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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, 1997
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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
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
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 ((S) 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 13, 1997 was $4.1 million. The number of shares of the
registrant's common stock outstanding as of June 13, 1997 was 6,500,000.
Documents Incorporated by Reference
(1) Portions of the Registrant's definitive proxy statement relating to its
1997 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.
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PART I
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ITEM 1. BUSINESS
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A. GENERAL
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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 36,000 square feet in size, and the last thirteen 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-1980Os, 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 and 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 was scaled down. For fiscal 1997, the relocation
and expansion of one existing store was completed. No additional store openings
are contemplated at this time. The Company's business plan currently
contemplates the opening of one new store per year during the next several
fiscal years. Future store openings are subject to availability of satisfactory
store locations based on local competitive conditions, site availability and
cost and the Company's ability to provide and maintain high service levels and
quality brand merchandising at competitive prices.
The previously mentioned Board Review culminated with the implementation of
several programs aimed at improving the Company's competitive position and
overall profitability. The Company has implemented 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,
developing more advanced inventory and procurement systems, and creating a new
loss prevention department.
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 (e.g., footwear, apparel, other general athletic
products) and nontraditional merchandise such as downhill skiing, mountaineering
and SCUBA. 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. The average sales transaction for fiscal
1997 was $46, down from a high of $60 in fiscal 1993, reflecting a product mix
more heavily weighted towards lower-priced items and away from relatively
higher-priced ski apparel and equipment. Average sales per store was $7.6
million for fiscal 1997.
The Company's business is highly seasonal in nature. 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. As with other retailers, the Company's
business is heavily affected by sales of merchandise during the Christmas
season. In addition, the Company's product mix historically has emphasized 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 1995, 1996 and 1997, sales of ski apparel and
equipment accounted for 25%, 20% and 18%, respectively, of the Company's total
sales for those fiscal years. In each of fiscal 1995, 1996 and 1997, 36%, 33%
and 34%, respectively, of the Company's sales and most of its net income were
attributable to the months of November, December and
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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 generally purchased by consumers in the spring, summer and fall
seasons. Moreover, in spite of recent product innovations such as snowboarding
and "shaped" skis, management believes that the winter-related product category
may have matured with little or no expected growth relative to other specialty
areas carried in the Company's stores, thereby further underscoring the need for
greater product and seasonal diversification
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, until very
recently, experienced an economic downturn which began in 1990. Management
believes that stagnant economic conditions and a weak and exceedingly price-
competitive retail environment have adversely affected price margins, same store
sales levels and sales growth in new stores, thereby negatively impacting the
Company's overall financial performance. In order to stimulate sales, the
Company is implementing new visual merchandising procedures, increasing emphasis
on its in-store training in order to provide better customer service, and
instituting a program to ensure that each store has the appropriate level of
stock on hand by enhancing coordination of procurement with in-store
merchandising.
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 37 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
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The market for retail sporting goods is highly competitive, fragmented and
segmented. The Company competes with many different types of retail stores,
including full-line sporting goods chains (Sportmart, The Sports Authority,
Oshmans, Big 5), specialty stores (REI, Turners), and discount and department
stores (Wal-Mart, Kmart, Target, Sears). Industry literature mentions with
increasing frequency the rising dominance of sporting good superstore retailers,
full-line sporting goods chains with stores typically larger than 30,000 square
feet often located in free-standing locations. Superstore chains generally
provide a greater selection of higher quality merchandise than other retailers,
while remaining price competitive. Historically, the Company has provided a
broader selection of higher-end specialty items which require higher levels of
customer service than other superstore retailers.
In the last two years, several superstore retailers have entered or
expanded their presence in Southern California, increasing competitive pressures
on the Company and adversely affecting same store sales and sales growth in new
stores. There can be no assurance that the Company will be able to maintain or
increase its current level of pricing, sales or profitability in view of such
competition, particularly as new competitors or superstores enter in the
Company's market. Furthermore, there is substantial competition from superstore
retailers for prime commercial locations and favorable lease terms that could
adversely affect the Company's ability to expand.
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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 discount and department stores,
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, superstore dominance, 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
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As of March 31, 1997, the Company had a total of 1,334 full and part-time
employees, 1,127 of whom were employed in the Company's stores and 207 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.
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ITEM 2. PROPERTIES
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At March 31, 1997, 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
- -------- ------------ ------------
<S> <C> <C>
La Canada(1) (2)............................. June 1960 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)................................ November 1987 31,000
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
Valencia (3)................................. November 1996 40,000
</TABLE>
______________________
(1) Consists of two nearby facilities.
(2) Expanded to a second nearby facility in July 1975.
(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 1999 through 2015. The El Cajon store lease was
terminated by the landlord on March 31, 1997 and the Company is operating this
store on a month to month basis. Management is evaluating whether to relocate
the store. 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 facilities in
Montclair and Pomona, and its stores in La Canada and Huntington Beach. The
Company has incurred rental expense to the Principal Shareholder of $1.5
million, $1.4 million, and $1.6 million in fiscal 1997, 1996, and 1995,
respectively. The Company
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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.
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 and in April, 1997 the Company was
notified that no further action related to the underground storage tank release
will be required at this time.
The Company maintains insurance coverage for its various facilities for
fire and theft, but does not maintain earthquake insurance.
ITEM 3. LEGAL PROCEEDINGS
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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
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None.
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
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(a) Market Price for Common Shares -
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The Company's Common Stock is traded on the Nasdaq National Market
tier of the Nasdaq Stock Market 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 1996 High Low
- ----------- ---- ---
<S> <C> <C>
First Quarter $3.750 $2.500
Second Quarter $4.063 $2.375
Third Quarter $3.250 $1.625
Fourth Quarter $2.750 $1.750
Fiscal 1997 High Low
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First Quarter $ 2.875 $ 1.625
Second Quarter $ 3.375 $ 2.375
Third Quarter $ 3.625 $ 2.375
Fourth Quarter $ 3.625 $ 2.375
</TABLE>
(b) Approximate Number of Holders of Common Shares -
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The approximate number of shareholders of the Company's Common Stock
as of June 13, 1997 was 165 (excluding individual participants in nominee
security position listings) and as of that date, the Company estimates that
there were approximately 2,000 beneficial owners holding stock in nominee or
"street" name.
(c) Frequency and Amount of Any Dividends Declared -
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The Company has not paid any dividends to shareholders since its
initial public offering in November 1992. It is currently contemplated that the
Company will retain earnings for use in the operation and potential expansion of
its business and, therefore, does not anticipate declaring or 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
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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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1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In thousands, except per share amounts and selected operating data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Net sales............................................ $137,705 $133,741 $134,735 $122,241 $106,392
Cost of goods sold(1)................................ 87,786 90,389 88,775 81,661 67,844
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Gross profit......................................... 49,919 43,352 45,960 40,580 38,548
Selling, general and administrative expenses......... 45,256 44,368 44,520 39,832 33,854
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Net income (loss) from operations.................... 4,663 (1,016) 1,440 748 4,694
Interest expense..................................... 805 1,224 894 736 1,053
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Net income (loss) before taxes....................... 3,858 (2,240) 546 12 3,641
Income tax provision (benefit) (2)................... 1,555 (880) 254 23 1,474
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Net income (loss) (2)................................ 2,303 (1,360) 292 (11) 2,167
===========================================================
Earnings (loss) per share (2)........................ $.35 $(.21) $.04 $.00 $.40
===========================================================
SELECTED OPERATING DATA:
Stores open at end of period......................... 18 18 17 16 14
Comparable store sales increase (decrease)(3)........ 0.0% (4.1)% 1.4% 2.2% 4.7%
BALANCE SHEET DATA:
Working capital...................................... $ 13,040 $ 11,240 $ 14,916 $ 14,838 $ 16,286
Total assets......................................... 44,436 49,508 51,565 43,679 44,623
Total loans payable.................................. 1,352 10,308 9,333 4,917 4,850
Total shareholders' equity........................... 26,707 24,404 25,764 25,472 25,483
</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 is 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
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RESULTS OF OPERATION
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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
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1997 1996 1995 1997 1996
----------------- ---------------- --------------- --------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales......................... $137,705 100.0% 133,741 100.0% $134,735 100.0% $34,057 100.0% $36,156 100.0%
Gross profit...................... 49,919 36.3 43,352 32.4 45,960 34.1 11,951 35.1 9,360 25.9
Selling, general and 45,256 32.9 44,368 33.2 44,520 33.0 11,337 33.3 11,023 30.5
administrative expenses........
Income (loss) from operations..... 4,663 3.4 (1,016) (0.8) 1,440 1.1 614 1.8 (1,663) (4.6)
Interest expense.................. 805 .6 1,224 0.9 894 0.7 67 .2 260 0.7
Income (loss) before taxes........ 3,858 2.8 (2,240) (1.7) 546 0.4 547 1.6 (1,923) (5.3)
Net income (loss)................. 2,303 1.7 (1,360) (1.0) 292 0.2 347 1.0 (1,143) (3.2)
Earnings (loss) per share......... .35 (.21) .04 .05 (.18)
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996. Sales increased from $133.7
million to $137.7 million, a 3.0% increase primarily as a result of opening one
new store in November 1995. Comparable store sales were relatively flat as
increasing sales during the first three quarters (as management continued its
emphasis on broadening product mix towards merchandise with higher sales in the
spring, summer and fall seasons) and improving economic conditions in Southern
California were offset by a decrease in fourth quarter 1997 sales and increased
competition.
Gross profit for the period increased as a percent of sales from 32.4%
to 36.3%. Improved inventory procurement practices together with the
implementation of more advanced inventory and procurement systems led to
reduced, more efficient inventory levels and less markdowns, while the new
expanded loss prevention department resulted in a significant reduction in
inventory shrinkage.
Selling, general and administrative ("SG&A") expenses decreased
slightly as a percent of sales, 32.9% compared to 33.2% last year. The fiscal
1997 decrease in SG&A expenses relative to sales reflects the impact of cost-
cutting actions instituted in response to the previously discussed Board Review,
partially offset by up-front costs related to implementing associated cost
reduction and productivity improving programs. The primary components of
selling, general and administrative expenses are labor, rent and other occupancy
costs and advertising.
Interest expense decreased to $805,000 from $1.2 million due to a
significant decrease in average debt outstanding.
The effective tax rate as a percent of pretax income is 40.3% for
fiscal 1997 and 39.3% for fiscal 1996. These rates differ from the statutory
rate of 40.1% as a result of permanent differences between financial reporting
and tax-basis income.
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Net income increased to $2.3 million from a loss of $1.4 million in
the prior year primarily due to increased sales and gross profit margins.
Earnings per share increased to $.35 from a loss per share of $.21 due to
increased net income.
FOURTH QUARTER 1997 COMPARED TO FOURTH QUARTER 1996. Sales decreased
from $36.2 million to $34.1 million, a 5.8% decrease primarily as a result of
fewer promotional markdowns due to improved inventory management and less
emphasis on sales from winter-related products.
Gross profit for the period increased as a percent of sales from 25.9%
to 35.1% Expanded inventory control efforts and the creation of a new loss
prevention department resulted in significantly lower inventory shrinkage.
Based on the year-end physical inventory, the Company was able during the fourth
quarter of 1997 to reduce its annual accrual for inventory shrinkage by
approximately $984,000. In addition, improved inventory procurement practices
and the development of more advanced inventory systems resulted in lower cost of
sales.
Selling, general and administrative expenses increased as a percent of
sales from 30.5% to 33.3% as a result of reduced sales volume and increased loss
prevention expenditures.
Interest expense decreased from $260,000 to $67,000 due to
considerably lower average debt outstanding.
The effective income tax rate as a percent of pretax income for the
fourth quarter 1997 is 36.6% compared to 40.6% of pretax loss for the same
period of fiscal 1996. The decrease is due to the relatively low level of
pretax income for the fourth quarter of 1997.
Net income increased to $347,000 from a $1.1 million loss and earnings
per share increased to $.05 from a $.18 loss primarily as a result of increased
gross profit.
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.
10
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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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for inventory, store
relocation 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.
Net cash provided by operating activities was $12.7 million and $3.2
million for fiscal 1997 and 1996, respectively, while for fiscal 1995, net
cash used in operating activities was $850,000. Net income provided cash of $2.3
million and $292,000 in fiscal 1997 and 1995, while net loss accounted for the
use of $1.4 million in fiscal 1996. Depreciation provided $2.4 million, $2.7
million and $2.5 million of cash for fiscal 1997, 1996, and 1995, respectively.
