of any nature
(other then compulsory counterclaims) in any action or proceeding with
respect to this Agreement, the Obligations, the Collateral or any matter
arising therefrom or relating hereto or thereto.
11.5 INDEMNIFICATION. Each Borrower shall indemnify and hold
Agent, Lender and their directors, agents, employees and counsel, harmless
from and against any and all losses, claims, damages, liabilities, costs or
expenses imposed on, incurred by or asserted against any of them in
connection with any litigation, investigation, claim or proceeding commenced
or threatened related to the negotiation, preparation, execution, delivery,
enforcement, performance or administration of this Agreement, any other
Financing Agreements, or any undertaking or proceeding related to any of the
transactions contemplated hereby or any act, omission, event or transaction
related or attendant thereto, including, without limitation, amounts paid in
settlement, court costs, and the fees and expenses of counsel, except for any
losses, claims, damages, liabilities, costs or expenses which result from the
gross negligence or willful misconduct of Lender or Agent as determined
pursuant to a final non-appealable order of a court of competent
jurisdiction. To the extent that the undertaking to indemnify, pay and hold
harmless set forth in this Section may be
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unenforceable because it violates any law or public policy, Borrowers shall
pay the maximum portion which it is permitted to pay under applicable law to
Agent and/or Lender in satisfaction of indemnified matters under this
Section. The foregoing indemnity shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
SECTION 12. THE AGENT
12.1 APPOINTMENT, POWERS AND IMMUNITIES. Lender hereby
irrevocably appoints and authorizes Agent to act as its Agent hereunder and
under the other Financing Agreements with such powers as are specifically
delegated to Agent by the terms of this Agreement and of the other Financing
Agreements, together with such other powers as are reasonably incidental
thereto. Agent (a) shall have no duties or responsibilities except those
expressly set forth in this Agreement and in the other Financing Agreements,
and shall not by reason of this Agreement or any other Financing Agreement be
a trustee or fiduciary for Lender; (b)shall not be responsible to Lender for
any recitals, statements, representations or warranties contained in this
Agreement or in any other Financing Agreement, or in any certificate or other
document referred to or provided for in, or received by any of them under,
this Agreement or any other Financing Agreement, or for the value, validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement
or any other Financing Agreement or any other document referred to or
provided for herein or therein or for any failure by Borrowers or any Obligor
or any other Person to perform any of its obligations hereunder or
thereunder; and (c) shall not be responsible to Lender for any action taken
or omitted to be taken by it hereunder or under any other Financing Agreement
or under any other document or instrument referred to or provided for herein
or therein or in connection herewith or therewith, except for its own gross
negligence or willful misconduct as determined by a final non-appealable
judgment of a court of competent jurisdiction. Agent may employ agents and
attorneys-in-fact and shall not be responsible for the negligence or
misconduct of any such agents or attorneys-in-fact selected by it in good
faith. Agent may deem and treat the payee of any note as the holder thereof
for all purposes hereof unless and until the assignment thereof pursuant to
an agreement (if and to the extent permitted herein) in form and substance
satisfactory to Agent shall have been delivered to and acknowledged by Agent.
12.2 RELIANCE BY AGENT. Agent shall be entitled to rely upon any
certification, notice or other communication (including any thereof by
telephone, telecopy, telex, telegram or cable) believed by it to be genuine
and correct and to have been signed or sent by or on behalf of the proper
Person or Persons, and upon advice and statements of legal counsel,
independent accountants and other experts selected by Agent. As to any
matters not expressly provided for by this Agreement or any other Financing
Agreement, Agent shall in all cases be fully protected in acting, or in
refraining from acting, hereunder or thereunder in accordance with
instructions given by the Lender or all of the Lender as is required in such
circumstance, and such instructions of Lender and any action taken or failure
to act pursuant thereto shall be binding on all Lender.
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12.3 EVENTS OF DEFAULT.
