<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number: 0-20736
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Sport Chalet, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 95-4390071
(State or other jurisdiction (I.R.S. employer identification number)
of incorporation or organization)
920 Foothill Boulevard, La Canada, California 91011
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 790-2717
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Securities registered pursuant to section 12(b) of the Act: N/A
Title of each class Name of each exchange on which registered
None
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Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229, 405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 7, 1996 was $4.1 million. The number of shares of the
registrant's common stock outstanding as of June 7, 1996 was 6,500,000.
Documents Incorporated by Reference
(1) Portions of the Registrant's definitive proxy statement relating to its 1996
Annual Meeting of Shareholders, which will be filed pursuant to Regulation 14A
within 120 days of the close of the Registrant's last fiscal year, as to Part
III.
CONTAINS 107 SEQUENTIALLY NUMBERED PAGES.
1
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PART I
ITEM 1. BUSINESS
A. GENERAL
Sport Chalet, Inc. is a leading operator of full service, specialty
sporting goods superstores in Southern California. The Company currently has 18
stores, eight located in Los Angeles County, four in Orange County, three in San
Diego County, two in San Bernardino County and one in Ventura County. These
stores average 35,000 square feet in size, and the last eleven superstores
opened by the Company range from 34,000 to 50,000 square feet. The Company's
executive offices are located at 920 Foothill Boulevard, La Canada, California
91011, and its telephone number is (818) 790-2717.
The Company began operations in 1959. During the mid-1980's, the Company
embarked on an expansion program that resulted in the opening of one store in
fiscal 1987, two stores in each of fiscal 1988, 1990 and 1991, one store in
fiscal 1992, another two stores in each of fiscal 1993, 1994 and the opening of
one store and relocation and expansion of another store in both 1995 and 1996.
During fiscal 1995, the Board of Directors began an evaluation of the Company's
strategic policies, operations and management (the "Board Review"). As a result,
the expansion program has been scaled down. For fiscal 1997 only a relocation
and expansion of an existing store is planned. No other store openings are
contemplated at this time.
The previously mentioned Board Review culminated with the recent
implementation of several programs aimed at improving the Company's competitive
position and overall profitability. The Company has embarked on and will
continue to implement a series of cost-cutting actions and productivity
improvements which include downsizing the Company's labor force, streamlining
management by reducing the number of executives and outsourcing certain
management functions, developing more advanced inventory and procurement
systems, and creating a new loss prevention department. To improve sales, the
Company has renewed its focus on customer service through an expansion of and
emphasis on its in-store training of personnel and the Company-wide adoption of
an incentive program to reward store personnel for sales productivity. The
Company also may be implementing additional programs in the future to stimulate
sales.
Management believes that the adoption and implementation of programs
developed in response to the Board Review eventually will have an overall
favorable impact on the Company's performance, but to some extent may restrain
short-run profits. Many programs require significant investment in up-front
costs, while the principal benefits derived from implementation are not expected
to be fully realized until future periods.
The Company's stores feature a number of distinct, specialty sporting goods
shops under one roof, each offering a large assortment of quality brand name
merchandise at competitive prices. The specialty shops include traditional
sporting goods merchandise and nontraditional merchandise such as downhill
skiing, mountaineering, SCUBA, mountain bicycling, in-line skating and roller
hockey. The merchandise within each shop appeals to both experts and beginners.
Each shop is staffed by sales associates with expertise in the use of the
merchandise they sell, permitting the Company to offer its customers a high
level of knowledgeable service. A combination of superstore selection supported
by specialty store service has distinguished the Company from its competitors
and has resulted in average sales per store of $7.4 million for fiscal 1996.
Furthermore, this strategy has resulted in higher than average gross margins and
higher than average sales per transaction compared to the industry.
Historically, the Company's average transaction was approximately $60. The
majority of the sales dollars came from transactions ranging from $50 to $300.
The Company had its own manufacturing operations (the "Manufacturing
Operations"), which produced a wide range of soft goods such as duffle bags and
aerobic clothing, accounting for approximately 2% of the Company's sales in
fiscal 1995. In June 1995, the Company, Director Eric S. Olberz, and Camp 7, a
California corporation under the control of Eric S. Olberz, entered into
agreements pursuant to which the Company sold the Manufacturing Operations to
Camp 7 under the terms and conditions described more fully in the Registrant's
Proxy Statement with respect to its 1996 Annual Meeting of Shareholders. The
Company now purchases its soft goods products from additional competitive
sources as well as Camp 7 and is able to apply the sales proceeds towards
reducing outstanding debt, and improving working capital balances rather than
tying up capital to finance manufacturing inventories and manufacturing
operations.
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The Company's business is highly seasonal in nature. Historically, its
highest sales levels and operating profitability occur predominantly during the
winter months of November, December and January, which overlap the third and
fourth fiscal quarters ended December 31 and March 31. Similar to the business
of other retailers, the Company's business is heavily affected by sales of
merchandise during the Christmas season. In addition, the Company's product mix
emphasizes cold weather sporting goods merchandise, particularly ski-related
products, thus boosting sales levels during the winter months and increasing the
seasonality of the Company's business. In fiscal 1994, 1995 and 1996, sales of
ski apparel and equipment accounted for 26%, 25% and 20%, respectively, of the
Company's total sales for those fiscal years. In each of fiscal 1994, 1995 and
1996, 37%, 36% and 33%, respectively, of the Company's sales and traditionally
all its net income were attributable to the months of November, December and
January. Management anticipates that this seasonal trend in sales and net income
will continue. No assurance can be provided that any substantial decrease in
sales for the winter months, which could be influenced by the amount and timing
of snowfall at the ski areas frequented by those living in Southern California,
will not have a material adverse effect on the Company's profitability. However,
in order to be less dependent upon winter business, Management has emphasized,
and plans to continue to emphasize, a broadened product mix that offers
merchandise with higher sales in the spring, summer and fall seasons.
The retail sporting goods industry is dependent on the general strength of
the economic environment and level of consumer spending. The economy in Southern
California, where all the Company's stores are located, had experienced an
economic downturn which began in 1990. Management believes that stagnant
economic conditions and a weak and exceedingly price-competitive retail
environment has adversely affected price margins, same store sales levels and
sales growth in new stores, thereby negatively impacting the Company's overall
financial performance.
Compliance with Federal, State and local environmental laws and regulations
has not had, and is not expected to have, a material effect on the capital
expenditures, earnings and competitive position of the Company.
The Company uses the "Sport Chalet" name as a service mark in connection
with its business operations. The Company has registered "Sport Chalet" as a
service mark with the State of California, and has obtained federal registration
for certain purposes. The Company also retains common law rights to the name,
which it has used for 36 years, and the lack of federal registration for certain
purposes, might only pose a problem if the Company were to expand into a
geographic area where the name or any confusingly similar name is used by
someone with prior rights. It has also licensed trademarks for certain labels
under which it merchandises soft goods.
B. INDUSTRY AND COMPETITION
The National Sporting Goods Association (NSGA), in its 1996 annual consumer
study, reported that the amount of national sales in 1995 for athletic
equipment, footwear and apparel was $36.2 billion and forecasted to be $37.6
billion in 1996. Many retailers strive to compete in this large market,
resulting in a highly fragmented and competitive marketplace and certain of the
Company's competitors are affiliated with large national or regional chains and
have substantially greater resources than the Company. Competitive retailers are
generally classified into four basic categories: mass merchandisers, traditional
sporting goods stores, specialty sporting goods stores and sporting goods
superstores, as described below:
(i) MASS MERCHANDISERS. This category includes discount retailers such as
Wal-Mart and Kmart, and department stores like JC Penney and Sears. These stores
sell large quantities of sporting goods and are usually very price competitive.
However, their sporting goods assortments are limited, with fewer specialty
items and fewer high quality name brands than offered by other sporting goods
retailers.
3
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(ii) Traditional Sporting Goods Stores. This category consists of the
traditional sporting goods chains that started 20 to 30 plus years ago. Among
those that directly compete with the Company in Southern California are Oshman's
Sporting Goods and Big 5 Sporting Goods. These companies have numerous small
stores throughout the area, typically ranging in size from 5,000 to 20,000
square feet, frequently located in malls and strip centers. With the large
number of store fronts, customers tend to view them as convenient neighborhood
stores. However, their limited floor space severely restricts the breadth and
depth of merchandise assortments and the number of specialty items they can
carry. Also, they are promotion driven, with frequent sales advertised in the
local newspapers. With their limited assortments and promotional sales, they
offer fewer high quality name brands. Management believes that this category has
not grown as much as the superstore category over the last decade and that the
relative market share of businesses in this category has eroded.
(iii) Specialty Sporting Goods Stores. This category consists of two
groups. The first group includes athletic footwear specialty stores, which are
typically 2,000 to 10,000 square feet in size and are located in shopping malls.
Examples are Foot Locker, Lady Foot Locker, Champs, and The Athlete's Foot.
These retailers are highly focused, with most of their sales coming from
athletic footwear and team licensed apparel. The second group consists of stores
specializing in a particular sport or recreation. This group includes
Recreational Equipment Incorporated (REI) and Adventure 16 (A16), both
specializing in backpacking and mountaineering, as well as retailers
specializing in SCUBA products. Many of these SCUBA retailers are one-to-three
store operations specializing only in dive equipment and certification lessons,
and offer excellent customer service but lack sufficient capital and floor space
to carry a broad assortment of products. Typically, prices at specialty stores
tend to be higher than prices at the sporting goods superstores and traditional
sporting goods stores.
(iv) Sporting Goods Superstores. Stores in this category typically are
larger than 30,000 square feet and tend to be free-standing locations. In
Southern California, the most established sporting goods superstore retailer
besides Sport Chalet is Sportmart, with 15 stores. In addition, Oshman's has one
superstore in San Diego County, and the Sport Authority has three in San Diego
County and one in Orange County. Several superstore retailers have publicly
announced plans to expand in or enter into the Southern California region;
however, during fiscal 1996, only three new superstores were opened, while two
were closed, in the Southern California area by the Company's competitors. Most
superstores emphasize low prices and high volume sales with frequent sales
promotions and a large number of stock-keeping-units. Unlike the Company, they
generally avoid marketing high-end specialty items which require significant
service.
The Company's position is that broad selection of high quality name brands
and numerous specialty items at competitive prices, showcased by its
well-trained sales associates, distinguish it from mass merchandisers,
traditional and specialty sporting goods stores and other superstore operations.
Management believes the Company's format takes advantage of several significant
trends and conditions in the sporting goods industry. These trends include the
size of the industry, fragmented competition, limited assortments offered by
many sporting goods retailers, consumer preference for one-stop shopping, and a
growing importance of delivering value through selection, quality, service and
price.
C. EMPLOYEES
In connection with the Board Review, the labor force was downsized during
fiscal 1996 resulting in a 13% reduction in the number of total employees since
March 31, 1995, notwithstanding the opening of an additional store in November
1995. As of March 31, 1996, the Company had a total of 1303 full and part-time
employees, 1128 of whom were employed in the Company's stores and 175 of whom
were employed in warehouse and delivery operations or executive office
positions. None of the employees are unionized. A typical store has
approximately 60 employees, of whom 15 to 30 are in the store at any time on a
normal operating basis. Each store employs a store manager, two assistant
managers, and six to eight area managers who supervise the sales associates.
Additional part-time employees typically are hired during the holiday season.
4
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ITEM 2. PROPERTIES
At March 31, 1996, the Company had eighteen store locations. The following table
summarizes the key information on the Company's retail properties:
<TABLE>
<CAPTION>
GROSS
SQUARE
LOCATION OPENING DATE FOOTAGE
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<S> <C> <C>
La Canada(1) (2) July 1975 35,000
Huntington Beach(3)(6) June 1981 50,000
La Jolla(1)(4) June 1983 15,000
Mission Viejo August 1986 30,000
Point Loma(3) November1987 31,000
Santa Clarita November 1987 30,000
Marina Del Rey November 1989 42,000
Beverly Hills November 1989 35,000
Brea(3) April 1990 34,000
Oxnard(3) June 1990 36,000
West Hills(3) June 1991 44,000
Burbank August 1992 45,000
Montclair(5) November 1992 20,000
Torrance November 1993 40,000
Glendora November 1993 40,000
Rancho Cucamonga(3) June 1994 36,000
El Cajon November 1994 38,000
Irvine(3) November 1995 35,000
</TABLE>
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(1) Consists of two nearby facilities.
(2) The original facility at this location opened June 1960.
(3) Includes swimming pool facility for SCUBA and kayaking instruction.
(4) The La Jolla store was originally opened in a different location in
the shopping mall and has been relocated.
(5) Store opened within the distribution center building in order to
utilize excess space.
(6) Relocated to a newly constructed facility on the same property in
August 1995.
All retail facilities are located on leased property. The initial terms of
the retail leases expire in 1998 through 2015. Leases for two stores expire
without options to renew in 1999 and 2004. The remaining leases are subject to
options that extend their terms through 2009 to 2027. All retail store leases
provide for base rent which may or may not be credited against percentage rent
based upon gross sales from the premises. In some cases, base rental amounts
increase as the lease term progresses, but in most cases, the Company expects
that percentage rent will more than offset the base rental amounts. Certain
leases permit the lessor and, in some cases, the Company, to terminate the
leases if the gross sales from the store are below specified levels.
The Company leases from Norbert J. Olberz, the Chairman of the Board and
the Company's Principal Shareholder (the "Principal Shareholder"), its corporate
office space in La Canada, its warehouse and distribution facility in Montclair,
and its stores in La Canada and Huntington Beach. The Company has incurred
rental expense to the Principal Shareholder of $1.4 million, $1.6 million, and
$1.7 million in fiscal 1996, 1995, and 1994, respectively. The Company believes
that the occupancy costs to the Company under each lease are no higher than
those which would be charged by an unrelated third party under similar
circumstances.
5
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In August 1994, the Company's non-employee Directors approved a proposal to
relocate the Huntington Beach store. In August 1995, the existing store lease
was terminated and the store relocated to a facility developed by and leased
from Huntington Beach Properties, Inc., a California corporation under the
control of the Principal Shareholder. The new rental rate is the amount by which
four percent times monthly Gross Sales exceeds the $41,667 monthly minimum rent.
Management believes that the new facilities are more advantageous given certain
logistical problems associated with the old store location and the reduction in
rent which would be achieved at anticipated store sales levels. The occupancy
costs under the new lease are believed to be no higher than those which would be
charged by an unrelated third party under similar circumstances.
A portion of the property in La Canada leased by the Company from the
Principal Shareholder was, until the late 1970's, used as a gas station and
contained underground storage tanks. In June 1991, petroleum hydrocarbon
pollution at the site was detected in connection with the removal of the
underground storage tanks. The Company has received regular approval of a site
investigation work plan for the property. Site remediation costs cannot be
accurately estimated until the site investigation work is completed. However, a
visual inspection of the storage tanks conducted with the tanks removed showed
no obvious leaks or damage. This suggests that site contamination may have been
the result of spillage during filling of the tanks and is not extensive. Based
on visual inspection, Management believes that the clean-up costs will not be
material. The Principal Shareholder has agreed to indemnify the Company against
all investigation and remediation costs relating to the property.
Starting in January 1993, the Company's manufacturing operations had been
located in a facility which is leased by the Company from Director Eric S.
Olberz, the son of the Principal Shareholder, in Santa Ana, California and
consists of a tilt-up concrete building of approximately 18,500 square feet. The
monthly rental rate was $7,380, triple net. The Company believes that the
occupancy costs under this lease were no higher than those which would be
charged by an unrelated third party under similar circumstances. In connection
with the sale of the Company's Manufacturing Operations to Eric S. Olberz and
Camp 7, Inc., in June 1995, the lease was terminated.
The Company maintains insurance coverage for its various facilities for
fire and theft, but does not maintain earthquake insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings incidental to
the conduct of its business. Management does not believe that any of these legal
proceedings will have a material adverse impact on the business or financial
condition or results of operations of the Company, either due to the nature of
the claims, or because Management believes that such claims should not exceed
the limits of the Company's insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Inapplicable.
6
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) Market Price for Common Shares -
The Company's Common Stock is traded on the NASDAQ National Market System
under the symbol "SPCH". The following table reflects the range of high and low
selling prices of the Company's Common Stock by quarter over the last two fiscal
years;
<TABLE>
<CAPTION>
Fiscal 1995 High Low
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<S> <C> <C>
First Quarter $4-1/2 $3-3/4
Second Quarter $4-1/4 $3-3/4
Third Quarter $4-1/8 $3-3/4
Fourth Quarter $5-1/8 $3-1/2
Fiscal 1996 High Low
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First Quarter $3-3/4 $2-1/2
Second Quarter $4-1/16 $2-3/8
Third Quarter $3-1/4 $1-5/8
Fourth Quarter $2-3/4 $1-3/4
</TABLE>
(b) Approximate Number of Holders of Common Shares -
The approximate number of shareholders of the Company's Common Stock as of
June 7, 1996 was 164 (excluding individual participants in nominee security
position listings).
(c) Frequency and Amount of Any Dividends Declared -
The Company has not paid any dividends to shareholders since its initial
public offering in November 1992. It is currently contemplated that no cash
dividends will be declared or paid. That is, the Company intends to retain
earnings for use in the operation and expansion of its business and, therefore,
does not anticipate paying any cash dividends in the foreseeable future.
(d) Dividend Restriction -
For information required by this section see the discussion in Item 7 under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
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ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected financial data as of and for the
periods presented. This data should be read in conjunction with the Financial
Statements and related Notes thereto and other financial information included
herein.
<TABLE>
<CAPTION>
Year ended March 31
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1996 1995 1994 1993 1992
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(In thousands, except per share amounts and selected operating data)
<S> <C> <C> <C> <C> <C>
Statements of Income Data:
Net sales $133,741 $134,735 $122,241 $106,392 $94,785
Cost of goods sold(1) 90,389 88,775 81,661 67,844 61,935
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Gross profit 43,352 45,960 40,580 38,548 32,850
Selling, general and administrative expenses 44,368 44,520 39,832 33,854 29,418
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(Loss) income from operations (1,016) 1,440 748 4,694 3,432
Interest expense 1,224 894 736 1,053 1,533
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(Loss) income before taxes (2,240) 546 12 3,641 1,899
Income tax (benefit) provision (2) (880) 254 23 1,474 771
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Net (loss) income (2) (1,360) 292 (11) $ 2,167 $ 1,129
=====================================================================
(Loss) earnings per share (2) $ (.21) $ .04 $ .00 $ .40 $ .23
=====================================================================
Selected Operating Data:
Stores open at end of period 18 17 16 14 12
Comparable store sales increase (decrease)(3) (4.1)% 1.4% 2.2% 4.7% 8.1%
Balance Sheet Data:
Working capital $11,240 $ 14,916 $ 14,838 $ 16,286 $ 4,364
Total assets 49,508 51,565 43,679 44,623 33,917
Total loans payable 10,308 9,333 4,917 4,850 12,045
Total shareholders' equity 24,404 25,764 25,472 25,483 10,617
</TABLE>
(1) Includes the direct cost of merchandise and internal costs associated with
merchandise procurement, storage, handling and distribution.
(2) Prior to November 19, 1992, the Company was an S Corporation and not
subject to federal and some state income taxes. Fiscal 1993 and earlier
periods are adjusted to reflect a proforma income tax provision as if the
Company were subject to corporate income taxes.
(3) A store's sales are included in the comparable store sales calculation
after its twelfth full month of operation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following should be read in conjunction with "Item 6. Selected
Financial Data" and the Company's financial statements and related notes
thereto.
Results of Operations
The following tables set forth statements of income data and relative
percentages of net sales for the periods indicated (dollar amounts in thousands,
except per share amounts).
<TABLE>
<CAPTION>
Year ended March 31 Quarter ended March 31
-------------------------------------------------------- -------------------------------------
1996 1995 1994 1996 1995
---------------- ---------------- --------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $133,741 100.0% $134,735 100.0% $122,241 100.0% $36,156 100.0% $35,713 100.0%
Gross profit 43,352 32.4 45,960 34.1 40,580 33.2 9,360 25.9 9,424 26.4
Selling, general and
administrative expenses 44,368 33.2 44,520 33.0 39,832 32.6 11,023 30.5 11,587 32.4
Income (loss) from operations (1,016) (0.8) 1,440 1.1 748 0.6 (1,663) (4.6) (2,163) (6.1)
Interest expense 1,224 0.9 894 0.7 736 0.6 260 0.7 263 0.7
Income (loss) before taxes (2,240) (1.7) 546 0.4 12 0.0 (1,923) (5.3) (2,426) (6.8)
Net income (loss) (1,360) (1.0) 292 0.2 (11) 0.0 (1,143) (3.2) (1,482) (4.2)
(Loss) earnings per share (.21) .04 .00 (.18) (.24)
</TABLE>
Fiscal 1996 Compared to Fiscal 1995. Sales decreased from $134.7 million to
$133.7 million, a 0.7% decrease. Although the Company relocated and expanded one
store in August and opened one new store in each of November 1995 and 1994 which
added to sales, these increases where offset by a comparable store sales
decrease of 4.1%, because of warm and dry weather in California during the third
quarter of fiscal 1996, when compared to the same period last year, which
severely impacted the sales of winter-related merchandise. Specifically, sales
of winter-related products decreased 31%. In addition, the slow Christmas sales
experienced by retailers nationally, along with the impact of a sluggish economy
in Southern California, also affected the Company's sales.
Gross profit for the period decreased as a percent of sales from 34.1% to
32.4%, primarily as a result of increased inventory shrinkage, as well as,
markdowns taken to stimulate the sales of winter-related merchandise.
Selling, general and administrative expenses remained relatively constant
as a percent of sales, 33.2% compared to 33.0% last year, even though sales
decreased, which obscured the full impact of Management's implementation of cost
reducing programs. The primary components of selling, general and administrative
expenses are labor, rent and other occupancy costs and advertising.
Interest expense increased to $1.2 million from $894,000 due to an increase
in average debt outstanding.
The effective tax rate as a percent of pretax loss is 39.3% for fiscal 1996
and 46.6% for fiscal 1995. These rates differ from the statutory rate of 40.1%
as a result of permanent differences between financial reporting and tax-basis
income, and for fiscal 1995, the relatively low level of pretax income.
Net income decreased from $292,000 to a loss of $1.4 million primarily due
to the previously discussed decrease in sales and gross profit margins. Earnings
per share decreased from $.04 to a loss per share of $.21 due to decreased net
income.
Fourth Quarter 1996 Compared to Fourth Quarter 1995. Sales increased from
$35.7 million to $36.2 million, a 1.4% increase. The Company relocated and
expanded one store in August 1995 and opened one new store in November 1995
which added to sales; however, these increases where offset by a comparable
store sales decrease of 3.4%, due to the adverse impact of unseasonably warm
weather in California on the sales of winter-related merchandise.
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Gross profit for the period decreased as a percent of sales from 26.4% to
25.9%, primarily as a result of increased inventory shrinkage. Because less ski
related merchandise was purchased during fiscal 1996 due to Management's focus
on improving procurement practices, markdowns taken to stimulate sales of
winter-related merchandise were high by historical measures, although equal to
the prior year as a percent of sales.
Selling, general and administrative expenses decreased as a percent of
sales from 32.4% to 30.5% reflecting the impact of Management's recently
implemented cost reduction program.
Interest expense remained relatively constant, $260,000 compared to
$263,000 for the same period last year. Lower interest rates were offset by
larger average debt outstanding.
The effective income tax rate as a percent of pretax loss for the fourth
quarter 1996 is 40.6% compared to 38.9% for the same period of fiscal 1995.
Net loss decreased from $1.5 million to $1.1 million and loss per share
decreased from $.24 to $.18 despite lower gross profit margins due to relatively
lower selling, general and administrative expenses.
Fiscal 1995 Compared to Fiscal 1994. Sales increased from $122.2 million to
$134.7 million, a 10.2% increase. The Company relocated and expanded one store
in June and opened one new store in November 1994 which added to sales. In
addition, comparable store sales increased 1.4%, a disappointing increase given
that California returned to more typical winter weather patterns in fiscal 1995
after warm and dry weather in fiscal 1994 resulted in the lack of snowfall in
ski areas frequented by Southern California residents, and the fact that five
stores were temporarily closed in fiscal 1994 due to the January 17, 1994
Northridge earthquake. Christmas sales were slow, similar to the experience of
retailers nationally, and ski clothing and equipment sales did not increase as
expected despite improved skiing conditions, possibly due to stagnant economic
conditions in Southern California.
Gross profit for the period increased as a percent of sales from 33.2% to
34.1%, primarily because lower margin sales from promotional and off-site sales
events during the third quarter of fiscal 1995 constituted a smaller portion of
overall sales than during the third quarter of 1994. However, higher margins in
the third quarter of fiscal 1995 were partially offset by reduced margins during
the fourth quarter of fiscal 1995 as disappointing sales of winter related
products prompted significant post-ski season markdowns in order to stimulate
sales.
Selling, general and administrative expenses remained relatively constant
as a percent of sales, 33.0% compared to 32.6% last year. The primary components
of selling, general and administrative expenses are labor, rent and other
occupancy costs and advertising.
Interest expense increased to $894,000 from $736,000 due to higher interest
rates and an increase in average debt outstanding.
The effective tax rate as a percent of pretax income for fiscal 1995 is
46.6%. In 1994, the provision for income taxes exceeded pretax income. These
rates differ from the statutory rate of 40.1% as a result of permanent
differences between financial reporting and tax basis income and the relatively
low level of pretax income.
Net income increased to $292,000 from a loss of $11,000 primarily due to
the previously discussed increase in sales and gross profit margins. Earnings
per share increased from $.00 to $.04 due to increased net income.
Liquidity and Capital Resources
The Company's primary capital requirements are for inventory, expansion and
remodeling. Historically, the Company's liquidity needs have been met by cash
from operations, credit terms from vendors and bank borrowings. The Company
believes that these sources will be sufficient to fund currently anticipated
cash requirements for the next 2 to 3 fiscal years.
10
<PAGE>
Net cash provided by operating activities was $3.2 million and $4.2 million
for fiscal 1996 and 1994, respectively, while for fiscal 1995, net cash used in
operating activities was $850,000. Net loss accounted for the use of $1.4
million and $11,000 cash in fiscal 1996 and 1994, respectively. Net income
provided cash of $292,000 in fiscal 1995. Depreciation provided $2.7 million,
$2.5 million and $2.3 million of cash for fiscal 1996, 1995, and 1994,
respectively.
During fiscal 1996 and 1994 inventories decreased $3.1 million and $3.6
million as a result of aggressive markdowns taken to stimulate sales of ski
related products. In addition, the implementation of a perpetual inventory
system helped reduce overall inventory during fiscal 1996. During fiscal 1995,
inventories increased $6.2 million primarily due to slower than expected sales
during the Christmas season and the fourth quarter.
Accounts payable decreased $1.6 million for fiscal 1996 primarily due to
reduced inventory. For fiscal 1995 accounts payable increased $1.9 million as a
result of increased inventory. For fiscal 1994 the increase in accounts payable
was due to changes in the timing of payments.
There were no income taxes payable at either March 31, 1996 or 1995 due to
the loss or low taxable income and overpayment of estimated taxes. For fiscal
1994, taxes payable decreased $1.7 million due to the payment of taxes accrued
in fiscal 1993.
Net cash used in investing activities was $3.8 million, $3.3 million and
$4.3 million for fiscal 1996, 1995 and 1994, respectively. The Company used a
substantial portion of this cash to open new stores. In each of fiscal 1996 and
1995, one store was relocated and one new store was opened. Two new stores were
opened in fiscal 1994. In fiscal 1996, 1995 and 1994, ongoing capital
expenditures for the Company's existing stores totalled $1.4 million, $1.8
million and $2.5 million, respectively.
Historically, net cash used or provided by financing activities has
resulted primarily from the advance or pay down of a revolving credit line.
During fiscal 1994 through fiscal 1996, the Company maintained a revolving line
of credit with Wells Fargo Bank, NA (the "Prior Lender"). During fiscal 1996,
the Company was authorized to borrow from up to $17.0 million to up to $30.0
million, based on the Company's projected seasonal needs, at an interest rate of
prime plus 1/8%. For fiscal 1996, and 1995 and 1994, peak borrowings on that
credit line were $17.0 million, $12.6 million, $14.0 million, respectively. In
addition, the Prior Lender provided an additional $2.5 million in the form of a
term commitment for the purpose of financing the opening of future new stores,
of which no money was borrowed during fiscal 1996. The balance, when drawn on
this term commitment, was to be amortized over a 3-year period, beginning June
1, 1995. During the last two quarters of fiscal 1996, the Company violated
certain financial covenants set forth in the loan agreement with the Prior
Lender. These violations were either waived by the Prior Lender or were rendered
moot because the Prior Lender's loan was paid off with the proceeds from the new
credit facility described below.
