<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _________ to __________
Commission file number: 0-21992
-------------------------
FOURTH SHIFT CORPORATION
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1437794
(state or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
-------------------------
TWO MERIDIAN CROSSINGS
MINNEAPOLIS, MN 55423
(612) 851-1500
(Address, including zip code, of Registrant's
principal executive offices and telephone
number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
The number of shares outstanding of the Registrant's Common Stock on May 7,
1999 was 10,304,277 shares.
<PAGE>
FOURTH SHIFT CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ------
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Item 1. Financial Statements:
Consolidated Balance Sheets at 2
March 31, 1999 and December 31, 1998
Consolidated Statements of Operations 3
for the three months ended March 31, 1999
and 1998
Consolidated Statements of Cash Flows 4
for the three months ended March 31, 1999
and 1998
Notes to Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II - OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
- ---------
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 10,248 $ 10,073
Accounts receivable, net ............................................ 13,416 13,863
Inventories ......................................................... 71 91
Prepaid expenses .................................................... 1,073 1,096
-------- --------
Total current assets ...................................... 24,808 25,123
FURNITURE, FIXTURES AND EQUIPMENT, net ......................................... 4,827 4,584
RESTRICTED CASH ................................................................ 215 465
SOFTWARE DEVELOPMENT COSTS, net ................................................ 3,218 3,229
-------- --------
TOTAL ASSETS .............................................................. $ 33,068 $ 33,401
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations ............................ $ 749 $ 1,099
Accounts payable .................................................... 3,696 2,501
Accrued expenses .................................................... 6,188 8,377
Deferred revenue .................................................... 13,612 13,510
-------- --------
Total current liabilities ................................. 24,245 25,487
LONG-TERM OBLIGATIONS .......................................................... 752 835
SHAREHOLDERS' EQUITY:
Common stock ........................................................ 103 102
Additional paid-in capital .......................................... 31,903 31,591
Deferred compensation ............................................... (395) (417)
Accumulated other comprehensive losses .............................. (142) (266)
Accumulated deficit ................................................. (23,398) (23,931)
-------- --------
Total shareholders' equity ................................ 8,071 7,079
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............... $ 33,068 $ 33,401
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
2
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------------
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
REVENUE:
Software license ................................ $ 5,431 $ 5,333
Service ......................................... 11,039 8,197
Third-party software and other .................. 507 900
-------- --------
Total revenue ......................... 16,977 14,430
-------- --------
OPERATING EXPENSES:
Cost of licenses ................................ 790 954
Cost of services ................................ 5,209 3,963
Cost of third-party software and other .......... 305 672
Selling, general and administrative ............. 7,798 7,129
Product development ............................. 2,119 1,808
-------- --------
Total operating expenses .............. 16,221 14,526
-------- --------
Operating income (loss) .................................... 756 (96)
Interest expense, net ....................................... (46) (131)
Other expense, net .......................................... (27) (49)
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES ...................... 683 (276)
Provision for income taxes ...................... 180 35
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS .................... 503 (311)
NET GAIN ON SALE OF DISCONTINUED OPERATIONS ................. 30 68
-------- --------
NET INCOME (LOSS) ........................................... $ 533 $ (243)
-------- --------
-------- --------
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations income (loss) per share .......... $ 0.05 $ (0.03)
Discontinued operations income per share ............... 0.00 0.01
-------- --------
-------- --------
Net income (loss) per share ............................ $ 0.05 $ (0.02)
-------- --------
-------- --------
SHARES USED IN BASIC AND DILUTED PER COMMON SHARE COMPUTATION
Basic ........................................... 10,111 9,901
-------- --------
-------- --------
Diluted ......................................... 10,948 9,901
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------------------
1999 1998
-------------- -------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................................. $ 533 $ (243)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................................ 1,036 655
Gain on sale of discontinued operations...................... (30) (68)
Deferred compensation........................................ 22 -
Other........................................................ - 16
Change in current operating items:
Accounts receivable, net................................ 438 785
Inventories............................................. 20 (127)
Prepaid expenses........................................ 23 (234)
Accounts payable........................................ 1,195 (472)
Accrued expenses........................................ (2,065) (2,114)
Deferred revenue........................................ 102 1,117
-------------- -------------
Net cash provided by (used in) operating activities.......... 1,274 (685)
-------------- -------------
INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment..................... (919) (69)
Proceeds from sale of furniture, fixtures and equipment........... 38 -
Cash released from restrictions................................... 250 -
Proceeds from sale of discontinued operations..................... 39 650
Capitalized software development costs............................ (387) -
-------------- -------------
Net cash provided by (used in) investing activities.......... (979) 581
-------------- -------------
FINANCING ACTIVITIES:
Payments of long-term obligations................................. (433) (924)
Proceeds from refinancing of equipment facility................... 583 -
Payments of equipment facility.................................... (583) -
Borrowings on line of credit...................................... - 500
Proceeds on issuance of common stock.............................. 313 -
-------------- -------------
Net cash used in financing activities........................ (120) (424)
-------------- -------------
Net change in cash and cash equivalents...................... 175 (528)
CASH AND CASH EQUIVALENTS:
Beginning of period........................................... 10,073 5,758
-------------- -------------
End of period................................................. $ 10,248 $ 5,230
-------------- -------------
-------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during each period for-
Interest................................................ $ 56 $ 192
-------------- -------------
-------------- -------------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capitalized leases...................................... $ - $ 51
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
FOURTH SHIFT CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. The accompanying interim consolidated financial statements have been
prepared by Fourth Shift Corporation (the "Company"), without audit, in
accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission.