During fiscal 1997 and 1996, inventories decreased $5.0 million and
$3.1 million as a result of the implementation of a perpetual inventory system
and improved procurement practices. 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 increased $691,000 during fiscal 1997 due to changes
in the timing of payments partially offset by decreased inventory levels. For
fiscal 1996, accounts payable decreased $1.6 million primarily due to reduced
inventory. For fiscal 1995, accounts payable increased $1.9 million as a result
of increased inventory.
Net cash used in investing activities was $4.0 million, $3.6 million
and $3.3 million for fiscal 1997, 1996 and 1995, respectively. In fiscal 1997,
one store was relocated and another was remodeled. Also a new computer system
was installed. In both fiscal 1996 and 1995, one store was relocated and one new
store was opened. In fiscal 1997, 1996 and 1995, ongoing capital expenditures
for the Company's existing stores totalled $2.2 million, $1.4 million and $1.8
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.
For fiscal 1997, and 1996 and 1995, peak borrowings on that credit line were
$14.2 million, $17.0 million, $12.6 million, respectively. Prior to fiscal 1995
and through May 1996, the Company maintained a revolving line of credit with
Wells Fargo Bank, NA ("Wells"). The Wells credit line was paid off with the
proceeds from the credit facility with BankAmerica Business Credit, Inc., an
affiliate of Bank of America ("BABC"), described below.
In May 1996, the Company obtained a credit facility from BABC, that
provided a new line of credit to borrow up to $20 million less the amount of any
outstanding draws on authorized letters of credit and/or any applicable
limitations on maximum borrowings. Maximum borrowings generally could not
exceed 50% of the value of eligible inventory and was also reduced to reflect
reserves or other adjustments. Interest was at prime plus 1/2%. The initial
$13.0 million proceeds from this financing were used to extinguish all of the
Company's obligations under the credit facility with Wells.
In March 1997, a new credit facility from Bank of America National
Trust and Savings Association, Inc. (the "New Lender") was established which
provides for advances up to $20 million less the amount of any outstanding draws
up to a $1.5 million maximum 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 accrues at prime or may be fixed for a period of
time at the then current rate established under one of several
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indices, all at the Company's option. This credit facility expires August 31,
1999. Proceeds from this loan were used to extinguish all obligations under the
BABC credit facility.
The Company's obligation to the New Lender is secured by a first
priority lien on substantially all of 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 certain minimum cash flow coverage, and restrict the level of losses
and capital expenditures, calculated on a quarterly basis. The Company currently
is in full compliance with these covenants and expects to remain in compliance
during the term of the credit facility. However, unexpected 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 1997.
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.
SEASONALITY AND QUARTERLY FLUCTUATIONS
As noted previously, the months of November, December and January
historically have accounted for the largest percentage of the Company's net
sales and a significant portion of 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.
In the past, the Company's operating results were 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. An early snowfall at Mammoth historically has
influenced sales because it extends the demand for ski apparel and equipment
while a late snowfall may have the opposite effect.
However, during the third and fourth quarters of fiscal 1997, sales of
winter-related products were relatively weak despite early and substantial
snowfall at Mammoth. Management believes that this was the result of poor snow
conditions at local Southern California ski resorts and the maturing nature of
the winter-related products business. Management currently projects little or no
growth in winter-related product sales relative to other specialty product areas
of the Company's business. Accordingly, the effect of snow conditions on the
Company's operating results have been and are being mitigated by Management's
actions to diversify the Company's product mix. Sales of ski apparel and
equipment have decreased over the last five fiscal years from 28% to 18% of
total Company sales revenue.
Suppliers in the ski industry require that commitments 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 snowfall in the winter. If
the snowfall does not at least provide an adequate base or occurs late in the
season, or if sales do not meet projections, the Company may be required to mark
down its ski merchandise.
12
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The statements which are not historical facts contained in this Annual
Report on Form 10-K are "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. The words "anticipate", "believes", "expect", 'intend," "may' or
similar expressions used in this Annual Report as they relate to the Company or
its Management are generally intended to identify such forward looking
statements. These risks and uncertainties contained in this Annual Report
include but are not limited to, product demand and market acceptance risks, the
effect of economic conditions generally and in Southern California, and retail
and sporting goods business conditions specifically, the impact of competition,
technological difficulties, capacity and supply constraints or difficulties, the
results of financing efforts, changes in consumer preferences and trends, the
effect of the Company's accounting policies, weather conditions, acts of God,
and other risks detailed in the Company's Security and Exchange Commission
filings.
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
- ------------------------------------------------------------
None.
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 30, 1997, indicating all positions and offices
presently held by each.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Norbert J. Olberz.... 72 Chairman of the Board, Interim President and Chief Executive Officer
Eric S. Olberz....... 34 Director
John R. Attwood...... 67 Director
Kenneth Olsen........ 79 Director
Dennis D. Trausch.... 47 Executive Vice President
Howard K. Kaminsky... 39 Senior Vice President - Finance, Chief Financial Officer and Secretary
Robert W. Haueter.... 45 Senior Vice President-Sales, Marketing and Merchandising
</TABLE>
Norbert J. Olberz is the Company's founder and has been its
Controlling Shareholder and Chairman of the Board since we founded it 1959.
Interim President and Chief Executive Officer since April 1995.
Eric S. Olberz has been a Director since 1992. Mr. Olberz currently
is pursuing a Masters degree in Business Administration. He was President and
owner of Camp 7, Inc., a soft goods manufacturing operation located in Santa
Ana, California from July 1995 through October 1996 and Vice Chairman of the
Company from October 1994 to July 1995. Vice President from 1984 through
October 1994 and Secretary from October 1992 to July 1995. Mr. Olberz resigned
as an officer and employee concurrently with Camp 7, Inc.'s acquisition of the
Company's soft goods manufacturing operations in July 1995. Mr. Olberz is the
son of Norbert J. Olberz, the Principal Shareholder.
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 Verdugo Hills Hospital, a non-
profit hospital organization.
Kenneth Olsen has been a Director of the Company since June 1994. Mr.
Olsen 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 as a director of several nonprofit organizations.
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, Chief Financial Officer since joining the Company
in 1985, Senior Vice President - Finance since April 1997 and Secretary since
July 1995. Mr. Kaminsky was also the Company's Vice-President - Finance from
January through April 1997. Prior to joining the Company, Mr. Kaminsky was
employed in the auditing division of Ernst & Young LLP. He is a Certified
Public Accountant and received his Bachelor of Science degree in Business
Administration from California State University, Northridge.
14
<PAGE>
Robert W. Haueter Senior Vice President - Sales, Marketing and
Merchandising since January 1997. Previously, Mr. Haueter was the Company's
Vice President-Marketing since joining the Company in 1989. Mr. Haueter spent
the previous ten years as a senior aide in the California Legislature. During
this period, he coordinated marketing and strategy for several political
campaigns.
Norbert J. Olberz, the Principal Shareholder, owns approximately 72%
of the Company's outstanding Common Stock at March 31, 1997. 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.
Other information responding to Item 10 was included in the
Registrant's Proxy Statement with respect to its 1997 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 1997 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 1997 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 1997 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, 1997
Balance Sheets as of March 31, 1997 and 1996
Statements of Shareholders' Equity for each of the three years in the period
ended March 31, 1997
Statements of Cash Flows for each of the three years in the period ended
March 31, 1997
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, 1997 and 1996, and the related statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended March 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sport Chalet, Inc. at March 31,
1997 and 1996 and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
-----------------------
Los Angeles, California
May 21, 1997
18
<PAGE>
SPORT CHALET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
Net sales................................................. $137,705,280 $133,740,747 $134,734,540
Cost of goods sold........................................ 87,785,740 90,389,348 88,774,812
----------------------------------------------------------
Gross profit.............................................. 49,919,540 43,351,399 45,959,728
Selling, general and administrative expenses (Note 4)..... 45,255,998 44,367,566 44,520,185
----------------------------------------------------------
Income (loss) from operations............................. 4,663,542 (1,016,167) 1,439,543
Interest expense.......................................... 805,284 1,223,656 893,962
----------------------------------------------------------
Income (loss) before taxes................................ 3,858,258 (2,239,823) 545,581
Income tax (benefit) provision (Note 5)................... 1,555,000 (880,000) 254,000
----------------------------------------------------------
Net income (loss)......................................... $ 2,303,258 $ (1,359,823) $ 291,581
==========================================================
Earnings (loss) per share................................. $.35 $(.21) $.04
==========================================================
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 1997 1996
- ------ -----------------------------
<S> <C> <C>
Current assets:
Cash................................................................. $ 451,114 $ 768,562
Accounts receivable, less allowance of $28,000 in 1997 and 1996...... 476,070 961,875
Merchandise inventories (Note 3)..................................... 28,093,635 33,069,322
Prepaid expenses and other current assets............................ 354,281 367,412
Note receivable...................................................... 212,710
Deferred income taxes (Note 5)....................................... 1,090,149 678,523
Refundable income tax................................................ 304,158 285,511
----------------------------
Total current assets.................................................. 30,769,407 36,343,915
Furniture, equipment and leasehold improvements:
Furniture, fixtures and office equipment............................. 11,701,171 12,151,631
Rental equipment..................................................... 2,253,071 2,379,805
Vehicles............................................................. 762,039 617,822
Leasehold improvements............................................... 9,423,154 8,649,990
----------------------------
24,139,435 23,799,248
Less allowance for depreciation and amortization..................... 10,838,101 11,144,652
----------------------------
13,301,334 12,654,596
Deferred income taxes (Note 5)........................................ 298,879 442,381
Deposits.............................................................. 66,730 66,730
----------------------------
Total assets.......................................................... $44,436,350 $49,507,622
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Loans payable to bank (Note 3)....................................... $ 1,351,765 $10,307,560
Accounts payable..................................................... 10,586,661 9,895,655
Salaries and wages payable........................................... 2,200,895 1,850,789
Other accrued expenses (Note 4)...................................... 3,266,082 3,049,929
Income tax payable................................................... 324,000
----------------------------
Total current liabilities............................................. 17,729,403 25,103,933
Commitments and contingencies (Note 4)
Shareholders' equity (Note 6):
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.................................................... 6,741,895 4,438,637
----------------------------
Total shareholders' equity............................................ 26,706,947 24,403,689
----------------------------
Total liabilities and shareholders' equity............................ $44,436,350 $49,507,622
============================
</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, 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
Net income for 1997............... 2,303,258 2,303,258
-------------------------------------------------------------------------------
Balance at March 31, 1997.......... 6,500,000 $65,000 $19,900,052 $ 6,741,895 $26,706,947
===============================================================================
</TABLE>
See accompanying notes.
21
<PAGE>
SPORT CHALET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-----------------------------------------------------
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
- --------------------
Net income (loss)............................................. $ 2,303,258 $ (1,359,823) $ 291,581
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................... 2,445,356 2,732,865 2,518,414
Write-off of equipment...................................... 936,592 414,783 38,133
Deferred income taxes....................................... (268,124) (618,996) (175,762)
Changes in operating assets and liabilities:
Accounts receivable........................................ 485,805 (386,724) (159,415)
Merchandise inventories.................................... 4,975,687 3,080,934 (6,237,047)
Prepaid expenses and other current assets.................. 13,131 466,156 89,037
Note receivable............................................ 212,710 (212,710)
Refundable income taxes.................................... (18,647) 103,922 (238,665)
Accounts payable........................................... 691,006 (1,626,499) 1,854,171
Salaries and wages payable................................. 350,106 (303,406) 426,922
Other accrued expenses..................................... 216,153 658,737 742,571
Income taxes payable....................................... 324,000
-----------------------------------------------------
Net cash provided by (used in) operating activities 12,667,033 2,949,239 (850,060)
INVESTING ACTIVITIES
- --------------------
Purchases of furniture, equipment and leasehold improvements.. (4,145,686) (3,860,730) (3,313,934)
Proceeds from sale of assets.................................. 117,000 213,000
-----------------------------------------------------
Net cash used in investing activities......................... (4,028,686) (3,647,730) (3,313,934)
FINANCING ACTIVITIES
- --------------------
Proceeds from bank and other borrowings....................... 133,618,058 47,435,883 39,001,374
Repayments of bank and other borrowings....................... (142,573,853) (46,461,133) (34,585,230)
-----------------------------------------------------
Net cash (used in) provided by financing activities........... (8,955,795) 974,750 4,416,144
-----------------------------------------------------
Increase (decrease) in cash................................... (317,448) 276,259 252,150
Cash at beginning of year..................................... 768,562 492,303 240,153
-----------------------------------------------------
Cash at end of year........................................... $ 451,114 $ 768,562 $ 492,303
=====================================================
Cash paid (refunded) during the year for:
Income taxes................................................. $ 1,516,168 $ (369,190) $ 665,489
Interest..................................................... 872,073 1,234,938 832,415
</TABLE>
See accompanying notes.