In May 1996, the Company obtained a two-year credit facility from
BankAmerica Business Credit, Inc., an affiliate of Bank of America (the "New
Lender"), which provides a new line of credit to borrow up to $20 million less
the amount of any outstanding draws on a maximum of $2.5 million in authorized
letters of credit and/or any applicable limitations on maximum borrowings.
Maximum borrowings generally may not exceed 50% of the value of eligible
inventory and may also be reduced, under certain circumstances, to reflect
reserves or other adjustments. Interest shall accrue at prime plus 1/2% or at
the election of the Company (and assuming certain conditions have been
satisfied), at an annual rate equal to 2-3/4% over the New Lender's LIBOR rate.
The initial proceeds of $13.0 million from the new financing were used to
extinguish all of the Company's obligations under the credit facility with the
Prior Lender on May 14, 1996.
The Company's obligation to the New Lender is secured by a first priority
lien on the Company's non-real estate assets, and the Company is subject to
several restrictive covenants as set forth in the Loan and Security Agreement
with the New Lender which is attached as an exhibit to this Form 10-K. The
principal operating covenants require the Company to maintain minimum levels of
net worth and cash flow coverage, restrict capital expenditures and lease
payments, and limit the amount of dividend payments. The Company currently is in
full compliance with these covenants and expects to remain in compliance during
the term of the credit facility. Management also believes that these operating
covenants provide the Company with greater flexibility than did the operating
covenants set forth in the agreement with the Prior Lender. However, unexpected
11
<PAGE>
conditions could cause the Company to alter its plans to avoid a breach of the
agreement with the New Lender or could cause the Company to violate a
restrictive covenant or otherwise breach that agreement. If a breach occurs, the
new lender will have all rights customarily provided to a secured lender,
including the right to foreclose on the secured collateral or to accelerate the
maturity of the loan obligations.
No cash dividends have been declared on common stock in fiscal 1996. The
Company intends to retain earnings for use in the operation and limited
expansion of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. In addition, the amount of dividend payment
is restricted in the agreement with the New Lender.
Seasonality and Quarterly Fluctuations
As noted previously, the months of November, December and January have
historically accounted for the largest percentage of the Company's net sales and
all its net income. As is typical with other sporting goods retailers, the
Company's sales volume increases significantly during the Christmas holiday
season and the peak ski season generally corresponds to this three-month period.
The Company's operating results are also influenced by the amount and
timing of snowfall at the ski areas frequented by those living in Southern
California, particularly the Mammoth Mountain ski resort in the eastern Sierra
Nevada mountains. The Company believes that snowfall at the Mammoth Mountain ski
area generally is an indicator of the Company's likely sales of ski apparel and
equipment. First, because of prevailing weather patterns, the Mammoth snowfall
is generally similar to that of Southern California ski areas. Second, for more
than twenty years, the Company has experienced better customer demand for skiing
apparel and equipment when there were early snowfalls and excellent ski
conditions at Mammoth. An early snowfall is more likely to influence sales
because it extends the demand for ski apparel and equipment. A late snowfall may
have the opposite effect.
The snowfall at Mammoth Mountain over the past 28 years has ranged from 26
to 343 inches and has averaged 156 inches for the three months ended January 31.
The following table sets forth the snowfall at Mammoth Mountain for the
three-month period ended January 31 over the last five years:
<TABLE>
<CAPTION>
Three months Snowfall
ended January 31 in inches
---------------- ---------
<S> <C>
1996 ......................... 170
1995 ......................... 315
1994 ......................... 68
1993 ......................... 343
1992 ......................... 116
</TABLE>
Even though fiscal 1996 snowfall for the three months ended January 31 is
above average, 60% of the snowfall occurred in the month of January and
therefore did not produce the positive effect on sales that might have been
expected by a more even distribution of snowfall over the three month period. In
addition, the effect of significant early snowfall on Company sales was less
than expected during fiscal 1995. Management believes this was possibly due in
part to then stagnant economic conditions in Southern California. The effect of
snowfall on the Company's results has been mitigated to some extent by
Management's attempt to diversify the Company's product mix. Sales of ski
apparel and equipment have decreased over the last five fiscal years from 28% to
20% of total sales revenue.
Suppliers in the ski industry require that commitments must be made for
purchases of apparel and equipment by April for fall delivery, and only limited
quantities of merchandise can be reordered during the fall. Consequently, the
Company places its orders in the spring anticipating a good snowfall in the
winter. If the snowfall does not at least provide an adequate base or occurs
late in the season, as was the case in fiscal 1994 and 1996, or if sales do not
meet projections as occurred in fiscal 1995, the Company may be required to mark
down its ski merchandise. Generally, ski merchandise carries a higher margin
than other sporting goods items.
12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required by this section are submitted as part of
Item 14 of this report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Inapplicable.
13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of all directors and
executive officers as of June 27, 1996, indicating all positions and offices
presently held by each.
Name Age Position
- ---- --- --------
Norbert J. Olberz 71 Chairman of the Board, Interim President
and Chief Executive Officer
Eric S. Olberz 33 Director
John R. Attwood 66 Director
Kenneth Olsen 78 Director
Dennis D. Trausch 46 Executive Vice President
Howard K. Kaminsky 38 Chief Financial Officer, Treasurer and Secretary
Robert W. Haueter 44 Vice President-Marketing
Norbert J. Olberz is the Company's founder and has been its Principal
Shareholder and Chairman of the Board since its formation. Mr. Olberz assumed
the duties of Interim President and Chief Executive Officer on April 3, 1995. In
connection with the Board Review, the Board of Directors will determine whether
to commence search activities for a new President and/or Chief Operating
Officer.
Eric S. Olberz has been a Director since 1992. He previously worked for the
Company from 1975 through July 1995. During that period, Mr. Olberz held several
positions with the Company including Vice President from 1984 through October
1994, and Secretary and Vice Chairman from October 1992 and October 1994,
respectively, through his resignation as an officer and employee in July 1995.
John R. Attwood has been a Director since February 1993. Mr. Attwood is the
President of Attwood Enterprises, a consulting business. He was the former
Chairman of Coca-Cola Bottling of Los Angeles and Senior Vice President and a
Group President at Beatrice Companies, Inc., the parent company of Coca-Cola
Bottling of Los Angeles until his retirement in 1986. Mr. Attwood currently
serves on the board of directors of WB Bottling Corp. and Verdugo Hills
Hospital, a non-profit hospital organization.
Kenneth Olsen has been a Director of the Company since June 1994. Mr. Olsen
has also served as President and Chief Executive Officer of the Vons Company,
Inc., a leading grocery store chain, from 1974 to 1983, at which time he retired
from full time responsibilities after thirty-eight years with that Company. Mr.
Olsen currently serves a director of several nonprofit organizations, and was a
trustee of Loyola Marymount University.
Dennis D. Trausch joined the Company in 1976 and has served in various
positions within the Company. He assumed his present position in June 1988. He
is responsible for all store operations and leasing.
Howard K. Kaminsky joined the Company as Chief Financial Officer in 1985,
Treasurer since October 1992 and Secretary since July 1995. Prior to joining the
Company, he was employed in the auditing division of Ernst & Young. Mr. Kaminsky
is a Certified Public Accountant and received his Bachelor of Science degree in
Business Administration from California State University, Northridge.
Robert W. Haueter joined the Company as Vice President-Marketing in 1989.
He spent the previous ten years as a senior aide in the California Legislature.
During this period, he coordinated marketing and strategy for a number of
political campaigns.
Norbert Olberz, the Principal Shareholder, owns approximately 72% of the
Company's outstanding Common Stock at March 31, 1996. As a result, the Principal
Shareholder has sufficient voting power to determine the outcome of any matters
submitted to the Company's shareholders for approval.
14
<PAGE>
Other information responding to Item 10 was included in the Registrant's
Proxy Statement with respect to its 1996 Annual Meeting of Shareholders and is
incorporated by reference herein pursuant to General Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
Information responding to Item 11 was included in the Registrant's proxy
statement with respect to its 1996 Annual Meeting of Shareholders and is
incorporated by reference herein pursuant to General Instruction G(3).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responding to Item 12 was included in the Registrant's proxy
statement with respect to its 1996 Annual Meeting of Shareholders and is
incorporated by reference herein pursuant to General Instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responding to Item 13 was included in the Registrant's proxy
statement with respect to its 1996 Annual Meeting of Shareholders and is
incorporated by reference herein pursuant to General Instruction G(3).
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements - The financial statements listed on the
accompanying Index to Financial Statements are filed as part of this
report.
(2) Schedules - Not applicable.
(3) Exhibits - See Index on Page E-1 hereof.
(b) Reports on Form 8-K
None.
16
<PAGE>
Sport Chalet, Inc.
Index to Audited Financial Statements
Report of Independent Auditors
Statements of Operations for each of the three years in the period ended March
31, 1996
Balance Sheets as of March 31, 1996 and 1995
Statements of Shareholders' Equity for each of the three years in the period
ended March 31, 1996
Statements of Cash Flows for each of the three years in the period ended
March 31, 1996
Notes to Financial Statements
17
<PAGE>
Report of Independent Auditors
The Shareholders and Board of Directors
Sport Chalet, Inc.
We have audited the accompanying balance sheets of Sport Chalet, Inc. as of
March 31, 1996 and 1995, and the related statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended March 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sport Chalet, Inc. at March 31,
1996 and 1995 and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1996, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG
Los Angeles, California
June 4, 1996
18
<PAGE>
Sport Chalet, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year ended March 31
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
Net sales $133,740,747 $134,734,540 $122,240,915
Cost of goods sold 90,389,348 88,774,812 81,661,114
----------------------------------------------------
Gross profit 43,351,399 45,959,728 40,579,801
Selling, general and administrative expenses (Note 4) 44,367,566 44,520,185 39,832,195
----------------------------------------------------
(Loss) income from operations (1,016,167) 1,439,543 747,606
Interest expense 1,223,656 893,962 735,733
----------------------------------------------------
(Loss) income before taxes (2,239,823) 545,581 11,873
Income tax (benefit) provision (Note 5) (880,000) 254,000 23,000
----------------------------------------------------
Net (loss) income $ (1,359,823) $ 291,581 $ (11,127)
====================================================
(Loss) earnings per share $ (.21) $ .04 $ .00
====================================================
Weighted average number of common shares
outstanding 6,500,000 6,500,000 6,500,000
====================================================
</TABLE>
See accompanying notes.
19
<PAGE>
Sport Chalet, Inc.
Balance Sheets
<TABLE>
<CAPTION>
March 31
ASSETS 1996 1995
-------------------------
<S> <C> <C>
Current assets:
Cash ........................................................... $ 768,562 $ 492,303
Accounts receivable, less allowance of $28,000 in 1996 and
$13,000 in 1995 ........................................... 961,875 575,151
Merchandise inventories (Note 3) ............................... 33,069,322 36,150,256
Prepaid expenses and other current assets ...................... 367,412 833,568
Note receivable ................................................ 212,710
Deferred income taxes (Note 5) ................................. 678,523 902,966
Refundable income taxes ........................................ 285,511 389,433
-------------------------
Total current assets ................................................ 36,343,915 39,343,677
Furniture, equipment and leasehold improvements:
Furniture, fixtures and office equipment ....................... 12,151,631 11,241,150
Rental equipment ............................................... 2,379,805 2,530,320
Vehicles ....................................................... 617,822 688,403
Leasehold improvements ......................................... 8,649,990 7,813,904
-------------------------
23,799,248 22,273,777
Less allowance for depreciation and amortization ............... 11,144,652 10,119,263
-------------------------
12,654,596 12,154,514
Deferred income taxes (Note 5) ...................................... 442,381
Deposits ............................................................ 66,730 66,730
-------------------------
Total assets ........................................................ $49,507,622 $51,564,921
=========================
Liabilities and shareholders' equity Current liabilities:
Current portion of loans payable to bank (Note 3) .............. $10,307,560 $ 8,360,596
Accounts payable ............................................... 9,895,655 11,522,154
Salaries and wages payable ..................................... 1,850,789 2,154,195
Other accrued expenses ......................................... 2,999,617 2,323,205
Amounts due to Principal Shareholder (Note 4) .................. 50,312 67,987
-------------------------
Total current liabilities ........................................... 25,103,933 24,428,137
Deferred income taxes (Note 5) ...................................... 401,058
Loans payable to bank, less current portion (Note 3) ................ 972,214
Commitments and contingencies (Note 4)
Shareholders' equity (Note 2):
Preferred stock, $.01 par value:
Authorized shares - 2,000,000
Issued and outstanding shares - none
Common stock, $.01 par value:
Authorized Shares - 15,000,000
Issued and outstanding shares - 6,500,000 .................. 65,000 65,000
Additional paid-in capital ..................................... 19,900,052 19,900,052
Retained earnings .............................................. 4,438,637 5,798,460
-------------------------
Total shareholders' equity .......................................... 24,403,689 25,763,512
-------------------------
Total liabilities and shareholders' equity .......................... $49,507,622 $51,564,921
=========================
</TABLE>
See accompanying notes
20
<PAGE>
Sport Chalet, Inc.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Retained
Shares Amount Paid-in Capital Earnings Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1993 6,500,000 $ 65,000 $ 19,900,052 $ 5,518,006 $ 25,483,058
Net loss for 1994 ............... (11,127) (11,127)
-------------------------------------------------------------------
Balance at March 31, 1994 6,500,000 65,000 19,900,052 5,506,879 25,471,931
Net income for 1995 ............. 291,581 291,581
-------------------------------------------------------------------
Balance at March 31, 1995 6,500,000 65,000 19,900,052 5,798,460 25,763,512
Net loss for 1996 ............... (1,359,823) (1,359,823)
-------------------------------------------------------------------
Balance at March 31, 1996 .......... 6,500,000 $65,000 $19,900,052 $ 4,438,637 $ 24,403,689
===================================================================
</TABLE>
See accompanying notes.
21
<PAGE>
Sport Chalet, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended March 31
-----------------------------------------------
1996 1995 1994
-----------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net (loss) income ...................................... $ (1,359,823) $ 291,581 $ (11,127)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities: .........
Depreciation and amortization ...................... 2,732,865 2,518,414 2,259,368
Write-off of equipment ............................. 627,783 38,133 22,588
Deferred income taxes .............................. (618,996) (175,762) (307,375)
Deposits ........................................... (6,638)
Changes in operating assets and liabilities:
Accounts receivable .............................. (386,724) (159,415) (119,727)
Merchandise inventories .......................... 3,080,934 (6,237,047) 3,641,942
Prepaid expenses and other current assets ........ 466,156 89,037 (167,388)
Note receivable .................................. (212,710)
Refundable income taxes .......................... 103,922 (238,665) (150,768)
Accounts payable ................................. (1,626,499) 1,854,171 716,444
Salaries and wages payable ....................... (303,406) 426,922 (351,800)
Other accrued expenses ........................... 676,412 846,865 313,876
Income taxes payable ............................. (1,712,015)
Amounts due to Principal Shareholder ............. (17,675) (104,294) 51,226
-----------------------------------------------
Net cash provided by (used in) operating activities ..... 3,162,239 (850,060) 4,178,606
INVESTING ACTIVITIES
Purchases of furniture, equipment and leasehold
improvements ................................... (3,860,730) (3,313,934) (4,278,516)
-----------------------------------------------
Net cash used in investing activities .............. (3,860,730) (3,313,934) (4,278,516)
FINANCING ACTIVITIES
Proceeds from bank and other borrowings ............ 47,435,883 39,001,374 15,453,000
Repayments of bank and other borrowings ............ (46,461,133) (34,585,230) (15,386,334)
-----------------------------------------------
Net cash provided by financing activities .......... 974,750 4,416,144 66,666
-----------------------------------------------
Increase (decrease) in cash ............................. 276,259 252,150 (33,244)
Cash at beginning of year ............................... 492,303 240,153 273,397
-----------------------------------------------
Cash at end of year ..................................... $ 768,562 $ 492,303 $ 240,153
===============================================
Cash paid (refunded) during the year for:
Income taxes ....................................... $ (369,190) $ 665,489 $ 2,193,158
Interest ........................................... 1,234,938 832,415 731,295
</TABLE>
See accompanying notes.
22
<PAGE>
Sport Chalet, Inc.
Notes to Financial Statements
1. Description of Business
Sport Chalet, Inc. (the Company) is an operator of full service, specialty
sporting goods superstores in Southern California. As of March 31, 1996, the
Company had 18 stores, eight of which are located in Los Angeles County, four in
Orange County, three in San Diego County, two in San Bernardino County, and one
in Ventura County.
The Chairman of the Board (Principal Shareholder) owned approximately 72% of the
Company's outstanding common stock at March 31, 1996.
2. Summary of Significant Accounting Policies
Merchandise Inventories
Merchandise inventories are stated at the lower of cost (first-in, first-out
determined by the retail method of accounting) or market and consist principally
of merchandise held for resale. The Company considers cost to include the direct
cost of merchandise, plus internal costs associated with merchandise
procurement, storage, handling and distribution.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment, and leasehold improvements are stated on the basis of
cost. Depreciation of furniture and equipment is computed primarily on the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized on the straight-line method over the life of the
asset. The estimated useful lives of the assets are as follows:
Furniture, fixtures and office equipment 5-7 years
Rental equipment 3 years
Vehicles 5 years
Leasehold improvements 15 years
Pre-opening Costs
Non-capital expenditures incurred prior to the opening of a new store are
charged to operations as incurred.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense amounted to
$2,790,643, $3,394,194 and $3,101,977 for the years ending March 31, 1996, 1995
and 1994, respectively.
23
<PAGE>
Sport Chalet, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company uses the liability method of accounting for income taxes.
Earnings Per Share
Earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during each period. Stock
options are not included as they do not have a dilutive effect.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Stock-Based Compensation
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 establishes a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain pro
forma disclosures are made. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. The Company intends to adopt the provisions for pro
forma disclosure requirements of SFAS 123 in fiscal 1997.
24
<PAGE>
Sport Chalet, Inc.
Notes to Financial Statements (continued)
3. Loans Payable to Bank
Loans payable to bank consist of the following:
<TABLE>
<CAPTION>
March 31
1996 1995
-------------------------------
<S> <C> <C>
Revolving line of credit, interest at prime plus 1/8%
(8 3/8% at March 31, 1996), due June 1, 1996 ................. $ 9,607,566 $ 7,749,480
Two term loans with interest at 1/2% above prime (9 1/2%
at March 31, 1996), principal payments of $27,778 due
monthly through December 1, 1996 and June 1, 1998 ............ 699,994 1,583,330
-------------------------------
10,307,560 9,332,810
Less current portion ........................................... 10,307,560 8,360,596
-------------------------------
$ - $ 972,214
===============================
</TABLE>
The Company obtained a two year credit facility from BankAmerica Business
Credit, Inc. on May 14, 1996, which provides for advances up to $20 million less
the amount of any outstanding draws up to a maximum of $2.5 million in
authorized letters of credit. Maximum borrowings generally may not exceed 50% of
the value of eligible inventory, as defined, and may also be reduced under
certain circumstances to reflect reserves or other adjustments. Interest shall
accrue at prime plus 1/2% or at 2-3/4% over the Lender's LIBOR rate, at the
Company's option. Proceeds from this loan were used to extinguish all
obligations to the former lender, Wells Fargo Bank NA, for amounts outstanding
under the revolving line of credit and two term loans discussed above. The
primary covenants in the new agreement require the Company to maintain certain
minimum levels of net worth and cash flow coverage, as well as restrict capital
expenditures, calculated on a monthly, quarterly and annual basis, respectively.
This loan is secured by all of the Company's non-real estate assets.
During fiscal 1996, the Company violated the financial covenants of its Wells
Fargo Bank agreement. At December 31, 1995, the bank waived the violation and
the new facility made it unnecessary to obtain a waiver at March 31, 1996. The
Company's previous bank agreement provided for a revolving line of credit that
permitted the Company to borrow from up to $17 million to $30 million based on
the Company's projected seasonal needs at an interest rate of prime plus 1/8%.
In addition, the agreement provided for term loans for the purpose of financing
the opening of new stores. All term loans were paid off with the initial
proceeds from the new facility described above.
At March 31, 1996, the Company has $137,147 of letters of credit outstanding.
The new agreement provides for letters of credit up to $2,500,000.
The weighted average interest rates on short-term borrowings were 6.71%, 8.39%
and 6.38% for the years ending March 31, 1996, 1995 and 1994, respectively.
25
<PAGE>
Sport Chalet, Inc.
Notes to Financial Statements (continued)
4. Leases
The Company leases all buildings (including four from the Company's Principal
Shareholder) }nder certain noncancelable operating lease agreements. Rentals of
the retail locations in most instances require the payment of contingent rentals
based on a percentage of sales in excess of minimum rental payment requirements.
Most leases contain renewal options of five years and certain leases provide for
various rate increases over the lease term.
Future minimum payments, by year and in the aggregate, under those leases with
terms of one year or more, consist of the following at March 31, 1996:
<TABLE>
<S> <C>
1997 ......................... $ 7,047,840
1998 ......................... 6,982,706
1999 ......................... 6,964,913
2000 ......................... 6,637,271
2001 ......................... 4,947,456
Thereafter ................... 42,499,762
-----------
$75,079,948
===========
</TABLE>
Total rent expense amounted to $10,132,188, $9,668,068 and $8,459,896 for the
years ended March 31, 1996, 1995 and 1994, respectively, of which, $1,413,120,
$1,616,438 and $1,671,573, respectively, was paid on the leases with the
Principal Shareholder. Also, total rent expense includes contingent rentals
calculated as a percentage of gross sales over certain base amounts of $567,165,
$981,420 and $975,211 for the years ended March 31, 1996, 1995 and 1994,
respectively. Included in the accompanying balance sheets are amounts due to the
Principal Shareholder for accrued rents of $50,312 at March 31, 1996 and $67,987
at March 31, 1995.
5. Income Taxes
The (benefit) provision for income taxes for the years ended March 31, 1996,
1995 and 1994, consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
Federal:
Current .................. $(200,000) $ 232,000 $ 229,000
Deferred ............... (558,000) (39,000) (213,000)
----------------------------------------------
(758,000) 193,000 16,000
State:
Current ................ 69,000 101,300
Deferred ............... (122,000) (8,000) (94,300)
----------------------------------------------
(122,000) 61,000 7,000
----------------------------------------------
$(880,000) $ 254,000 $ 23,000
==============================================
</TABLE>
26
<PAGE>
Sport Chalet, Inc.
Notes to Financial Statements (continued)
5. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of March 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------
Current Non-current Current Non-current
<S> <C> <C> <C> <C>
-------------------------------------------------------
Deferred tax liabilities:
Tax over book depreciation .......... $(268,502) $ $(401,058)
Other .................................. (42,774)
-------------------------------------------------------
Total deferred tax liabilities ......... (311,276) (401,058)
Deferred tax assets:
Uniform cost capitalization ......... 151,694 589,312
Markdown reserve .................... 247,676
Accrued vacation ....................... 279,153 265,301
Tax effect of NOL carryforward ...... 486,787
AMT carryforward .................... 266,870
Other ............................... 48,353
-------------------------------------------------------
Total deferred tax assets .............. 678,523 753,657 902,966
-------------------------------------------------------
Total deferred tax asset (liability) ... $678,523 $442,381 $902,966 $(401,058)
=======================================================
</TABLE>
As of March 31, 1996, the Company had approximately $1,200,000 available in
operating loss carryforwards for federal income tax purposes which expire in
2011.
A reconciliation of the provision for income taxes for the years ended March 31,
1996, 1995 and 1994 with the amount computed using the federal statutory rate
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Statutory rate 34% applied to (loss) income before taxes $(762,000) $ 186,000 $ 4,000
State taxes, net of federal tax effect ................. (81,000) 40,000 5,000
Other, net ............................................. (37,000) 28,000 14,000
----------------------------------------
$(880,000) $ 254,000 $ 23,000
========================================
</TABLE>
6. Stock Option and Award Plans
Stock Option Plan
The Company has an Incentive Award Plan (the 1992 Plan) under which stock
options to purchase up to 600,000 shares of the Company's common stock may be
granted to employees and non-employee directors. The option price per share
shall not be less than fair market value at the date of grant. Options vest over
a five year period and if not exercised, expire ten years from the date of
grant.
At March 31, 1996, there were options outstanding to purchase 242,000 shares of
the Company's common stock at a purchase price ranging from $2.375 to $7.75 per
share.
The 1992 Plan also provides for issuance by the Company of stock appreciation
rights, restricted stock and performance awards (PAs).
27
<PAGE>
Sport Chalet, Inc.
Notes to Financial Statements (continued)
6. Stock Option and Award Plans (continued)
Stock Appreciation Rights
In April 1990, the Company adopted a stock appreciation rights plan (the 1990
Plan) for key employees. The stock appreciation rights (SARs) entitle the holder
on exercise to receive cash in an amount equal to .11% (.0011) of three times
the increase in the aggregate book value of the Company from the grant date. The
value of a right is 10% of the book value of one share of common stock of the
Company as of the valuation date, based on 90 shares outstanding (the number of
shares of common stock outstanding immediately prior to the reincorporation).
During the years ended March 31, 1991 and 1992, 14 and 8 SARs were granted with
an aggregate value which was paid out during fiscal 1996 of $178,131 and
$82,578, respectively. Pursuant to the terms of the 1992 Plan, the SARs granted
under the 1990 Plan were converted into PAs with similar terms and conditions,
and the 1990 Plan was terminated.
7. Quarterly Results of Operations (Unaudited)
A summary of the unaudited quarterly results of operations follows (dollar
amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1996
Net sales $ 27,328 $ 30,913 $ 39,344 $ 36,156
Gross profit 9,782 9,940 14,269 9,360
Income (loss) from operations (455) (1,000) 2,102 (1,663)
Net income (loss) (462) (779) 1,024 (1,143)
Earnings (loss) per share (.07) (.12) .16 (.18)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------
Fiscal 1995
Net sales $ 25,386 $ 29,559 $ 44,077 $ 35,713
Gross profit 9,133 10,564 16,839 9,424
Income (loss) from operations (424) 288 3,739 (2,163)
Net income (loss) (343) 51 2,066 (1,482)
Earnings (loss) per share (.05) .01 .32 (.24)
</TABLE>
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, on June 28, 1996.
SPORT CHALET, INC.
(Registrant)
By: /s/ NORBERT J. OLBERZ
----------------------------------------------
Norbert J. Olberz, Chairman, Interim President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated above.