(a) Agent shall not be deemed to have knowledge or notice
of the occurrence of an Event of Default or other failure of a condition
precedent to the Revolving Loans and Letter of Credit Accommodations
hereunder, unless and until Agent has received written notice from a Lender
or Borrowers specifying such Event of Default or any unfulfilled condition
precedent, and stating that such notice is a "Notice of Default or Failure of
Condition". In the event that Agent receives such a Notice of Default or
Failure of Condition, Agent shall give prompt notice thereof to Lender.
Agent shall (subject to Section 12.7) take such action with respect to any
such Event of Default or failure of condition precedent as shall be directed
by Lender; PROVIDED THAT, unless and until Agent shall have received such
directions, Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to or by reason of such Event
of Default or failure of condition precedent, as it shall deem advisable in
the best interest of Lender. Without limiting the foregoing, and
notwithstanding the existence or occurrence and continuance of an Event of
Default or any other failure to satisfy any of the conditions precedent set
forth in Section 4 of this Agreement to the contrary, Agent may, but shall
have no obligation to, continue to make Revolving Loans and issue or cause to
be issued Letter of Credit Accommodations for the account and risk of Lender
from time to time if Agent believes making such Revolving Loans or issuing or
causing to be issued such Letter of Credit Accommodations is in the best
interests of Lender.
(b) Except with the prior written consent of Agent, no
Lender may assert or exercise any enforcement right or remedy in respect of
the Revolving Loans, Letter of Credit Accommodations or other Obligations, as
against Borrowers or any Obligor or any of the Collateral or other property
of Borrowers or any Obligor.
12.4 INDEMNIFICATION. Lender agrees to indemnify Agent (to the
extent not reimbursed by Borrowers hereunder and without limiting the
Obligations of Borrowers hereunder) for any and all claims of any kind and
nature whatsoever that may be imposed on, incurred by or asserted against
Agent (including by Lender) arising out of or by reason of any investigation
in or in any way relating to or arising out of this Agreement or any other
Financing Agreement or any other documents contemplated by or referred to
herein or therein or the transactions contemplated hereby or thereby
(including the costs and expenses that Agent is obligated to pay hereunder)
or the enforcement of any of the terms hereof or thereof or of any such other
documents, PROVIDED, THAT, Lender shall not be liable for any of the
foregoing to the extent it arises from the gross negligence or willful
misconduct of the party to be indemnified as determined by a final
non-appealable judgment of a court of competent jurisdiction.
12.5 NON-RELIANCE ON AGENT AND LENDER. Lender agrees that it has,
independently and without reliance on Agent, and based on such documents and
information as it has deemed appropriate, made its own credit analysis of
Borrowers and any Obligors and has made its own decision to enter into this
Agreement and that it will, independently and without reliance upon Agent,
and based on such documents and information as it shall deem appropriate at
the time, continue to make its own analysis and decisions in taking or not
taking action under this Agreement or any of the other Financing Agreements.
Agent shall not be required to keep itself informed as to the performance or
observance by Borrowers or any Obligor of any term or provision of this
Agreement or any of the other Financing Agreements or any other document
referred to or provided for herein or therein or to inspect the properties or
books of Borrowers or any Obligor. Agent will use reasonable efforts to
provide Lender with any information received by Agent from Borrowers which is
required to be provided to Lender hereunder, with a copy of any Notice of
Default or Failure of Condition received by Agent from Borrowers or Lender
and with a copy of any notice of an
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Event of Default delivered by Agent to Borrowers; PROVIDED, THAT, Agent shall
not be liable to Lender for any failure to do so, except to the extent that
such failure is attributable to Agent's own gross negligence or willful
misconduct as determined by a final non-appealable judgment of a court of
competent jurisdiction. Except for notices, reports and other documents
expressly required to be furnished to Lender by Agent hereunder, Agent shall
not have any duty or responsibility to provide Lender with any other credit
or other information concerning the affairs, financial condition or business
of Borrowers or any of their Subsidiaries (or any of their affiliates) that
may come into the possession of Agent or any of its Affiliates.
12.6 FAILURE TO ACT. Except for action expressly required of
Agent hereunder and under the other Financing Agreements, Agent shall in all
cases be fully justified in failing or refusing to act hereunder and
thereunder unless it shall receive further assurances to its satisfaction
from Lender of their indemnification obligations under Section 12.5 hereof
against any and all liability and expense that may be incurred by it by
reason of taking or continuing to take any such action.