22
<PAGE>
SPORT CHALET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 1997, 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, 1997.
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 are expensed as incurred. Advertising expense amounted to
$2,873,299, $2,790,643 and $3,394,194 for the years ending March 31, 1997, 1996
and 1995, 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 are immaterial or 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
In October 1995, the Financial Accounting Standards Board issued "Accounting for
Stock-Based Compensation" (SFAS No. 123). The statement is effective for fiscal
years beginning after December 15, 1995. Under SFAS No. 123, stock-based
compensation expense is measured using either the intrinsic value method as
prescribed by Accounting Principle Board Opinion No. 25 or the fair value method
described in SFAS No. 123. The Company adopted the pro forma disclosure
requirements of SFAS No. 123 in fiscal 1996. The pro forma impact on net income
and net income per common share was not material.
RECLASSIFICATION
Certain amounts in March 31, 1996 financial statements have been reclassified to
conform with the March 31, 1997 classification.
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
1997 1996
------------------------------------
<S> <C> <C>
Revolving credit facility....................................... $1,351,765 $ 9,607,566
Two term loans.................................................. 699,994
------------------------------------
$1,351,765 $10,307,560
====================================
</TABLE>
The Company obtained a credit facility from Bank of America National Trust and
Savings Association, Inc. on March 25, 1997 which provides for advances up to
$20 million less the amount of any outstanding draws up to a maximum of $1.5
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 (8.25% at March 31, 1997) or may be fixed for a
period of time at the then current rate established under one of several
indicies, all at the Company's option. This credit facility expires August 31,
1999. Proceeds from this loan were used to extinguish all obligations to the
former lender, Bank America Business Credit, Inc. (BABC), for amounts
outstanding under the revolving credit facility discussed below. The primary
covenants in the new agreement require the Company to maintain certain minimum
cash flow coverage, and restricts the total of losses and capital expenditures,
calculated on a quarterly basis. This loan is secured by substantially all of
the Company's non-real estate assets.
The Company previously obtained a two year credit facility from BABC on May 14,
1996, which provided 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 could not exceed 50% of the value of
eligible inventory, as defined, and were also reduced to reflect reserves or
other adjustments. Interest accrued at prime plus 1/2%. Proceeds from this loan
were used to extinguish all obligations to the former lender, Wells Fargo Bank,
for amounts outstanding under the revolving line of credit and two term loans.
The primary covenants in the BABC agreement required the Company to maintain
certain minimum levels of net worth and cash flow coverage, as well as
restricted capital expenditures, calculated on a monthly, quarterly and annual
basis, respectively. This loan was secured by substantially all of the Company's
non-real estate assets.
At March 31, 1997, the Company has no letters of credit outstanding.
The weighted average interest rates on short-term borrowings were 8.75%, 7.90%
and 8.39% for the years ending March 31, 1997, 1996 and 1995, respectively.
25
<PAGE>
SPORT CHALET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LEASES
The Company leases all buildings (including its corporate office space, two
warehouses and distribution facilities and two stores from the Company's
Principal Shareholder) under 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, 1997:
<TABLE>
<S> <C>
1998..................................................... $ 6,908,083
1999..................................................... 7,116,234
2000..................................................... 6,663,063
2001..................................................... 5,960,530
2002..................................................... 6,119,230
Thereafter............................................... 46,098,176
-----------
$78,865,316
===========
</TABLE>
Total rent expense amounted to $10,451,676, $10,132,188 and $9,668,068 for the
years ended March 31, 1997, 1996 and 1995, respectively, of which $1,498,092,
$1,413,120 and $1,616,438, 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 $557,155,
$567,165 and $981,420 for the years ended March 31, 1997, 1996 and 1995,
respectively. Included in the accompanying balance sheets are amounts
representing prepaid rent to the Principal Shareholder of $81,367 at March 31,
1997 and amounts representing accrued rent due to the Principal Shareholder of
$50,312 at March 31, 1996.
5. INCOME TAXES
The provision (benefit) for income taxes for the years ended March 31, 1997,
1996 and 1995, consists of the following:
<TABLE>
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Federal:
Current...................................... $1,560,000 $(200,000) $232,000
Deferred..................................... (363,000) (558,000) (39,000)
--------------------------------------------------
1,197,000 (758,000) 193,000
State:
Current...................................... 365,000 69,000
Deferred..................................... (7,000) (122,000) (8,000)
--------------------------------------------------
358,000 (122,000) 61,000
--------------------------------------------------
$1,555,000 $(880,000) $254,000
==================================================
</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, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------------
Current Non-current Current Non-current
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Tax over book depreciation.............. $ $ (2,499) $ $(268,502)
Other................................... (42,774)
--------------------------------------------------------------------------
Total deferred tax liabilities........... (2,499) (311,276)
Deferred tax assets:
Uniform cost capitalization............. 131,339 151,694
Markdown reserve........................ 606,200 247,676
Accrued vacation........................ 326,883 279,153
Tax effect of NOL carryforward.......... 486,787
AMT carryforward........................ 266,870 266,870
Other................................... 25,727 34,508
--------------------------------------------------------------------------
Total deferred tax assets................ 1,090,149 301,378 678,523 753,657
--------------------------------------------------------------------------
Total deferred tax asset................. $1,090,149 $298,879 $678,523 $ 442,381
==========================================================================
</TABLE>
A reconciliation of the provision (benefit) for income taxes for the years ended
March 31, 1997, 1996 and 1995 with the amount computed using the federal
statutory rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Statutory rate 34% applied to income (loss) before taxes..... $1,312,000 $(762,000) $186,000
State taxes, net of federal tax effect....................... 237,000 (81,000) 40,000
Other, net................................................... 6,000 (37,000) 28,000
----------------------------------------------
$1,555,000 $(880,000) $254,000
==============================================
</TABLE>
27
<PAGE>
Sport Chalet, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
The 1992 Plan also provides for issuance by the Company of stock appreciation
rights, restricted stock and performance awards (PAs).
Exercise prices for options outstanding as of March 31, 1997, ranged from $2.375
to $6.00. The weighted average remaining contractual life of those options is 9
years.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996
and 1997 weighted-average risk-free interest rates of 6%; dividend yields of 0%;
weighted-average volatility factors of the expected market price of the
Company's common stock of .30; and a weighted average expected life of the
option of 5 years. The impact on net income and earnings per share was not
material.
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
----------------------------------------------------------------
Weighted Weighted
Options Average Options Average
Exercise Price Exercise Price
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 242,000 $ 2.51 332,000 $8.62
Granted.......................... 3,000 3.125 318,000 2.40
Exercised........................
Canceled......................... (5,000) 2.51 (408,000) 8.71
------- --------
Outstanding at end of year........ 240,000 2.52 242,000 2.51
======= ========
Exercisable at end of year........ 59,400 2.80 9,000 5.24
Weighted average fair value of
options granted during the year 0.88 0.67
</TABLE>
28
<PAGE>
Sport Chalet, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 (1)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1997
Net sales................................. $29,250 $32,517 $41,881 $34,057
Gross profit.............................. 10,800 11,477 15,692 11,951
Income from operations.................... 437 527 3,086 614
Net income................................ 91 197 1,668 347
Earnings per share........................ .01 .03 .26 .05
</TABLE>
<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)
</TABLE>
(1) THE fourth quarter 1997 provision for merchandise inventory shrinkage,
based upon the year end physical inventory, was less by approximately
$984,000 than the rate of accrual estimated during the prior three
quarters.
29
<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 30, 1997.
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/ JACK R. ATTWOOD
------------------------------
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER John R. Attwood, Director
/s/ HOWARD K. KAMINSKY
- ------------------------------
Howard K. Kaminsky
Senior Vice President - Finance,
Chief Financial Officer and Secretary /s/ KENNETH OLSEN
-------------------------------
Kenneth Olsen, Director
30
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S> <C>
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 (6)
1, 1992.
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, (8)
INC., A CALIFORNIA CORPORATION.
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. (10)
OLBERZ AND CAMP 7, A CALIFORNIA CORPORATION.
10.20 SECURITY AGREEMENT [DEBTOR IN POSSESSION] DATED JUNE 23,1995 AND EXECUTED BY CAMP 7, INC., A CALIFORNIA (10)
CORPORATION, AS BORROWER, ON BEHALF OF THE COMPANY, AS SECURED PARTY.
10.21 CONTINUING GUARANTY DATED JUNE 23, 1995 EXECUTED BY ERIC S. OLBERZ, AS GUARANTOR, ON BEHALF OF THE (10)
COMPANY, AS LENDER.
10.22 PROMISSORY NOTE DATED JUNE 23, 1995 EXECUTED BY CAMP 7, INC., A CALIFORNIA CORPORATION, AS MAKER ON BEHALF (10)
OF THE COMPANY.
10.23 AGREEMENT OF ASSIGNMENT AND ASSUMPTION OF LEASE AND CONSENT OF LANDLORD, DATED JUNE 23, 1995, BY AND AMONG (10)
THE COMPANY, AS ASSIGNOR, CAMP 7, INC., A CALIFORNIA CORPORATION, AS ASSIGNEE AND ERIC S. OLBERZ, AS
LANDLORD.
10.24 PLEDGE AGREEMENT DATED JUNE 23, 1995, BY AND BETWEEN ERIC S. OLBERZ, AS PLEDGOR, AND THE COMPANY, AS (10)
PLEDGEE.
10.25 LICENSING AGREEMENT DATED JUNE 23, 1995, BY AND BETWEEN THE COMPANY AS LICENSEE, AND CAMP 7, INC., A (10)
CALIFORNIA CORPORATION, AS LICENSOR
10.26 INDEMNIFICATION AGREEMENT DATED JUNE 23, 1995, BY ERIC S. OLBERZ, AS INDEMNITOR, ON BEHALF OF THE COMPANY, (10)
AS INDEMNITY [IF REQUIRED].
</TABLE>
E-1
<PAGE>
<TABLE>
<C> <S> <C>
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 (11)
CALIFORNIA CORPORATION.
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, (13)
INC., TOGETHER WITH SCHEDULES THERETO.
10.31 LETTER OF CREDIT FINANCING AGREEMENT SUPPLEMENT TO LOAN AND SECURITY AGREEMENT DATED AS OF MAY 14,1996 (13)
BETWEEN THE COMPANY AND BANKAMERICA BUSINESS CREDIT, INC.
10.32 SIDE LETTER, DATED AS OF MAY 14, 1996, BETWEEN THE COMPANY AND BANKAMERICA BUSINESS CREDIT, INC., (13)
RESPECTING THE AGGREGATE RENT RESERVE.
10.33 TERMINATION AGREEMENT AND MUTUAL GENERAL RELEASE DATED MARCH 25, 1997 AMONG THE COMPANY, BANKAMERICA
BUSINESS CREDIT, INC. AND BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION.
10.34 BUSINESS LOAN AGREEMENT DATED AS OF MARCH 25, 1997 BETWEEN THE COMPANY AND BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, TOGETHER WITH RELATED EXHIBITS.
23 CONSENT OF INDEPENDENT AUDITORS
27 FINANCIAL DATA SCHEDULE
(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.
(13) INCORPORATED BY REFERENCE TO EXHIBIT 10.30, 10.31 AND 10.32 TO THE COMPANY'S FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1996.
</TABLE>
E-2
<PAGE>
EXHIBIT 10.33
TERMINATION AGREEMENT AND MUTUAL GENERAL RELEASE
This Termination Agreement and Mutual General Release ("Release") dated
March 25, 1997, is entered into by and between Sport Chalet, Inc., a Delaware
corporation ("Borrower"), and BankAmerica Business Credit, Inc., a Delaware
corporation ("BABC").