Signature
PRINCIPAL EXECUTIVE OFFICER DIRECTORS
/s/ NORBERT J. OLBERZ /s/ ERIC S. OLBERZ
- ------------------------------ ------------------------------
Norbert J. Olberz Eric S. Olberz, Director
Chairman, Interim President
and Chief Executive Officer
/s/ JOHN R. ATTWOOD
------------------------------
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER John R. Attwood, Director
/S/ HOWARD K. KAMINSKY
- ------------------------------
Howard K. Kaminsky
Chief Financial Officer, /s/ KENNETH OLSEN
Treasurer and Secretary ------------------------------
Kenneth Olsen, Director
29
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ------
3.1 Certificate of Incorporation of Sport Chalet, Inc. (1)
3.2 Bylaws of Sport Chalet, Inc. (1)
4.1 Form of Certificate for the Common Stock (1)
10.1 Credit Agreement, dated August 1, 1992, between the Company and
Wells Fargo Bank. (2)
10.2 Letter dated October 8, 1992 by Wells Fargo Bank. (2)
10.3 1992 Incentive Award Plan of the Company. (2)
10.4 Form of Nonemployee Director Stock Option Incentive Award
Agreement. (2)
10.5 Form of Key Employee Stock Option Incentive Award Agreement. (2)
10.6 Tax Indemnity Agreement, dated October 8, 1992, between the
Company and Norbert J. Olberz (2)
10.7 Form of Director and Officer Indemnification Agreement. (2)
10.8 Form of Employee Stock Option Incentive Award Agreement. (3)
10.9 Credit Agreement Between the Company and Wells Fargo Bank dated
December 1, 1992.) (4)
10.10 Camp 7 Manufacturing Operations Lease dated March 1, 1993, between
the Company and Eric Steven Olberz. (5)
10.11 First through Fourth Amendment to Credit Agreement between the
Company and Wells Fargo Bank dated December 1, 1992. (6)
10.12 Credit Agreement between the Company and Wells Fargo Bank dated
June 1, 1994 (7)
10.13 Huntington Beach store lease, dated August 25, 1994 between the
Company and Huntington Beach Properties, Inc., a California
Corporation. (8)
10.14 Letter Regarding Resignation of Samuel G. Allen (9)
10.15 Letter Regarding Resignation of Joseph H. Coulombe (10)
10.16 Severance and General Release Agreement with Samuel G. Allen (10)
10.17 Employment Contract for Joseph H. Coulombe (10)
10.18 Employment Contract for Kim D. Robbins (10)
10.19 Agreement for sale of Sport Chalet Manufacturing, dated June 23,
1995 by and among the Company, Eric S. Olberz and Camp 7, a
California corporation. (10)
10.20 Security Agreement [Debtor in Possession] dated June 23,1995 and
executed by Camp 7, Inc., a California corporation, as Borrower,
on behalf of the Company, as Secured Party. (10)
10.21 Continuing Guaranty dated June 23, 1995 executed by Eric S.
Olberz, as Guarantor, on behalf of the Company, as lender. (10)
10.22 Promissory Note dated June 23, 1995 executed by Camp 7, Inc., a
California corporation, as Maker on behalf of the Company. (10)
E-1
<PAGE>
<TABLE>
<S> <C> <C>
10.23 Agreement of Assignment and Assumption of Lease and Consent of
Landlord, dated June 23, 1995, by and among the Company, as
Assignor, Camp 7, Inc., a California corporation, as Assignee and
Eric S. Olberz, as Landlord. (10)
10.24 Pledge Agreement dated June 23, 1995, by and between Eric S.
Olberz, as Pledgor, and the Company, as Pledgee. (10)
10.25 Licensing Agreement dated June 23, 1995, by and between the
Company as Licensee, and Camp 7, Inc., a California corporation,
as Licensor (10)
10.26 Indemnification Agreement dated June 23, 1995, by Eric S. Olberz,
as Indemnitor, on behalf of the Company, as Indemnity [if
required]. (10)
10.27 Severance and General Release Agreement with Eric S. Olberz. (10)
10.28 Pomona Warehouse lease, dated August 10, 1995, between the company
and Montclair Warehouse, Inc., a California Corporation. (11)
10.29 Waiver of Loan Covenant by Bank dated February 13, 1996. (12)
10.30 Loan and Security Agreement dated as of May 14, 1996, between the
Company and BankAmerica Business Credit, Inc., together with
schedules thereto. E-3 - E-71
10.31 Letter of Credit Financing Agreement Supplement to Loan and
Security Agreement dated as of May 14,1996 between the Company and
BankAmerica Business Credit, Inc. E-72 - E-74
10.32 Side Letter, dated as of May 14, 1996, between the Company and
BankAmerica Business Credit, Inc., respecting the Aggregate Rent
Reserve. E-75 - E-76
23 Consent of Independent Auditors E-77
27 Article 5 - Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the respective exhibit to the Company's
Registration Statement on Form S-1 (Registration Statement No. 33-53120).
(2) Incorporated by reference to Exhibits 10.17 through 10.23, inclusive, to
the Company's Registration Statement on Form S-1 (Registration statement
and No. 33-53120).
(3) Incorporated by reference to Exhibit 4.5 to the Company's Registration
Statement on Form S-8 (Registration Statement No. 33-61612.)
(4) Incorporated by reference to Exhibit 10.1 to the Company's quarterly
report, on Form 10-Q, for the quarter ending September 30, 1992.
(5) Incorporated by reference to Registrant's Report on Form 10-K filed with
the Securities and Exchange Commission on June 28, 1993.
(6) Incorporated by reference to Exhibit 10.1, 10.2, 10.3 and 10.4 to the
Company's quarterly report, on Form 10-Q, for the quarter ending December
31, 1993.
(7) Incorporated by reference to the Company's Form 10-K filed with the
Commission on June 28, 1994.
(8) Incorporated by reference to Exhibit 10.1 to the Company's quarterly
report, on Form 10-Q, for the quarter ending September 30, 1994.
(9) Incorporated by reference to Exhibit 10.1 to the Company's quarterly
report, on Form 10-Q, for the quarter ending December 31, 1994.
(10) Incorporated by reference to the Company's Form 10-K filed with the
Commission on June 28, 1995.
(11) Incorporated by reference to Exhibit 10.1 to the Company's quarterly
report, on Form 10-Q, for the quarter ending September 30, 1995.
(12) Incorporated by reference to Exhibit 10.1 to the Company's quarterly
report, on Form 10-Q, for the quarter ending December 31, 1995.
E-2
<PAGE>
EXHIBIT 10.30
LOAN AND SECURITY AGREEMENT
Dated as of May 14, 1996
Among
BANKAMERICA BUSINESS CREDIT, INC.
as the Lender
and
SPORT CHALET, INC.
as the Borrower
E-3
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. DEFINITIONS............................... 1
Account................................... 1
Account Debtor............................ 1
Adjusted Net Earnings from Operations..... 1
Adjusted Tangible Assets.................. 1
Adjusted Tangible Net Worth............... 2
Affiliate................................. 2
Anniversary Date.......................... 2
Assigned Contracts........................ 2
Availability.............................. 2
Bank...................................... 3
Borrowing................................. 3
Business Day.............................. 3
Capital Adequacy Regulation............... 3
Capital Expenditures...................... 3
Capital Lease............................. 4
Closing Date.............................. 4
Code...................................... 4
Collateral................................ 4
Contaminant............................... 4
Current Assets............................ 4
Current Liabilities....................... 4
Debt...................................... 4
Distribution.............................. 5
DOL....................................... 5
Eligible Inventory........................ 5
Environmental Compliance Reserve.......... 5
Environmental Laws........................ 5
Environmental Lien........................ 6
Equipment................................. 6
ERISA..................................... 6
ERISA Affiliate........................... 6
ERISA Event............................... 6
Event..................................... 7
Event of Default.......................... 7
Financial Statements...................... 7
Fiscal Year............................... 7
Funding Date.............................. 7
GAAP...................................... 7
Guaranty.................................. 7
</TABLE>
i
E-4
<PAGE>
<TABLE>
<S> <C>
Increased Advance Rate.................... 7
Intercompany Accounts..................... 7
Interest Period........................... 7
Inventory................................. 8
IRS....................................... 8
Latest Projections........................ 8
Letter of Credit Agreement................ 8
Letter of Credit.......................... 8
LIBOR Interest Rate Determination Date.... 8
LIBOR Rate................................ 8
Eurodollar Reserve Percentage............. 9
LIBOR..................................... 9
LIBOR Rate Loans.......................... 9
LIBOR Revolving Loan...................... 9
Lien...................................... 9
Loans..................................... 9
Loan Documents............................ 9
Multi-employer Plan....................... 10
1992 Agreement............................ 10
Normal Advance Rate....................... 10
Notice of Borrowing....................... 10
Notice of Conversion/Continuation......... 10
Obligations............................... 10
Other Taxes............................... 10
Participating Lender...................... 10
Payment Account........................... 10
PBGC...................................... 10
Pension Plan.............................. 11
Permitted Liens........................... 11
Permitted Rentals......................... 11
Person.................................... 11
Plan...................................... 11
Premises.................................. 11
Proceeds.................................. 12
Property.................................. 12
Proprietary Rights........................ 12
Public Authority.......................... 12
Receivables............................... 12
Reference Rate............................ 13
Reference Rate Loans...................... 13
Reference Rate Revolving Loans............ 13
Release................................... 13
Rent Reserve.............................. 13
</TABLE>
ii
E-5
<PAGE>
<TABLE>
<S> <C>
Reportable Event......................... 13
Requirement of Law....................... 13
Restricted Investment.................... 13
Reversions............................... 14
Revolving Loans.......................... 14
Security Interest........................ 14
Solvent.................................. 14
Subsidiary............................... 14
Taxes.................................... 14
Tax Indemnification Agreement............ 14
Total Facility........................... 14
UCC...................................... 14
Unused Line Fee.......................... 14
Working Capital.......................... 15
Accounting Terms......................... 15
Other Terms.............................. 15
2. LOANS AND LETTERS OF CREDIT.............. 15
2.1 Total Facility..................... 15
2.2 Revolving Loans.................... 15
2.3 Letters of Credit.................. 16
3. INTEREST AND OTHER CHARGES............... 17
3.1 Interest........................... 17
3.2 Conversion and Continuation
Elections........................ 18
3.3 Maximum Interest Rate.............. 19
3.4 Capital Adequacy................... 20
4. PAYMENTS AND PREPAYMENTS................. 20
4.1 Revolving Loans.................... 20
4.2 Place and Form of Payments;
Extension of Time................ 20
4.3 Application and Reversal of
Payments......................... 20
4.4 INDEMNITY FOR RETURNED PAYMENTS.... 21
5. LENDER'S BOOKS AND RECORDS; MONTHLY
STATEMENTS............................. 21
6. TAXES, YIELD PROTECTION AND ILLEGALITY... 21
6.1 Taxes.............................. 21
6.2 Illegality......................... 22
6.3 Increased Costs and Reduction
of Return........................ 23
6.4 Funding Losses..................... 23
6.5 Inability to Determine Rates....... 24
6.6 Survival........................... 24
</TABLE>
iii
E-6
<PAGE>
<TABLE>
<S> <C>
7. COLLATERAL............................... 24
7.1 Grant of Security Interest......... 24
7.2 Perfection and Protection of
Security Interest................ 25
7.3 Location of Collateral............. 26
7.4 Title to, Liens on, and Sale
and Use of Collateral............ 26
7.5 Appraisals......................... 26
7.6 Access and Examination............. 27
7.7 Insurance.......................... 27
7.8 Collateral Reporting............... 28
7.9 Accounts........................... 28
7.10 Collection of Accounts; Payments... 29
7.11 Inventory.......................... 29
7.12 Equipment.......................... 30
7.13 Assigned Contracts................. 30
7.14 Documents, Instruments, and
Chattel Paper.................... 31
7.15 Right to Cure...................... 31
7.16 Power of Attorney.................. 31
7.17 Lender's Rights, Duties, and
Liabilities...................... 32
8. BOOKS AND RECORDS; FINANCIAL INFORMATION;
NOTICES................................ 32
8.1 Books and Records.................. 32
8.2 Financial Information.............. 33
8.3 Notices to Lender.................. 35
9. GENERAL WARRANTIES AND REPRESENTATIONS... 36
9.1 Authorization, Validity, and
Enforceability of this Agreement
and the Loan Documents........... 36
9.2 Validity and Priority of Security
Interest......................... 37
9.3 Organization and Qualification..... 37
9.4 Corporate Name; Prior Transactions. 37
9.5 Subsidiaries and Affiliates........ 37
9.6 Financial Statements and
Projections...................... 37
9.7 Capitalization..................... 38
9.8 Solvency........................... 38
9.9 Debt............................... 38
9.10 Distributions...................... 38
9.11 Title to Property.................. 38
9.12 Adequate Assets.................... 38
9.13 Real Property; Leases.............. 38
9.14 Proprietary Rights Collateral...... 38
9.15 Trade Names and Terms of Sale...... 39
9.16 Litigation......................... 39
9.17 Restrictive Agreements............. 39
</TABLE>
iv
E-7
<PAGE>
<TABLE>
<S> <C>
9.18 Labor Disputes.................... 39
9.19 Environmental Laws................ 39
9.20 No Violation of Law............... 41
9.21 No Default........................ 41
9.22 ERISA Compliance.................. 41
9.23 Taxes............................. 42
9.24 Use of Proceeds................... 42
9.25 Private Offerings................. 42
9.26 Broker's Fees..................... 42
9.27 No Material Adverse Change........ 42
9.28 Disclosure........................ 42
10. AFFIRMATIVE AND NEGATIVE COVENANTS....... 43
10.1 Taxes and Other Obligations....... 43
10.2 Corporate Existence and Good
Standing........................ 43
10.3 Compliance with Law and
Agreements...................... 43
10.4 Maintenance of Property and
Insurance....................... 43
10.5 Environmental Laws................ 43
10.6 ERISA............................. 44
10.7 Mergers, Consolidations,
Acquisitions, or Sales.......... 44
10.8 Distributions; Capital Changes.... 44
10.9 Transactions Affecting Collateral
or Obligations.................. 44
10.10 Guaranties........................ 44
10.11 Debt.............................. 45
10.12 Prepayment........................ 45
10.13 Transactions with Affiliates...... 45
10.14 Business Conducted................ 45
10.15 Liens............................. 45
10.16 Sale and Leaseback Transactions... 45
10.17 New Subsidiaries.................. 45
10.18 Restricted Investments............ 45
10.19 Capital Expenditures.............. 45
10.20 Operating Lease Obligations....... 46
10.21 Minimum Interest Coverage......... 46
10.22 Adjusted Tangible Net Worth....... 47
10.23 Further Assurances................ 49
11. CLOSING; CONDITIONS TO CLOSING........... 49
11.1 Conditions Precedent to Making
of Loans on the Closing Date.... 49
11.2 Conditions Precedent to Each
Loan............................ 50
12. DEFAULT; REMEDIES........................ 51
12.1 Events of Default................. 51
</TABLE>
v
E-8
<PAGE>
<TABLE>
<S> <C>
13. REMEDIES................................. 53
14. TERM AND TERMINATION..................... 54
15. MISCELLANEOUS............................ 55
15.1 Cumulative Remedies; No Prior
Recourse to Collateral.......... 55
15.2 No Implied Waivers................ 55
15.3 Severability...................... 55
15.4 Governing Law..................... 55
15.5 Consent to Jurisdiction and
Venue; Service of Process....... 55
15.6 Waiver of Jury Trial.............. 56
15.7 Arbitration; Reference Proceeding. 56
15.8 Survival of Representations and
Warranties...................... 57
15.9 Other Security and Guaranties..... 57
15.10 Fees and Expenses................. 57
15.11 Notices........................... 58
15.12 Indemnification................... 59
15.13 Waiver of Notices................. 59
15.14 Binding Effect; Assignment;
Participations.................. 60
15.15 Modification...................... 60
15.16 Counterparts...................... 60
15.17 Captions.......................... 61
15.18 Right of Set-Off.................. 61
15.19 Participating Lender's Security
Interests....................... 61
</TABLE>
vi
E-9
<PAGE>
LOAN AND SECURITY AGREEMENT, dated as of May 14, 1996, by and between
BANKAMERICA BUSINESS CREDIT, INC., a Delaware corporation, with offices at Two
North Lake Avenue, Suite 400, Pasadena, California 91101 (the "Lender") and
------
SPORT CHALET, INC., a Delaware corporation, with offices at 920 Foothill
Boulevard, La Canada, California 91011 (the "Borrower").
--------
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Borrower has requested the Lender make available to the
Borrower a revolving line of credit for loans and letters of credit in an amount
not to exceed $20,000,000, which extensions of credit the Borrower will use for
its working capital needs and general business purposes as permitted hereunder.
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth in this Agreement, and for good and valuable consideration,
the receipt of which is hereby acknowledged, the Borrower and the Lender hereby
agree as follows:
1. DEFINITIONS. As used herein:
-----------
"Account" means the Borrower's right to payment for a sale or lease
-------
and delivery of goods or rendition of services.
"Account Debtor" means each Person obligated in any way on or in
--------------
connection with an Account.
"Adjusted Net Earnings from Operations" means, with respect to any
-------------------------------------
fiscal period of the Borrower, the Borrower's net income after provision for
income taxes for such fiscal period, as determined in accordance with GAAP and
reported on the Financial Statements for such period, less any and all of the
following included in such net income: (a) gain or loss arising from the sale
of capital asset; (b) gain arising from any write-up in the book value of any
asset; (c) earnings of any corporation, substantially all the assets of which
have been acquired by the Borrower in any manner, to the extent realized by such
other corporation prior to the date of acquisition; (d) earnings of any business
entity in which the Borrower has an ownership interest unless (and only to the
extent) such earnings shall actually have been received by the Borrower in the
form of cash distributions; (e) earnings of any Person to which assets of the
Borrower shall have been sold, transferred or disposed of, or into which the
Borrower shall have been merged, or which has been a party with the Borrower to
any consolidation or other form of reorganization, prior to the date of such
transaction; (f) gain arising from the acquisition of debt or equity securities
of the Borrower or from cancellation or forgiveness of Debt; and (g) gain
arising from extraordinary items, as determined in accordance with GAAP, or from
any other non-recurring transaction.
1
E-10
<PAGE>
"Adjusted Tangible Assets" means all of the Borrower's assets except:
------------------------
(a) deferred assets, other than prepaid insurance and prepaid taxes; (b)
patents, copyrights, trademarks, trade names, franchises, goodwill, and other
similar intangibles; (c) Restricted Investments; (d) unamortized debt discount
and expense; (e) assets of the Borrower constituting Intercompany Accounts; and
(f) fixed assets to the extent of any write-up in the book value thereof
resulting from a revaluation effective after the Closing Date.
"Adjusted Tangible Net Worth" means, at any date: (a) the book value
---------------------------
(after deducting related depreciation, obsolescence, amortization, valuation,
and other proper reserves as determined in accordance with GAAP) at which the
Adjusted Tangible Assets would be shown on a balance sheet of the Borrower at
such date prepared in accordance with GAAP less (b) the amount at which the
----
Borrower's liabilities would be shown on such balance sheet, including as
liabilities all reserves for contingencies and other potential liabilities not
already considered in (a) above which would be shown on such balance sheet or
disclosed in the notes thereto.
"Affiliate" means: (a) a Person which, directly or indirectly,
---------
controls, is controlled by or is under common control with, the Borrower; (b) a
Person which beneficially owns or holds, directly or indirectly, five percent or
more of any class of voting stock of the Borrower; or (c) a Person in which five
percent of any class of the voting stock is beneficially owned or held, directly
or indirectly, by the Borrower. The term control (including the terms
"controlled by" and "under common control with"), means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of the Person in question.
"Anniversary Date" means each anniversary of the Closing Date.
----------------
"Assigned Contracts" means, collectively, all of the Borrower's rights
------------------
and remedies under, and all moneys and claims for money due or to become due to
the Borrower under any material contracts and any and all amendments,
supplements, extensions, and renewals thereof including, without limitation, all
rights and claims of the Borrower now or hereafter existing: (a) under any
insurance, indemnities, warranties, and guarantees provided for or arising out
of or in connection with the foregoing agreements; (b) for any damages arising
out of or for breach default under or in connection with the foregoing
agreements; (c) to all other amounts from time to time paid or payable under or
in connection with the foregoing agreements; or (d) to exercise or enforce any
and all covenants, remedies, powers and privileges thereunder.
"Availability" means at any time the lesser of:
------------
(a) The amount of Twenty Million Dollars ($20,000,000) (the
"Maximum Revolving Credit Line") or
- ------------------------------ --
2
E-11
<PAGE>
(b) up to fifty percent (50%) of the value of Eligible Inventory (the
"Normal Advance Rate"); provided, however, that if no Event of Default has
-----------------
occurred and is continuing, Lender will upon Borrower's request, make advances
of up to fifty-five percent (55%) of the value of Eligible Inventory (the
"Increased Advance Rate") subject to the following conditions: (a) the Increased
Advance Rate shall not be in effect for more than 120 days during any Fiscal
Year; (b) the Increased Advance Rate shall not be in effect more than once per
year; and (c) at the end of any period during which the Increased Advance Rate
has been in effect, the Normal Advance Rate must then be in effect for a period
of at least 180 consecutive days before Borrower may again request the Increased
Advance Rate;
provided, however, that at all times Availability shall be reduced by
-------- -------
the sum of:
(i) the unpaid balance of Revolving Loans at that time;
(ii) the aggregate undrawn face amount of all outstanding Letters of
Credit which the Lender has caused to be issued or obtained for the Borrower's
account;
(iii) reserves for accrued interest on the Revolving Loans, the
Environmental Compliance Reserve, the Rent Reserve; and
(iv) all other reserves which the Lender has notified Borrower are
being established and which the Lender in its reasonable discretion deems
necessary or desirable to maintain with respect to the Borrower's account,
including, without limitation, any amounts which the Lender may be obligated to
pay in the future for the account of the Borrower.
"Bank" means Bank of America National Trust and Savings Association in
----
San Francisco, California.
"Borrowing" means a borrowing hereunder consisting of Revolving Loans
---------
made on the same day by the Lenders to the Borrower.
"Business Day" means (a) any day that is not a Saturday, Sunday, or a
------------
day on which banks in San Francisco, California, are required or permitted to be
closed, and (b) with respect to all notices, determinations, fundings and
payments in connection with the LIBOR Rate or LIBOR Rate Loans, any day that is
a Business Day pursuant to clause (a) above and that is also a day on which
trading is carried on by and between banks in the London interbank market.
"Capital Adequacy Regulation" means any guideline, request or
---------------------------
directive of any central bank or other Public Authority, or any other law, rule
or regulation, whether or not having the force of law, in each case, regarding
capital adequacy of any bank or of any corporation controlling a bank.
3
E-12
<PAGE>
"Capital Expenditures" means all payments due (whether or not paid)
--------------------
during a Fiscal Year in respect of the cost of any fixed asset (which shall also
include vehicles and leasehold improvements) or improvement, or replacement,
substitution, or addition thereto, which have a useful life of more than one
year, including, without limitation, those arising in connection with the direct
or indirect acquisition of such assets by way of increased product or service
charges or offset items or in connection with Capital Leases.
"Capital Lease" means any lease of Property by the Borrower that, in
-------------
accordance with GAAP, should be reflected as a liability on the balance sheet of
the Borrower.
"Closing Date" means the date of this Agreement, being the date first
------------
above written.
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Collateral" has the meaning given to such term in Section 7.1
----------
"Contaminant" means any waste, pollutant, hazardous substance, toxic
-----------
substance, hazardous waste, special waste, petroleum or petroleum-derived
substance or waste, asbestos in any form or condition, polychlorinated biphenyls
("PCBs"), or any constituent of any such substance or waste.
"Current Assets" means at any date the amount at which the current
--------------
assets of the Borrower (other than assets constituting Intercompany Accounts)
would be shown on a balance sheet of the Borrower as at such date, prepared in
accordance with GAAP.
"Current Liabilities" means at any date the amount at which the
-------------------
current liabilities of the Borrower would be shown on a balance sheet of the
Borrower as at such date, prepared in accordance with GAAP.
"Debt" means all liabilities, obligations and indebtedness of the
----
Borrower to any Person, of any kind or nature, now or hereafter owing, arising,
due or payable, howsoever evidenced, created, incurred, acquired or owing,
whether primary, secondary, direct, contingent, fixed or otherwise, and
including, without in any way limiting the generality of the foregoing: (a) the
Borrower's liabilities and obligations to trade creditors; (b) all Obligations;
(c) all obligations and liabilities of any Person secured by any Lien on the
Borrower's Property, even though the Borrower shall not have assumed or become
liable for the payment thereof; provided, however, that all such obligations and
-------- -------
liabilities which are limited in recourse to such Property shall be included in
Debt only to the extent of the book value of such Property as would be shown on
a balance sheet of the Borrower prepared in accordance with GAAP; (d) all
obligations or liabilities created or arising under any Capital Lease or
conditional sale or other title retention agreement with respect to Property
used or acquired by the Borrower, even if the rights and remedies of the lessor,
seller or lender thereunder are limited to repossession of such
4
E-13
<PAGE>
Property; provided, however, that all such obligations and liabilities which are
--------- -------
limited in recourse to such Property shall be included in Debt only to the
extent of the book value of such Property as would be shown on a balance sheet
of the Borrower prepared in accordance with GAAP; (e) all accrued pension fund
and other employee benefit plan obligations and liabilities; and (f) all
obligations and liabilities under Guaranties; and (A) deferred taxes.
"Distribution" means, in respect of any corporation: (a) the payment
------------
or making of any dividend or other distribution of Property in respect of
capital stock of such corporation, other than distributions in capital stock of
the same class; or (b) the redemption or other acquisition of any capital stock
of such corporation.
"DOL" means the United States Department of Labor or any successor
---
department or agency.
"Eligible Inventory" means Inventory, valued at the lower cost (on a
------------------
first-in, first-out basis determined by the retail method of accounting) or
market, net of accrued shrinkage reserves, that constitutes first quality new
replacement parts held for sale, new spare parts held for sale, and finished
goods and that: (a) is not, in the Lender's reasonable opinion, slow moving,
team sales (i.e., promotional items), obsolete or unmerchantable; (b) is located
at premises owned or leased by the Borrower or on premises otherwise reasonably
acceptable to the Lender, provided, however, that Inventory located on premises
-------- -------
leased to the Borrower shall not be Eligible Inventory unless either the
Borrower shall have delivered to the Lender a written waiver, duly executed on
behalf of the appropriate landlord and in form and substance acceptable to the
Lender, of all Liens which the landlord for such premises may be entitled to
assert against such Inventory or the Rent Reserve shall have been established as
to the Premises wherein such Inventory is located; (c) upon which the Lender has
a first priority perfected security interest; (d) is not work-in-process,
packaging and shipping materials, supplies, bill-and-hold Inventory, returned or
defective Inventory, Inventory held for lease or rental or Inventory delivered
to the Borrower on consignment; and (e) the Lender, in the exercise of its
reasonable discretion, deems eligible as the basis for Revolving Loans based on
such collateral and credit criteria as the Lender may from time to time
establish. If any Inventory at any time ceases to be Eligible Inventory, such
Inventory shall promptly be excluded from the calculation of Eligible Inventory.
"Environmental Compliance Reserve" means all reserves which the Lender
--------------------------------
from time to time establishes for amounts that are reasonably required to be
expended in order for the Borrower and the Borrower's operations and Property to
comply with Environmental Laws or in order to correct any violation by the
Borrower or the Borrower's operations or Property of Environmental Laws.
"Environmental Laws" means all federal, state and local laws, rules,
------------------
regulations, ordinances, programs, permits, guidance, orders and consent decrees
relating to health, safety, hazardous substances, and environmental matters
applicable to the Borrower's business and
5
E-14
<PAGE>
facilities (whether or not owned by it). Such laws and regulations include but
are not limited to the Resource Conservation and Recovery Act, 42 U.S.C. S 6901
et seq., as amended; the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. S 9601 et seq., as amended; the Toxic Substances
Control Act, 15 U.S.C. S 2601 et seq., as amended; the Clean Water Act, 33
U.S.C. S 466 et seq., as amended; the Clean Air Act, 42 U.S.C. S 7401 et seq.,
as amended; state and federal lien and environmental cleanup programs; and U.S.
Department of Transportation regulations.
"Environmental Lien" means a Lien in favor of any Public Authority for
------------------
(a) any liability under any Environmental Laws, or (b) damages arising from, or
costs incurred by such Governmental Authority in response to, a Release or
threatened Release of a Contaminant into the environment.
"Equipment" means all of the Borrower's now owned and hereafter
---------
acquired machinery, equipment, furniture, furnishings, fixtures (except to the
extent such fixtures constitute real property or are owned by a lessor pursuant
to a lease under which Borrower is the lessee), and other tangible personal
property (except Inventory), including, without limitation, data processing
hardware and software, motor vehicles, aircraft, dies, tools, jigs, and office
equipment, as well as all of such types of property leased by the Borrower and
all of the Borrower's rights and interests with respect thereto under such
leases (including, without limitation, options to purchase); together with all
present and future additions and accessions thereto, replacements therefor,
component and auxiliary parts and supplies used or to be used in connection
therewith, and all substitutes for any of the foregoing, and all manuals,
drawings, instructions, warranties and rights with respect thereto; wherever any
of the foregoing is located.
"ERISA" means the Employee Retirement Income Security Act of 1974., as
-----
amended.
"ERISA Affiliate" means any trade or business (whether or not
---------------
incorporated) under common control with the Borrower within the meaning of
Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for
purposes of provisions relating to Section 412 of the Code).
"ERISA Event" means (a) a Reportable Event with respect to a Pension
-----------
Plan; (b) a withdrawal by the Borrower or any ERISA Affiliate from a Pension
Plan subject to Section 4063 of ERISA during a plan year in which it was a
substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation
of operations which is treated as such a withdrawal under Section 4062(e) of
ERISA; (c) a complete or partial withdrawal by the Borrower or any ERISA
Affiliate from a Multi-employer Plan or notification that a Multi-employer Plan
is in reorganization; (d) the filing of a notice of intent to terminate, the
treatment of a Plan amendment as a termination under Section 4041 or 4041A of
ERISA, or the commencement of proceedings by the PBGC to terminate a Pension
Plan or Multi-employer Plan; (e) an event or condition which might reasonably be
expected to constitute grounds under Section 4042 of
6
E-15
<PAGE>
ERISA for the termination of, or the appointment of a trustee to administer, any
Pension Plan or Multi-employer Plan; or (f) the imposition of any liability
under Title IV of ERISA, other than PBGC premiums due but not delinquent under
Section 4007 of ERISA, upon the Borrower or any ERISA Affiliate.