12.7 RESIGNATION OF AGENT. Subject to the appointment and
acceptance of a successor Agent as provided below, Agent may resign at any
time by giving notice thereof to Lender and Borrowers. Upon any such
resignation, the Lender shall have the right to appoint a successor Agent
with the consent of Borrowers, which consent shall not be unreasonably
withheld, conditioned or delayed. If no successor Agent shall have been so
appointed by the Lender, and/or so consented to by Borrowers and the
appointment accepted by such successor Agent within thirty (30) days after
the retiring Agent's giving of notice of resignation, then the retiring Agent
may, on behalf of Lender, appoint (without the consent of Borrowers) a
successor Agent that shall be a bank, commercial finance company or other
financial institution. Upon the acceptance of any appointment as Agent
hereunder by a successor Agent in accordance with the terms hereof, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations hereunder. After
any retiring Agent's resignation hereunder as Agent, the provisions of this
Section 12 shall continue in effect for its benefit in respect of any actions
taken or omitted to be taken by it while it was acting as Agent.
12.8 CONSENTS AND RELEASES OF COLLATERAL UNDER FINANCING
AGREEMENTS. Agent may consent to any modification, supplement or waiver under
any of the Financing Agreements; PROVIDED, THAT, without the prior consent of
Lender, Agent shall not release any Collateral or otherwise terminate any
security interest in or lien upon any of the Collateral under any of the
Financing Agreements, except that no such consent shall be required, and
Agent is hereby authorized (i) to release any security interest in or lien
upon any of the Collateral which is the subject of a disposition permitted
hereunder or under the other Financing Agreements, or (ii) to release, in any
fiscal year of Borrowers, any security interest in or lien upon any of the
Collateral the value of which does not exceed $100,000.
12.9 COLLATERAL MATTERS.
(a) Except as otherwise expressly provided for in this
Agreement, Agent shall have no obligation whatsoever to Lender or any other
Person to investigate, confirm or assure that the Collateral exists or is
owned by Borrowers or any Obligor or is cared for, protected or insured or
has been encumbered, or that any particular items of Collateral meet the
eligibility criteria applicable in respect of the Revolving Loans or Letter
of Credit Accommodations hereunder, or whether any particular Availability
Reserves are appropriate, or that the liens and security interests granted to
Agent herein or pursuant hereto or otherwise have been properly or
sufficiently or lawfully created, perfected, protected or enforced or are
entitled to any particular priority, or to exercise at all or in any
particular manner or under any duty of care,
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disclosure or fidelity, or to continue exercising, any of the rights,
authorities and powers granted or available to Agent in this Agreement or in
any of the other Financing Agreements, it being understood and agreed that in
respect of the Collateral, or any act, omission or event related thereto,
Agent may act in any manner it may deem appropriate, in its discretion, given
Agent's own interest in the Collateral as a Lender and that Agent shall have
no duty or liability whatsoever to Lender, other than liability for its own
gross negligence or willful misconduct as determined by a final
non-appealable judgment of a court of competent jurisdiction.
(b) Lender hereby appoints Agent for the purpose of
perfecting the security interest of Agent in assets which, in accordance with
Article 9 of the Uniform Commercial Code can be perfected only by possession.
Should Lender obtain possession of any such Collateral, Lender shall notify
Agent thereof and, promptly upon Agent's request therefor, shall deliver such
Collateral to Agent or in accordance with Agent's instructions.