FOR VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, the
parties agree to terminate the Loan and Security Agreement between them dated
May 14, 1996, as amended ("Loan Agreement"), effective on the date hereof, and
the parties hereby mutually release and forever discharge one another, and their
respective successors, representatives, assigns, officers, directors, agents,
employees, and attorneys, and each of them, of and from any and all claims,
demands, debts, liabilities, actions, and causes of action of every kind and
character based upon or arising out of the Loan Agreement (except as hereinafter
specifically set forth). Notwithstanding termination of the Loan Agreement, all
obligations of Borrower under the Loan Agreement which by their terms are
intended to survive termination shall continue in full force and effect.
The parties hereby specifically waive as against one another any rights
they, or any of them, may have under Section 1542 of the California Civil Code,
which provides as follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his settlement
with the debtor.
The parties hereby warrant and represent that they have not assigned or in
any other way conveyed, transferred, or encumbered all or any portion of the
claims or rights covered by this Release. The parties, and each of them,
execute this Release voluntarily, after consultation with counsel, and with full
knowledge of its significance.
The release by BABC provided for herein is conditional upon the final
payment, in cash, of all of Borrower's "Obligations" (as defined in the Loan
Agreement) and all checks and other instruments delivered by Borrower to BABC,
and Borrower agrees to repay BABC, on demand, the amount of any such check or
other instrument that may be returned for nonpayment and any other Obligations
which remain unpaid. Borrower further agrees to indemnify BABC against any and
all claims, debts, liabilities, obligations, actions, proceedings, penalties,
judgments, causes of action, costs, and expenses (including, without limitation
attorneys' fees) of every kind, which BABC may sustain or incur as a result of
Borrower's failure to pay any payroll or other taxes of Borrower or as a result
of any other acts, omission, or occurrence relating to Borrower.
1
<PAGE>
This Release, the Loan Agreement, and the other written documents and
instruments between the parties set forth in full all of the representations and
agreements of the parties, and this Release may not be modified or amended, nor
may any rights hereunder be waived, except in a writing signed by the parties
hereto.
SPORT CHALET, INC.
By /s/ Howard K. Kaminsky
-------------------------
Title V. P. Finance
-------------------------
BANKAMERICA BUSINESS CREDIT, INC.
By /s/ Margret Lambka
-------------------------
Title Vice President
-------------------------
The undersigned, Bank of America NT&SA ("Bank"), agrees to indemnify
BankAmerica Business Credit, Inc.("BABC") from, and hold BABC harmless against,
all losses and liabilities which BABC may incur at any time as a result of any
nonpayment, claim, refund, or chargeback of any check or other item which has
been credited by BABC to Borrower's account with BABC, together with any
expenses or other charges incident thereto. The amount of any such losses or
liabilities indemnified hereunder shall be paid to BABC promptly by Bank upon
BABC's demand therefor, and the amount of such demand shall be conclusive upon
Bank. Bank acknowledges and agrees that its obligation to make such payments
shall not be conditioned upon any prior demand by BABC upon Borrower with
respect thereto.
BANK OF AMERICA NT&SA
By /s/ Jeff Thom
--------------------------------
Title Vice President
----------------------------
2
<PAGE>
EXHIBIT 10.34
================================================================================
[LOGO OF BANK OF AMERICA]
BANK OF AMERICA BUSINESS LOAN AGREEMENT
National Trust and Savings Association (INVENTORY)
- --------------------------------------------------------------------------------
This Agreement dated as of March 25, 1997, is between Bank of America National
Trust and Savings Association (the "Bank") and Sport Chalet, Inc. (the
"Borrower").
1. DEFINITIONS
In addition to the terms which are defined elsewhere in this Agreement, the
following terms have the meanings indicated for the purposes of this Agreement:
1.1 "BORROWING BASE" means 50% of Acceptable inventory, minus the sum of all
Rent Reserves.
In determining the value of Acceptable Inventory to be included in the Borrowing
Base, the Bank will use the first-in-first-out (FIFO) method, based upon the
retail method of accounting, and will use the lowest of (i) the Borrower's cost,
(ii) the Borrower's estimated market value, or (iii) the Bank's independent
determination of the resale value of such inventory in such quantities and on
such terms as the Bank deems appropriate.
1.2 "ACCEPTABLE INVENTORY" means inventory which satisfies the following
requirements:
(a) The inventory is owned by the Borrower free of any title defects or Liens
except the security interest in favor of the Bank and Permitted Liens.
(b) The inventory is permanently located at locations which the Borrower has
disclosed to the Bank and which are acceptable to the Bank. If the
inventory is covered by a negotiable document of title (such as a warehouse
receipt) that document must be delivered to the Bank.
(c) The inventory is held for sale or use in the ordinary course of the
Borrower's business and is of good and merchantable quality. Display items,
work-in-process and packing and shipping materials are not acceptable.
Inventory which is obsolete, unsalable, damaged, defective, discontinued or
team sales inventory or slow-moving, or accrued shrinkage reserve or which
has been returned by the buyer, is not acceptable.
(d) The inventory is not placed on consignment.
(e) If the inventory is located on premises leased to the Borrower if the
Borrower shall have delivered to the Bank either (i) a written agreement
duly executed on behalf of the appropriate landlord and in form and
substance acceptable to the Bank which subordinates all Liens that the
landlord for such premises may be entitled to assert against such
inventory; or (ii) information sufficient to permit the Bank to establish
Rent Reserve as to the locations where such inventory is located, and the
Bank has done so;
(f) The inventory is otherwise acceptable to the Bank in its reasonable
discretion.
1.3 "CREDIT LIMIT" means the amount of Twenty Million Dollars ($20,000,000).
1.4 "APPLICABLE MARGIN" means with respect to the Reference Rate, the LIBOR
Rate, the Offshore Rate, and the Short Term Base Fixed Rate, the percentage
points indicated as being added thereto, as set forth in the
-1-
<PAGE>
chart below, based on the Borrower's fixed charge coverage ratio:
<TABLE>
<CAPTION>
Fixed Charge Coverage Ratio
---------------------------
Greater than or equal to 1.15 to 1.00 Less than 1.15 to 1.00
------------------------------------- ----------------------
<S> <C>
RR + 0.00 RR + 0.25
Fixed + 2.00 Fixed + 2.25
Offshore + 2.00 Offshore + 2.25
LIBOR + 2.00 LIBOR + 2.25
</TABLE>
In this chart "fixed charge coverage ratio" refers to the cash flow ratio
calculation under Paragraph 8.4 below; "RR" refers to the Reference Rate;
"Fixed" refers to the Short Term Base Fixed Rate; "Offshore" refers to the
Offshore Rate; and "LIBOR" refers to the LIBOR Rate. Any change in the
Applicable Margin shall take effect on the date on which Bank gives notice
thereof to Borrower based upon the most recent financial statements delivered to
Bank pursuant to this Agreement.
1.5 "LIEN" means: (a) any interest in property of the Borrower securing an
obligation owed to, or a claim by, anyone 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 of the Borrower.
1.6 "PERMITTED LIENS" means: (a) Liens for taxes not yet payable or Liens for
taxes (in an amount not to exceed One Hundred Thousand Dollars ($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
generally accepted accounting principles ("GAAP") shall have been made therefor
on the Borrower's financial statements and that a stay of enforcement of any
such Lien is in effect); (b) Liens in favor of the Bank or its affiliates; (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 the 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 real property owned or occupied by the Borrower: 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 Bank's security interest therein, or materially
interfere with the Bank's ordinary conduct of the business of the Borrower; and
(i) purchase money security interests and Liens under capital leases to the
extent that the acquisition or lease of the underlying asset was permitted under
paragraph 8.6(d), the security interest for 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.
1.7 "RENT RESERVE" means an amount equal to the rent and other amounts payable
by the Borrower during any three (3) month period on any premises leased by the
Borrower.
-2-
<PAGE>
2. LINE OF CREDIT AMOUNT AND TERMS
2.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Commitment") is equal to the lesser of (i) the Credit Limit or (ii) the
Borrowing Base.
(b) This is a revolving line of credit for advances with a within line facility
for letters of credit. During the availability period, the Borrower may
repay principal amounts and reborrow them.
(c) The Borrower agrees not to permit the outstanding principal balance of the
line of credit plus the outstanding amounts of any letters of credit,
including amounts drawn on letters of credit and not yet reimbursed, to
exceed the Commitment. If the Borrower exceeds this limit, the Borrower
will immediately pay the excess to the Bank upon the Bank's demand. The
Bank may apply payments received from the Borrower under this Paragraph to
the obligations of the Borrower to the Bank in the order and manner as the
Bank, in its discretion, may determine.
2.2 AVAILABILITY PERIOD. The line of credit is available between the date of
this Agreement and August 31, 1999 (the "Expiration Date") unless the Borrower
is in default.
2.3 CONDITIONS TO EACH EXTENSION OF CREDIT. Before each extension of credit
under the line of credit, including the first, but excluding any extension of
credit made pursuant to the provisions of Subparagraph 2.11(b) or Paragraph
10.16 of this Agreement, the Borrower will deliver the following to the Bank if
requested by the Bank:
(a) a borrowing certificate, in form and detail satisfactory to the Bank,
setting forth the Acceptable Inventory on which the requested extension of
credit is to be based.
2.4 INTEREST RATE.
(a) Unless the Borrower elects an optional interest rate as described below,
the interest rate is the Bank's Reference Rate plus the Applicable Margin.
(b) The Reference Rate is the rate of interest publicly announced from time to
time by the Bank in San Francisco, California, as its Reference Rate. The
Reference Rate is set by the Bank based on various factors, including the
Bank's costs and desired return, general economic conditions and other
factors, and is used as a reference point for pricing some loans. The Bank
may price loans to its customers at, above, or below the Reference Rate.
Any change in the Reference Rate shall take effect at the opening of
business on the day specified in the public announcement of a change in the
Bank's Reference Rate.
2.5 REPAYMENT TERMS.
(a) The Borrower will pay interest on March 31, 1997, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit.
(b) The Borrower will repay in full all principal and any unpaid interest or
other charges outstanding under this line of credit no later than the
Expiration Date. Any amount bearing interest (as described in paragraphs
2.6 through 2.9, below) may be repaid at the end of the applicable interest
period, which shall be no later than the Expiration Date.
2.6 OPTIONAL INTEREST RATES. Instead of the interest rate based on the Bank's
Reference Rate, the Borrower may elect to have all or portions of the line of
credit (during the availability period) bear interest at the rate(s) described
below during an interest period agreed to by the Bank and the Borrower. Each
interest rate is
-3-
<PAGE>
a rate per year. Interest will be paid on the last day of each interest period,
and on the last day of each month during the interest period. At the end of any
interest period, the interest rate will revert to the rate based on the
Reference Rate, unless the Borrower has designated another optional interest
rate for the portion.
2.7 SHORT TERM FIXED RATE. The Borrower may elect to have all or portions of
---------------------
the principal balance of the line of credit bear interest at the Short Term
Fixed Rate, subject to the following requirements:
(a) The "Short Term Fixed Rate" means the Short Term Base Fixed Rate plus the
Applicable Margin.
(b) The "Short Term Base Fixed Rate" means the fixed interest rate per annum,
determined solely by the Bank on the first day of the applicable interest
period for the Short Term Fixed Rate portion, as the rate at which the Bank
would be able to borrow funds in the Money Market in the amount of the
Short Term Fixed Rate portion and with an interest and principal payment
schedule equal to the Short Term Fixed Rate portion and for a term equal to
the applicable interest period. The Short Term Base Fixed Rate shall
include adjustments for reserve requirements, federal deposit insurance,
and any other similar adjustment which the Bank deems appropriate. The
Short Term Base Fixed Rate is the Bank's estimate only and the Bank is
under no obligation to actually purchase or match funds for any
transaction.
(c) "Money Market" means one or more wholesale funding markets available to the
Bank, including domestic negotiable certificates of deposit, eurodollar
deposits, bank deposit notes or other appropriate money market instruments
selected by the Bank.
(d) The interest periods during which the Short Term Fixed Rate will be in
effect will be no shorter than 14 days and no longer than one year.
(e) Each Short Term Fixed Rate portion will be for an amount not less than Five
Hundred Thousand Dollars ($500,000).
(f) Any portion of the principal balance of the line of credit already bearing
interest at the Short Term Fixed Rate will not be converted to a different
rate during its interest period.
(g) Each prepayment of a Short Term Fixed Rate portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee equal to the
amount (if any) by which:
(i) the additional interest which would have been payable on the amount
prepaid had it not been prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the Money Market for a period
starting on the date on which it was prepaid and ending on the last
day of the interest period for such portion (or the scheduled payment
date for the amount prepaid, if earlier).