"Event" means any event or condition which, with notice, the passage
-----
of time, the happening of any other condition or event, or any combination
thereof, would constitute an Event of Default
"Event of Default" has the meaning given to such term in Section 12.1.
----------------
"Financial Statements" means, according to the context in which it is
--------------------
used, the financial statements attached most recently delivered to the Lender
prior to the Closing Date or any financial statements required to be given to
the Lender pursuant to Sections 8.2(a), (b), and (c), or any combination
thereof.
"Fiscal Year" means the Borrower's fiscal year for financial
-----------
accounting purposes. The current Fiscal Year of the Borrower will end on March
31, 1997.
"Funding Date" means the date on which a Borrowing occurs.
------------
"GAAP" means at any particular time generally accepted accounting
----
principles as in effect at such time.
"Guaranty" by any Person means all obligations of such Person which in
--------
any manner directly or indirectly guarantee or assure, or in effect guarantee or
assure, the payment or performance of any indebtedness, dividend or other
obligation of any other Person (the "guaranteed obligations"), or to assure or
in effect assure the holder of the guaranteed obligations against loss in
respect thereof, including, without limitation, any such obligations incurred
through an agreement, contingent or otherwise: (a) to purchase the guaranteed
obligations or any Property constituting security therefor; (b) to advance or
supply funds for the purchase or Payment of the guaranteed obligations or to
maintain a working capital or other balance sheet condition; (c) to lease
Property or to purchase any debt or equity securities or other Property or
services.
"Increased Advance Rate" has the meaning set forth in the definition
----------------------
of Availability.
"Intercompany Accounts" means all assets and liabilities, however
---------------------
arising, which are due to the Borrower from, which are due from the Borrower to,
or which otherwise arise from any transaction by the Borrower with, any
Affiliate.
7
E-16
<PAGE>
"Interest Period" means, as to any LIBOR Rate Loan, the period
---------------
commencing on the Funding Date of such Loan or on the Conversion/Continuation
Date on which the Loan is converted into or continued as a LIBOR Rate Loan, and
ending on the date one, two, or three months thereafter as selected by the
Borrower in its Notice of Borrowing or Notice of Conversion/Continuation;
provided that:
(i) if any Interest Period would otherwise end on a day that is
not a Business Day, that Interest Period shall be extended to the following
Business Day unless the result of such extension would be to carry such
Interest Period into another calendar month, in which event such Interest
Period shall end on the preceding Business Day;
(ii) any Interest Period pertaining to a LIBOR Rate Loan that
begins on the last Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the calendar month at the end
of such Interest Period) shall end on the last Business Day of the calendar
month at the end of such Interest Period; and
(iii) no Interest Period for any Revolving Loan shall extend
beyond the Termination Date.
"Inventory" means all of the Borrower's now owned and hereafter
---------
acquired inventory, goods, merchandise, and other personal property, wherever
located, to be furnished under any contract of service or held for sale or
lease, all raw materials, work-in-process, finished goods, returned goods, and
materials and supplies of any kind, nature or description which are or might be
used or consumed in the Borrower's business or used in connection the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise and such other personal property, and all documents of title or
other documents representing them.
"IRS" means the Internal Revenue Service or any successor agency.
---
"Latest Projections" means: (a) on the Closing Date and thereafter
------------------
until the Lender receives new projections pursuant to Section 8.2(f), the
projections of the Borrower's monthly financial condition, results of
operations, and cash flow for the one -year period ending March 31, 1997,
previously delivered to the Lender, and (b) thereafter, the projections most
recently received by the Lender pursuant to Section 8.2(f).
"Letter of Credit Agreement" has the meaning specified in Section 2.3.
--------------------------
"Letter of Credit" has the meaning specified in Section 2.3.
----------------
"LIBOR Interest Rate Determination Date" means each date of
--------------------------------------
calculating the LIBOR Rate for purposes of determining the interest rate with
respect to an Interest Period. The
8
E-17
<PAGE>
LIBOR Interest Rate Determination Date for any LIBOR Rate Loan shall be the
second Business Day prior to the first day of the related Interest Period for
such LIBOR Rate Loan.
"LIBOR Rate" means, for any Interest Period, with respect to LIBOR
----------
Rate Loans comprising part of the same Borrowing, the rate of interest per annum
(rounded upward to the next 1/1000th of 1.0%) determined as follows:
LIBOR Rate = LIBOR
-------------------------------
1.00 - Eurodollar Reserve Percentage
Where,
"Eurodollar Reserve Percentage" means for any day for any
-----------------------------
Interest Period the maximum reserve percentage (expressed as a
decimal, rounded upward to the next 1/100th of 1.0%) in effect on such
day (whether or not applicable to the Lender) under regulations issued
from time to time by the Federal Reserve Board for determining the
maximum reserve requirement (including any emergency, supplemental or
other marginal reserve requirement) with respect to Eurocurrency
funding (currently referred to as "Eurocurrency liabilities"); and
"LIBOR" means the rate of interest per annum (rounded upward to
-----
the next 1/16th of 1%) notified to the Lender by Bank as the rate of
interest at which United States Dollar deposits in the approximate
amount of the Loan to be made or continued as, or converted into, a
LIBOR Rate Loan and having a maturity comparable to such Interest
Period would be offered by Bank's applicable lending office to major
banks in the London interbank market at their request at approximately
11:00 a.m. (London time) two Business Days prior to the commencement
of such Interest Period.
"LIBOR Rate Loans" means the LIBOR Revolving Loans.
----------------
"LIBOR Revolving Loan" means a Revolving Loan during any period in
--------------------
which it bears interest at the LIBOR Rate.
"Lien" means: (a) any interest in Property securing an obligation
----
owed to, or a claim by, a Person other than the owner of the Property, whether
such interest is based on the common law, statute, or contract, and including
without limitation, a security interest, charge, claim, or lien arising from a
mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit
arrangement, agreement, security agreement, conditional sale or trust receipt or
a lease, consignment or bailment for security purposes; and (b) to the extent
not included under clause (a), any reservation, exception, encroachment,
easement, right-of-way, covenant, condition, restriction, lease or other title
exception or encumbrance affecting Property.
9
E-18
<PAGE>
"Loans" means, collectively, all loans and advances provided for in
-----
Section 2.
"Loan Documents" means this Agreement, the Letter of Credit Agreement
--------------
and all other agreements, instruments, and documents heretofore, now or
hereafter evidencing, securing, guaranteeing or otherwise relating to the
Obligations, the Collateral, the Security Interest, or any other aspect of the
transactions contemplated by this Agreement.
"Multi-employer Plan" means a "multi-employer plan" as defined in
-------------------
Section 4001(a)(3) of ERISA which is or was at any time during the current year
or the immediately preceding six (6) years contributed to by the Borrower or any
ERISA Affiliate.
"1992 Agreement" means that certain 1992 Incentive Award Plan entered
--------------
into by the Borrower on October 8, 1992.
"Normal Advance Rate" has the meaning set forth in the definition of
-------------------
Availability.
"Notice of Borrowing" has the meaning specified in Section 2.2(b).
------------------- --------------
"Notice of Conversion/Continuation" has the meaning specified in
---------------------------------
Section 3.2(b).
- --------------
"Obligations" means all present and future loans, advances,
-----------
liabilities, obligations, covenants, duties, and Debts owing by the Borrower to
the Lender, whether or not arising under this Agreement, whether or not
evidenced by any note, or other instrument or document, whether arising from an
extension of credit, opening of a letter of credit, acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment from others, and any participation by
the Lender in the Borrower's debts owing to others). absolute or contingent, due
or to become due, primary or secondary, as principal or guarantor, and
including, without limitation, all interest, charges, expenses, fees, attorneys.
fees, filing fees and any other sums chargeable to the Borrower hereunder, under
another Loan Document, or under any other agreement or instrument with the
Lender. "Obligations" includes, without limitation, all debts, liabilities, and
-----------
obligations now or hereafter owing from Borrower to Lender under or in
connection with the Letters of Credit and the Letter of Credit Agreement.
"Other Taxes" means any present or future stamp or documentary taxes
-----------
or any other excise or property taxes, charges or similar levies which arise
from any payment made hereunder or from the execution, delivery or registration
of, or otherwise with respect to, this Agreement or any other Loan Documents.
"Participating Lender" has the meaning set forth in Section 15.14.
--------------------
10
E-19
<PAGE>
"Payment Account" means each blocked bank account, established
---------------
pursuant to Section 6.10, to which the funds of the Borrower (including, without
limitation, Proceeds of Accounts and other Collateral) are deposited or
credited, and which is maintained in the name of the Lender or the Borrower, as
the Lender may determine, on terms acceptable to the Lender.
"PBGC" means the Pension Benefit Guaranty Corporation or any Person
----
succeeding to the functions thereof.
"Pension Plan" means a pension plan (as defined in Section 3(2) of
------------
ERISA) subject to Title IV of ERISA which the Borrower sponsors, maintains, or
to which it makes, is making, or is obligated to make contributions, or in the
case of a Multiple-employer Plan has made contributions at any time during the
immediately preceding five (5) plan years.
"Permitted Liens" means: (a) Liens for taxes not yet payable or Liens
---------------
for taxes (in an amount not to exceed $100,000) being contested in good faith by
appropriate proceedings diligently pursued, provided that a reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been made
therefor on the applicable Financial Statements and that a stay of enforcement
of any such Lien is in effect; (b) Liens in favor of the Lender; (c) mechanics
and materialmen's liens securing Debt not yet past due; (d) Liens in connection
with worker's compensation or other unemployment insurance incurred in the
ordinary course of the Borrower's business; (e) Liens created by deposits of
cash to secure performance of bids, tenders, leases (to the extent permitted
under this Agreement), or trade contracts, incurred in the ordinary course of
business of the Borrower and not in connection with the borrowing of money; (f)
Liens arising by reason of cash deposit for surety or appeal bonds in the
ordinary course of business of the Borrower; (g) Liens of or resulting from any
judgment or award, the time for the appeal or petition for rehearing of which
has not yet expired, or in respect of which the Borrower is in good faith
prosecuting an appeal or proceeding for a review, and in respect of which a stay
of execution pending such appeal or proceeding for review has been secured; (h)
with respect to any Premises: easements, rights or way, zoning and similar
covenants and restrictions and similar encumbrances which customarily exist on
properties of corporations engaged in similar activities and similarly situated
and which in any event do not materially interfere with or impair the use or
operation of the Collateral by the Borrower or the value of the Lender's
Security Interest therein, or materially interfere with the ordinary conduct of
the business of the Borrower; and, (i) purchase money security interests and
liens of lessors under capital leases to the extent that the acquisition or
lease of the underlying asset was permitted under Section 10.19, the security
interest or lien only encumbers the asset purchased or leased, and so long as
the security interest or lien only secures the purchase price of the asset.
"Permitted Rentals" has the meaning specified in Section 10.20.
-----------------
"Person" means any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation, Public
Authority, or any other entity.
11
E-20
<PAGE>
"Plan" means an employee benefit plan (as defined in Section 3(3) of
----
ERISA) which the Borrower sponsors or maintains or to which the Borrower makes,
is making, or is obligated to make contributions and includes any Pension Plan.
"Premises" means the land identified by addresses on Schedule 9.13
-------- -------------
together with all buildings, improvements, and fixtures thereon and all
tenements, hereditament, and appurtenances belonging or in any way appertaining
thereto, and which constitutes all of the real property in which the Borrower
has any interests on the Closing Date.
"Proceeds" means all products and proceeds of any Collateral, and all
--------
proceeds of such proceeds and products, including, without limitation, all cash
and credit balances, all payments under any indemnity, warranty, or guaranty
payable with respect to any Collateral, all awards for taking by eminent domain,
all proceeds of fire or other insurance, and all money and other Property
obtained as a result of any claims against third parties or any legal action or
proceeding with respect to Collateral.
"Property" means any interest in any kind of property or asset,
--------
whether real, personal or mixed, or tangible or intangible.
"Proprietary Rights" means all of the Borrower's now owned and
------------------
hereafter arising or acquired: licenses, franchises, permits, patents, patent
rights, copyrights, works which are the subject matter of copyrights,
trademarks, trade names, trade styles, patent and trademark applications and
licenses and rights thereunder, and all other rights under any of the foregoing,
all extensions, renewals, reissues, divisions, continuations, and continuations-
in-part of any of the foregoing, and all rights to sue for past, present, and
future infringement of any of the foregoing; inventions, trade secrets,
formulae, processes, compounds, drawings, designs, blueprints, surveys, reports,
manuals, and operating standards; goodwill; customer and other lists in whatever
form maintained; and trade secret rights, copyright rights, rights in works of
authorship, and contract rights relating to computer software programs, in
whatever form created or maintained.
"Public Authority" means the government of any country or sovereign
----------------
state, or of any state, province, municipality, or other political subdivision
thereof, or any department, agency, public corporation or other instrumentality
of any of the foregoing.
"Receivables" means all of the Borrower's now owned and hereafter
-----------
arising or acquired: Accounts (whether or not earned by performance), including
Accounts owed to the Borrower by any of its Subsidiaries or Affiliates, together
with all interest, late charges, penalties, collection fees, and other sums
which shall be due and payable in connection with any Account; proceeds of any
letters of credit naming the Borrower as beneficiary; contract rights, chattel
paper, instruments, documents, general intangibles (including without limitation
choses in action, causes of action, tax refunds, tax refund claims, and
Reversions and other amounts payable to the Borrower from or with respect to any
Plan) and all forms of obligations owing
12
E-21
<PAGE>
to the Borrower (including, without limitation, in respect of loans, advances,
and extensions of credit by the Borrower to its Subsidiaries and Affiliates);
guarantees and other security for any of the foregoing; goods represented by or
the sale, lease or delivery of which gave rise to any of the foregoing;
merchandise returned to or repossessed by the Borrower and rights of stoppage in
transit, replevin, and reclamation; and other rights or remedies of an unpaid
vendor, lienor, or secured party.
"Reference Rate" means the rate of interest publicly announced from
--------------
time to time by the Bank at its headquarters in San Francisco, California, as
its reference rate. It is a rate set by the Bank based upon various factors
including Bank's costs and desired return, general economic conditions, and
other factors, and is used as a reference point for pricing some loans.
However, the Bank may price loans at, above, or below such announced rate. Any
changes in the Reference Rate shall take effect on the day specified in the
public announcement of such change.
"Reference Rate Loans" means the Reference Rate Revolving Loans.
--------------------
"Reference Rate Revolving Loans" means a Revolving Loan during any
------------------------------
period in which it bears interest at the Reference Rate.
"Release" means a release, spill, emission, leaking, pumping,
-------
injection, deposit, disposal, discharge, dispersal, leaching or migration of a
Contaminant into the indoor or outdoor environment or into or out of any
Premises or other property, including the movement of Contaminants through or in
the air, soil, surface water, groundwater or Premises or other property.
"Rent Reserve" has the meaning set forth in Section 7.2.
------------
"Reportable Event" means any of the events set forth in Section
----------------
4043(b) of ERISA or the regulations thereunder, other than any such event for
which the 30-day notice requirement under ERISA has been waived in regulations
issued by the PBGC.
"Requirement of Law" means, as to any Person, any law (statutory or
------------------
common), treaty, rule or regulation or determination of an arbitrator or of a
Public Authority, in each case applicable to or binding upon the Person or any
of its property or to which the Person or any of its property is subject.
"Restricted Investment" means any acquisition of Property by the
---------------------
Borrower or any of its Subsidiaries in exchange for cash or other Property,
whether in the form of an acquisition of Stock, debt security, or other
indebtedness or obligation, or the purchase or acquisition of any other
Property, or by loan, advance, capital contribution, or subscription, except
acquisitions of the following: (a) fixed assets to be used in the business of
the Borrower, so long as the acquisition costs thereof constitute Capital
Expenditures permitted hereunder; (b) current assets arising from the sale or
lease of goods or rendition of services in the ordinary
13
E-22
<PAGE>
course of business of the Borrower; (c) Inventory in the ordinary course of
business of the Borrower; (d) direct obligations of the United States of
America, or any agency thereof, or obligations guaranteed by the United States
of America, provided that such obligations mature within one year from the date
of acquisition thereof; (e) certificates of deposit maturing within one year
from the date of acquisition, bankers acceptances, Eurodollar bank deposits, or
overnight bank deposits, in each case issued by, created by, or with a bank or
trust company organized under the laws of the United States or any state thereof
having capital and surplus aggregating at least $100,000,000; (f) commercial
paper given the highest rating by a national credit rating agency and maturing
not more than 270 days from the date of creation thereof; (g) assets consisting
of prepaid expenses for insurance, taxes, and advertising, arising in the
ordinary course of the Borrower's business; and (h) up to an additional $100,000
in the aggregate in any twelve month period of other acquisitions.
"Reversions" means any funds which may become due to the Borrower in
----------
connection with the termination of any Plan or other employee benefit plan.
"Revolving Loans" has the meaning specified in Section 2.2.
---------------
"Security Interest" means collectively the Liens granted to the Lender
-----------------
in the Collateral pursuant to this Agreement, the other Loan Documents, or any
other agreement or instrument.
"Solvent" shall mean when used with respect to any Person that: (a)
-------
the fair value of all its Property is in excess of the total amount of its debts
(including contingent liabilities); (b) it is able to pay its debts as they
mature; and (c) it does not have unreasonably small capital for the business in
which it is engaged or for any business or transaction in which it is about to
engage.
"Subsidiary" means any corporation of which more than 50% of the
----------
outstanding securities of any class or classes, the holders of which are
ordinarily, in the absence of contingencies, entitled to elect a majority of the
corporate directors (or Persons performing similar functions), is at the time,
directly or indirectly through one or more intermediaries, owned by the Borrower
and/or one or more of its Subsidiaries.
"Taxes" means any and all present or future taxes, levies, imposts,
-----
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of the Lender, such taxes (including income taxes or
franchise taxes) as are imposed on or measured by the Lender's net income by the
United States of America or by the jurisdiction (or any political subdivision
thereof) under the laws of which the Lender is organized or maintains a lending
office.
14
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<PAGE>
"Tax Indemnification Agreement" means" means that certain Tax
-----------------------------
Indemnification Agreement, dated October 18, 1992, in effect as of the Closing
Date and in the form delivered to Lender prior to the Closing Date.
"Total Facility" has the meaning specified in Section 2.1.
--------------
"UCC" means the Uniform Commercial Code (or any successor statute) of
---
the State of California or of any other state the laws of which are required by
Section 9-103 thereof to be applied in connection with the issue of perfection
of security interests.
"Unused Line Fee" has the meaning specified in Section 3.1(c).
---------------
"Working Capital" at any date means Current Assets minus Current
--------------- -----
Liabilities.
Accounting Terms Any accounting term used in this Agreement shall
----------------
have, unless otherwise specifically provided herein, the meaning customarily
given in accordance with GAAP, and all financial computations hereunder shall be
computed, unless otherwise specifically provided herein, in accordance with GAAP
as consistently applied and using the same method for inventory valuation as
used in the preparation of the Financial Statements.
Other Terms All other undefined terms contained in this Agreement
-----------
shall, unless the context indicates otherwise, have the meanings provided for by
the UCC to the extent the same are used or defined therein. Wherever
appropriate in the context, terms used herein in the singular also include the
plural, and vice versa, and each masculine, feminine, or neuter pronoun shall
---- -----
also include the other genders.
2. LOANS AND LETTERS OF CREDIT.
---------------------------
2.1 Total Facility. Subject to all of the terms and conditions of
--------------
this Agreement, the Lender shall make available a total credit facility of up to
$20,000,000 (the "Total Facility") for Borrower's use from time to time during
--------------
the term of this Agreement. The Total Facility shall be comprised of a
revolving line of credit up to the limits of the Availability, consisting of
revolving loans and letters of credit as described in Sections 2.2 and 2.3.
------------ ---
2.2 Revolving Loans.
---------------
(a) The Lender shall, upon the Borrower's request from time to time,
make revolving loans (the "Revolving Loans") to the Borrower up to the limits of
---------------
the Availability. The Lender, in its discretion, may elect to exceed the limits
of the Availability on one or more occasions, but if it does so, the Lender
shall not be deemed thereby to have changed the limits of the Availability or to
be obligated to exceed the limits of the Availability on any other occasion. If
the unpaid balance of the Revolving Loans exceeds the Availability (determined
for this purpose as if the amount of the Revolving Loans were zero), then the
15
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<PAGE>
Lender may refuse to make or otherwise restrict Revolving Loans on such terms as
the Lender determines until such excess has been eliminated. The Borrower may
request Revolving Loans either orally or in writing. Each oral request for a
Revolving Loan shall be conclusively presumed to be made by a person authorized
by the Borrower to do so and the crediting of a Revolving Loan to the Borrower's
deposit account, or transmittal to such Person as the Borrower shall direct,
shall conclusively establish the obligation of the Borrower to repay such
Revolving Loan as provided herein. The Borrower may authorize, pursuant to a
written power of attorney, an employee of the Bank to request Revolving Loans on
behalf of Borrower. The Lender will charge all Revolving Loans and other
Obligations to a loan account of the Borrower maintained with the Lender. All
fees, commissions, costs, expenses, and other charges under or pursuant to the
Loan Documents, and all payments made and out-of-pocket expenses incurred by
Lender pursuant to the Loan Documents, will be charged as Revolving Loans to the
Borrower's loan account as of the date due from the Borrower or the date paid or
incurred by the Lender, as the case may be.
(b) Procedure for Borrowing.
-----------------------
(i) Each Borrowing shall be made upon the Borrower's irrevocable
written notice delivered to the Lender in the form of a Notice of Borrowing
(which notice must be received by the Lender prior to 11 a.m. (Los Angeles time)
(1) three Business Days prior to the requested Funding Date, in the case of
LIBOR Rate Loans and (2) no later than 11:00 a.m. on the requested Funding Date,
in the case of Reference Rate Loans, specifying:
(A) the amount of the Borrowing;
(B) the requested Funding Date, which shall be a Business Day;
(C) whether the Revolving Loans requested are to be Reference Rate
Revolving Loans or LIBOR Revolving Loans; and
(D) the duration of the Interest Period if the requested Revolving
Loans are to be LIBOR Revolving Loans. If the Notice of Borrowing fails to
specify the duration of the Interest Period for any Borrowing comprised of LIBOR
Rate Loans, such Interest Period shall be three months;
provided, however, that with respect to the Borrowing to be made on the Closing
Date, such Borrowings will consist of Reference Rate Revolving Loans only.
(ii) After giving effect to any Borrowing, there may not be more than
four different Interest Periods in effect.
16
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<PAGE>
(iii) With respect to any request for Reference Rate Revolving Loans,
in lieu of delivering the above-described Notice of Borrowing the Borrower may
give the Lender telephonic notice of such request by the required time, with
such telephonic notice to be confirmed in writing within 24 hours of the giving
of such notice but Lender shall be entitled to rely on the telephonic notice in
making such Revolving Loans.
2.3 Letters of Credit. The Lender shall, upon the Borrower's request
-----------------
from time to time, cause merchandise or standby letters of credit to be issued
for the Borrower's account (the "Letters of Credit"). The Lender will not
--------------------
cause to be opened any Letter of Credit if: (a) the maximum face amount of the
requested Letter of Credit, plus the aggregate undrawn face amount of all
outstanding Letters of Credit, would exceed $2,500,000; or (b) the maximum face
amount of the requested Letter of Credit, and all commissions, fees, and charges
due from Borrower to Lender in connection with the opening thereof, would cause
the Availability to be exceeded at such time. The Letters of Credit shall be
governed by a Letter of Credit Financing Agreement -Supplement to Loan and
Security Agreement between the Lender and the Borrower ("Letter of Credit
-----------------
Agreement"), in addition to the terms and conditions hereof. All payments made
- ----------
and expenses incurred by the Lender pursuant to or in connection with the
Letters of Credit and the Letter of Credit Agreement will be charged to the
Borrower's loan account as Revolving Loans.
3. INTEREST AND OTHER CHARGES.
--------------------------
3.1 Interest.
--------
(a) All Obligations shall bear interest on the unpaid principal amount
thereof from the date made until paid in full in cash at a rate determined by
reference to the Reference Rate or the LIBOR Rate and Sections 3.1 (a)(i) or
----------------------
(ii), as applicable, but not to exceed the maximum rate permitted by applicable
- ----
law. Subject to the provisions of Section 3.2, any of the Loans may be
-----------
converted into, or continued as, Reference Rate Loans or LIBOR Rate Loans in the
manner provided in Section 3.2. If at any time Loans are outstanding with
-----------
respect to which notice has not been delivered to Lender in accordance with the
terms of this Agreement specifying the basis for determining the interest rate
applicable thereto, then those Loans shall be Reference Rate Loans and shall
bear interest at a rate determined by reference to the Reference Rate until
notice to the contrary has been given to the Lender and such notice has become
effective. Except as otherwise provided herein, the Obligations shall bear
interest as follows:
(i) For all Obligations, other than LIBOR Rate Loans, then at a
fluctuating per annum rate equal to one-half percent ( 1/2%) (the "Reference
---------
Rate Margin") plus the Reference Rate; provided, however, in the event that
- ----------- -----------------
Borrower shall not maintain compliance with the financial covenants in Section
10.22(a) or Section 10.23(a), then the Reference Rate Margin shall be increased
to seven-eighths percent (0.875%); and
17
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<PAGE>
(ii) If the Loans are LIBOR Rate Loans, then at a per annum rate equal
to two and three-quarters percent (2-3/4%) (the "LIBOR Margin") plus the LIBOR
------------
Rate determined for the applicable Interest Period; provided, however, in the
-----------------
event that Borrower shall not maintain compliance with the financial covenants
in Section 10.22(a) or Section 10.23(a), then the LIBOR Margin shall be
increased to three and one-eighth percent (3.125%).
Each change in the Reference Rate shall be reflected in the interest
rate described in (i) above as of the effective date of such change. All
interest charges shall be computed on the basis of a year of three hundred sixty
(360) days and actual days elapsed. All interest shall be payable to Lender on
the first day of each month hereafter.
(b) If any Event of Default occurs, then, from the date such Event of
Default occurs until it is cured, or if not cured until all Obligations are paid
and performed in full, the Borrower will pay interest on the unpaid principal
balance at a per annum rate two (2) percentage points (200 basis points) greater
than the rate of interest otherwise specified herein, and the Letter of Credit
Fee shall be increased to three percent (3%) per annum.
(c) Unused Line Fee. For every month during the term of this
---------------
Agreement, the Borrower shall pay the Lender a fee (the "Unused Line Fee") in an
---------------
amount equal to one-eighth of one percent (0.125%) per annum, multiplied by the
-------------
average daily amount by which the Maximum Revolving Credit Line exceeds the sum
of (i) the average daily outstanding amount of Revolving Loans and (ii) the
undrawn face amount of all outstanding Letters of Credit during such month, with
the unpaid balance calculated for this purpose by applying payments immediately
upon receipt. Such a fee, if any, shall be calculated on the basis of a year of
three hundred sixty (360) days and actual days elapsed, and shall be payable to
the Lender on the first day of each month with respect to the prior month.
3.2 Conversion and Continuation Elections.
-------------------------------------
(a) The Borrower may, upon irrevocable written notice to the
Lender in accordance with Subsection 3.2(b):
(i) elect, as of any Business Day, in the case of Reference Rate
Loans to convert any such Loans (or any part thereof in an amount not less
than $1,000,000, or that is in an integral multiple of $100,000 in excess
thereof) into LIBOR Rate Loans; or
(ii) elect, as of the last day of the applicable Interest Period,
to continue any LIBOR Rate Loans having Interest Periods expiring on such
day (or any part thereof in an amount not less than $1,000,000 or that is
in an integral multiple of $100,000 in excess thereof);
18
E-27
<PAGE>
provided, that if at any time the aggregate amount of LIBOR Rate Loans in
- --------
respect of any Borrowing is reduced, by payment, prepayment, or conversion of
part thereof to be less than $1,000,000, such LIBOR Rate Loans shall
automatically convert into Reference Rate Loans, and on and after such date the
right of the Borrower to continue such Loans as, and convert such Loans into,
LIBOR Rate Loans, as the case may be, shall terminate.
(b) The Borrower shall deliver a Notice of Conversion/Continuation to
be received by the Lender not later than 11 a.m. (Los Angeles time) at least
three Business Days in advance of the Conversion/Continuation Date, if the Loans
are to be converted into or continued as LIBOR Rate Loans and specifying:
(A) the proposed Conversion/Continuation Date;
(B) the aggregate amount of Loans to be converted or renewed;
(C) the type of Loans resulting from the proposed conversion or
continuation; and
(D) the duration of the requested Interest Period.