SECTION 13. TERM OF AGREEMENT; MISCELLANEOUS
13.1 TERM.
(a) This Agreement and the other Financing Agreements
shall become effective as of the date set forth on the first page hereof and
shall continue in full force and effect for a term ending on the date three
(3) years from the date hereof (the "Renewal Date"), and from year to year
thereafter, unless sooner terminated pursuant to the terms hereof; PROVIDED,
THAT, this Agreement and all other Financing Agreements must be terminated
simultaneously. Upon the effective date of termination or non-renewal of the
Financing Agreements (the "Termination Date"), Borrowers shall pay to Agent,
for the benefit of Lender, in full, all outstanding and unpaid Obligations
and shall furnish cash collateral to Agent, for the benefit of Lender, in
such amounts as Agent determines are reasonably necessary to secure Agent and
Lender from loss, cost, damage or expense, including attorneys' fees and
legal expenses, in connection with any issued and outstanding Letter of
Credit Accommodations, checks or other payments provisionally credited to the
Obligations and/or any other Obligations which Agent or Lender in good faith
determines (based upon facts or circumstances which exist as of the
Termination Date) is due or may be due and payable in connection with the
Financing Agreements. Such payments in respect of the Obligations as set
forth above and cash collateral shall be remitted by wire transfer in Federal
funds to such bank account of Agent, as Agent may, in its discretion,
designate in writing to Borrowers for such purpose. Interest shall be due
until and including the next business day, if the amounts so paid by
Borrowers to the bank account designated by Agent are received in such bank
account later than 12:00 noon, Chicago, Illinois time.
(b) No termination of this Agreement or the other
Financing Agreements shall relieve or discharge Borrowers of their respective
duties, obligations and covenants under this Agreement or the other Financing
Agreements until all Obligations as set forth above have been fully and
finally discharged and paid or cash collateralized as provided for above, and
the continuing security interest of Agent, for the benefit of Lender, in the
Collateral and the rights and remedies of Agent and Lender hereunder, under
the other Financing Agreements and applicable law, shall remain in effect
until all such Obligations have been fully and finally discharged and paid.
(c) In the event this Agreement is terminated prior to
the end of the then current term or renewal term of this Agreement for any
reason, in view of the impracticality and extreme difficulty of ascertaining
actual damages and by mutual agreement of the parties as to a reasonable
calculation of Lender's lost profits as a result thereof, Borrowers agrees to
pay to Agent, for the benefit of Lender, upon
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the effective date of such termination, an early termination fee in the
amount set forth below if such termination is effective in the period
indicated:
<TABLE>
<CAPTION>
AMOUNT PERIOD
<S> <C> <C>
(i) 2% of the Average Loan
Termination Balance From the date hereof to and
including August 20, 1999.
(ii) 1% of the Average Loan
Termination Balance From August 19, 1999 to and
including August 20, 2000.
(iii) 1/2% of the Average Loan
Termination Balance From August 19, 2000 to and
including August 20, 2001.
</TABLE>
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrowers agree
that it is reasonable under the circumstances currently existing. If the
early termination fee provided for in this Section 13.1 is payable to Agent,
for the benefit of Lender, then such early termination fee shall be deemed
included in the Obligations.
(d) Notwithstanding anything to the contrary contained in
Section 13.1(c), in the event of the termination of this Agreement by
Borrowers prior to the end of the then current term and the full and final
repayment of all of the Obligations and the receipt by Agent and Lender of
cash collateral all as provided in Section 13.1(a), Borrowers shall not be
required to pay the early termination fee provided for above if each of the
following conditions is satisfied: (i) no Event of Default or act, condition
or event which with notice or passage of time or both would constitute an
Event of Default shall exist or have occurred and be continuing,(ii) Agent
shall have received not less than thirty (30) days prior written notice of
the intention of Borrowers to so terminate this Agreement, and (iii) the
final payment in full of all of the Obligations is received simultaneously
with (A) the sale, or exchange arising in connection with the merger of
Borrowers, of all or substantially all of the Capital Stock or assets of the
Borrowers to a third party Person on an arm's length transaction;(B) the
consummation of a public equity offering, after the date hereof, which equity
offering shall be registered under the Securities Act of 1933, as amended,
and the net proceeds received by Borrowers shall not be less than
$25,000,000;(C) the repurchase by Borrowers of all of its issued and
outstanding Capital Stock in connection with the Borrowers becoming a private
corporation; or (D) the consummation by Borrowers of an unsecured bond,
debenture or note offering pursuant to which Borrowers shall receive net
proceeds of not less than the $75,000,000.