2.8 OFFSHORE RATE. The Borrower may elect to have all or portions of the
principal balance of the line of credit bear interest at the Offshore Rate plus
the Applicable Margin.
Designation of an Offshore Rate portion is subject to the following
requirements:
(a) The interest period during which the Offshore Rate will be in effect will
be no shorter than 30 days and no longer than one year. The last day of the
interest period will be determined by the Bank using the practices of the
offshore dollar inter-bank market.
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(b) Each Offshore Rate portion will be for an amount not less than Five Hundred
Thousand Dollars ($500,000).
(c) The "Offshore Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts
in the calculation will be determined by the Bank as of the first day of
the interest period.)
Offshore Rate = Grand Cayman Rate
----------------------
(1.00 - Reserve Percentage)
Where,
(i) "Grand Cayman Rate" means the interest rate (rounded upward to the
nearest 1/16th of one percent) at which the Bank's Grand Cayman Branch,
Grand Cayman, British West Indies, would offer U.S. dollar deposits for
the applicable interest period to other major banks in the offshore
dollar inter-bank markets.
(ii) "Reserve Percentage" means the total of the maximum reserve percentages
for determining the reserves to be maintained by member banks of the
Federal Reserve System for Eurocurrency Liabilities, as defined in the
Federal Reserve Board Regulation D, rounded upward to the nearest 1/100
of one percent. The percentage will be expressed as a decimal, and
will include, but not be limited to, marginal, emergency, supplemental,
special, and other reserve percentages.
(d) The Borrower may not elect an Offshore Rate with respect to any portion of
the principal balance of the line of credit which is scheduled to be repaid
before the last day of the applicable interest period.
(e) Any portion of the principal balance of the line of credit already bearing
interest at the Offshore Rate will not be converted to a different rate
during its interest period.
(f) Each prepayment of an Offshore Rate portion, whether voluntary, by reason
of acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid, and a prepayment fee equal to the amount
(if any) by which:
(i) the additional interest which would have been payable on the amount
prepaid had it not been paid until the last day of the interest
period, exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the offshore dollar market for a
period starting on the date on which it was prepaid and ending on the
last day of the interest period for such portion.
(g) The Bank will have no obligation to accept an election for an Offshore Rate
portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to the
interest period, of an Offshore Rate portion are not available in the
offshore dollar inter-bank market; or
(ii) the Offshore Rate does not accurately reflect the cost of an Offshore
Rate portion.
2.9 LIBOR RATE. The Borrower may elect to have all or portions of the principal
balance bear interest at the LIBOR Rate plus the Applicable Margin.
Designation of a LIBOR Rate portion is subject to the following requirements:
(a) The interest period during which the LIBOR Rate will be in effect will be
one, two, or three weeks, or one, two, three, four, five, six, seven,
eight, nine, ten, eleven, or twelve months. The first day of the interest
period must be a day other than a Saturday or a Sunday on which the Bank is
open for business in
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California, New York and London and dealing in offshore dollars (a "LIBOR
Banking Day"). The last day of the interest period and the actual number of
days during the interest period will be determined by the Bank using the
practices of the London inter-bank market.
(b) Each LIBOR Rate portion will be for an amount not less than Five Hundred
Thousand Dollars ($500,000) for interest periods of one month or longer.
For shorter maturities, each LIBOR Rate portion will be for an amount
which, when multiplied by the number of days in the applicable interest
period, is not less than fifteen million (15,000,000) dollar-days.
(c) The "LIBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts
in the calculation will be determined by the Bank as of the first day of
the interest period.)
LIBOR Rate = London Inter-Bank Offered Rate
------------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Inter-Bank Offered Rate" means the interest rate at which the
Bank's London Branch, London, Great Britain, would offer U.S. dollar
deposits for the applicable interest period to other major banks in
the London inter-bank market at approximately 11:00 a.m. London time
two (2) London Banking Days before the commencement of the interest
period. A "London Banking Day" is a day on which the Bank's London
Branch is open for business and dealing in offshore dollars.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member
banks of the Federal Reserve System for Eurocurrency Liabilities, as
defined in Federal Reserve Board Regulation D, rounded upward to the
nearest 1/100 of one percent. The percentage will be expressed as a
decimal, and will include, but not be limited to, marginal, emergency,
supplemental, special, and other reserve percentages.
(d) The Borrower shall irrevocably request a LIBOR Rate portion no later than
12:00 noon San Francisco time on the LIBOR Banking Day preceding the day on
which the London Inter-Bank Offered Rate will be set, as specified above.
(e) The Borrower may not elect a LIBOR Rate with respect to any principal
amount which is scheduled to be repaid before the last day of the
applicable interest period.
(f) Any portion of the principal balance already bearing interest at the LIBOR
Rate will not be converted to a different rate during its interest period.
(g) Each prepayment of a LIBOR Rate portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid and a prepayment fee as described below. A
"prepayment" is a payment of an amount on a date earlier than the scheduled
payment date for such amount as required by this Agreement. The prepayment
fee shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable during the
interest period on the amount prepaid had it not been prepaid,
exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the domestic certificate of deposit
market, the eurodollar deposit market, or other
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appropriate money market selected by the Bank, for a period starting
on the date on which it was prepaid and ending on the last day of the
interest period for such portion (or the scheduled payment date for
the amount prepaid, if earlier).
(h) The Bank will have no obligation to accept an election for a LIBOR Rate
portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to the
interest period, of a LIBOR Rate portion are not available in the
London inter-bank market; or
(ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR Rate
portion.
2.10 LETTERS OF CREDIT. This line of credit may be used for financing:
(i) commercial letters of credit with a maximum maturity of 120 days but
not to extend beyond the Expiration Date. Each commercial letter of
credit will require drafts payable at sight.
(ii) standby letters of credit with a maximum maturity of 365 days but not
to extend beyond the Expiration Date.
(iii) The amount of the letters of credit outstanding at any one time
(including amounts drawn on the letters of credit and not yet
reimbursed) may not exceed One Million Five Hundred Thousand Dollars
($1,500,000).
The Borrower agrees:
(a) any sum drawn under a letter of credit may, at the option of the Bank, be
added to the principal amount outstanding under this Agreement. The amount
will bear interest and be due as described elsewhere in this Agreement.
(b) if there is a default under this Agreement, to immediately prepay and make
the Bank whole for any outstanding letters of credit.
(c) the issuance of any letter of credit and any amendment to a letter of
credit is subject to the Bank's written approval and must be in form and
content satisfactory to the Bank and in favor of a beneficiary acceptable
to the Bank.
(d) to sign the Bank's form Application and Agreement for Commercial Letter of
Credit or Application and Agreement for Standby Letter of Credit.
(e) to pay any issuance and/or other fees that the Bank notifies the Borrower
will be charged for issuing and processing letters of credit for the
Borrower.
(f) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
2.11 CREDIT SWEEP. The Borrower agrees:
(a) If on any banking day there is a principal balance outstanding under this
Agreement, then the Bank will automatically deduct from checking account
number 14593-05000, (the "Account") and apply in repayment of such
principal balance an amount equal to the lesser of such principal balance
or the unrestricted ledger balance of the Account less (i) float, (ii) the
total amount of checks presented for payment through the controlled
disbursement account by the Bank on such banking day for payment against
the Account, and (iii) the sum of One Hundred Thousand Dollars ($100,000).
The ledger balance of the Account will not be "unrestricted" if, in the
reasonable determination of the Bank, it is subject to hold, dispute, or
legal process preventing its withdrawal.
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<PAGE>
(b) If on any banking day the Bank determines that there might be insufficient
funds in the Account at the end of such banking day to pay (i) the total
amount of checks presented for payment through the Borrower's controlled
disbursement account on such banking day, (ii) the total amount of interest
and principal payments scheduled to be paid by the Borrower on such banking
day, and (iii) any other items to be debited against the Account on such
banking day of which the Bank is aware, then the Bank will automatically
make an advance under the line of credit in an amount equal to the lesser
of the amount of the line of credit available to the Borrower under the
line of credit or the amount estimated by the Bank as being necessary, in
addition to the balance of funds in the Account on such banking day, to pay
the items mentioned above. The proceeds of these advances will be deposited
into the Account. For purposes of this subparagraph (b), a levy, notice of
lien, writ or other legal process served by a third party upon the Bank
shall not be construed as an instrument or other item to be debited against
the Account, and the Bank shall be under no obligation to make an advance
to make a payment in respect of such levy, notice of lien, writ or other
legal process.
(c) In determining the beginning and the end of any banking day, the Bank may
follow its customary practices for setting cutoff hours for the handling of
money and items and the making of entries on its books.
(d) The arrangement provided for in this Paragraph may be terminated by the
Borrower or the Bank by giving to the other at least ten (10) banking days'
written notice.
(e) Except as provided above, nothing in this Paragraph shall be deemed or
construed to alter or amend any other agreement between the Borrower and
the Bank concerning the Account, and the Bank otherwise shall be entitled
to follow its usual and customary procedures concerning the Account.
(f) Notwithstanding any other provisions of this paragraph, in the event of the
commencement of a case pursuant to Title 11, United States Code, filed by
or against the Borrower, or in the event of the commencement of any similar
case under then applicable federal or state law providing for the relief of
debtors or the protection of creditors by or against the Borrower, the Bank
may act as the Bank deems necessary to comply with all applicable
provisions of governing statutes and shall be held harmless from any claim
of the Borrower for so doing.
(g) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection
with any action or omission in connection with this Paragraph, except gross
negligence or willful misconduct of the Bank. This indemnity and excuse
will survive the termination.
3. FEES AND EXPENSES
3.1 UNUSED COMMITMENT FEE. The Borrower agrees to pay a fee on any difference
between the Credit Limit and the amount of credit it actually uses, determined
by the weighted average loan balance maintained during the specified period. The
fee will be calculated at .125% per year. This fee is due on June 30, 1997, and
quarterly thereafter until the expiration of the availability period.
3.2 EXPENSES.
(a) The Borrower agrees to immediately repay the Bank for expenses that
include, but are not limited to, filing, recording and search fees,
appraisal fees, title report fees and documentation fees in an amount not
exceeding Five Hundred Dollars ($500).
(b) The Borrower agrees to reimburse the Bank for any expenses it incurs in the
preparation of this Agreement and any agreement or instrument required by
this Agreement in an amount not exceeding Four Thousand Dollars ($4,000).
Expenses include, but are not limited to, reasonable attorneys' fees,
including any allocated costs of the Bank's in-house counsel.
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<PAGE>
(c) The Borrower agrees to reimburse the Bank for the cost of periodic audits
and appraisals of the personal property collateral securing this Agreement,
at such intervals as the Bank may reasonably require. The audits and
appraisals may be performed by employees of the Bank or by independent
appraisers. Unless a default has occurred hereunder, the maximum amount
which the Borrower will be required to reimburse the Bank for any audit
will be Three Thousand Dollars ($3,000).
4. COLLATERAL
4.1 PERSONAL PROPERTY. The Borrower's obligations to the Bank under this
Agreement will be secured by personal property the Borrower now owns or will own
in the future as listed below. The collateral is further defined in security
agreement(s) executed by the Borrower. In addition, all personal property
collateral securing this Agreement shall also secure all other present and
future obligations of the Borrower to the Bank (excluding any consumer credit
covered by the federal Truth in Lending law, unless the Borrower has otherwise
agreed in writing). All personal property collateral securing any other present
or future obligations of the Borrower to the Bank shall also secure this
Agreement.
(a) Machinery and equipment.
(b) Inventory.
(c) Receivables.
5. DISBURSEMENTS, PAYMENTS AND COSTS
5.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be made
in writing in a manner acceptable to the Bank, or by another means acceptable to
the Bank, but excluding any extension of credit made pursuant to the provisions
of Subparagraph 2.11(b) or Paragraph 10.16.
5.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each payment
by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from time to
time;
(c) made in immediately available funds, or such other type of funds as agreed
to by Bank and Borrower;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrower to sign one or more promissory notes.
5.3 TELEPHONE AUTHORIZATION.
(a) The Bank may honor telephone instructions for advances or repayments or for
the designation of optional interest rates given by any one of the
individuals authorized to sign loan agreements on behalf of the Borrower,
or any other individual designated by any one of such authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from the
Account, or such other of the Borrower's accounts with the Bank as
designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection
with any act resulting from telephone instructions it reasonably believes
are made by any individual authorized by the Borrower to give such
instructions. This indemnity and excuse will survive this Agreement's
termination.