(c) If upon the expiration of any Interest Period applicable to LIBOR
Rate Loans, the Borrower has failed to select timely a new Interest Period to be
applicable to LIBOR Rate Loans or if any Default or Event of Default then
exists, the Borrower shall be deemed to have elected to convert such LIBOR Rate
Loans into Reference Rate Loans effective as of the expiration date of such
Interest Period.
(d) During the existence of a Default or Event of Default, the
Borrower may not elect to have a Loan converted into or continued as a LIBOR
Rate Loan.
(e) After giving effect to any conversion or continuation of Loans,
there may not be more than four different Interest Periods in effect.
3.3 Maximum Interest Rate. In no event shall any interest rate
---------------------
provided for hereunder exceed the maximum rate permissible for corporate
borrowers under applicable law for loans of the type provided for hereunder (the
"Maximum Rate"). If, in any month, any interest rate, absent such limitation,
would have exceeded the Maximum Rate, then the interest rate for that month
shall be the Maximum Rate, and, if in future months, that interest rate would
otherwise be less than the Maximum Rate, then that interest rate shall remain at
the Maximum Rate until such time as the amount of interest paid hereunder equals
the amount of interest which would have been paid if the same had not been
limited by the Maximum Rate. In the event that, upon payment in full of the
Obligations under this Agreement, the total amount of interest paid or accrued
under the terms of this Agreement is less than the total amount of
19
E-28
<PAGE>
interest which would, but for this Section 3.3, have been paid or accrued if the
-----------
interest rates otherwise set forth in this Agreement had at all times been in
effect, then the Borrower shall, to the extent permitted by applicable law, pay
the Lender, an amount equal to the difference between (a) the lesser of (i) the
amount of interest which would have been charged if the Maximum Rate had, at all
times, been in effect or (ii) the amount of interest which would have accrued
had the interest rates otherwise set forth in this Agreement, at all times, been
in effect and (b) the amount of interest actually paid or accrued under this
Agreement. In the event that a court determines that the Lender has received
interest and other charges hereunder in excess of the Maximum Rate, such excess
shall be deemed received on account of, and shall automatically be applied to
reduce, the Obligations other than interest, in the inverse order of maturity,
and if there are no Obligations outstanding, the Lender shall refund to the
Borrower such excess.
3.4 Capital Adequacy. If as a result of any regulatory change
----------------
directly or indirectly affecting Lender or any of Lender's affiliated companies
there shall be imposed modified or deemed applicable any tax, reserve, special
deposit, minimum capital, capital ratio, or similar requirement against or with
respect to or measured by reference to loans made or to be made hereunder or
participation therein, or to Letters of Credit issues pursuant to the Letter of
Credit Agreement, and the result shall be to increase the cost to Lender or to
any of Lender's affiliated companies of making or maintaining any loan or Letter
of Credit hereunder or to any other party maintaining any participation therein,
or reduce any amount receivable, shall be the result of Lender's or Lender's
affiliated company's reasonable allocation among all affected customers of the
aggregate of such increase or reductions resulting from such event), then,
within ten (10) days after receipt by Borrower of a certificate from Lender
containing the information described in this Section 3.4 which shall be
-----------
delivered to Borrower, Borrower agrees from time to time to pay Lender such
additional amounts as shall be sufficient to compensate Lender or any of
Lender's affiliated companies for such increased costs or reductions in amounts
which Lender determines in Lender's sole discretion are material.
Notwithstanding the foregoing, all such amounts shall be subject to the
provisions of Section 3.3. The certificate requesting compensation under this
-----------
Section 3.4 shall identify the regulatory change which has occurred, the
- -----------
requirements which have been imposed, modified or deemed applicable, the amounts
of such additional cost or reduction in the amount receivable and the way in
which such amount has been calculated.
4. PAYMENTS AND PREPAYMENTS.
------------------------
4.1 Revolving Loans. The Borrower shall repay the outstanding
---------------
principal balance of the Revolving Loans, plus all accrued but unpaid interest
thereon, upon the termination of this Agreement for any reason. In addition,
and without limiting the generality of the foregoing, the Borrower shall pay to
the Lender, on demand, the amount by which the unpaid principal balance of the
Revolving Loans at any time exceeds the Availability at such time (determined
for this purpose as if the amount of the Revolving Loans were zero).
20
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<PAGE>
4.2 Place and Form of Payments; Extension of Time. All payments of
---------------------------------------------
principal, interest, premium, and other sums due to the Lender shall be made at
the Lender's address set forth in Section 15.11. Except for Proceeds received
-------------
directly by the Lender, all such payments shall be made in immediately available
funds. If any payment of principal, interest, premium, or other sum to be made
hereunder becomes due and payable on a day other than a Business Day, the due
date of such payment shall be extended to the next succeeding Business Day and
interest thereon shall be payable at the applicable interest rate during such
extension.
4.3 Application and Reversal of Payments. The Lender shall determine
------------------------------------
in its sole discretion the order and manner in which Proceeds of Collateral and
other payments that the Lender receives are applied to the Revolving Loans,
interest thereon, and the other Obligations, and the Borrower hereby irrevocably
waives the right to direct the application of any payment or Proceeds. The
Lender shall have the continuing and exclusive right to apply and reverse and
reapply any and all such Proceeds and payments to any portion of the
Obligations.
4.4 INDEMNITY FOR RETURNED PAYMENTS. IF AFTER RECEIPT OF ANY PAYMENT
-------------------------------
WHICH IS APPLIED TO THE PAYMENT OF ALL OR ANY PART OF THE OBLIGATIONS, THE
LENDER IS FOR ANY REASON COMPELLED TO SURRENDER SUCH PAYMENT TO ANY PERSON
BECAUSE SUCH PAYMENT IS INVALIDATED, DECLARED FRAUDULENT, SET ASIDE, DETERMINED
TO BE VOID OR VOIDABLE AS A PREFERENCE, IMPERMISSIBLE SETOFF, OR A DIVERSION OF
TRUST FUNDS, OR FOR ANY OTHER REASON, THEN: THE OBLIGATIONS OR PART THEREOF
INTENDED TO BE SATISFIED SHALL BE REVIVED AND CONTINUE AND THIS AGREEMENT SHALL
CONTINUE IN FULL FORCE AS IF SUCH PAYMENT HAD NOT BEEN RECEIVED BY THE LENDER
AND THE BORROWER SHALL BE LIABLE TO PAY TO THE LENDER AND HEREBY DOES INDEMNIFY
THE LENDER AND HOLD THE LENDER HARMLESS FOR THE AMOUNT OF SUCH PAYMENT
SURRENDERED. The provisions of this Section 4.4 shall be and remain effective
-----------
notwithstanding any contrary action which may have been taken by the Lender in
reliance upon such payment, and any such contrary action so taken shall be
without prejudice to the Lender's rights under this Agreement and shall be
deemed to have been conditioned upon such payment having become final and
irrevocable. The provisions of this Section 4.4 shall survive the termination
-----------
of this Agreement.
5. LENDER'S BOOKS AND RECORDS; MONTHLY STATEMENTS.
----------------------------------------------
The Borrower agrees that the Lender's books and records showing the
Obligations and the transactions pursuant to this Agreement and the other Loan
Documents shall be admissible in any action or proceeding arising therefrom, and
shall constitute prima facie proof thereof, irrespective of whether any
----- -----
Obligation is also evidenced by a promissory note or other instrument. The
Lender will provide to the Borrower a monthly statement of Loans, payments, and
other transactions pursuant to this Agreement. Such statement shall be deemed
21
E-30
<PAGE>
correct, accurate, and binding on the Borrower and as an account stated (except
for reversals and reapplications of payments made as provided in Section 4.3 and
-----------
corrections of errors discovered by the Lender), unless the Borrower notifies
the Lender in writing to the contrary within thirty (30) days after such
statement is rendered. In the event a timely written notice of objections is
given by the Borrower, only the items to which exception is expressly made will
be considered to be disputed by the Borrower.
6. TAXES, YIELD PROTECTION AND ILLEGALITY.
--------------------------------------
6.1 Taxes.
-----
(a) Any and all payments by the Borrower to the Lender under this
Agreement and any other Loan Document shall be made free and clear of, and
without deduction or withholding for any Taxes. In addition, the Borrower shall
pay all Other Taxes.
(b) The Borrower agrees to indemnify and hold harmless the Lender for
the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes
imposed by any jurisdiction on amounts payable under this Section) paid by the
Lender and any liability (including penalties, interest, additions to tax and
expenses) arising therefrom or with respect thereto, whether or not such Taxes
or Other Taxes were correctly or legally asserted. Payment under this
indemnification shall be made within 30 days after the date the Lender makes
written demand therefor.
(c) If the Borrower shall be required by law to deduct or withhold any
Taxes or Other Taxes from or in respect of any sum payable hereunder to Lender,
then:
(i) the sum payable shall be increased as necessary so that after
making all required deductions and withholdings (including deductions and
withholdings applicable to additional sums payable under this Section) the
Lender receives an amount equal to the sum it would have received had no such
deductions or withholdings been made;
(ii) the Borrower shall make such deductions and withholdings;
(iii) the Borrower shall pay the full amount deducted or withheld to
the relevant taxing authority or other authority in accordance with applicable
law; and
(iv) the Borrower shall also pay to the Lender at the time interest
is paid, all additional amounts which the Lender specifies as necessary to
preserve the after-tax yield the Lender would have received if such Taxes or
Other Taxes had not been imposed.
22
E-31
<PAGE>
(d) Within 30 days after the date of any payment by the Borrower of
Taxes or Other Taxes, the Borrower shall furnish the Lender the original or a
certified copy of a receipt evidencing payment thereof, or other evidence of
payment satisfactory to the Lender.
6.2 Illegality.
----------
(a) If the Lender determines in good faith that the introduction of
any Requirement of Law, or any change in any Requirement of Law, or in the
interpretation or administration of any Requirement of Law, has made it
unlawful, or that any central bank or other Public Authority has asserted that
it is unlawful, for the Lender or its applicable lending office to make LIBOR
Rate Loans, then, on notice thereof by the Lender to the Borrower, any
obligation of the Lender to make LIBOR Rate Loans shall be suspended until the
Lender notifies the Borrower that the circumstances giving rise to such
determination no longer exist.
(b) If the Lender determines in good faith that it is unlawful to
maintain any LIBOR Rate Loan, the Borrower shall, upon its receipt of notice of
such fact and demand from the Lender, prepay in full such LIBOR Rate Loans then
outstanding, together with interest accrued thereon and amounts required under
Section 6.4, either on the last day of the Interest Period thereof, if the
- -----------
Lender may lawfully continue to maintain such LIBOR Rate Loans to such day, or
immediately, if the Lender may not lawfully continue to maintain such LIBOR Rate
Loan. If the Borrower is required to so prepay any LIBOR Rate Loan, then
concurrently with such prepayment, the Borrower shall borrow from the Lender, in
the amount of such repayment, a Reference Rate Loan.
6.3 Increased Costs and Reduction of Return.
----------------------------------------
(a) If the Lender determines in good faith that, due to either (i) the
introduction of or any change in the interpretation of any law or regulation or
(ii) the compliance by the Lender with any guideline or request from any central
bank or other Public Authority (whether or not having the force of law), there
shall be any increase in the cost to the Lender of agreeing to make or making,
funding or maintaining any LIBOR Rate Loans, then the Borrower shall be liable
for, and shall from time to time, upon demand, pay to the Lender, additional
amounts as are sufficient to compensate the Lender for such increased costs.
(b) If the Lender shall have determined that (i) the introduction of
any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy
Regulation, (iii) any change in the interpretation or administration of any
Capital Adequacy Regulation by any central bank or other Public Authority
charged with the interpretation or administration thereof, or (iv) compliance by
the Lender or any corporation controlling the Lender with any Capital Adequacy
Regulation, affects or would affect the amount of capital required or expected
to be maintained by the Lender or any corporation controlling the Lender and
(taking into consideration such Lender's or such corporation's policies with
respect to capital adequacy and such Lender's desired return on capital)
determines that the amount of such capital is increased
23
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<PAGE>
as a consequence of its loans, credits or obligations under this Agreement,
then, upon demand of the Lender to the Borrower, the Borrower shall pay to the
Lender, from time to time as specified by the Lender, additional amounts
sufficient to compensate the Lender for such increase.
6.4 Funding Losses. The Borrower shall reimburse the Lender and hold
--------------
the Lender harmless from any loss or expense which the Lender may sustain or
incur as a consequence of:
(a) the failure of the Borrower to make on a timely basis any payment
of principal of any LIBOR Rate Loan;
(b) the failure of the Borrower to borrow, continue or convert a Loan
after the Borrower has given (or is deemed to have given) a Notice of Borrowing
or a Notice of Conversion/ Continuation;
(c) the prepayment or other payment (including after acceleration
thereof) of an LIBOR Rate Loan on a day that is not the last day of the relevant
Interest Period;
including any such loss or expense arising from the liquidation or reemployment
of funds obtained by it to maintain its LIBOR Rate Loans or from fees payable to
terminate the deposits from which such funds were obtained.
6.5 Inability to Determine Rates. If the Lender determines that for
----------------------------
any reason adequate and reasonable means do not exist for determining the LIBOR
Rate for any requested Interest Period with respect to a proposed LIBOR Rate
Loan, or that the LIBOR Rate for any requested Interest Period with respect to a
proposed LIBOR Rate Loan does not adequately and fairly reflect the cost to the
Lender of funding such Loan, the Lender will promptly so notify the Borrower.
Thereafter, the obligation of the Lender to make or maintain LIBOR Rate Loans
hereunder shall be suspended until the Lender revokes such notice in writing.
Upon receipt of such notice, the Borrower may revoke any Notice of Borrowing or
Notice of Conversion/Continuation then submitted by it. If the Borrower does
not revoke such Notice, the Lender shall make, convert or continue the Loans, as
proposed by the Borrower, in the amount specified in the applicable notice
submitted by the Borrower, but such Loans shall be made, converted or continued
as Reference Rate Loans instead of LIBOR Rate Loans.
6.6 Survival. The agreements and obligations of the Borrower in this
--------
Section 6 shall survive the payment of all other Obligations.
- ---------
24
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<PAGE>
7. COLLATERAL.
----------
7.1 Grant of Security Interest.
--------------------------
(a) As security for the Obligations, the Borrower hereby grants to the
Lender a continuing security interest in, lien on, and collateral assignment of:
(i) all Receivables, Inventory, Equipment, Assigned Contracts, Proprietary
Rights and Proceeds, wherever located and whether now existing or hereafter
arising or acquired; (ii) all moneys, securities and other property and the
Proceeds thereof, now or hereafter held or received by, or in transit to, the
Lender from or for the Borrower, whether for safekeeping, pledge, custody,
transmission, collection or otherwise, including, without limitation, all of the
Borrower's deposit accounts, credits, and balances with the Lender and all
claims of the Borrower against the Lender at any time existing; (iii) all of
Borrower's deposit accounts with any financial institutions with which Borrower
maintains deposits; and (iv) all books, records and other Property relating to
or referring to any of the foregoing, including, without limitation, all books,
records, ledger cards, data processing records, computer software and other
property and general intangibles at any time evidencing or relating to the
Receivables, Inventory, Equipment, Assigned Contracts, Proprietary Rights,
Proceeds, and other property referred to above (all of the foregoing, together
with all other property in which the Lender may at any time be granted a Lien,
being herein collectively referred to as the "Collateral"). The Lender shall
----------
have all of the rights of a secured party with respect to the Collateral under
the UCC and other applicable laws.
(b) All Obligations shall constitute a single loan secured by the
Collateral. The Lender may, in its sole discretion, (i) exchange, waive, or
release any of the Collateral, (ii) apply Collateral and direct the order or
manner of sale thereof as the Lender may determine, and (iii) settle,
compromise, collect, or otherwise liquidate any Collateral in any manner, all
without affecting the Obligations or the Lender's right to take any other action
with respect to any other Collateral.
7.2 Perfection and Protection of Security Interest. The Borrower
----------------------------------------------
shall, at its expense, perform all steps requested by the Lender at any time to
perfect, maintain, protect, and enforce the Security Interest including, without
limitation: (a) executing and filing financing or continuation statements, and
amendments thereof, in form and substance satisfactory to the Lender; (b)
delivering to the Lender the originals of all material instruments, documents,
and chattel paper, and all other Collateral of which the Lender determines it
should have physical possession in order to perfect and protect the Security
Interest therein, duly endorsed or assigned to the Lender without restriction;
(c) delivering to the Lender warehouse receipts covering any material portion of
the Collateral located in warehouses and for which warehouse receipts are
issued; (d) following an Event of Default, transferring Inventory to warehouses
designated by the Lender; (e) placing notations on the Borrower's books of
account to disclose the Security Interest; (f) executing and delivering to the
Lender a security agreement relating to the Reversions in form and substance
satisfactory to the Lender; (g) delivering to the Lender all
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letters of credit on which the Borrower is named beneficiary; and (h) taking
such other steps as are deemed reasonably necessary by the Lender to maintain
the Security Interest. To the extent permitted by applicable law, the Lender may
file, without the Borrower's signature, one or more financing statements
disclosing the Security Interest. The Borrower agrees that a carbon,
photographic, photostatic, or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement. If any Collateral is
at any time in the possession or control of any warehouseman, bailee or any of
the Borrower's agents or processors, then the Borrower shall notify the Lender
thereof and shall notify such Person of the Security Interest in such Collateral
and, upon the Lender's request, instruct such Person to hold all such Collateral
for the Lender's account subject to the Lender's instructions. If at any time
any Collateral is located on any Premises that are not owned by the Borrower,
then the Borrower shall obtain written waivers, in form and substance
satisfactory to the Lender, of all present and future Liens to which the owner
or lessor or any mortgagee of such premises may be entitled to assert against
the Collateral; provided, however, that in the event Borrower is unable to
-------- -------
obtain any such waivers with respect to any Premises, then Lender shall
establish a reserve (the "Rent Reserve") against Availability equal to the rent
and other amounts payable with respect to such Premises during any three (3)
month period and the existence of such reserves shall be deemed to be compliance
by the Borrower with the foregoing requirements of this Section 7.2. From time
to time, the Borrower shall, upon Lender's request, execute and deliver
confirmatory written instruments pledging to the Lender the Collateral, but the
Borrower's failure to do so shall not affect or limit the Security Interest or
the Lender's other rights in and to the Collateral. So long as this Agreement is
in effect and until all Obligations have been fully satisfied, the Security
Interest shall continue in full force and effect in all Collateral (whether or
not deemed eligible for the purpose of calculating the Availability or as the
basis for any advance, loan, extension of credit, or other financial
accommodation).
7.3 Location of Collateral. The Borrower represents and warrants to
----------------------
the Lender that: (a) Schedule 7.3 hereto is a correct and complete list of the
------------
Borrower's chief executive office, the location of its books and records, the
locations of the Collateral, and the location's of all of its other places of
business and (b) Schedule 7.3 correctly identifies any of such facilities and
------------
locations that are not owned by the Borrower and sets forth the names of the
owners and lessors or sub-lessors of, and, to the best of the Borrower's
knowledge, the holders of any mortgages on, such facilities and locations. The
Borrower covenants and agrees that it will not maintain any Collateral (other
than (i) Inventory subject to current rental agreements and (ii) Inventory with
a book value of not more than $200,000 at any one time that is moved by Borrower
in the ordinary course of its business, to locations within California in
connection with temporary promotional and marketing functions) at any location
other than those listed on Schedule 7.3, and it will not otherwise change or add
------------
to any of such locations, unless it gives the Lender at least 30 days prior
written notice thereof and executes any and all financing statements and other
documents that the Lender requests in connection therewith.
7.4 Title to, Liens on, and Sale and Use of Collateral. The Borrower
--------------------------------------------------
represents and warrants to the Lender that: (a) all Collateral is and will
continue to be owned
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by the Borrower free and clear of all Liens whatsoever, except for the Security
Interest and other Permitted Liens; (b) the Security Interest will not be
subject to any prior Lien except for Permitted Liens, if any; (c) the Borrower
will use, store, and maintain the Collateral with all reasonable care and will
use the Collateral for lawful purposes only; and (d) the Borrower will not,
without the Lender's prior written approval, sell, or dispose of or permit the
sale or disposition of any Collateral, except for sales of Inventory in the
ordinary course of business and as permitted by Section 7.12. The inclusion of
-------------
Proceeds in the Collateral shall not be deemed the Lender's consent to any sale
or other disposition of the Collateral except as expressly permitted herein.
7.5 Appraisals. Whenever an Event or Event of Default exists, at the
----------
Borrower's expense, as the Lender requests, and at such other times as the
Lender reasonably requests and at the Lender's expense, the Borrower shall, upon
the Lender's request, provide the Lender with appraisals or updates thereof of
any or all of the Collateral from an appraiser.
7.6 Access and Examination. (a) The Lender may at all reasonable
----------------------
times have access to, examine, audit, make extracts from and inspect the
Borrower's records, files, and books of account and the Collateral and may
discuss the Borrower's affairs with the Borrower's officers and management. The
Borrower will deliver to the Lender any instrument necessary for the Lender to
obtain records from any service bureau maintaining records for the Borrower.
The Lender may, at any time when an Event of Default exists and at the
Borrower's expense, make copies of all of the Borrower's books and records, or
require the Borrower to deliver such copies to the Lender. The Lender may,
without expense to the Lender, use such of the Borrower's personnel, supplies,
and premises as may be reasonably necessary for maintaining or enforcing the
Security Interest. Lender shall have the right, at any time, in Lender's name
or in the name of a nominee of the Lender, to verify the validity, amount or any
other matter relating to the Accounts, by mail, telephone, or otherwise.
(b) Lender agrees to maintain the confidentiality of all information
identified as "confidential" or "secret" by the Borrower and provided to it by
or on behalf of the Borrower, under this Agreement or any other Loan Document.
Neither the Lender or any of its Affiliates shall use such information other
than in connection with or in enforcement of this Agreement and the other Loan
Documents, except to the extent that such information (i) was or becomes
generally available to the public other than as a result of disclosure by
Lender, or (ii) was or becomes available on a nonconfidential basis from a
source other than the Borrower or any of its Subsidiaries or Affiliates,
provided that such source is not bound by a confidentiality agreement with the
Borrower known to the Lender; provided, however, that the Lender may disclose
-------- -------
such information (A) at the request or pursuant to any requirement of any Public
Authority to which the Lender is subject or in connection with an examination of
the Lender by any such Public Authority; (B) with notice to the Borrower,
pursuant to subpoena or other court process; (C) when required to do so in
accordance with the provisions of any applicable requirement of law; (D) with
notice to the Borrower, to the extent reasonably required in connection with any
litigation or proceeding to which Lender or its Affiliates may
27
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<PAGE>
be party and which arises out of or in connection with the transactions
contemplated by this Agreement and the Loan Documents; (E) to the extent
reasonably required in connection with the exercise of any remedy hereunder or
under any other Loan Document; (F) to the Lender's independent auditors,
accountants, attorneys and other professional advisors who are informed of the
confidential nature of such information; (G) to any Affiliate of the Lender, or
to any Participating Lender or assignee actual or potential, provided that such
Affiliate, Participating Lender or assignee agrees to keep such information
confidential to the same extent required of the Lender hereunder; and (H) as
expressly permitted under the terms of any other document or agreement regarding
confidentiality to which the Borrower is party or is deemed to be a party with
the Lender.
7.7 Insurance. The Borrower shall insure the Collateral against loss
---------
or damage by fire with extended coverage, theft, burglary, pilferage, loss in
transit, and such other hazards as the Lender shall specify, in amounts, under
policies and by insurers acceptable to the Lender. Upon the Lender's request,
the Borrower shall maintain flood insurance for its Inventory and Equipment
which is located at any time in an SFHA. The Borrower shall cause the Lender to
be named in each such policy as secured party or mortgagee and loss payee or
additional insured, in a manner acceptable to the Lender. Each policy of
insurance shall contain a clause or endorsement requiring the insurer to give
not less than thirty (30) days prior written notice to the Lender in the event
of cancellation of the policy for any reason whatsoever and a clause or
endorsement stating that the interest of the Lender shall not be impaired or
invalidated by any act or neglect of the Borrower or the owner of any premises
where Collateral is located nor by the occupation of such premises for purposes
more hazardous than are permitted by such policy. The Borrower shall pay, upon
Lender's request, all fees incurred by the Lender to determine whether any of
the Premises and Collateral is located in a SFHA. The Borrower shall also pay
all premiums for such insurance when due, and shall deliver to the Lender
certificates of insurance and, if requested, photocopies of the policies. If the
Borrower fails to pay such fees or to procure such insurance or the premiums
therefor when due, the Lender may (but shall not be required to) do so and
charge the costs thereof to the Borrower's loan account as a Revolving Loan. The
Borrower shall promptly notify the Lender of any loss, damage, or destruction to
the Collateral or arising from its use, whether or not covered by insurance to
the extent that the amount of any such losses, damage or destruction exceeds
$25,000 per occurrence (if uninsured) or $100,000 per occurrence (if insured).
The Lender is hereby authorized to collect all insurance proceeds directly.
After deducting from such proceeds the expenses, if any, incurred by Lender in
the collection or handling thereof, the Lender may apply such proceeds to the
reduction of the Obligations in such order as Lender determines, or at the
Lender's option may permit or require the Borrower to use such money, or any
part thereof, to replace, repair, restore or rebuild the Collateral in a
diligent and expeditious manner with materials and workmanship of substantially
the same quality as existed before the loss, damage or destruction.
7.8 Collateral Reporting. The Borrower will provide the Lender with
--------------------
the following documents at the following times in form satisfactory to the
Lender: (a) monthly (weekly during the months of November through March and any
other period during which
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<PAGE>
Availability is less than $2,000,000 on a roll forward basis) inventory reports,
on a first-in, first-out cost basis using the retail accounting method; (b)
monthly reconciliations of the inventory reports to the general ledger inventory
balances; (c) monthly agings of accounts payable; (d) upon request, copies of
purchase orders, invoices, and delivery documents for Inventory and Equipment
acquired by the Borrower; (e) such other reports as to the Collateral as the
Lender shall reasonably request from time to time; and (f) certificates of an
officer of the Borrower certifying as to the foregoing. If any of the Borrower's
records or reports of the Collateral are prepared by an accounting service or
other agent, the Borrower hereby authorizes such service or agent to deliver
such records, reports, and related documents to the Lender.
7.9 Accounts. The Borrower hereby represents and warrants to the
--------
Lender and agrees with the Lender that: (i) each existing Account represents,
and each future Account will represent, a bona fide sale or lease and delivery
---- ----
of goods (subject to customary returns) by the Borrower, or rendition of
services (subject to customary returns) by the Borrower, in the ordinary course
of the Borrower's business; and (ii) all goods described in each invoice will
have been delivered to the Account Debtor (subject to customary returns) and all
services of the Borrower described in each invoice will have been performed
(subject to customary returns). Upon the request of Lender, the Borrower shall
deliver to Lender copies of invoices, credit memoranda, and other information
respecting Accounts. The Borrower shall immediately notify the Lender if returns
of Inventory during any month exceed 7% of sales for such month.
7.10 Collection of Accounts; Payments.
--------------------------------
(a) Until the Lender notifies the Borrower to the contrary, the
Borrower shall make collection of all Accounts and other Collateral for the
Lender, shall receive all payments as the Lender's trustee, and shall
immediately deliver all payments to the Lender in their original form duly
endorsed in blank or deposit them into a Payment Account established at the
Lender's request, as the Lender may direct. All collections received in any
such Payment Account or directly by the Borrower or the Lender, and all funds in
any Payment Account or other account to which such collections are deposited,
shall be the sole property of the Lender and subject to the Lender's sole
control. The Lender or the Lender's designee may, at any time, notify obligors
that the Accounts have been assigned to the Lender and of the Security Interest
therein, and may collect them directly and charge the collection costs and
expenses to the Borrower's loan account as a Revolving Loan. At the Lender's
request, the Borrower shall execute and deliver to the Lender such documents as
the Lender shall require to grant the Lender access to any post office box in
which collections of Accounts are received.
(b) If sales of Inventory are made for cash, the Borrower shall
immediately deliver to the Lender the identical checks, cash, or other forms of
payment which the Borrower receives.
(c) All payments received by the Lender on account of Accounts or as
Proceeds of other Collateral will be the Lender's sole property and will be
credited to the
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<PAGE>
Borrower's loan account (conditional upon final collection) after allowing one
(1) Business Day for collection.
(d) In the event the Borrower repays all of the Obligations upon the
termination of this Agreement, other than through the Lender's receipt of
payments on account of Accounts or Proceeds of other Collateral, such payment
will be credited (conditional upon final collection) to the Borrower's loan
account one (1) Business Days after the Lender's receipt thereof.