13.2 NOTICES. All notices, requests and demands hereunder shall
be in writing and (a) made to Agent and Lender at their respective addresses
set forth below and to Borrowers at their chief executive office set forth
below, or to such other address as either party may designate by written
notice to the other in accordance with this provision, and (b) deemed to have
been given or made: if delivered in person, immediately upon delivery; if by
telex, telegram or facsimile transmission, immediately upon sending and upon
confirmation of receipt; if by nationally recognized overnight courier
service with instructions to deliver the next Business Day, one (1) Business
Day after sending; and if by certified mail, return receipt requested, five
(5) days after mailing.
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13.3 PARTIAL INVALIDITY. If any provision of this Agreement is
held to be invalid or unenforceable, such invalidity or unenforceability
shall not invalidate this Agreement as a whole, but this Agreement shall be
construed as though it did not contain the particular provision held to be
invalid or unenforceable and the rights and obligations of the parties shall
be construed and enforced only to such extent as shall be permitted by
applicable law.
13.4 SUCCESSORS. This Agreement, the other Financing Agreements
and any other document referred to herein or therein shall be binding upon
and inure to the benefit of and be enforceable by Lender, Agent and Borrowers
and their respective successors and assigns, except that Borrowers may not
assign their rights under this Agreement, the other Financing Agreements and
any other document referred to herein or therein without the prior written
consent of Agent and Lender. Lender may not assign its rights and
obligations under this Agreement (or any part thereof) without the prior
written consent of Agent, except as permitted under Section 13.5(b) hereof.
Any purported assignment by Lender without such prior express consent or
compliance with Section 13.5(b) where applicable, shall be void. The terms
and provisions of this Agreement and the other Financing Agreements are for
the purpose of defining the relative rights and obligations of Borrowers,
Agent and Lender with respect to the transactions contemplated hereby and
there shall be no third party beneficiaries of any of the terms and
provisions of this Agreement or any of the other Financing Agreements.
13.5 ASSIGNMENTS AND PARTICIPATIONS.
(a) Lender may, in the ordinary course of its commercial
banking or finance business and in accordance with applicable law, at any
time sell to one or more banks, commercial finance companies or other
financial institutions ("Participants"), including, without limitation,
Congress Financial Corporation (Central) in its individual capacity,
participating interests in all or a portion of its rights and obligations
under this Agreement and the other Financing Agreements (including all or a
part of its interest in the Obligations). In the event of any such sale by
Lender of a participating interest to a Participant, Lender's obligations
under this Agreement to the other parties to this Agreement shall remain
unchanged, Lender shall remain solely responsible for the performance
thereof, Lender shall remain the holder of any such obligations for all
purposes under this Agreement and the other Financing Agreements, and
Borrowers and Agent shall continue to deal solely and directly with Lender in
connection with Lender's rights and obligations under this Agreement and the
other Financing Agreements. Borrowers agrees that if amounts outstanding
under this Agreement are due or unpaid, or shall have been declared or shall
have become due and payable upon the occurrence of an Event of Default, each
Participant shall, to the maximum extent permitted by applicable law, be
deemed to have the right of setoff in respect of its participating interest
in amounts owing under this Agreement to the same extent as if the amount of
its participating interest were owing directly to it as a Lender under this
Agreement; PROVIDED, THAT, in purchasing such participating interest, such
Participant shall be deemed to have agreed to share with Lender the proceeds
thereof as provided in Section 6.7 hereof. Notwithstanding anything to the
contrary contained herein, Lender shall not grant any participation under
which the Participant shall have rights to approve any amendment to or waiver
of or consent under this Agreement or the other Financing Agreements, EXCEPT
with the consent of Agent.