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<PAGE>
5.4 DIRECT DEBIT (PRE-BILLING).
(a) The Borrower agrees that the Bank will debit the Account such other of the
Borrower's accounts with the Bank as designated in writing by the Borrower
(the "Designated Account") on the date each payment of interest and any
fees from the Borrower becomes due (the "Due Date"). If the Due Date is not
a banking day, the Designated Account will be debited on the next banking
day.
(b) Approximately 10 days prior to each Due Date, the Bank will mail to the
Borrower a statement of the amounts that will be due on that Due Date (the
"Billed Amount"). The calculation will be made on the assumption that no
new extensions of credit or payments will be made between the date of the
billing statement and the Due Date, and that there will be no changes in
the applicable interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount due on that date (the "Accrued Amount"). If
the Billed Amount debited to the Designated Account differs from the
Accrued Amount, the discrepancy will be treated as follows:
(i) If the Billed Amount is less than the Accrued Amount, the Billed
Amount for the following Due Date will be increased by the amount of
the discrepancy. The Borrower will not be in default by reason of any
such discrepancy.
(ii) If the Billed Amount is more than the Accrued Amount, the Billed
Amount for the following Due Date will be decreased by the amount of
the discrepancy.
Regardless of any such discrepancy, interest will continue to accrue based
on the actual amount of principal outstanding without compounding. The Bank
will not pay the Borrower interest on any overpayment.
(d) The Borrower will maintain sufficient funds in the Designated Account to
cover each debit. If there are insufficient funds in the Designated Account
on the date the Bank enters any debit authorized by this Agreement, the
debit will be reversed.
5.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking day is
a day other than a Saturday or a Sunday on which the Bank is open for business
in California. For amounts bearing interest at an offshore rate (if any), a
banking day is a day other than a Saturday or a Sunday on which the Bank is open
for business in California and dealing in offshore dollars. All payments and
disbursements which would be due on a day which is not a banking day will be due
on the next banking day. All payments received on a day which is not a banking
day will be applied to the credit on the next banking day.
5.6 TAXES. The Borrower will not deduct any taxes from any payments it makes to
the Bank. If any government authority imposes any taxes on any payments made by
the Borrower, the Borrower will pay the taxes and will also pay to the Bank, at
the time interest is paid, any additional amount which the Bank specifies as
necessary to preserve the after-tax yield the Bank would have received if such
taxes had not been imposed. Upon request by the Bank, the Borrower will confirm
that it has paid the taxes by giving the Bank official tax receipts (or
notarized copies) within 30 days after the due date. However, the Borrower will
not pay the Bank's net income taxes.
5.7 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the Bank's
costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments for
credit.
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5.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used.
5.9 INTEREST ON LATE PAYMENTS. At the Bank's sole option in each instance, any
amount not paid when due under this Agreement (including interest) shall bear
interest from the due date at the Bank's Reference Rate plus 1.00 percentage
point. This may result in compounding of interest.
5.10 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, advances under this Agreement will at the option
of the Bank bear interest at a rate per annum which is 2.00 percentage points
higher than the rate of interest otherwise provided under this Agreement. This
will not constitute a waiver of any event of default.
5.11 OVERDRAFTS. At the Bank's sole option in each instance, the Bank may do
one of the following:
(a) The Bank may make advances under this Agreement to prevent or cover an
overdraft on any account of the Borrower with the Bank. Each such advance
will accrue interest from the date of the advance or the date on which the
account is overdrawn, whichever occurs first, at the interest rate
described in this Agreement.
(b) The Bank may reduce the amount of credit otherwise available under this
Agreement by the amount of any overdraft on any account of the Borrower
with the Bank.
This paragraph shall not be deemed to authorize the Borrower to create
overdrafts on any of the Borrower's accounts with the Bank.
6. CONDITIONS
The Bank must receive the following items, in form and content acceptable to the
Bank, before it is required to extend any credit to the Borrower under this
Agreement:
6.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance by
the Borrower of this Agreement and any instrument or agreement required under
this Agreement have been duly authorized.
6.2 SECURITY AGREEMENTS. Signed original security agreements, assignments,
financing statements and fixture filings (together with collateral in which the
Bank requires a possessor security interest) which the Bank requires.
6.3 EVIDENCE OF PRIORITY. Evidence that security interests and liens in favor
of the Bank are valid, enforceable, and prior to all others' rights and
interests, except for Permitted Liens and other Liens the Bank consents to in
writing.
6.4 INSURANCE. Evidence of insurance coverage, as required in the "Covenants"
section of this Agreement.
6.5 OTHER ITEMS. Any other items that the Bank reasonably requires.
7. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation.
7.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
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7.2 AUTHORIZATION. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
7.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
7.4 GOOD STANDING. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes, except where the failure to be so licensed, in good
standing or in compliance would not have a material adverse effect on the
Borrower's financial condition or operations.
7.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement, or
obligation by which the Borrower is bound, except where any such conflict would
not have a material adverse effect on the Borrower's financial condition,
business, or operations.
7.6 FINANCIAL INFORMATION. To the best of Borrower's knowledge, all financial
and other information that has been or will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the Borrower's
financial condition.
(b) in material compliance with all material government regulations that apply.
7.7 LAWSUITS. To the best of the Borrower's knowledge, there is no lawsuit, tax
claim or other dispute pending or threatened against the Borrower which, if
lost, would impair the Borrower's financial condition or ability to repay the
loan, except as have been disclosed in writing to the Bank.
7.8 COLLATERAL. All collateral required in this Agreement is owned by the
grantor of the security interest free of any Liens other than Permitted Liens.
7.9 PERMITS, FRANCHISES. To the best of the Borrower's knowledge, the Borrower
possesses all permits, memberships, franchises, contracts and licenses required
and all trademark rights, trade name rights, patent rights and fictitious name
rights necessary to enable it to conduct the business in which it is now
engaged.
7.10 OTHER OBLIGATIONS. There is no default on any of the Borrower's
obligations for borrowed money, purchase money obligations, and other leases,
commitments, contracts, instruments or material obligations, which default would
have a material adverse effect on the Borrower's financial condition, business
or operations.
7.11 INCOME TAX RETURNS. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.
7.12 NO EVENT OF DEFAULT. There is no event which is, or with notice or lapse
of time or both would be, a default under this Agreement.
7.13 MERCHANTABLE INVENTORY. All material quantities of inventory which are
included in the Borrowing Base are of good and merchantable quality and free
from defects.
7.14 ERISA PLANS.
(a) The Borrower has fulfilled its obligations, if any, under the minimum
funding standards of ERISA and the Code with respect to each Plan and is in
compliance in all material respects with the presently applicable
provisions of ERISA and the Code, and has not incurred any liability with
respect to any Plan under Title IV of ERISA.
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<PAGE>
(b) No reportable event has occurred under Section 4043(b) of ERISA for which
the PBGC requires 30 day notice.
(c) No action by the Borrower to terminate or withdraw from any Plan has been
taken and no notice of intent to terminate a Plan has been filed under
Section 4041 of ERISA.
(d) No proceeding has been commenced with respect to a Plan under Section 4042
of ERISA, and no event has occurred or condition exists which might
constitute grounds for the commencement of such a proceeding.
(e) The following terms have the meanings indicated for purposes of this
Agreement:
(i) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(ii) "ERISA" means the Employee Retirement Income Act of 1974, as amended
from time to time.
(iii) "PBGC" means the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA.
(iv) "Plan" means any employee pension benefit plan maintained or
contributed to by the Borrower and insured by the Pension Benefit
Guaranty Corporation under Title IV of ERISA.
7.15 LOCATION OF BORROWER. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
8. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
8.1 USE OF PROCEEDS. To use the proceeds of the credit only for general
corporate purposes.
8.2 FINANCIAL INFORMATION. To provide the following financial information and
statements and such additional information as requested by the Bank from time to
time:
(a) Within 120 days of the Borrower's fiscal year end, the Borrower's annual
financial statement. These financial statements must be audited (with an
unqualified opinion) by a Certified Public Accountant ("CPA") acceptable to
the Bank.
(b) Within 60 days of the period's end, the Borrower's monthly financial
statements. These financial statements may be Borrower prepared.
(c) Within the periods provided in (a) and (b) above, a compliance certificate
of the Borrower signed by an authorized financial officer of the Borrower
setting forth (i) the information and computations (in sufficient detail)
to establish that the Borrower is in compliance with all financial
covenants at the end of the period covered by the financial statements then
being furnished and (ii) whether there existed as of the date of such
financial statements and whether there exists as of the date of the
certificate, any default under this Agreement and, if any such default
exists, specifying the nature thereof and the action the Borrower is taking
and proposes to take with respect thereto.
(d) Financial projections for the following fiscal year no sooner than ninety
(90) days and no less than thirty (30) days prior to such period. These
projections shall include a balance sheet, income statement and statements
of cash flow.
(e) A borrowing certificate setting forth the respective amounts of Acceptable
Inventory as of the last day of each month within thirty (30) days after
month end.
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(f) A statement showing an aging of accounts payable within thirty (30) days
after the end of each month.
(g) An inventory listing within thirty (30) days after the end of each month;
the listing must include a description of the inventory, its location and
cost (which may be a summary listing, in accordance with the Borrower's
customary reporting to its prior lender), and such other information as the
Bank may reasonably require.
(h) Promptly upon the Bank's request, such other statements, lists of property
and accounts, budgets, forecasts or reports as to the Borrower as the Bank
may request.
8.3 INVENTORY DAYS. Not to permit Quarterly Inventory Days for any of its
fiscal quarters to be greater than 185 days for quarters ending June 30 and
September 30, 165 days for the quarter ending December 31, and 150 days for the
quarter ending March 31.
"Quarterly Inventory Days" is defined as (A) the book value of inventory,
divided by (B) total cost of goods sold multiplied by (C) 365 days, performing
- ------- -- ---------- --
such calculations in alphabetical order; for the interim fiscal periods,
quarterly cost of goods sold will be annualized.
8.4 FIXED CHARGE COVERAGE RATIO. To maintain a Fixed Charge Coverage Ratio of
at least 1.00:1.00.
"Fixed Charge Coverage Ratio" is defined as net profit after taxes plus interest
expense, depreciation, amortization, less dividends, loans and advances to
parents, affiliates and officers divided by current portion long term debt,
interest expense, and non-financed capital expenditures. This ratio will be
calculated at the end of each fiscal quarter, using the results of that quarter
and each of the 3 immediately preceding quarters. The current portion of long
tern debt will be measured as of the last day of the preceding fiscal year.
8.5 LIMITATION ON LOSSES. Not to incur a net loss after taxes in excess of One
Million Three Hundred Thousand Dollars ($1,300,000) in any one fiscal year
period.
8.6 OTHER DEBTS. Not to have outstanding or incur any direct or contingent
debts (other than those to the Bank), or become liable for the debts of others
without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, merchandise or services on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of business.
(c) Obtaining surety bonds in the usual course of business.
(d) Additional debts and capital lease obligations for business purposes which,
do not exceed a total principal amount of Three Hundred Thousand Dollars
outstanding at any one time.
(e) Indebtedness that is secured by Permitted Liens.
8.7 OTHER LIENS. Not to create, assume, or allow any Lien on property the
Borrower now or later owns, except for Permitted Liens.
8.8 CAPITAL EXPENDITURES. Not to spend or incur obligations for more than Three
Million Six Hundred Thousand Dollars ($3,600,000) in any single fiscal year to
acquire fixed or capital assets.
8.9 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over Five Hundred Thousand Dollars ($500,000) against the
Borrower.
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(b) any substantial dispute between the Borrower and any government authority,
which, if resolved adversely to the Borrower, would have a material adverse
effect on Borrower's financial condition, business or operations.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's financial condition or
operations.
(e) any change in the Borrower's name, legal structure, place of business, or
chief executive office if the Borrower has more than one place of business.
8.10 BOOKS AND RECORDS. To maintain adequate books and records.
8.11 AUDITS. To allow the Bank and its agents to inspect (including taking and
removing samples) the Borrower's properties and examine, audit and make copies
of books and records at any reasonable time. If any of the Borrower's
properties, books or records are in the possession of a third party, the
Borrower authorizes that third party to permit the Bank or its agents to have
access to perform inspections or audits and to respond to the Bank's requests
for information concerning such properties, books and records. The Bank has no
duty to inspect the Borrower's properties or to examine, audit appraise or copy
books and records and the Bank shall not incur any obligation or liability by
reason of not making any such inspection or inquiry. In the event that the Bank
inspects the Borrower's properties or examines, audits, appraises, or copies
books and records, the Bank will be acting solely for the purposes of protecting
the Bank's security and preserving the Bank's rights under this Agreement.