7.11 Inventory. The Borrower represents and warrants to the Lender
---------
that all of the Inventory is and will be held for sale or lease, or to be
furnished in connection with the rendition of services in the ordinary course of
the Borrower's business and is and will be fit for such purposes. The Borrower
will keep the Inventory in good and marketable condition, at its own expense.
The Borrower will not, without prior written notice to the Lender, acquire or
accept any Inventory on consignment or approval. The Borrower agrees that all
Inventory will be produced in accordance with the Federal Fair Labor Standards
Act of 1938, as amended, and all rules, regulations, and orders thereunder. The
Borrower will maintain a perpetual inventory reporting system at all times. The
Borrower will conduct a physical count of the Inventory at least twice per
Fiscal Year, and at such other times as the Lender requests and, if prior to the
occurrence of an Event of Default, Borrower agrees, and shall promptly supply
the Lender with a copy of such count accompanied by a report of the value of
such Inventory (valued at the lower or cost, on a first-in, first-out basis
(using the retail method of accounting), or market value). Except in the
ordinary course of business, the Borrower will not without the Lender's prior
written consent, sell any Inventory on a bill-and-hold, guaranteed sale, sale
and return, sale on approval, consignment, or other repurchase or return basis.
7.12 Equipment. The Borrower represents and warrants to the Lender
---------
that all of the Equipment is and will be used or held for use in the Borrower's
business and is and will be fit for such purposes. The Borrower shall keep and
maintain the Equipment in good operating condition and repair (ordinary wear and
tear excepted) and shall make all necessary replacements thereof. So long as no
Event of Default has occurred and is continuing, or would occur under any other
Section of this Agreement as a result thereof, the Borrower may sell, transfer
or otherwise dispose of the Equipment that has become obsolete or unusable, in
the ordinary course of its business. The Borrower shall promptly inform the
Lender of any material additions to or deletions from the Equipment.
7.13 Assigned Contracts. The Borrower shall fully perform all of its
------------------
obligations under each of the Assigned Contracts, and shall enforce all of its
rights and remedies thereunder as it deems appropriate in its business judgment,
provided, however, the Borrower shall not take any action or fail to take any
- -------- -------
action with respect to the Assigned Contracts that would result in a waiver or
other loss of any material right or material remedy of the Borrower thereunder.
Without limiting the generality of the foregoing, the Borrower shall take all
action necessary or appropriate to permit, and shall not take any action which
would have any adverse
30
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<PAGE>
effect upon, the full enforcement of all indemnification rights under the
Assigned Contracts. Except in the ordinary course of its business, the Borrower
shall not, without the Lender's prior written consent, modify, amend,
supplement, compromise, satisfy, release, or discharge any of the Assigned
Contracts, any collateral securing the same, any Person liable directly or
indirectly with respect thereto, or any agreement relating to any of the
Assigned Contracts or the collateral therefor. The Borrower shall notify the
Lender in writing, promptly after it becomes aware thereof, of any event or fact
which could give rise to a claim by it for indemnification under any of the
Assigned Contracts and shall diligently pursue such right and report to the
Lender on all further developments with respect thereto. The Borrower shall
remit directly to the Lender, for application to the Obligations in such order
as the Lender determines, all amounts received by the Borrower as
indemnification or otherwise pursuant to the Assigned Contracts. If the Borrower
shall fail after the Lender's demand to diligently pursue any right under the
Assigned Contracts, or if an Event of Default exists, then the Lender may
directly enforce such right in its own or the Borrower's name and may enter into
such settlements or other agreements with respect thereto as the Lender
determines. All amounts thereby recovered by the Lender, after deducting
Lender's costs and expenses in connection therewith, shall be applied to the
Obligations in such order as the Lender determines. In any suit, proceeding or
action brought by the Lender under any Assigned Contract for any sum owing
thereunder or to enforce any provision thereof, the Borrower shall indemnify and
hold the Lender harmless from and against all expense, loss or damage suffered
by reason of any defense, setoff, counterclaim, recoupment, or reduction of
liability whatsoever of the obligor thereunder arising out of a breach by the
Borrower of any obligation thereunder or arising out of any other agreement,
indebtedness or liability at any time owing from the Borrower to or in favor of
such obligor or its successors. All such obligations of the Borrower shall be
and remain enforceable only against the Borrower and shall not be enforceable
against the Lender. Notwithstanding any provision hereof to the contrary, the
Borrower shall at all times remain liable to observe and perform all of its
duties and obligations under the Assigned Contracts and the Lender's exercise of
any of its rights with respect to the Collateral shall not release the Borrower
from any of such duties and obligations. The Lender shall not be obligated to
perform or fulfill any of the Borrower's duties or obligations under the
Assigned Contracts or to make any payment thereunder or to make any inquiry as
to the nature or sufficiency of any payment or Property received by it
thereunder or the sufficiency of performance by any party thereunder, or to
present or file any claim, or to take any action to collect or enforce any
performance or payment of any amounts due.
7.14 Documents, Instruments, and Chattel Paper. The Borrower
-----------------------------------------
represents and warrants to the Lender that: (a) to the best of its knowledge,
all documents, instruments, and chattel paper describing, evidencing, or
constituting Collateral, and all signatures and endorsements thereon, are and
will be complete, valid, and genuine; and (b) all goods evidenced by such
documents, instruments, and chattel paper are and will be owned by the Borrower
free and clear of all Liens other than Permitted Liens.
7.15 Right to Cure. The Lender may, in its sole discretion and at any
-------------
time, pay any amount or do any act required of the Borrower hereunder to
preserve, protect, maintain or
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<PAGE>
enforce the Obligations, the Collateral or the Security Interest, and which the
Borrower fails to pay or do, including, without limitation, payment of any
judgment against the Borrower, any insurance premium, any warehouse charge, any
finishing or processing charge, any landlord's claim, and any other Lien upon or
with respect to the Collateral. All payments that the Lender makes under this
Section 7.15 and all out-of-pocket costs and expenses that the Lender pays or
- ------------
incurs in connection with any action taken by it hereunder shall be charged to
the Borrower's loan account as a Revolving Loan. Any payment made or other
action taken by the Lender under this Section 7.15 shall be without prejudice to
------------
any right to assert an Event of Default hereunder and to proceed thereafter as
herein provided.
7.16 Power of Attorney. The Borrower hereby appoints the Lender and
-----------------
the Lender's designees as the Borrower's attorney, with Power: (a) to endorse
the Borrower's name on any checks, notes, acceptances, money orders, or other
forms of payment or security that come into the Lender's possession; (b) to sign
the Borrower's name on any invoice, bill of lading, or other document of title
relating to any Collateral, on drafts against customers, on assignments of
Accounts, on notices of assignment, financing statements and other public
records, on verifications of Accounts and on notices to Account Debtors; (c) to
notify the post office authorities, when an Event of Default exists, to change
the address for delivery of the Borrower's mail to an address designated by the
Lender and to receive, open and dispose of all mail addressed to the Borrower;
(d) to send requests for verification of Accounts to Account Debtors; and (e) to
do all things necessary to carry out this Agreement. The Borrower ratifies and
approves all acts of such attorney. Neither the Lender nor the attorney will be
liable for any acts or omissions or for any error of judgment or mistake of fact
or law except to the extent of the Lender's or its attorney's gross negligence
or willful misconduct. This power, being coupled with an interest, is
irrevocable until this Agreement has been terminated and the Obligations have
been fully satisfied.
7.17 Lender's Rights, Duties, and Liabilities. The Borrower assumes
----------------------------------------
all responsibility and liability arising from or relating to the use, sale, or
other disposition of the Collateral. Neither the Lender nor any of its
officers, directors, employees, and agents shall be liable or responsible in any
way for the safekeeping of any of the Collateral, or for any act or failure to
act with respect to the Collateral, or for any loss or damage thereto, or for
any diminution in the value thereof, or for any act of default or any
warehouseman, carrier, forwarding agency or other person whomsoever, all of
which shall be at the Borrower's sole risk. The Obligations shall not be
affected by any failure of the Lender to take any steps to perfect the Security
Interest or to collect or realize upon the Collateral, nor shall loss of or
damage to the Collateral release the Borrower from any of the Obligations. The
Lender may (but shall not be required to), without notice to or consent from the
Borrower, sue upon or otherwise collect, extend the time for payment of, modify
or amend the terms of, compromise or settle for cash, credit, or otherwise upon
any terms, grant other indulgences, extensions, renewals, compositions, or
releases, and take or omit to take any other action with respect to the
Collateral, any security therefor, any agreement relating thereto, any insurance
applicable thereto, or any Person liable directly or indirectly in connection
with any of the foregoing,
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<PAGE>
without discharging or otherwise affecting the liability of the Borrower for the
Obligations or under this Agreement or any other agreement now or hereafter
existing between the Lender and the Borrower.
8. BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES.
-------------------------------------------------
8.1 Books and Records. The Borrower shall maintain, at all times,
-----------------
correct and complete books, records and accounts in which complete, correct and
timely entries are made of its transactions in accordance with GAAP consistent
with those applied in the preparation of the Financial Statements. The Borrower
shall, by means of appropriate entries, reflect in such accounts and in all
Financial Statements proper liabilities and reserves for all taxes and proper
provision for depreciation and amortization of Property and bad debts, all in
accordance with GAAP. The Borrower shall maintain at all times books and
records pertaining to the Collateral in such detail, form, and scope as the
Lender shall reasonably require, including without limitation records of: (a)
all payments received and all credits and extensions granted with respect to the
Accounts; (b) the return, rejections repossession, stoppage in transit, loss,
damage, or destruction of any Inventory; and (c) all other dealings affecting
the Collateral.
8.2 Financial Information. The Borrower shall promptly furnish to
---------------------
the Lender or its agents all such financial information as the Lender shall
reasonably request, and notify its auditors and accountants that the Lender is
authorized to obtain such information directly from them. Without limiting the
foregoing, the Borrower and its Subsidiaries will furnish to the Lender, in such
detail as the Lender shall request, the following:
(a) As soon as available, but in any event not later than 120 days
after the close of each Fiscal Year, consolidated and consolidating audited
balance sheets, and statements of income and expense, retained earnings, and
changes in financial position and stockholders equity for the Borrower and its
consolidated Subsidiaries for such Fiscal Year, and the accompanying notes
thereto, setting forth in each case in comparative form figures for the previous
Fiscal Year, all in reasonable detail, fairly presenting. the financial position
and the results of operations of the Borrower and its consolidated Subsidiaries
as at the date thereof and for the Fiscal Year then ended, and prepared in
accordance with GAAP. Such statements shall be examined in accordance with
generally accepted auditing standards by and accompanied by a report thereon
unqualified as to scope of independent certified public accountants selected by
the Borrower and reasonably satisfactory to the Lender.
(b) As soon as available, but in any event not later than 60 days
after the close of each fiscal quarter other than the fourth quarter of a Fiscal
Year, consolidated and consolidating unaudited balance sheets of the Borrower
and its consolidated Subsidiaries as at the end of such quarter, and
consolidated and consolidating unaudited statements of income and expense and
changes in financial position for the Borrower and its consolidated Subsidiaries
for such quarter and for the period from the beginning of the Fiscal Year to the
end of such quarter, together with the accompanying notes thereto, all in
reasonable detail, fairly presenting the
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financial position and results of operation of the Borrower and its consolidated
Subsidiaries as at the date thereof and for such periods, prepared in accordance
with GAAP consistent with the audited Financial Statements required pursuant to
Section 8.2(a) (but without footnotes not required to be included in Borrower's
- --------------
Form 10-Q). Such statements shall be certified to be correct by the chief
financial or accounting officer of the Borrower, subject to normal year-end
adjustments.
(c) As soon as available, but in any event not later than 30 days
after the end of each month, consolidated and consolidating unaudited balance
sheets of the Borrower and its consolidated Subsidiaries as at the end of such
month, and consolidated and consolidating unaudited statements of income and
expenses for the Borrower and its consolidated Subsidiaries for such month and
for the period from the beginning of the Fiscal Year to the end of such month,
all in reasonable detail, fairly presenting the financial position and results
of operation of the Borrower and its consolidated Subsidiaries as at the date
thereof and for such periods, and prepared in accordance with GAAP consistent
with the audited Financial Statements required pursuant to Section 8.2(a) (but
--------------
without footnotes not required to be included in Borrower's Form 10-Q). Such
statements shall be certified to be correct by the chief financial or accounting
officer of the Borrower, subject to normal year-end adjustments.
(d) With each of the audited Financial Statements delivered pursuant
to Section 8.2(a), a certificate of the independent certified public accountants
--------------
that examined such statements to the effect that they have reviewed and are
familiar with the Loan Documents and that, in examining such Financial
Statements, they did not become aware of any fact or condition which then
constituted an Event or Event of Default, except for those, if any, described in
reasonable detail in such certificate.
(e) With each of the annual audited and monthly unaudited Financial
Statements delivered pursuant to Sections 8.2(a) and 8.2(b), a certificate of
--------------- ------
the chief executive or chief financial officer of the Borrower (i) setting forth
in reasonable detail the calculations required to establish that the Borrower
was in compliance with its covenants set forth in Sections 10.20 through 10.23
during the period covered in such Financial Statements, and (ii) stating that,
except as explained in reasonable detail in such certificate, (A) all of the
representations and warranties of the Borrower contained in this Agreement and
the other Loan Documents are correct and complete as at the date of such
certificate as if made at such time, (B) no Event or Event of Default then
exists or existed during the period covered by such Financial Statements and
(iii) describing and analyzing in reasonable detail all material trends, changes
and developments in such Financial Statements. If such certificate discloses
that a representation or warranty is not correct or complete, or that a covenant
has not been complied with, or that an Event or Event of Default existed or
exists, such certificate shall set forth what action the Borrower has taken or
proposes to take with respect thereto.
(f) No sooner than 90 days and no less than 30 days prior to the
beginning of each Fiscal Year, consolidated and consolidating projected balance
sheets,
34
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<PAGE>
statements of income and expense, and statements of cash flow for the Borrower
and its Subsidiaries as at the end of and for each month of such Fiscal Year.
(g) Within 60 days after the end of each fiscal quarter, a report of
the Capital Expenditures of the Borrower and its Subsidiaries for such quarter
and a statement of cash flow for the Borrower and its Subsidiaries for the
period from the beginning of the then current Fiscal Year to the end of such
quarter, prepared in accordance with GAAP consistent with the audited Financial
Statements required pursuant to Section 8.2(a).
--------------
(h) Promptly after their preparation, copies of any and all proxy
statements, financial statements, and reports which the Borrower makes available
to its stockholders.
(i) Promptly after filing with the PBGC, DOL, or IRS, a copy of each
annual report or other filing or notice filed with respect to each Plan of the
Borrower or any ERISA Affiliate.
(j) Such additional information as the Lender may from time to time
reasonably request regarding the financial and business affairs of the Borrower
or any Subsidiary, including, without limitation, projections of future
operations on both a consolidated and consolidating basis.
8.3 Notices to Lender. The Borrower shall notify the Lender in
-----------------
writing of the following matters at the following times:
(a) Immediately after becoming aware of the existence of any Event or
Event of Default.
(b) Immediately after becoming aware that the holder of any capital
stock of the Borrower or of any Debt has given notice or taken any action with
respect to a claimed default.
(c) Immediately after becoming aware of any material adverse change in
the Borrower's Property, business, operations, or condition (financial or
otherwise).
(d) Immediately after becoming aware of any pending or threatened
action, suit, proceeding, or counterclaim by any Person, or any pending or
threatened investigation by a Public Authority, which may materially and
adversely affect the Collateral, the repayment of the Obligations, the Lender's
rights under the Loan Documents, or the Borrower's Property, business,
operations, or condition (financial or otherwise).
35
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<PAGE>
(e) Immediately after becoming aware of any pending or threatened
strike, work stoppage, material unfair labor practice claim, or other material
labor dispute affecting the Borrower or any of its Subsidiaries.
(f) Immediately after becoming aware of any violation of any law,
statute, regulation, or ordinance of a Public Authority applicable to Borrower,
any Subsidiary, or their respective Properties which may materially and
adversely affect the Collateral, the repayment of the Obligations, the Lender's
rights under the Loan Documents, or the Borrower's Property, business,
operations, or condition (financial or otherwise).
(g) Immediately after becoming aware of any material violation by the
Borrower of Environmental Laws or immediately upon receipt of and any notice
that a Public Authority has asserted that the Borrower is not in compliance with
Environmental Laws or that its compliance is being investigated.
(h) Thirty (30) days prior to the Borrower changing its name.
(i) Immediately after becoming aware of any ERISA Event, accompanied
by any materials required to be filed with the PBGC with respect thereto;
immediately after the Borrower's receipt of any notice concerning the imposition
of any withdrawal liability under Section 4042 of ERISA with respect to a Plan;
immediately upon the establishment of any Pension Plan not existing at the
Closing Date or the commencement of contributions by the Borrower to any Pension
Plan to which the Borrower was not contributing at the Closing Date; and
immediately upon becoming aware of any other event or condition regarding a Plan
or the Borrower's or an ERISA Affiliate's compliance with ERISA, which may
materially and adversely affect the Borrower's Property, business, operation, or
condition (financial or otherwise).
Each notice given under this Section 8.3 shall describe the subject matter
-----------
thereof in reasonable detail and shall set forth the action that the Borrower
has taken or proposes to take with respect thereto.
9. GENERAL WARRANTIES AND REPRESENTATIONS.
--------------------------------------
The Borrower continuously warrants and represents to the Lender, at
all times during the term of this Agreement and until all Obligations have been
satisfied, that, except as hereafter disclosed to and accepted by the Lender in
writing:
9.1 Authorization, Validity, and Enforceability of this Agreement and
-----------------------------------------------------------------
the Loan Documents. The Borrower has the corporate power and authority to
- ------------------
execute, deliver and perform this Agreement and the other Loan Documents, to
incur the Obligations, and to grant the Security Interest. The Borrower has
taken all necessary corporate action (including, without limitation, obtaining
approval of its stockholders) to authorize its execution, delivery, and
36
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<PAGE>
performance of this Agreement and the other Loan Documents. No consent,
approval, or authorization of, or declaration or filing with, any Public
Authority, and no consent of any other Person, is required in connection with
the Borrower's execution, delivery, and performance of this Agreement and the
other Loan Documents, except for those already duly obtained. This Agreement
and the other Loan Documents have been duly executed and delivered by the
Borrower and constitutes the legal, valid and binding obligation of the
Borrower, enforceable against it in accordance with its terms without defense,
setoff, or counterclaim. The Borrower's execution, delivery, and performance of
this Agreement and the other Loan Documents do not and will not conflict with,
or constitute a violation or breach of, or constitute a default under, or result
in the creation or imposition of any Lien (other than a Permitted Lien) upon the
Property of the Borrower or any of its Subsidiaries (except as contemplated by
this Agreement and the other Loan Documents) by reason of the terms of (a) any
mortgage, lease, agreement, or instrument to which the Borrower or any of its
Subsidiaries is a party or which is binding upon it, (b) any judgment, law,
statute, rule or governmental regulation applicable to the Borrower or any of
its Subsidiaries, or (c) the Certificate or Articles of Incorporation or By-Laws
of the Borrower or any of its Subsidiaries.
9.2 Validity and Priority of Security Interest. The provisions of
------------------------------------------
this Agreement and the other Loan Documents create legal and valid Liens on all
the Collateral in the Lender's favor, and when all proper filings, recordings,
and other actions necessary to perfect such Liens have been made or taken, such
Liens will constitute perfected and continuing Liens on all the Collateral,
having priority over all other Liens on the Collateral except Permitted Liens,
securing all the Obligations, and enforceable against the Borrower and all third
parties.
9.3 Organization and Qualification. The Borrower: (a) is duly
------------------------------
incorporated and organized and validly existing in good standing under the laws
of the State of Delaware; (b) is qualified to do business as a foreign
corporation and is in good standing in the States of California, which is the
only state in which qualification is necessary in order for it to own or lease
its Property and conduct its business; and (c) has all requisite power and
authority to conduct its business and to own its Property.
9.4 Corporate Name; Prior Transactions. The Borrower has not, during
----------------------------------
the past five years, been known by or used any other corporate or fictitious
name, or been a party to any merger or consolidation, or acquired all or
substantially all of the assets of any Person, or acquired any of its Property
out of the ordinary course of business, except as set forth on Schedule 9.4.
------------
9.5 Subsidiaries and Affiliates. Schedule 9.5 is a correct and
--------------------------- ------------
complete list of the name and relationship to the Borrower of each and all of
the Borrower's Subsidiaries and other Affiliates. Each Subsidiary is (a) duly
incorporated and organized and validly existing in good standing under the laws
of its state of incorporation set forth on Schedule 9.5, and (b) qualified to do
------------
business as a foreign corporation and in good standing in the states set forth
37
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<PAGE>
opposite its name on Schedule 9.5, which are the only states in which such
------------
qualification is necessary in order for it to own or lease its Property and
conduct its business.
9.6 Financial Statements and Projections.
------------------------------------
(a) The Borrower has delivered to the Lender the audited balance sheet
and related statements of income, retained earnings, changes in financial
position, and changes in stockholders equity for the Borrower as of March 31,
1995, and for the Fiscal Year then ended, accompanied by the report thereon of
the Borrower's independent certified public accountants, Ernst & Young, LLP. The
Borrower has also delivered to the Lender the unaudited balance sheet and
related statements of income and changes in financial position for the Borrower,
as at March 31, 1996 and for the 12 months then ended. Such financial
statements (without notes and subject to final adjustments by the Borrower's
independent auditors) have been delivered to the Lender concurrently herewith.
All such financial statements have been prepared otherwise in accordance with
GAAP and otherwise present accurately and fairly the Borrower's financial
position as at the dates thereof and its results of operations for the periods
then ended.
(b) The Latest Projections represent the Borrower's best estimate of
the Borrower's future financial performance for the periods set forth therein.
The Latest Projections have been prepared on the basis of the assumptions set
forth therein, which the Borrower believes are fair and reasonable in light of
current and reasonably foreseeable business conditions.
9.7 Capitalization. As of March 31, 1996, the Borrower's authorized
--------------
capital stock consisted of 15,000,000 shares of Common Stock, par value $.01 per
share, of which 6,500,000 shares had been validly issued and outstanding, fully
paid and non-assessable, and 2,000,000 shares of Preferred Stock, $.01 per value
per share, of which no shares had been issued.
9.8 Solvency. The Borrower is Solvent prior to and after giving
--------
effect to the making of each Revolving Loan.
9.9 Debt. The Borrower has no Debt, except (a) the Obligations, (b)
----
Debt set forth in the most recent Financial Statements delivered to the Lender,
or the notes thereto, (c) trade payables and other contractual obligations
arising in the ordinary course of business since the date of such Financial
Statements, and (d) Debt incurred since the date of such Financial Statements to
finance Capital Expenditures permitted hereby.
9.10 Distributions. From March 31, 1996 through the date hereof, no
-------------
Distribution has been declared, paid, or made upon or in respect of any capital
stock or other securities of the Borrower.
38
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<PAGE>
9.11 Title to Property. Except for Permitted Liens and except for
-----------------
Property which the Borrower leases, the Borrower has good, indefeasible, and
merchantable title to all of its other Property including, without limitation,
the assets reflected on the most recent Financial Statements delivered to the
Lender, except as disposed of since the date thereof in the ordinary course of
business.
9.12 Adequate Assets. The Borrower possesses adequate assets for the
---------------
conduct of its business.
9.13 Real Property; Leases. Schedule 9.13 hereto is a correct and
--------------------- -------------
complete list of all real property owned by the Borrower, all leases and
subleases of real or personal property by the Borrower as lessee or sublessee,
and all leases and subleases of real or personal property by the Borrower as
lessor or sublessor. Each of such leases and subleases is valid and enforceable
in accordance with its terms and is in full force and effect and no default by
any party to any such lease or sublease exists.
9.14 Proprietary Rights Collateral. Except for a leasing agreement
-----------------------------
between Borrower and Camp 7, Inc. dated July 6, 1995, a copy of which has been
delivered to Lender, none of the Proprietary Rights are subject to any licensing
agreement or similar arrangement. None of the Proprietary Rights infringe on or
conflict with any other Person's Property, and no other Person's Property
infringes on or conflicts with the Proprietary Rights, except for infringements
or conflicts that, individually or taken together, could not reasonably be
expected to have a material adverse effect on the Borrower's Property, business
operations, or conditions (financial or otherwise). The Proprietary Rights
presently owned by the Borrower constitute all of the Property of such type
necessary to the current and anticipated future conduct of the Borrower's
business.
9.15 Trade Names and Terms of Sale. All trade names or styles under
-----------------------------
which the Borrower will sell Inventory or create Accounts, or to which
instruments in payment of Accounts may be made payable, are listed on Schedule
9.15 --------
- ----
9.16 Litigation. Except as disclosed in writing to the Lender before
----------
the Closing Date, there is no pending or, to the best of the Borrower's
knowledge, threatened action, suit, proceeding, or counterclaim by any Person,
or investigation by any Public Authority, or any basis for any of the foregoing,
which may materially and adversely affect the Collateral, the repayment of the
Obligations, the Lender's rights under the Loan Documents, or the Borrower's
Property, business, operations, or condition (financial or otherwise).
9.17 Restrictive Agreements. The Borrower is not a party to any
----------------------
contract or agreement, and is not subject to any charter or other corporate
restriction, which affects its ability to execute, deliver, and perform the Loan
Documents and repay the Obligations or which materially and adversely affects
the Borrower's Property, business, operations, or condition (financial or
otherwise).
39
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<PAGE>
9.18 Labor Disputes. Except as disclosed in writing to the Lender
--------------
before the Closing Date: (a) there is no collective bargaining agreement or
other labor contract covering employees of the Borrower or any of its
Subsidiaries; (b) no such collective bargaining agreement or other labor
contract is scheduled to expire during the term of this Agreement; (c) no union
of other labor organization is seeking to organize, or to be recognized as, a
collective bargaining unit of employees of the Borrower or any of its
Subsidiaries or for any similar purpose; and (d) there is no pending or, to the
best of the Borrower's knowledge, threatened strike, work stoppage, material
unfair labor practice claims, or other material labor dispute against or
affecting the Borrower, or any of its Subsidiaries or their respective
employees.
9.19 Environmental Laws. Except as otherwise disclosed on Schedule
------------------ --------
9.19:
- ----
(a) The Borrower and its Subsidiaries have complied in all material
respects with all Environmental Laws applicable to its Premises and business,
and neither the Borrower nor any Subsidiary nor any of its present Premises or
operations, nor its past property or operations, is subject to any enforcement
order from or liability agreement with any Public Authority or private Person
respecting (i) compliance with any Environmental Law or (ii) any potential
liabilities and costs or remedial action arising from the Release or threatened
Release of a Contaminant.
(b) The Borrower and its Subsidiaries have obtained all permits
necessary for their current operations under Environmental Laws, and all such
permits are in good standing and the Borrower and its Subsidiaries are in
compliance with all terms and conditions of such permits.
(c) Neither the Borrower nor any of its Subsidiaries, nor, to the best
of the Borrower's knowledge, any of its predecessors in interest, has stored,
treated or disposed of any hazardous waste on any Premises, as defined pursuant
to 40 CFR Part 261 or any equivalent Environmental Law.
(d) Neither the Borrower nor any of its Subsidiaries has received any
summons, complaint, order or similar written notice that it is not currently in
compliance with, or that any Public Authority is investigating its compliance
with, any Environmental Laws or that it is or may be liable to any other Person
as a result of a Release or threatened Release of a Contaminant.
(e) None of the present or past operations of the Borrower and its
Subsidiaries is the subject of any investigation by any Public Authority
evaluating whether any remedial action is needed to respond to a Release or
threatened Release of a Contaminant.
(f) There is not now, nor to the best of the Borrower's knowledge
has there ever been on or in the Premises:
40
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<PAGE>
(i) any underground storage tanks or surface impoundments,
(ii) any asbestos containing material, or
(iii) any polychlorinated biphenyls (PCB's) used in hydraulic
oils, electrical transformers or other equipment.
(g) Neither the Borrower nor any of its Subsidiaries has filed any
notice under any requirement of Environmental Law reporting a spill or
accidental and unpermitted release or discharge of a Contaminant into the
environment.
(h) Neither the Borrower nor any of its Subsidiaries has entered into
any negotiations or settlement agreements with any Person (including, without
limitation, the prior owner of its property) imposing material obligations or
liabilities on the Borrower or any of its Subsidiaries with respect to any
remedial action in response to the Release of a Contaminant or environmentally
related claim.
(i) None of the products manufactured, distributed or sold by the
Borrower or any of its Subsidiaries contain asbestos material.
(j) No Environmental Lien has attached to any Premises of the Borrower
or any of its Subsidiaries.