(b) Lender may, in accordance with applicable law, at any
time and from time to time assign to another bank, commercial finance company
or other financial institution or any of its affiliates, or in connection
with the sale of its business or all or substantially all of its loan
portfolio, with the written consent of Agent, to a bank, commercial finance
company or other financial institution (an "Assignee") all of its rights and
obligations under this Agreement and the other Financing Agreements, pursuant
to an assignment agreement, in form and substance satisfactory to Agent,
executed by such Assignee and Lender
50
<PAGE>
and delivered to Agent for its acceptance and recording in its records. Upon
such execution, delivery, acceptance and recording, from and after the
effective date determined pursuant to such assignment agreement, the Assignee
thereunder shall be a party hereto and, to the extent provided in such
assignment agreement,(i) have the rights and obligations of Lender hereunder
with a Commitment and Commitment Percentage as set forth therein, and (ii)
Lender thereunder shall, to the extent provided in such assignment agreement,
be released from its obligations under this Agreement (and, in the case of an
assignment agreement covering all or the remaining portion of Lender's rights
and obligations under this Agreement, Lender shall cease to be a party
hereto).
(c) Upon its receipt of an assignment agreement executed
by Lender and an Assignee, Agent shall (i) promptly accept such assignment
agreement and (ii) on the effective date determined pursuant thereto record
the information contained therein in Agent's records and give notice of such
acceptance and recordation to Lender and Borrowers.
(d) Except as otherwise provided in this Section 13.5,
Lender shall not, as among Borrowers and Lender, be relieved of any of its
obligations hereunder as a result of any sale, assignment, transfer or
negotiation of, or granting of participation in, all or any part of the
Obligations owed to Lender. Lender is permitted to sell assignments and
participations under this Section 13.5 and may furnish any information
concerning Borrowers and their Subsidiaries and affiliates in the possession
of Lender from time to time to Assignees and Participants (including,
prospective Assignees and Participants).
(e) Borrowers shall assist Lender in selling assignments
and/or participations under this Section 13.5 in whatever manner reasonably
necessary in order to enable or effect any such assignment or participation.
13.6 ENTIRE AGREEMENT. This Agreement, the other Financing
Agreements, any supplements hereto or thereto, and any instruments or
documents delivered or to be delivered in connection herewith or therewith
represents the entire agreement and understanding concerning the subject
matter hereof and thereof between the parties hereto, and supersede all other
prior agreements, understandings, negotiations and discussions,
representations, warranties, commitments, proposals, offers and contracts
concerning the subject matter hereof, whether oral or written.
[Remainder of Page Intentionally Left Blank]
51
<PAGE>
IN WITNESS WHEREOF, Agent, Lender and Borrowers have caused these
presents to be duly executed as of the day and year first above written.
BORROWERS:
DAMARK INTERNATIONAL, INC.
By:
----------------------------------
Title:
-------------------------------
7101 Winnetka Avenue North
Brooklyn Park, Minnesota 55428
DAMARK FINANCIAL SERVICES, INC.
By:
----------------------------------
Title:
-------------------------------
Address:
7101 Winnetka Avenue North
Brooklyn Park, Minnesota 55428
LENDER:
FIRST UNION NATIONAL BANK
By:
----------------------------------
Title:
-------------------------------
Address:
1339 Chestnut Street
Philadelphia, Pennsylvania 19107
AGENT:
CONGRESS FINANCIAL CORPORATION,
(CENTRAL), as Agent
By:
----------------------------------
Title:
-------------------------------
Address:
150 South Wacker Drive
Chicago, Illinois 60606-4401
52
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-26-1998
<CASH> 38
<SECURITIES> 0
<RECEIVABLES> 42,602
<ALLOWANCES> 1,395
<INVENTORY> 38,050
<CURRENT-ASSETS> 94,197
<PP&E> 65,574
<DEPRECIATION> 27,630
<TOTAL-ASSETS> 139,186
<CURRENT-LIABILITIES> 86,205
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 51,366
<TOTAL-LIABILITY-AND-EQUITY> 139,186
<SALES> 344,740
<TOTAL-REVENUES> 344,740
<CGS> 227,942
<TOTAL-COSTS> 277,942
<OTHER-EXPENSES> 126,875
<LOSS-PROVISION> 2,536
<INTEREST-EXPENSE> 2,286
<INCOME-PRETAX> (15,309)
<INCOME-TAX> (5,205)
<INCOME-CONTINUING> (10,104)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,104)
<EPS-PRIMARY> (1.34)
<EPS-DILUTED> (1.34)
</TABLE>