Neither the Borrower nor any other party is entitled to rely on any inspection
or other inquiry by the Bank. The Bank owes no duty of care to protect the
Borrower or any other party against, or to inform the Borrower or any other
party of, any adverse condition that may be observed as affecting the Borrower's
properties or premises, or the Borrower's business. In the event that the Bank
has a duty or obligation under applicable laws, regulations or legal requirement
to disclose any report or findings made as a result of, or in connection with,
any site, visit, observation or testing by the Bank, the Bank may make such a
disclosure to the Borrower or any other party.
8.12 COMPLIANCE WITH LAWS. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business, except where the failure to so comply would not
have a material adverse effect on Borrower's financial condition, business, or
operations.
8.13 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges,
and franchises the Borrower now has.
8.14 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or replacements
to keep the Borrower's properties in good working condition.
8.15 PERFECTION OF LIENS. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect its
security interests and liens.
8.16 COOPERATION. To take any action requested by the Bank to carry out the
intent of this Agreement.
8.17 INSURANCE.
(a) INSURANCE COVERING COLLATERAL. To maintain all risk property damage
insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be in an amount acceptable to the
Bank. The insurance must be issued by an insurance company acceptable to
the Bank and must include a lender's loss payable endorsement in favor of
the Bank in a form acceptable to the Bank.
(b) GENERAL BUSINESS INSURANCE. To maintain insurance as is usual for the
business it is in.
(c) EVIDENCE OF INSURANCE. Upon the request of the Bank, to deliver to the Bank
a copy of each insurance policy, or, if permitted by the Bank, a
certificate of insurance listing all insurance in force.
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8.18 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, pool, joint venture, syndicate, or
other combination.
(d) lease, or dispose of all or a substantial part of the Borrower's business
or the Borrower's assets.
(e) acquire or purchase a business or its assets.
(f) sell or otherwise dispose of any fixed or capital assets for less than fair
market value, or enter into any sale and leaseback agreement covering any
of its fixed or capital assets.
8.19 ERISA PLANS. To give prompt written notice to the Bank of:
(a) The occurrence of any reportable event under Section 4043(b) of ERISA for
which the PBGC requires 30 day notice.
(b) Any action by the Borrower to terminate or withdraw from a Plan or the
filing of any notice of intent to terminate under Section 4041 of ERISA.
(c) Any notice of noncompliance made with respect to a Plan under Section
4041(b) of ERISA.
(d) The commencement of any proceeding with respect to a Plan under Section
4042 of ERISA.
9. DEFAULT
If any of the following events occur, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to the Borrower, then, the
entire debt outstanding under this Agreement will automatically become due
immediately.
9.1 FAILURE TO PAY. The Borrower fails to make a payment under this Agreement
when due.
9.2 LIEN PRIORITY. The Bank fails to have an enforceable first lien (except for
Permitted Liens or any prior Liens to which the Bank has consented in writing)
on or security interest in any property given as security for this loan.
9.3 FALSE INFORMATION. Any financial or other information delivered by Borrower
to Bank proves to be false or misleading in any material respect.
9.4 BANKRUPTCY. The Borrower files a bankruptcy petition, a bankruptcy petition
is filed against the Borrower, or the Borrower makes a general assignment for
the benefit of creditors.
9.5 RECEIVERS. A receiver or similar official is appointed for the Borrower's
business, or the business is terminated.
9.6 JUDGMENTS. Any final judgments or arbitration awards are entered against
the Borrower; or the Borrower enters into any settlement agreements with respect
to any litigation or arbitration, in an aggregate amount of Five Hundred
Thousand Dollars ($500,000) or more in excess of any insurance coverage during
each fiscal year period.
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9.7 GOVERNMENT ACTION. Any government authority takes action that the Bank
reasonably believes materially adversely affects the Borrower's financial
condition or ability to repay.
9.8 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the Borrower's
financial condition, properties or prospects, or ability to repay the loan.
9.9 CROSS-DEFAULT. Any default occurs under any agreement in connection with
any credit the Borrower has obtained from anyone else or which the Borrower has
guaranteed in the amount of Five Hundred Thousand Dollars ($500,000) or more in
the aggregate if the default consists of failing to make a payment when due or
gives the other lender the right to accelerate the obligation.
9.10 DEFAULT UNDER RELATED DOCUMENTS. Any security agreement or other document
required by this Agreement is violated.
9.11 OTHER BANK AGREEMENTS. The Borrower fails to meet the conditions of, or
fails to perform any obligation under any other agreement the Borrower has with
the Bank or any affiliate of the bank.
9.12 ERISA PLANS. The occurrence of any one or more of the following events
with respect to the Borrower, provided such event or events could reasonably be
expected, in the judgment of the Bank, to subject the Borrower to any tax,
penalty or liability (or any combination of the foregoing) which, in the
aggregate, could have a material adverse effect on the financial condition of
the Borrower with respect to a Plan:
(a) A reportable event shall occur with respect to a Plan which is, in the
reasonable judgment of the Bank likely to result in the termination of such
Plan for purposes of Title IV of ERISA.
(b) Any Plan termination (or commencement of proceedings to terminate a Plan)
or the Borrower's full or partial withdrawal from a Plan.
9.13 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the conditions of,
or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article. If in the Bank's opinion, the breach
is capable of being remedied, the breach will not be considered an event of
default under this Agreement for a period of thirty (30) days after the date on
which the Bank gives written notice of the breach to the Borrower; provided,
however, that the Bank will not be obligated to extend any additional credit to
the Borrower during that period.
10. ENFORCING THIS AGREEMENT; MISCELLANEOUS
10.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
GAAP, consistently applied.
10.2 CALIFORNIA LAW. This Agreement is governed by California law.
10.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of set-off against the Borrower.
10.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those that
arise from:
(i) This Agreement (including any renewals, extensions or modifications
of this Agreement);
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(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted between
the Borrower and the Bank, including claims for injury to persons,
property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United States
Arbitration Act. The United States Arbitration Act will apply even though
this Agreement provides that it is governed by California law.
(c) Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration.
(d) For purposes of the application of the statute of limitations, the filing
of an arbitration pursuant to this paragraph is the equivalent of the
filing of a lawsuit, and any claim or controversy which may be arbitrated
under this paragraph is subject to any applicable statute of limitations.
The arbitrators will have the authority to decide whether any such claim or
controversy is barred by the statute of limitations and, if so, to dismiss
the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the arbitrators
will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be submitted
to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or claim,
at the time of the proposed submission to arbitration, arises from or
relates to an obligation to the Bank secured by real property located in
California. In this case, both the Borrower and the Bank must consent to
submission of the claim or controversy to arbitration. If both parties do
not consent to arbitration, the controversy or claim will be settled as
follows:
(i) The Borrower and the Bank will designate a referee (or a panel of
referees) selected under the auspices of the American Arbitration
Association in the same manner as arbitrators are selected in
Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be appointed
by a court as provided in California Code of Civil Procedure Section
638 and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an active
attorney or a retired judge; and
(iv) The award that results from the decision of the referee (or the
panel) will be entered as a judgment in the court that appointed the
referee, in accordance with the provisions of California Code of
Civil Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property collateral;
or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
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<PAGE>
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank, including the
suing party, to submit the controversy or claim to arbitration if the other
party contests the lawsuit. However, if the controversy or claim arises
from or relates to an obligation to the Bank which is secured by real
property located in California at the time of the proposed submission to
arbitration, this right is limited according to the provision above
requiring the consent of both the Borrower and the Bank to seek resolution
through arbitration.
(j) If the Bank forecloses against any real property securing this Agreement,
the Bank has the option to exercise the power of sale under the deed of
trust or mortgage, or to proceed by judicial foreclosure.
10.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
it makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.
10.6 ADMINISTRATION COSTS. The Borrower shall pay the Bank for all reasonable
costs incurred by the Bank in connection with administering this Agreement (in
addition to expenses that the Borrower is obligated to pay pursuant to the
provisions of Paragraph 3.2 of this Agreement) in an amount not exceeding Five
Thousand Dollars ($5,000) per year.
10.7 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any reasonable
costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement. In the
event of a lawsuit or arbitration proceeding, the prevailing party is entitled
to recover costs and reasonable attorneys' fees incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or arbitrator. As
used in this paragraph, "attorneys' fees" includes the allocated costs of the
Bank's in-house counsel.
10.8 ONE AGREEMENT. This Agreement and any related security or other agreements
required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank and
the Borrower concerning this credit;
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
10.9 DISPOSITION OF SCHEDULES, REPORTS, ETC. DELIVERED BY BORROWER. The Bank
will not be obligated to return any schedules, invoices, statements, budgets,
forecasts, reports or other papers delivered by the Borrower. The Bank will
destroy or otherwise dispose of such materials at such time as the Bank, in its
discretion, deems appropriate.
10.10 RETURNED MERCHANDISE. Until the Bank exercises its rights to collect the
accounts receivable as provided under any security agreement required under this
Agreement, the Borrower may continue its present policies for returned
merchandise and adjustments. Credit adjustments with respect to returned
merchandise shall be made immediately upon receipt of the merchandise by the
Borrower or upon such other disposition of the merchandise by the debtor in
accordance with the Borrower's instructions. If a credit adjustment is made
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with respect to any Acceptable Receivable, the amount of such adjustment shall
no longer be included in the amount of such Acceptable Receivable in computing
the Borrowing Base.
10.11 INDEMNIFICATION. The Borrower agrees to indemnify the Bank against, and
hold the Bank harmless from, all claims, actions, losses, costs and expenses
(including attorneys' fees and allocated costs for in-house legal services)
(collectively, "Damages") incurred by the Bank and arising from any contention,
whether well-founded or otherwise, that there has been a failure to comply with
any law regulating the Borrower's sales or leases to or performance of services
for debtors obligated upon the Borrower's accounts receivable and disclosures in
connection therewith; provided, however, that this indemnity shall not apply to
any Damages incurred by the Bank that are attributable to the Bank's gross
negligence or willful misconduct. This indemnity will survive repayment of the
Borrower's obligations to the Bank and termination of this Agreement.
10.12 NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.
10.13 HEADINGS. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
10.14 COUNTERPARTS. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.
10.15 CONFIDENTIAL INFORMATION. The Bank 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 or in
connection with this Agreement. Neither the Bank nor any of its affiliates
shall use such information other than in connection with or in enforcement of
this Agreement and any other agreement required hereunder, except to the extent
that such information (i) was or becomes generally available to the public other
than as a result of disclosure by the Bank, or (ii) was or becomes available on
a non-confidential 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 Bank; provided,
---------
however, that the Bank may disclose such information (A) at the request or
- -------
pursuant to any requirement of any public authority to which the Bank is subject
or in connection with an examination of the Bank by any such public authority;
(B) 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 the Bank or its affiliates may be party and
which arises out of or in connection with the transactions contemplated by this
Agreement; (E) to the extent reasonably required in connection with the exercise
of any remedy hereunder or under any other agreement required hereunder; (F) to
the Bank's independent auditors, accountants, attorneys and other professional
advisors; (G) to any affiliate of the Bank, or to any participant or assignee,
actual or potential, provided that such affiliate, participant, or assignee
agrees to keep such information confidential to the same extent required of the
Bank 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 Bank.
10.16 BABC INDEMNITY. If at any time the Bank is requested by BankAmerica
Business Credit, Inc. ("BABC") to pay BABC any amount under the indemnity issued
on ________________________, 1997 to BABC by the Bank, the Bank will
automatically make an advance under the line of credit in an amount equal to the
lesser of the amount of such payment or the amount of the line of credit then
available to the Borrower; provided, however, that if the amount of such advance
-------- -------
is less than the amount of the payment made by the Bank to BABC under such
indemnity, the Borrower shall immediately pay to the Bank, upon the Bank's
demand, the amount of such difference, plus interest on that amount at the rate
then applicable under this Agreement to advance under the line of credit.
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<PAGE>
This Agreement is executed as of the date stated at the top of the first page.
[LOGO OF BANK AMERICA]
BANK OF AMERICA SPORT CHALET, INC.