9.20 No Violation of Law. The Borrower is not in violation of any
-------------------
law, statute, regulation, ordinance, judgment, order, or decree applicable to it
which violation would in any respect materially and adversely affect the
Collateral, the repayment of the Obligations, the Lender's rights under the Loan
Documents, or the Borrower's Property, business, operations, or condition
(financial or otherwise).
9.21 No Default. The Borrower is not in default with respect to any
----------
note, indenture, loan agreement, mortgage, lease, deed, or other agreement to
which the Borrower is a party or bound, which default could reasonably be
expected to materially and adversely affect the Collateral, the repayment of the
Obligations, the Lender's rights under the Loan Documents, or the Borrower's
Property, business, operations, or condition (financial or otherwise).
9.22 ERISA Compliance. Except as specifically disclosed in Schedule
---------------- --------
9.22:
- ----
(a) Each Plan is in compliance in all material respects with the
applicable provisions of ERISA, the Code and other federal or state law. Each
Plan which is intended to qualify under Section 401(a) of the Code has received
a favorable determination letter from the IRS and to the best knowledge of the
Borrower, nothing has occurred which would cause the loss of such qualification.
The Borrower and each ERISA Affiliate has made all required contributions to any
Plan subject to Section 412 of the Code, and no application for
41
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<PAGE>
a funding waiver or an extension of any amortization period pursuant to Section
412 of the Code has been made with respect to any Plan.
(b) There are no pending or, to the best knowledge of Borrower,
threatened claims, actions or lawsuits, or action by any Public Authority, with
respect to any Plan which has resulted or could reasonably be expected to result
in a material adverse effect on the Borrower's business or operations. There
has been no prohibited transaction or violation of the fiduciary responsibility
rules with respect to any Plan which has resulted or could reasonably be
expected to result in a material adverse effect on the Borrower's business or
operations.
(c) (i) No ERISA Event has occurred or is reasonably expected to
occur; (ii) no Pension Plan has any unfunded pension liability; (iii) neither
the Borrower nor any ERISA Affiliate has incurred, or reasonably expects to
incur, any liability under Title IV of ERISA with respect to any Pension Plan
(other than premiums due and not delinquent under Section 4007 of ERISA); (iv)
neither the Borrower nor any ERISA Affiliate has incurred, or reasonably expects
to incur, any liability (and no event has occurred which, with the giving of
notice under Section 4219 of ERISA, would result in such liability) under
Section 4201 or 4243 of ERISA with respect to a Multi-employer Plan; and (v)
neither the Borrower nor any ERISA Affiliate has engaged in a transaction that
could be subject to Section 4069 or 4212(c) of ERISA.
9.23 Taxes. The Borrower and its Subsidiaries have, to the best of
-----
the Borrower's knowledge, filed all tax returns and other reports required to be
filed and have paid all taxes, assessments, fees and other governmental charges
levied or imposed upon them or their properties, income or assets that are
otherwise due and payable except for such taxes as are being contested in good
faith, by appropriate proceedings diligently pursued and with respect to which
reserves, in accordance with GAAP, are being maintained by the Borrower or any
such Subsidiary, as the case may be.
9.24 Use of Proceeds. None of the transactions contemplated in this
---------------
Agreement (including, without limitation, the use of proceeds from the Loans)
will violate or result in the violation of Section 7 of the Securities Exchange
Act of 1934, as amended, or any regulations issued pursuant thereto, including
without limitation, Regulations G, T, U and X of the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"), 12 C.F.R., Chapter II.
Borrower does not own or intend to carry or purchase any "margin stock" within
the meaning of said Regulation U or G. None of the proceed of the loans will be
used, directly or indirectly, to purchase or carry (or refinance any borrowing,
the proceeds of which were used to purchase or carry) any "security" within the
meaning of the Securities Exchange Act of 1934, as amended.
9.25 Private Offerings. Borrower has not, directly or indirectly,
-----------------
offered the Loans for sale to, or solicited offers to buy part thereof from, or
otherwise approached or
42
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<PAGE>
negotiated with respect thereto with any prospective purchaser other than
Lender. Borrower hereby agrees that neither it nor anyone acting on its behalf
has offered or will offer the Loans or any part thereof or any similar
securities for issue or sale to or solicit any offer to acquire any of the same
from anyone so as to bring the issuance thereof within the provisions of Section
5 of the Securities Act of 1933, as amended.
9.26 Broker's Fees. Borrower and Lender represent and warrant to each
-------------
other that no Person is entitled to any brokerage fees with respect to the
transactions described in this Agreement.
9.27 No Material Adverse Change. No material adverse change has
--------------------------
occurred in the Borrower's Property, business, operations, or conditions
(financial or otherwise) since the date of the Financial Statements delivered to
the Lender.
9.28 Disclosure. Neither this Agreement nor any document or statement
----------
furnished to the Lender by or on behalf of the Borrower hereunder contains any
untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements contained herein or therein not
misleading.
10. AFFIRMATIVE AND NEGATIVE COVENANTS.
----------------------------------
The Borrower covenants that, so long as any of the Obligations remain
outstanding or this Agreement is in effect:
10.1 Taxes and Other Obligations. The Borrower and each of its
---------------------------
Subsidiaries shall: (a) file when due all tax returns and other reports which
it is required to file, pay, or provide for the payment, when due, of all taxes,
fees, assessments and other governmental charges against it or upon its
Property, income, and franchises, make all required withholding and other tax
deposits, and establish adequate reserves for the payment of all such items, and
shall provide to the Lender, upon request, satisfactory evidence of its timely
compliance with the foregoing; and (b) pay when due all Debt owed by it and
perform and discharge in a timely manner all other obligations undertaken by it;
provided, however that the Borrower and its Subsidiaries need not pay any tax,
- -------- -------
fee, assessment, governmental charge, or Debt, or perform or discharge any other
obligation, that it is contesting in good faith by appropriate proceedings
diligently pursued and as to which appropriate reserves shall have been
established in accordance with GAAP.
10.2 Corporate Existence and Good Standing. The Borrower and each of
-------------------------------------
its Subsidiaries shall maintain its corporate existence and its qualification
and good standing in all states necessary to conduct its business and own its
Property, and shall obtain and maintain all licenses, permits, franchises and
governmental authorizations necessary to conduct its business and own its
Property.
43
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<PAGE>
10.3 Compliance with Law and Agreements. The Borrower and each of its
----------------------------------
Subsidiaries shall comply with the material terms and provisions of each
judgment, law, statute, rule, and governmental regulation applicable to it and
each contract, mortgage, lien, lease, indenture, order, instrument, agreement,
or document to which it is a party or by which it is bound, except to the extent
that any such failure to comply does not, and could not reasonably be expected
to, have a material adverse effect on Borrower's Property, business, operations,
or conditions (financial or otherwise).
10.4 Maintenance of Property and Insurance. The Borrower and each of
-------------------------------------
its Subsidiaries shall: (a) maintain all of its Property necessary and useful
in its business in good operating condition and repair, ordinary wear and tear
excepted; and (b) in addition to the insurance required by Section 7.7, maintain
-----------
with financially sound and reputable insurers such other insurance with respect
to its Property and business against casualties and contingencies of such types
(including, without limitation, business interruption, public liability, product
liability, and larceny, embezzlement or other criminal misappropriation) and in
such amounts as is customary for Persons of established reputation engaged in
the same or a similar business and similarly situated, naming the Lender, at its
request, as additional insured under each such policy.
10.5 Environmental Laws. The Borrower shall conduct its business in
------------------
full compliance with all Environmental Laws applicable to it, including, without
limitation, those relating to the Borrower's generation, handling, use, storage,
and disposal of hazardous and toxic wastes and substances. The Borrower shall
take prompt and appropriate action to respond to any non-compliance with
Environmental Laws and shall regularly report to the Lender on such response.
Without limiting the generality of the foregoing, whenever the Borrower gives
notice to the Lender pursuant to Section 8.3(g) the Borrower shall, at the
--------------
Lender's request and the Borrower's expense: (a) cause an independent
environmental engineer acceptable to the Lender to conduct such tests of the
site where the Borrower's noncompliance or alleged non-compliance with
Environmental Laws has occurred and prepare and deliver to the Lender a report
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 (b) provide to the Lender a supplemental report of such engineer whenever
the scope of the environmental problems, or the Borrower's response thereto or
the estimated costs thereof, shall change.
10.6 ERISA. The Borrower shall cause each Plan to be qualified within
-----
the meaning of Section 401(a) of the Code and to be administered in all respects
in compliance with ERISA and Section 401(a) of the Code.
10.7 Mergers, Consolidations, Acquisitions, or Sales. Neither the
-----------------------------------------------
Borrower nor any of its Subsidiaries shall enter into any transaction of merger,
reorganization, or consolidation, or transfer, sell, assign, lease, or otherwise
dispose of all or any part of its Property, or wind up, liquidate or dissolve,
or agree to do any of the foregoing, except sales of
44
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<PAGE>
Inventory in the ordinary course of its business or sales of Equipment as
provided in Section 7.12.
10.8 Distributions; Capital Changes. Neither the Borrower nor any of
------------------------------
its Subsidiaries shall: (a) directly or indirectly declare or make, or incur
any liability to make, any Distribution, except: Distributions in accordance
with the Tax Indemnification Agreement; Distributions consisting of payments in
respect of stock appreciation rights as presently provided for under the 1992
Plan; Distributions to the Borrower by a Subsidiary wholly owned by the
Borrower; and Distributions consisting of dividends payable on, or redemption
of, its common stock if after giving effect thereto (i) no Event of Default
shall exist, (ii) there shall exist at least $2,000,000 of Availability, and
(iii) the ratio of (X) the sum of Adjusted Net Earnings from Operations, plus
----
interest expense, plus taxes, plus depreciation and amortization expense to (Y)
---- ----
the sum of principal payments on Debt for borrowed money, plus, interest
----
expense, plus taxes, plus Capital Expenditures, plus Distributions, all for the
---- ---- ----
preceding 12 month period, shall exceed 1.0:1.0; or (b) make any change in its
capital structure which could adversely affect the repayment of the Obligations.
10.9 Transactions Affecting Collateral or Obligations. Neither the
------------------------------------------------
Borrower nor any of its Subsidiaries shall enter into any transaction which
materially and adversely affects the Collateral or the Borrower's ability to
repay the Obligations.
10.10 Guaranties. Neither the Borrower nor any of its Subsidiaries
----------
shall make, issue, or become liable on any Guaranty, except Guarantees in favor
of the Lender and endorsements of instruments for deposit.
10.11 Debt. Neither the Borrower nor any of its Subsidiaries shall
----
incur or maintain any Debt, other than: (a) the Obligations; (b) trade payables
and contractual obligations to suppliers and customers incurred in the ordinary
course of business; and (c) other Debt existing on the Closing Date and
reflected in the Financial Statements delivered to the Lender concurrently
herewith.
10.12 Prepayment. Neither the Borrower nor any of its Subsidiaries
----------
shall voluntarily prepay any Debt, except the Obligations in accordance with
their terms.
10.13 Transactions with Affiliates. Except as set forth below and on
----------------------------
Schedule 10.13, neither the Borrower nor any of its Subsidiaries shall: sell,
- --------------
transfer, distribute, or pay any money or Property to any Affiliate, or lend or
advance money or Property to any Affiliate, or invest in (by capital
contribution or otherwise) or purchase or repurchase any stock or indebtedness
or any Property of any Affiliate, or become liable on any Guaranty of the
indebtedness, dividends, or other obligations of any Affiliate. Notwithstanding
the foregoing, if no Event of Default has occurred and is continuing, the
Borrower and its Subsidiaries may engage in transactions (in addition to those
set forth on Schedule 10.13) with Affiliates in the ordinary course of business
--------------
in amounts and upon terms fully disclosed to the Lender and no less
45
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favorable to the Borrower or such Subsidiary than would obtain in a comparable
arm's length transaction with a third party who is not an Affiliate.
10.14 Business Conducted. The Borrower and its Subsidiaries shall
------------------
not engage, directly or indirectly, in any line of business other than the
businesses in which the Borrower and its Subsidiaries are engaged on the Closing
Date.
10.15 Liens. Neither the Borrower nor any of its Subsidiaries shall
-----
create, incur, assume, or permit to exist any Lien on any Property now owned or
hereafter acquired by any of them, except Permitted Liens.
10.16 Sale and Leaseback Transactions. Neither the Borrower nor any
-------------------------------
of its Subsidiaries shall, directly or indirectly, enter into any arrangement
with any Person providing for the Borrower or a Subsidiary to lease or rent
Property that the Borrower or a Subsidiary has or will sell or otherwise
transfer to such Person.
10.17 New Subsidiaries. The Borrower shall not, directly or
----------------
indirectly, organize or acquire any Subsidiary other than those listed on
Schedule 10.18.
- --------------
10.18 Restricted Investments. Neither the Borrower nor any of its
----------------------
Subsidiaries shall make any Restricted Investment.
10.19 Capital Expenditures. Neither the Borrower nor any of its
--------------------
Subsidiaries shall make or incur any Capital Expenditure if, after giving effect
thereto, the aggregate amount of all Capital Expenditures by the Borrower and
its Subsidiaries in any Fiscal year would exceed $3,600,000.
10.20 Operating Lease Obligations. Neither the Borrower nor any of
---------------------------
its Subsidiaries shall enter into any lease of real or personal property as
lessee or sublessee (other than Capital Leases), if, after giving effect
thereto, the aggregate amount of Rentals (as hereinafter defined) payable by the
Borrower and its Subsidiaries in any Fiscal Year in respect of such lease and
all other such leases would exceed $_________ (such amount being referred to
herein as "Permitted Rentals"). The term "Rentals" means all payments due from
-----------------
the lessee or sublessee under a lease, including, without limitation, basic
rent, percentage rent, property taxes, utility or maintenance costs, and
insurance premiums.
10.21 Minimum Interest Coverage.
-------------------------
(a) In order to avoid an increase in the Reference Rate Margin and the
LIBOR Margin, the Borrower will maintain a ratio of (a) Adjusted Net Earnings
from Operations for the fiscal quarter specified below plus interest, tax,
----
depreciation, and amortization expense for such fiscal quarter to (b) interest
--
expense for such fiscal quarter of not less than the following:
46
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<PAGE>
Quarter Ending Minimum Ratio
9/30/96 1.06:1.0
12/31/96 3.87:1.0
3/31/97 4.01:1.0
6/30/97 0.30:1.0
9/30/97 1.75:1.0
12/31/97 and thereafter 5.50:1.0
(b) The Borrower will maintain a ratio of (a) Adjusted Net Earnings
from Operations for the fiscal quarter specified below plus interest, tax,
----
depreciation, and amortization expense for such fiscal quarter to (b) interest
--
expense for such fiscal quarter of not less than the following, and any failure
to maintain the applicable ratios set forth in this Section 10.22(b) shall
constitute an Event of Default:
Quarter Ending Minimum Ratio
6/30/96 0.01:1.0
9/30/96 0.75:1.0
12/31/96 3.25:1.0
3/31/97 2.70:1.0
6/30/97 0.01:1.0
9/30/97 1.25:1.0
12/31/97 4.50:1.0
3/31/98 and thereafter 5.00:1.0
10.22 Adjusted Tangible Net Worth.
---------------------------
(a) In order to avoid an increase in the Reference Rate Margin and the
LIBOR Margin, the Borrower will maintain Adjusted Tangible Net Worth of not less
than the following amounts as of the following dates:
47
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<PAGE>
Quarter Ending Minimum Dollar Amount (in 000s)
6/30/96 $23,671
9/30/96 $23,346
12/31/96 $24,849
3/31/97 $24,889
6/30/97 $23,800
9/30/97 $23,800
12/31/97 $25,200
3/31/98 and thereafter $25,400
(b) The Borrower will maintain Adjusted Tangible Net Worth of not less
than the following amounts as of the following dates, and any failure to
maintain the applicable ratios set forth in this Section 10.23(b) shall
constitute an Event of Default:
Month Ending Minimum Dollar Amount (in 000s)
5/31/96 $23,000
6/30/96 $23,000
7/31/96 $23,000
8/30/96 $23,000
9/30/96 $23,000
10/31/96 $22,000
11/30/96 $22,000
12/31/96 $24,300
1/31/97 $23,400
2/28/97 $23,400
3/31/97 $23,400
4/30/97 $23,400
5/31/97 $23,400
48
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<PAGE>
6/30/97 $23,400
7/31/97 $23,400
8/30/97 $23,400
9/30/97 $23,400
10/31/97 $22,000
11/30/97 $22,000
12/31/97 $25,000
1/31/98 $24,600
2/28/98 $24,600
3/31/98 and thereafter $24,600
10.23 Further Assurances. The Borrower shall execute and deliver, or
------------------
cause to be executed and delivered, to the Lender such documents and agreements,
and shall take or cause to be taken such actions, as the Lender may, from time
to time, request to carry out the terms and conditions of this Agreement and the
other Loan Documents.
11. CLOSING; CONDITIONS TO CLOSING.
------------------------------
The Lender will not be obligated to make the initial Loans or to
obtain any Letters of Credit on the Closing Date, unless the following
conditions precedent have been satisfied in a manner satisfactory to Lender:
11.1 Conditions Precedent to Making of Loans on the Closing Date.
-----------------------------------------------------------
(a) Representations and Warranties; Covenants; Events. The Borrower's
-------------------------------------------------
representations and warranties contained in this Agreement and the other Loan
Documents shall be correct and complete; the Borrower shall have performed and
complied with all covenants, agreements, and conditions contained herein and in
the other Loan Documents which are required to have been performed or complied
with; and there shall exist no Event or Event of Default on the Closing Date.
(b) Delivery of Documents. The Borrower shall have delivered, or
---------------------
caused to be delivered, to the Lender such documents, instruments and agreements
as the Lender shall request in connection herewith, duly executed by all parties
thereto other than the Lender, and in form and substance satisfactory to the
Lender and its counsel, including, without limitation, this Agreement, a Uniform
Commercial Code financing statement for filing in the
49
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<PAGE>
Office of the California Secretary of State, and an opinion of counsel issued to
Lender by Borrower's counsel.
(c) Termination of Liens. The Lender shall have received a duly
--------------------
executed payoff letter from Wells Fargo Bank, N.A., and duly executed UCC-2
Termination Statements and other instruments, in form and substance satisfactory
to the Lender, as shall be necessary to terminate and satisfy all Liens on the
Property of the Borrower and its Subsidiaries except Permitted Liens.
(d) Environmental Compliance. The Lender shall have received evidence
------------------------
satisfactory to it that there does not exist on the Premises or in connection
with the operation thereof or of the Borrower's business, any violation of any
Environmental Laws.
(e) Required Approvals. The Lender shall have received certified
------------------
copies of all consents or approvals of any Public Authority or other Person
which the Lender determines is required in connection with the transactions
contemplated by this Agreement.
(f) No Material Adverse Change. There shall have occurred no material
--------------------------
adverse change in the Borrower's business or financial condition or in the
Collateral since March 31, 1996, and the Lender shall have received a
certificate of Borrower's chief financial officer to such effect.
(g) Proceedings. All proceedings to be taken in connection with the
-----------
transactions contemplated by this Agreement, and all documents, contemplated in
connection herewith, shall be satisfactory in form and substance to the Lender
and its counsel.
(h) Excess Availability. After taking into account the Revolving
-------------------
Loans and the Letters of Credit issued on the Closing Date, there shall be
remaining Availability of at least ten percent (10%) of the Availability
calculated prior to the making of such Revolving Loans and the issuance of the
Letters of Credit.
11.2 Conditions Precedent to Each Loan. The obligation of the Lender
---------------------------------
to make each Loan or to provide for the issuance of any Letter of Credit shall
be subject to the conditions precedent that on the date of any such extension of
credit the following statements shall be true, and the acceptance by the
Borrower of any extension of credit shall be deemed to be a statement to the
effect set forth in clauses (a) and (b), with the same effect as the delivery to
the Lender of a certificate signed by the chief executive officer and chief
financial officer of the Borrower, dated the date of such extension of credit,
stating that:
(a) The representations and warranties contained in this Agreement and
the other Loan Documents are correct in all material respects on and as of the
date of such extension of credit as though made on and as of such date, except
to the extent the Lender has
50
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<PAGE>
been notified by the Borrower that any representation or warranty is not correct
and the Lender has explicitly waived in writing compliance with such
representation or warranty; and
(b) No Event or Event of Default has occurred and is continuing, or
would result from such extension of credit.
12. DEFAULT; REMEDIES.
-----------------
12.1 Events of Default. It shall constitute an event of default
-----------------
("Event of Default") if any one or more of the following shall occur for any
------------------
reason:
(a) failure to make payment of principal, interest, fees or premium on
any of the Obligations when due;
(b) any representation or warranty made by the Borrower in this
Agreement, any of the other Loan Documents, any Financial Statement, or any
certificate furnished by the Borrower or any Subsidiary at any time to the
Lender shall prove to be untrue in any material respect as of the date when made
or furnished;
(c) default shall occur in the observance or performance of any of the
covenants and agreements contained in this Agreements, the other Loan Documents,
or any other agreement entered into at any time to which the Borrower and the
Lender are party, or if any such agreement or document shall terminate (other
than in accordance with its terms or with the written consent of the Lender) or
become void or unenforceable without the written consent of the Lender;
(d) default shall occur in the payment of any principal or interest on
any indebtedness for borrowed money (other than the Obligations) beyond any
period of grace provided with respect thereto;
(e) the Borrower or any Subsidiary shall: (i) file a voluntary
petition in bankruptcy or file a voluntary petition or an answer or otherwise
commence any action or proceeding seeking reorganization, arrangement or
readjustment of its debts or for any other relief under the Federal Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency act or law, state
or federal, now or hereafter existing, or consent to, approve of, or acquiesce
in, any such petition, action or proceeding; (ii) apply for or acquiesce in the
appointment of a receiver, assignee, liquidator, sequestrator, custodian,
trustee or similar officer for it or for all or any part of its Property; (iii)
make an assignment for the benefit of creditors; or (iv) be unable generally to
pay its debts as they become due;
(f) an involuntary petition shall be filed or an action or proceeding
otherwise commenced seeking reorganization, arrangement or readjustment of the
Borrower's or any Subsidiary's debts or for any other relief under the Federal
Bankruptcy Code, as
51
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<PAGE>
amended, or under any other bankruptcy or insolvency act or law, state or
federal, now or hereafter existing;
(g) a receiver, assignee, liquidator, sequestrator, custodian, trustee
or similar officer for the Borrower or any Subsidiary or for all or any part of
their Property shall be appointed involuntarily; or a warrant of attachment,
execution or similar process shall be issued against any part of the Property of
the Borrower or any Subsidiary;
(h) the Borrower or any Subsidiary shall file a certificate of
dissolution under applicable state law or shall be liquidated, dissolved or
wound-up or shall commence or have commenced against it any action or proceeding
for dissolution, winding-up or liquidation, or shall take any corporate action
in furtherance thereof;
(i) all or any part of the Property of the Borrower shall be
nationalized, expropriated or condemned, seized or otherwise appropriated, or
custody or control of such Property or of the Borrower shall be assumed by any
Public Authority or any court of competent jurisdiction at the instance of any
Public Authority, except where contested in good faith by proper proceedings
diligently pursued where a stay of enforcement is in effect;
(j) any guaranty of the Obligations shall be terminated, revoked or
declared void or invalid;
(k) one or more final judgments for the payment of money aggregating
in excess of $100,000 (to the extent not covered by insurance or where the
insurer has not accepted coverage) shall be rendered against the Borrower or any
Subsidiary and the Borrower or such Subsidiary shall fail to discharge the same
within thirty (30) days from the date of notice of entry thereof or to appeal
therefrom;
(l) any loss, theft, damage or destruction of any item or items of
Collateral occurs which: (i) materially and adversely affects the operation of
the Borrower's business or (ii) is material in amount and is not adequately
covered by insurance;
(m) Norbert J. Olberz, his estate, heirs (following his death), or one
or more trusts controlled by him, ceases to own or have the right to control the
voting of at least 51% of the Voting Stock of Borrower;
(n) any event or condition shall occur or exist with respect to a Plan
that could, in the Lender's reasonable judgment, subject the Borrower or any
Subsidiary to any tax, penalty or other liabilities under ERISA or the Code
which in the aggregate are material in relation to the business, operations,
Property or financial or other condition of the Borrower and its Subsidiaries
taken as a whole; or
52
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<PAGE>
(o) there occurs any material adverse change in the Borrower's
Property, business, operations, or condition (financial or otherwise).
13. REMEDIES.
--------
(a) If an Event of Default exists, the Lender may, without notice to
or demand on the Borrower, do one or more of the following at any time or times
and in any order: (i) reduce the Availability or one or more of the elements
thereof; (ii) restrict the amount of or refuse to make Revolving Loans and
restrict or refuse to arrange for Letters of Credit; (iii) terminate this
Agreement; (iv) declare any or all Obligations to be immediately due and payable
(provided however that upon the occurrence of any Event of Default described in
Sections 11.1(e). 11.1(f), 11.1(g), or 11.1(h), all Obligations shall
automatically become immediately due and payable); and (v) pursue its other
rights and remedies under the Loan Documents and applicable law.
(b) If an Event of Default exists: (i) the Lender shall have, in
addition to all other rights, the rights and remedies of a secured party under
the UCC; (ii) the Lender may, at any time, take possession of the Collateral and
keep it on the Borrower's premises, at no cost to the Lender, or remove any part
of it to such other place or places as the Lender may desire, or the Borrower
shall, upon the Lender's demand, at the Borrower's cost, assemble the Collateral
and make it available to the Lender at a place reasonably convenient to the
Lender; and (iii) the Lender may sell and deliver any Collateral at public or
private sales, for cash, upon credit or otherwise, at such prices and upon such
terms as the Lender deems advisable, in its sole discretion, and may, if the
Lender deems it reasonable, postpone or adjourn any sale of the Collateral by an
announcement at the time and place of sale or of such postponed or adjourned
sale without giving a new notice of sale. Without in any way requiring notice to
be given in the following manner, the Borrower agrees that any notice by the
Lender of sale, disposition or other intended action hereunder or in connection
herewith, whether required by the UCC or otherwise, shall constitute reasonable
notice to the Borrower if such notice is mailed by registered or certified mail,
return receipt requested, postage prepaid, or is delivered personally against
receipt, at least five (5) days prior to such action to the Borrower's address
specified in or pursuant to Section 15.11. If any Collateral is sold on terms
-------------
other than payment in full at the time of sale, no credit shall be given against
the Obligations until the Lender receives payment, and if the buyer defaults in
payment, the Lender may resell the Collateral without further notice to the
Borrower. In the event the Lender seeks to take possession of all or any portion
of the Collateral by judicial process, the Borrower irrevocably waives: (a) the
posting of any bond, surety or security with respect thereto which might
otherwise be required; (b) any demand for possession prior to the commencement
of any suit or action to recover the Collateral; and (c) any requirement that
the Lender retain possession and not dispose of any Collateral until after trial
or final judgment. The Borrower agrees that the Lender has no obligation to
preserve rights to the Collateral or marshall any Collateral for the benefit of
any Person. The Lender is hereby granted a license or other right to use,
without charge, the Borrower's labels, patents, copyrights, name, trade secrets,
trade names, trademarks, and advertising matter, or any similar property,
53
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<PAGE>
in completing production of, advertising or selling any Collateral, and the
Borrower's rights under all licenses and all franchise agreements shall inure to
the Lender's benefit. The proceeds of sale shall be applied first to all
expenses of sale, including attorneys. fees, and second, in whatever order the
Lender elects, to all Obligations. The Lender will return any excess to the
Borrower or such other Person as shall be legally entitled thereto and the
Borrower shall remain liable for any deficiency.
(c) If an Event of Default occurs, the Borrower hereby waives (i) all
rights to notice and hearing prior to the exercise by the Lender of the Lender's
rights to repossess the Collateral without judicial process or to replevy,
attach or levy upon the Collateral without notice or hearing, and (ii) all
rights of set-off and counterclaim against Lender.
(d) If the Lender terminates this Agreement upon an Event of Default,
the Borrower shall pay the Lender, immediately upon termination, an early
termination penalty equal to the early termination fee that would have been
payable under Section 14 if this Agreement had been terminated on that date
----------
pursuant to the Borrowers election.