NATIONAL TRUST AND SAVINGS ASSOCIATION
/s/ Jeff Thorn /s/ Howard K. Kaminsky
------------------------- --------------------------
By: Jeff Thom By: Howard K. Kaminsky
Title: Vice President Title: Vice President-Finance and
Secretary
ADDRESS WHERE NOTICES TO THE BANK ADDRESS WHERE NOTICES TO THE BORROWER
ARE TO BE SENT: ARE TO BE SENT:
525 South Flower Street 920 Foothill Boulevard
Los Angeles, California 90071 La Canada, California 91011
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===============================================================================
[LOGO OF BANK OF AMERICA] SECURITY AGREEMENT
BANK OF AMERICA (RECEIVABLES, INVENTORY AND EQUIPMENT)
- -------------------------------------------------------------------------------
1. THE SECURITY. The undersigned Sport Chalet, Inc. ("Borrower") hereby
assigns and grants to Bank of America National Trust and Savings Association
("Bank") a security interest in the following described property ("Collateral"):
A. All of the following, whether now owned or hereafter acquired by Borrower:
accounts, contract rights, chattel paper, instruments, deposit accounts
and general intangibles.
B. All inventory now owned or hereafter acquired by Borrower.
C. All machinery, furniture, fixtures and other equipment of every type now
owned or hereafter acquired by Borrower (including, but not limited to,
the equipment described in the attached Equipment Description, if any).
D. All negotiable and nonnegotiable documents of title now owned or hereafter
acquired by Borrower covering any of the above-described property.
E. All rights under contracts of insurance now owned or hereafter acquired by
Borrower covering any of the above-described property.
F. All proceeds, product, rents and profits now owned or hereafter acquired
by Borrower of any of the above-described property.
G. All books and records now owned or hereafter acquired by Borrower
pertaining to any of the above-described property, including but not
limited to any computer-readable memory and any computer hardware or
software necessary to process such memory ("Books and Records").
2. THE INDEBTEDNESS. The Collateral secures and will secure all Indebtedness
of Borrower to Bank. For the purposes of this Agreement, "Indebtedness" means
all loans and advances made by Bank to Borrower and all other obligations and
liabilities of Borrower to Bank, whether now existing or hereafter incurred or
created, whether voluntary or involuntary, whether due or not due, whether
absolute or contingent, or whether incurred directly or acquired by Bank by
assignment or otherwise. Unless Borrower shall have otherwise agreed in writing,
Indebtedness, for the purposes of this Agreement, shall not include "consumer
credit" subject to the disclosure requirements of the Federal Truth in Lending
Act or any regulations promulgated thereunder.
3. BORROWER'S COVENANTS. Borrower covenants and warrants that unless compliance
is waived by Bank in writing:
A. Borrower will properly preserve the Collateral; defend the Collateral
against any adverse claims and demands; and keep accurate Books and
Records.
B. Borrower has notified Bank in writing of the locations of (i) Borrower's
chief executive office and (ii) the Collateral, including the Books and
Records. Borrower will notify Bank in writing prior to any change in the
location of its chief executive office, and prior to either ceasing to use
any current location of Collateral, or using any location for Collateral
other than the current locations.
C. Borrower will notify Bank in writing prior to any change in Borrower's
name, identity or business structure.
D. Borrower will maintain and keep in force insurance covering Collateral
designated by Bank against fire and extended coverages. Such insurance
shall require losses to be paid on a replacement cost basis, be issued by
insurance companies acceptable to Bank and include a loss payable
endorsement in favor of Bank in a form acceptable to Bank.
E. Borrower has not granted and will not grant any security interest in any
of the Collateral except to Bank, and will keep the Collateral free of all
liens, claims, security interests and encumbrances of any kind or nature
except the security interest of Bank and except for Liens to which
("Liens") the Bank consents in writing.
F. Borrower will not sell, lease, agree to sell or lease, or otherwise
dispose of, or remove from Borrower's place of business (i) any inventory
except in the ordinary course of business as heretofore conducted by
Borrower, or (ii) any other Collateral except with the prior written
consent of Bank.
G. Borrower will promptly notify Bank in writing of any event which has a
material adverse affect on the value of the Collateral, the ability of
Borrower or Bank to dispose of the Collateral, or the rights and remedies
of Bank in relation thereto, including, but not limited to, the levy of
any legal process against any Collateral and the adoption arrangement or
procedure affecting the Collateral, whether governmental or otherwise.
H. If any Collateral is or becomes the subject of any registration
certificate or negotiable document of title, including any warehouse
receipt, Borrower shall immediately deliver such document to Bank.
I. Borrower will not attach any Collateral to any real property or fixture in
a manner which might cause such Collateral to become a part thereof unless
Borrower first obtains Bank's written consent to such attachment, or
obtains the written consent of any owner, holder of any lien on the real
property or fixture, or other person having an interest in such property
to the removal by Bank of the Collateral from such real property or
fixture. Such written consent shall be in form and substance acceptable
to Bank.
J. Until Bank exercises its rights to make collection, Borrower will
diligently collect all Collateral.
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<PAGE>
4. ADDITIONAL OPTIONAL REQUIREMENTS. Borrower agrees that Bank may at its
option at any time, whether or not Borrower is in default:
A. Require Borrower to segregate all collections and proceeds of the
Collateral so that they are capable of identification and deliver daily
such collections and proceeds to Bank in kind.
B. Require Borrower to deliver to Bank (i) copies of or extracts from the
Books and Records, and (ii) information on any contracts or other matters
affecting the Collateral.
C. Examine the Collateral, including the Books and Records, and make copies
of or extracts from the Books and Records, and for such purposes enter at
any reasonable time upon the property where any Collateral or any Books
and Records are located.
D. Require Borrower to deliver to Bank any instruments or chattel paper.
5. DEFAULTS. Any one or more of the following shall be a default hereunder:
A. Borrower fails to pay any Indebtedness when due.
B. Borrower breaches any term, provision, warranty or representation under
this Agreement, or under any other obligation of Borrower to Bank.
C. Any custodian, receiver or trustee is appointed to take possession,
custody or control of all or a substantial portion of the property of
Borrower or of any guarantor of any Indebtedness.
D. Borrower or any guarantor of any Indebtedness becomes insolvent, or is
generally not paying or admits in writing its inability to pay its debts
as they become due, fails in business, makes a general assignment for the
benefit of creditors, dies or commences any case, proceeding or other
action under any bankruptcy or other law for the relief of, or relating
to, debtors.
E. Any case, proceeding or other action is commenced against Borrower or any
guarantor of any Indebtedness under any bankruptcy or other law for the
relief of, or relating to, debtors.
F. Any involuntary lien of any kind or character attaches to any Collateral.
G. Any financial statements, certificates, schedules or other information now
or hereafter furnished by Borrower to Bank proves false or incorrect in
any material respect.
6. BANK'S REMEDIES AFTER DEFAULT. In the event of any default Bank may do any
one or more of the following:
A. Declare any Indebtedness immediately due and payable, without notice or
demand.
B. Enforce the security interest given hereunder pursuant to the Uniform
Commercial Code and any other applicable law.
C. Enforce the security interest of Bank in any deposit account of Borrower
maintained with Bank by applying such account to the Indebtedness.
D. Require Borrower to assemble the Collateral, including the Books and
Records, and make them available to Bank at a place designated by Bank.
E. Enter upon the property where any Collateral, including any Books and
Records, are located and take possession of such Collateral and such Books
and Records, and use such property (including any buildings and
facilities) and any of Borrower's equipment, if Bank deems such use
necessary or advisable in order to take possession of, hold, preserve,
process, assemble, prepare for sale or lease, market for sale or lease,
sell or lease, or otherwise dispose of, any Collateral.
F. Grant extensions and compromise or settle claims with respect to the
Collateral for less than face value, all without prior notice to Borrower.
G. Use or transfer any of Borrower's rights and interests in any Intellectual
Property now owned or hereafter acquired by Borrower, if Bank deems such
use or transfer necessary or advisable in order to take possession of,
hold, preserve, process, assemble, prepare for sale or lease, market for
sale or lease, sell or lease, or otherwise dispose of, any Collateral.
Borrower agrees that any such use or transfer shall be without any
additional consideration to Borrower. As used in this paragraph,
"Intellectual Property" includes, but is not limited to, all trade
secrets, computer software, service marks, trademarks, trade names, trade
styles, copyrights, patents, applications for any of the foregoing,
customer lists, working drawings, instructional manuals, and rights in
processes for technical manufacturing, packaging and labelling, in which
Borrower has any right or interest, whether by ownership, license,
contract or otherwise.
H. Have a receiver appointed by any court of competent jurisdiction to take
possession of the Collateral.
I. Take such measures as Bank may deem necessary or advisable to take
possession of, hold, preserve, process, assemble, insure, prepare for sale
or lease, market for sale or lease, sell or lease, or otherwise dispose
of, any Collateral, and Borrower hereby irrevocably constitutes and
appoints Bank as Borrower's attorney-in-fact to perform all acts and
execute all documents in connection therewith.
J. Require Borrower to obtain Bank's prior written consent to any sale,
lease, agreement to sell or lease, or other disposition of any inventory
outside of the normal course of Borrower's business.
K. Notify any account debtors, any buyers of the Collateral, or any other
persons of Bank's interest in the Collateral.
L. Require Borrower to direct all account debtors to forward all payments and
proceeds of the Collateral to a post office box under Bank's exclusive
control.
M. Demand and collect any payments and proceeds of the Collateral. In
connection therewith Borrower irrevocably authorizes Bank to endorse or
sign Borrower's name on all checks, drafts, collections, receipts and
other documents, and to take possession of and open the mail addressed to
Borrower and remove therefrom any payments and proceeds of the Collateral.
-2-
<PAGE>
7. MISCELLANEOUS.
A. Any waiver, express or implied, of any provision hereunder and any delay
or failure by Bank to enforce any provision shall not preclude Bank from
enforcing any such provision thereafter.
B. Borrower shall, at the request of Bank, execute such other agreements,
documents, instruments, or financing statements in connection with this
Agreement as Bank may reasonably deem necessary.
C. All notes, security agreements, subordination agreements and other
documents executed by Borrower or furnished to Bank in connection with
this Agreement must be in form and substance satisfactory to Bank.
D. This Agreement shall be governed by and construed according to the laws of
the State of California, to the jurisdiction of which the parties hereto
submit.
E. All rights and remedies herein provided are cumulative and not exclusive
of any rights or remedies otherwise provided by law. Any single or
partial exercise of any right or remedy shall not preclude the further
exercise thereof or the exercise of any other right or remedy.
F. All terms not defined herein are used as set forth in the Uniform
Commercial Code.
G. In the event of any action by Bank to enforce this Agreement or to protect
the security interest of Bank in the Collateral, or to take possession of,
hold, preserve, process, assemble, insure, prepare for sale or lease,
market for sale or lease, sell or lease, or otherwise dispose of, any
Collateral, Borrower agrees to pay immediately the costs and expenses
thereof, together with reasonable attorney's fees and allocated costs for
in-house legal services.
H. Any Borrower who is married agrees that such Borrower's separate property
shall be liable for payment of the Indebtedness if such Borrower is
personally liable for the Indebtedness.
Date: March 25, 1997
Bank of America BORROWER
National Trust and Savings Association Sport Chalet, Inc.
/s/ Jeff Thom /s/ Howard K. Kaminsky
_____________________________ -------------------------------
By: Jeff Thom, Vice President By: Howard K. Kaminsky, Vice
President-Finance and Secretary
-3-
<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 May 21, 1997, with respect to the financial statements of
Sport Chalet, Inc. included in the Annual Report (Form 10-K) for the year ended
March 31, 1997.
/s/ Ernst & Young LLP
----------------------
Los Angeles, California
June 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1997 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 451,114
<SECURITIES> 0
<RECEIVABLES> 504,070
<ALLOWANCES> 28,000
<INVENTORY> 28,093,635
<CURRENT-ASSETS> 30,769,407
<PP&E> 24,139,435
<DEPRECIATION> 10,838,101
<TOTAL-ASSETS> 44,436,350
<CURRENT-LIABILITIES> 17,729,403
<BONDS> 0
0
0
<COMMON> 65,000
<OTHER-SE> 26,641,947
<TOTAL-LIABILITY-AND-EQUITY> 44,436,350
<SALES> 137,705,280
<TOTAL-REVENUES> 137,705,280
<CGS> 87,785,740
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 45,255,998
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 805,284
<INCOME-PRETAX> 3,858,258
<INCOME-TAX> 1,555,000
<INCOME-CONTINUING> 2,303,258
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,303,258
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