14. TERM AND TERMINATION.
--------------------
The initial term of this Agreement shall be two (2) years from the
Closing Date. This Agreement shall automatically be renewed thereafter for
successive one-year terms, unless this Agreement is terminated as provided
below. The Lender and the Borrower shall have the right to terminate this
Agreement, without premium or penalty, at the end of the initial term or at the
end of any renewal term by giving the other written notice not less than sixty
(60) days prior to the end of such term by registered or certified mail. The
Borrower may also terminate this Agreement at any time during its initial term
or any successive renewal term if: (a) it gives the Lender sixty (60) days prior
written notice of termination by registered or certified mail; (b) it pays and
performs all Obligations on or prior to the effective date of termination; and
(c) it pays the Lender, on or prior to the effective date of termination, and
(i) two percent (2%) of the average amount of the Revolving Loans and Letters of
Credit outstanding during the prior 180 day period (or lesser period if within
180 days of the Closing Date) if such termination is made on or prior to the
first Anniversary Date; and (ii) one-half percent ( 1/2%) of the average amount
of the Revolving Loans and Letters of Credit outstanding during the prior 180
day period if such termination is after the first Anniversary Date, including
during any renewal term; provided, however, no early termination fee shall be
-------- -------
payable in the event of any early termination of this Agreement due to a
refinancing effected by Bank. The Lender may also terminate this Agreement
without notice upon an Event of Default. Upon the effective date of termination
of this Agreement for any reason whatsoever, all Obligations shall become
immediately due and payable. Notwithstanding the termination of this Agreement,
until all Obligations are paid and performed in full, the Lender shall retain
all its rights and remedies hereunder (including, without limitation, in all
then existing and after-arising Collateral).
54
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<PAGE>
15. MISCELLANEOUS.
-------------
15.1 Cumulative Remedies; No Prior Recourse to Collateral. The
----------------------------------------------------
enumeration herein of the Lender's rights and remedies is not intended to be
exclusive, and such rights and remedies are in addition to and not by way of
limitation of any other rights or remedies that the Lender may have under the
UCC or other applicable law. The Lender shall have the right, in its sole
discretion, to determine which rights and remedies are to be exercised and in
which order. The exercise of one right or remedy shall not preclude the
exercise of any others, all of which shall be cumulative. The Lender may,
without limitation, proceed directly against the Borrower to collect the
Obligations without any prior recourse to the Collateral.
15.2 No Implied Waivers. No act, failure or delay by the Lender shall
------------------
constitute a waiver of any of its rights and remedies. No single or partial
waiver by the Lender of any provision of this Agreement or any other Loan
Document, or of breach or default hereunder or thereunder, or of any right or
remedy which the Lender may have, shall operate as a waiver of any other
provision, breach, default, right or remedy or of the same provision, breach,
default, right or remedy on a future occasion. No waiver by the Lender shall
affect its rights to require strict performance of this Agreement.
15.3 Severability. If any provision of this Agreement shall be
------------
prohibited or invalid, under applicable law, it shall be is effective only to
such extent, without invalidating the remainder of this Agreement.
15.4 Governing Law. This Agreement shall be deemed to have been made
-------------
in the State of California and shall be governed by and interpreted in
accordance with the laws of such state, except that no doctrine of choice of law
shall be used to apply the laws of any other state or jurisdiction.
15.5 Consent to Jurisdiction and Venue; Service of Process. Each of
-----------------------------------------------------
the Borrower and the Lender agrees that, in addition to any other courts that
may have jurisdiction under applicable laws, any action or proceeding to enforce
or arising out of this Agreement or any of the other Loan Documents may be
commenced in the Superior Court of the State of California for Los Angeles
County, or in the United States District Court for the Central District of
California, and each of the Borrower and the Lender consents and submits in
advance to such jurisdiction and agrees that venue will be proper in such courts
on any such matter. Each of the Borrower and the Lender hereby waives personal
service of process and agrees that a summons and complaint commencing an action
or proceeding in any such court shall be properly served and shall confer
personal jurisdiction if served by registered or certified mail to such Person.
Should either the Borrower or the Lender fail to appear or answer any summons,
complaint, process or papers so served within thirty (30) days after the mailing
or other service thereof, such Person shall be deemed in default and an order or
judgment may be entered against such Person as demanded or prayed for in such
summons, complaint, process or papers. The choice of forum set forth in this
section shall not be deemed to preclude the enforcement of any
55
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<PAGE>
judgment obtained in such forum, or the taking of any action under this
Agreement to enforce the same, in any appropriate jurisdiction.
15.6 Waiver of Jury Trial. THE BORROWER HEREBY WAIVES TRIAL BY JURY,
--------------------
RIGHTS OF SETOFF, AND THE RIGHT TO IMPOSE COUNTERCLAIMS IN ANY LITIGATION IN ANY
COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL, OR ANY INSTRUMENT OR
DOCUMENT DELIVERED PURSUANT HERETO OR THERETO, OR ANY OTHER CLAIM OR DISPUTE
HOWSOEVER ARISING, BETWEEN THE BORROWER AND THE LENDER. THE BORROWER CONFIRMS
THAT THE FOREGOING WAIVERS ARE INFORMED AND FREELY MADE.
15.7 Arbitration; Reference Proceeding.
---------------------------------
(a) ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES, INCLUDING
BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY
AGREEMENTS OR INSTRUMENTS RELATING HERETO OR DELIVERED IN CONNECTION HEREWITH
AND ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL AT THE REQUEST OF
ANY PARTY BE DETERMINED BY ARBITRATION. THE ARBITRATION SHALL BE CONDUCTED IN
ACCORDANCE WITH THE UNITED STATES ARBITRATION ACT (TITLE 9, U.S. CODE),
NOTWITHSTANDING ANY CHOICE OF LAW PROVISION IN THIS AGREEMENT, AND UNDER THE
COMMERCIAL RULES OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA"). THE
ARBITRATION SHALL BE CONDUCTED WITHIN LOS ANGELES COUNTY, CALIFORNIA. THE
ARBITRATOR (S) SHALL GIVE EFFECT TO STATUTES OF LIMITATION IN DETERMINING ANY
CLAIM. ANY CONTROVERSY CONCERNING WHETHER AN ISSUE IS ARBITRABLE SHALL BE
DETERMINED BY THE ARBITRATOR(S). JUDGMENT UPON THE ARBITRATION AWARD MAY BE
ENTERED IN ANY COURT HAVING JURISDICTION. THE INSTITUTION AND MAINTENANCE OF AN
ACTION FOR JUDICIAL RELIEF OR PURSUIT OF A PROVISIONAL OR ANCILLARY REMEDY SHALL
NOT CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE PLAINTIFF, TO
SUBMIT THE CONTROVERSY OR CLAIM TO ARBITRATION IF ANY OTHER PARTY CONTESTS SUCH
ACTION FOR JUDICIAL RELIEF.
(b) Notwithstanding the provisions of subparagraph (a), no controversy
or claim shall be submitted to arbitration without the consent of all parties
if, at the time of the proposed submission, such controversy or claim arises
from or relates to an obligation to the Lender which is secured by real property
collateral located in California. If
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all parties do not consent to submission of such a controversy or claim to
arbitration, the controversy or claim shall be determined as provided in
subparagraph (c).
(c) A controversy or claim which is not submitted to arbitration as
provided and limited in subparagraphs (a) and (b) shall, at the request of any
party, be determined by a reference in accordance with California Code of Civil
Procedure Section 638 et seq. If such an election is made, the parties shall
-- ---
designate to the court a referee or referees selected under the auspices of the
AAA in the same manner as arbitrators are selected in AAA--sponsored
proceedings. The presiding referee of the panel, or the referee if there is a
single referee, shall be an active attorney or retired judge. Judgment upon the
award rendered by such referee or referees shall be entered in the court in
which such proceeding was commenced in accordance with California Code of Civil
Procedure Sections 644 and 645.
(d) No provision of this paragraph shall limit the right of any party
to this Agreement to exercise self-help remedies such as setoff, to foreclose
against or sell any real or personal property collateral or security, or to
obtain provisional or ancillary remedies from a court of competent jurisdiction
before, after, or during the pendency of any arbitration or other proceeding.
The exercise of a remedy does not waive the right of either party to resort to
arbitration or reference.
15.8 Survival of Representations and Warranties. All of the
------------------------------------------
Borrower's representations and warranties contained in this Agreement shall
survive the execution, delivery, and acceptance thereof by the parties,
notwithstanding any investigation by the Lender or its agents.
15.9 Other Security and Guaranties. The Lender may, without notice or
-----------------------------
demand and without affecting the Borrower's obligations hereunder, from time to
time: (a) take from any Person and hold collateral (other than the Collateral)
for the payment of all or any part of the Obligations and exchange, enforce or
release such collateral or any part thereof; and (b) accept and hold any
endorsement or guaranty of payment of all or any part of the Obligations and
release or substitute any such endorser or guarantor, or any Person who has
given any Lien in any other collateral as security for the payment of all or any
part of the Obligations, or any other Person in any way obligated to pay all or
any part of the Obligations.
15.10 Fees and Expenses. The Borrower shall pay to the Lender on
-----------------
demand all costs and expenses that the Lender pays or incurs in connection with
the negotiation, preparation, consummation, administration, enforcement, and
termination of this Agreement and the other Loan Documents, including, without
limitation: (a) attorneys' and paralegal's fees and disbursements of counsel to
the Lender (including, without limitation, a reasonable estimate of the
allocable cost of in-house counsel and staff) ; (b) costs and expenses including
attorneys' and paralegals' fees and disbursements (including, without
limitation, a reasonable estimate of the allocable cost of in-house counsel and
staff) for any amendment, supplement, waiver, consent, or subsequent closing in
connection with the Loan Documents and the transactions
57
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<PAGE>
contemplated thereby; (c) costs and expenses of lien and title searches and
title insurance; (d) taxes, fees and other charges for filing financing
statements and continuations, and other actions to perfect, protect, and
continue the Security Interest; (e) sums paid or incurred to pay any amount or
take any action required of the Borrower under the Loan Documents that the
Borrower fails to pay or take; (f) except as otherwise specifically provided in
this Agreement, costs of appraisals, inspections, and verifications of the
Collateral, including, without limitation, travel, lodging, and meals together
with an allocated charge of $500 per day for each auditor employed by Lender for
inspections of the Collateral and the Borrower's operations; (g) costs and
expenses of forwarding loan proceeds, collecting checks and other items of
payment, and establishing and maintaining Payment Accounts; (h) all amounts that
the Borrower is required to pay under the Letter of Credit Agreement; (i) costs
and expenses of preserving and protecting the Collateral; and (j) costs and
expenses including attorneys' and paralegals' fees and disbursements (including,
without limitation, a reasonable estimate of the allocable cost of in-house
counsel and staff) paid or incurred to obtain payment of the Obligations,
enforce the Security Interest, sell or otherwise realize upon the Collateral,
and otherwise enforce the provisions of the Loan Documents, or to defend any
claims made or threatened against the Lender arising out of the transactions
contemplated hereby (including without limitation, preparations for and
consultations concerning any such matters). If either the Lender or the Borrower
files any lawsuit against the other predicated on a breach of this Agreement or
the Loan Documents, the prevailing party in such action shall be entitled to
recover its reasonable costs and attorneys' fees, including (but not limited to)
reasonable attorneys' fees and costs incurred in the enforcement of, execution
upon or defense of any order, decree, award or judgment. The foregoing shall not
be construed to limit any other provisions of the Loan Documents regarding costs
and expenses to be paid by the Borrower. All of the foregoing costs and expenses
shall be charged to the Borrower's loan account as Revolving Loans.
15.11 Notices. Except as otherwise provided herein, all notices,
-------
demands, and requests that either party is required or elects to give to the
other shall be in writing, shall be delivered personally against receipt, or
sent by recognized overnight courier services, or mailed by registered or
certified mail, return receipt requested, postage prepaid, and shall be
addressed to the party to be notified as follows:
If to the Lender: BankAmerica Business Credit, Inc.
Two North Lake Avenue
Pasadena, California 91101
Attention: Charles Burtch
with a copy to: Bank of America NT&SA, Legal Department
10124 Old Grove Road
San Diego, California 92131
58
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<PAGE>
If to the Borrower: Sport Chalet, Inc.
920 Foothill Boulevard
La Canada, California 91011
Attention: Howard Kaminsky
or to such other address as each party may designate for itself by like notice.
Any such notice, demand, or request shall be deemed given when received if
personally delivered or sent by overnight courier, or when deposited in the
United States mails, postage paid, if sent by registered or certified mail.
15.12 Indemnification. BORROWER HEREBY INDEMNIFIES, DEFENDS AND
---------------
HOLDS LENDER, AND ITS DIRECTORS, OFFICERS, AGENTS, EMPLOYEES AND COUNSEL,
HARMLESS FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS, DAMAGES, LIABILITIES,
DEFICIENCIES, JUDGMENTS, PENALTIES OR EXPENSES IMPOSED ON, INCURRED BY OR
ASSERTED AGAINST ANY OF THEM, WHETHER DIRECT, INDIRECT OR CONSEQUENTIAL ARISING
OUT OF OR BY REASON OF ANY LITIGATION, INVESTIGATIONS, CLAIMS, OR PROCEEDINGS
(WHETHER BASED ON ANY FEDERAL, STATE OR LOCAL LAWS OR OTHER STATUTES OR
REGULATIONS, INCLUDING, WITHOUT LIMITATION, SECURITIES, ENVIRONMENTAL, OR
COMMERCIAL LAWS AND REGULATIONS, UNDER COMMON LAW OR AT EQUITABLE CAUSE, OR ON
CONTRACT OR OTHERWISE) COMMENCED OR THREATENED, WHICH ARISE OUT OF OR ARE IN ANY
WAY BASED UPON THE NEGOTIATION, PREPARATION, EXECUTION, DELIVERY, ENFORCEMENT,
PERFORMANCE OR ADMINISTRATION OF THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR ANY
UNDERTAKING OR PROCEEDING RELATED TO ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY
OR ANY ACT, OMISSION TO ACT, EVENT OR TRANSACTION RELATED OR ATTENDANT THERETO,
INCLUDING, WITHOUT LIMITATION, AMOUNTS PAID IN SETTLEMENT, COURT COSTS, AND THE
FEES AND EXPENSES OF COUNSEL REASONABLY INCURRED IN CONNECTION WITH ANY SUCH
LITIGATION, INVESTIGATION, CLAIM OR PROCEEDING; PROVIDED, HOWEVER, THAT BORROWER
SHALL NOT INDEMNIFY LENDER, ITS DIRECTORS, OFFICERS, AGENTS, EMPLOYEES AND
COUNSEL FROM SUCH DAMAGES RESULTING FROM THEIR GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT. Without limiting the foregoing, if, by reason of any suit or
proceeding of any kind, nature, or description against Borrower, or by Borrower
or any other party against Lender, which in Lender's sole discretion makes it
advisable for Lender to seek counsel for protection and preservation of its
liens and security assets, or to defend its own interest, such expenses and
counsel fees shall be allowed to Lender. To the extent that the undertaking to
indemnify, pay and hold harmless set forth in this Section 14.11 may be
-------------
unenforceable because it is violative of any law or public policy, Borrower
shall contribute the maximum portion which it is permitted to pay and satisfy
under applicable law, to the payment and satisfaction of all indemnified matters
incurred by Lender. The foregoing
59
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<PAGE>
indemnity shall survive the payment of the Obligations and the termination of
this Agreement. All of the foregoing costs and expenses shall be part of the
Obligations and secured by the Collateral.
15.13 Waiver of Notices. Unless otherwise expressly provided herein,
-----------------
the Borrower waives presentment, protest and notice of demand or dishonor and
protest as to any instrument, as well as any and all other notices to which it
might otherwise be entitled. No notice to or demand on the Borrower which the
Lender may elect to give shall entitle the Borrower to any or further notice or
demand in the same, similar or other circumstances.
15.14 Binding Effect; Assignment; Participations. (a) The provisions
------------------------------------------
of this Agreement shall be binding upon and inure to the benefit of the
respective representatives, successors and assigns of the parties hereto;
provided, however, that no interest herein may be assigned by the Borrower
- -------- -------
without the prior written consent of the Lender. The rights and benefits of the
Lender hereunder shall, if the Lender so agrees, inure to any party acquiring
any interest in the Obligations or any part thereof.
(b) Lender may at any time sell to one or more Persons (a
"Participating Lender") participating interests in the Loans and the other
interests of Lender hereunder and under the other Loan Documents; provided,
--------
however, that (i) the Lender's commitment to lend and other obligations under
- -------
this Agreement or under any other Loan Document shall remain unchanged, (ii) no
participating interest contemplated hereunder shall relieve Lender from its
commitment to lend or its other obligations hereunder or under the other Loan
Documents, (iii) the Lender shall remain solely responsible for the performance
of its commitment to lend and such other obligations, (iv) the Borrower shall
continue to deal solely and directly with the Lender in connection with the
Lender's rights and obligations under this Agreement and each of the other Loan
Documents, (v) no Participating Lender shall be entitled to require Lender to
take or refrain from taking any action hereunder or under any other Loan
Document; and (vi) Lender shall not transfer or grant any participating interest
under which the Participating Lender shall have any right to approve any
amendment of or any consent or waiver with respect to this Agreement or any
other Loan Document. In the case of any such participation, except as provided
in Section 15.19, the Participating Lender shall not have any rights under this
Agreement, or any of the other Loan Documents, and all amounts payable by the
Borrower hereunder shall be determined as Lender had not sold such
participation.
15.15 Modification. This Agreement is intended by the Borrower and
------------
the Lender to be the final, complete, and exclusive expression of the agreement
between them. This Agreement supersedes any and all prior oral or written
agreements relating to the subject matter hereof and may not be contradicted by
evidence of prior, contemporaneous or subsequent oral agreements of the parties.
There are no oral agreements between the parties. No modification, rescission,
waiver, release, or amendment of any provision of this Agreement shall be made,
except by a written agreement signed by the Borrower and a duly authorized
officer of the Lender.
60
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<PAGE>
15.16 Counterparts. This Agreement may be executed in any number of
------------
counterparts, and by the Lender and the Borrower in separate counterparts, each
of which shall be an original, but all of which shall together constitute one
and the same agreement.
15.17 Captions. The captions contained in this Agreement are for
--------
convenience only, are without substantive meaning and should not be construed to
modify, enlarge, or restrict any provision.
15.18 Right of Set-Off. Whenever an Event of Default exists, the
----------------
Lender is hereby authorized at any time and from time to time, to the fullest
extent permitted by law, to set off and apply any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by the Lender or any affiliate of the Lender to
or for the credit or the account of the Borrower against any and all of the
Obligations, whether or not then due and payable. Lender agrees promptly to
notify Borrower after any such set-off and application made by Lender, provided
that the failure to give such notice shall not affect the validity of such set-
off and application.
15.19 Participating Lender's Security Interests. The Lender may,
-----------------------------------------
without notice to or consent by the Borrower, grant one or more participations
in the Loans to Participating Lenders. If a Participating Lender shall at any
time with the Borrower's knowledge participate with the Lender in the Loans, the
Borrower hereby grants to such Participating Lender, and the Lender and such
Participating Lender shall have and are hereby given, a continuing lien on and
security interest in any money, securities and other property of the Borrower in
the custody or possession of the Participating Lender, including the right of
setoff, to the extent of the Participating Lender's participation in the
Obligations, and such Participating Lender shall be deemed to have the same
right of setoff to the extent of Participating Lender's participation in the
Obligations under this Agreement as it would have it were a direct lender.
IN WITNESS WHEREOF, the parties have entered into this Agreement on
the date first above written.
SPORT CHALET, INC.
By: /s/ Howard Kaminsky
-------------------------------------------
Title: Chief Financial Officer
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/ M.L. Williams
-------------------------------------------
Title: Vice President
61
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<PAGE>
List of Exhibits/Schedules
--------------------------
Schedule 7.3 Locations of Borrower
Schedule 9.4 Names of Borrower and Trade Styles
Schedule 9.5 Subsidiaries and Affiliates and state of incorporation and
qualification
Schedule 9.13 Real Estate - Owned and Leased
Schedule 9.15 Trade Names
Schedule 9.19 Environmental Laws
Schedule 9.22 ERISA Compliance
Schedule 10.13 Transactions with Affiliates
Schedule 10.18 New Subsidiaries
62
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<PAGE>
EXHIBIT 10.31
LETTER OF CREDIT FINANCING AGREEMENT
SUPPLEMENT TO
LOAN AND SECURITY AGREEMENT
BankAmerica Business Credit, Inc.
Two North Lake Avenue, Suite 400
Pasadena, California 91101
Ladies and Gentlemen:
This Letter of Credit Financing Agreement ("LC Agreement") is effective as
of May 14, 1996, is a supplement to our Loan and Security Agreement with you
bearing effective date of the date hereof ("Agreement"), and is hereby
incorporated into the Agreement and made a part thereof. All capitalized terms
used herein and not otherwise defined herein shall have the meanings set forth
in the Agreement.
1. Upon our request, you may, at your discretion, open or cause to be
opened by a commercial bank documentary or standby letters of credit, or issue
guarantees of payment, for our account (such letters of credit and guarantees
being hereinafter referred to as the "LC"). You may make loans and advances to
or for our account in connection with the LC which shall be payable upon demand
and shall become part of our Obligations to you. The LC shall be subject to the
limitations contained in Section 2.3 of the Agreement.
2. We agree to be bound by all of the terms and conditions of any
application executed in connection with your opening the LC for our account. In
opening or causing to be opened the LC for our account, you may use any bank
selected by you if it is not convenient for you to use the bank chosen by us.
We hereby agree to indemnify, save, and hold you harmless from any loss, cost,
expense, or liability, including, without limitation, payments made by you and
expenses and reasonable attorneys' fees incurred by you arising out of, or in
connection with, your opening or causing the LC to be opened or issued for us.
It is understood and agreed that you shall not be liable for any error,
negligence, and/or mistakes, whether of omission or commission, as a result of
the issuing bank's or its correspondents' following our instructions or those
contained in the LC or of any modifications, amendments, or supplement thereto.
3. We hereby authorize and direct any bank which issues the LC to name us
as the "Account Party" therein and deliver to you all instruments, documents,
and other writings and property received by the bank pursuant to the LC, and to
accept and rely upon your instructions and agreements with respect to all
matters arising in connection with the LC or the applications therefor.
1
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<PAGE>
4. In connection with all transactions financed by you under this LC
Agreement, we hereby appoint you, or your designee, as our attorney with full
power and authority: (a) to sign and/or endorse our name upon any warehouse or
other receipts and LC applications; (b) to sign our name on bills of lading; (c)
to clear Inventory through Customs in our name or yours, or your designee, and
to sign and deliver to Customs Officials powers of attorney in our name for such
purpose; (d) to complete in your name or ours, any order, sale or transaction,
obtain the necessary documents in connection therewith, and collect the proceeds
thereof; and (e) to do such other acts and things as are necessary to carry out
the terms of the LC Agreement or in order to enable you to obtain payment of all
Obligations. Neither you nor your attorney will be liable for any acts or
omissions nor for any error of judgment or mistakes of fact or law except to the
extent that such acts or omissions represent the gross negligence or willful
misconduct of you or such attorney. This power, being coupled with an interest,
is irrevocable until all Obligations have been paid and satisfied.
5. We will, and you may, at your option, instruct all suppliers, carriers,
forwarders, warehouses or others receiving or holding cash, checks, Inventory,
documents or instruments in which you hold a security interest to deliver them
to you and/or subject to your order and if they shall come into our possession,
they, and each of them, shall be held by us in trust as your trustee, and we
will immediately deliver them to you in their original form.
6. We will pay you, in addition to the amount of any costs and expenses
incurred by you in opening any LC or causing any LC to be opened, a Letter of
Credit Fee equal to: one percent (1%) per annum of the face amount of each LC
and such commission shall be charged to our account monthly. Interest at the
rate as provided for in the Agreement shall be paid by us on the amount and from
the date of any advance or the date of negotiation of any document (whichever
date is earlier). All bank charges and other disbursements incurred by you for
us are to be paid by us. All amounts payable by us to you under this LC
Agreement, including, but not limited to, commissions, fees, and charges shall
become part of the Obligations and shall be charged to our account and shall be
payable upon demand.
7. We will, and you may, at your option, instruct all suppliers, carriers,
forwarders, warehouses or others receiving or holding cash, checks, Inventory,
documents or instruments in which you hold a security interest to deliver them
to you and/or subject to your order and it they shall come into our possession,
they, and each of them, shall be held by us in trust as your trustee, and we
will immediately deliver them to you in their original form.
8. We will obtain and furnish to you all risk United States dollar
insurance in your favor covering all Inventory. Such insurance must be placed
with prime underwriters for at least 100% of the full value (at least 100% of
the CIF value), and allow for at least 30 days delay in customs at the country
of destination and, if any of such Inventory should be insured by our custodian,
we will arrange for his affecting such similar insurance coverage, payable in
United States dollars, and we will cause such insurance to be issued and
delivered to you in negotiable form.
2
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<PAGE>
Very truly yours,
SPORT CHALET, INC.
By /s/ Howard Kaminsky
-------------------------------------------
Title: Chief Financial Officer
----------------------------------------
Accepted:
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/ M.L. Williams
-----------------------------------
Title: Vice President
--------------------------------
3
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<PAGE>
EXHIBIT 10.32
BANKAMERICA BUSINESS CREDIT, INC.
Two North Lake Avenue, Suite 400
Pasadena, California 91101
May 14, 1996
Sport Chalet, Inc.
920 Foothill Boulevard
La Canada, California 91011
Re: BABC/Sport Chalet, Inc. -- Landlord Waivers
-------------------------------------------
Ladies and Gentlemen:
Reference is made to that certain Loan and Security Agreement (the "Loan
Agreement"), dated as of May 14, 1996, by and between BankAmerica Business
Credit, Inc., a Delaware corporation ("BABC") and Sport Chalet, Inc., a Delaware
corporation ("Borrower"). All initially capitalized terms used but not otherwise
defined herein shall have the meanings set forth in the Loan Agreement.
Notwithstanding the provisions of Section 7.2 of the Loan Agreement to the
contrary, as of the Closing Date, Lender shall establish a Rent Reserve in the
aggregate principal amount of One Million Dollars ($1,000,000) against
Availability (the "Aggregate Rent Reserve") with respect to those Premises of
Borrower in which Borrower has not obtained a written waiver of all present and
future Liens to which the owner of such Premises may be entitled to assert
against the Collateral ("Landlord Waiver"). Such Aggregate Rent Reserve shall
increase on the fifteenth day of each month, commencing June 15, 1996, by an
amount equal to Three Hundred Thirty-Four Thousand Dollars ($334,000); provided,
--------
however, such Aggregate Rent Reserve shall not exceed the lesser of (a) Two
- ------- ------
Million Three Thousand Six Hundred Thirty-Nine Dollars ($2,003,639), or (b) the
aggregate amount of rent and other amounts payable with respect to each such
Premises in which an executed Landlord Waiver has not been provided to BABC, in
form and substance satisfactory to BABC, during any three (3) month period.
E-75
<PAGE>
Sport Chalet, Inc.
May 14, 1996
Page 2
Except as modified hereby, the Loan Agreement shall remain in full force
and effect.
Very truly yours,
BANKAMERICA BUSINESS CREDIT, INC.,
a Delaware corporation
By: /s/ M. L. Williamson
------------------------------
Title: Vice President
---------------------------
AGREED AND ACCEPTED:
SPORT CHALET, INC.,
a Delaware corporation
By: /s/ Howard K. Kaminsky
-------------------------------
Title: Chief Financial Officer
----------------------------
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<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-61612) pertaining to the Sport Chalet, Inc. 1992 Incentive Award Plan
of our report dated June 4, 1996, with respect to the financial statements of
Sport Chalet, Inc. included in the Annual Report (Form 10-K) for the year ended
March 31, 1996.
/s/ ERNST & YOUNG
Los Angeles, California
June 24, 1996
E-77
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<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1995
<PERIOD-START> APR-01-1995 APR-01-1994
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 768,562 492,303
<SECURITIES> 0 0
<RECEIVABLES> 961,875 575,151
<ALLOWANCES> 28,000 13,000
<INVENTORY> 33,069,322 36,150,256
<CURRENT-ASSETS> 36,343,915 39,343,677
<PP&E> 23,799,248 22,273,777
<DEPRECIATION> 11,144,652 10,119,263
<TOTAL-ASSETS> 49,507,622 51,564,921
<CURRENT-LIABILITIES> 25,103,933 24,428,137
<BONDS> 0 0
0 0
0 0
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<TOTAL-LIABILITY-AND-EQUITY> 49,507,622 51,564,921
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<TOTAL-REVENUES> 133,740,747 134,734,540
<CGS> 90,389,348 88,774,812
<TOTAL-COSTS> 44,367,566 44,520,185
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<INTEREST-EXPENSE> 1,223,656 893,962
<INCOME-PRETAX> (2,239,823) 545,581
<INCOME-TAX> (880,000) 254,000
<INCOME-CONTINUING> 0 0
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<NET-INCOME> (1,359,823) 291,581
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