The unaudited consolidated financial statements as of March 31, 1999
and 1998 and for the three month periods then ended include, in the opinion
of management, all adjustments, consisting solely of normal recurring
adjustments, necessary for a fair presentation of the financial results for
the respective interim periods. The results of operations for the three month
period ended March 31, 1999 are not necessarily indicative of results of
operations to be expected for the entire fiscal year ending December 31,
1999. The accompanying interim consolidated financial statements have been
prepared under the presumption that users of the interim consolidated
financial information have either read or have access to the audited
consolidated financial statements for the year ended December 31, 1998.
Accordingly, certain footnote disclosures that would substantially duplicate
the disclosures contained in the December 31, 1998 audited consolidated
financial statements have been omitted from these interim consolidated
financial statements. It is suggested that these interim consolidated
financial statements be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 1998 and the notes
thereto.
2. Other comprehensive income was $124,000 for the three months ended
March 31, 1999 and other comprehensive losses were $8,000 for the three
months ended March 31, 1998. These amounts result from translation losses
from the Company's foreign operations.
3. In accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed," certain
software development costs are capitalized upon the establishment of
technological feasibility. Costs incurred prior to the establishment of
technological feasibility and development costs incurred to improve and
enhance existing software are charged to expense as incurred.
In the first quarter of 1999, the Company capitalized $387,000 of
development costs relating to future releases of MSS for OBJECTS. In
addition, the Company amortized $398,000 of previously capitalized
technology. In the first quarter of 1998, the Company capitalized no software
development costs and recorded no amortization expense.
5
<PAGE>
4. The Company has three operating segments: Americas, Europe and
Asia. Financial information by operating segment as of and for the three
months ended March 31 is as follows (in thousands):
<TABLE>
<CAPTION>
Americas Europe Asia Eliminations Consolidated
-------- ------ ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
March 31, 1999:
Revenue $12,053 $3,191 $ 1,733 $ - $16,977
Net income (loss) 490 (18) 61 - 533
Segment assets 27,793 5,041 3,015 (2,781) 33,068
March 31, 1998:
Revenue $10,731 $2,416 $ 1,283 $ - $14,430
Net income (loss) 18 13 (274) - (243)
Segment assets 24,915 4,119 3,056 (2,781) 29,309
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations has been prepared under the presumption that users of
the interim consolidated financial statements have either read or have access
to the Company's annual report for the year ended December 31, 1998.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The following
Management's Discussion and Analysis contains various "forward looking
statements" within the meaning of federal securities laws which represent
management's expectations or beliefs concerning future events, including
statements regarding anticipated sales, marketing and research and
development expenditures, growth in revenue, capital requirements and the
sufficiency of cash to meet operating expenses. These and other forward
looking statements made by the Company, must be evaluated in the context of a
number of factors that may affect the Company's financial condition and
results of operations, including the following:
- - The ability of the Company to continually enhance the Manufacturing
Software System for OBJECTS (MSS) product to meet ever changing market
demands for both functionality and new technology;
- - Fluctuations in quarterly operating results caused by changes in the
computer industry, buying patterns and general economic conditions;
- - The effect of year 2000 buying patterns on revenue from licensing of its
MSS product;
- - The ability of the Company to successfully develop its MSS product to
continue to meet European Monetary Union requirements;
- - The dependence of the Company on revenue from licensing of its MSS product;
- - The effects of changes in technology and standards in the computer
industry;
- - The significant competition among developers and marketers of industrial
software;
- - The ability of the Company to retain key employees;
- - The ability of the Company to continue to integrate complementary
applications with its MSS product to meet functionality demands;
- - The Company's international operations, particularly in Asia;
- - The ability of the Company to manage expansion of international
distribution channels;
- - The dependence of the MSS product line on a third-party database management
system; and
- - Evolving standards regarding intellectual property protection for software
products in general.
RESULTS OF OPERATIONS
NET INCOME (LOSS). The Company recorded net income of $533,000 or
$.05 per share for the quarter ended March 31, 1999, compared to a net loss
of $243,000 or $.02 per share for the quarter ended March 31, 1998. The
improved net income primarily resulted from growth in service revenue and
control of selling, general and administrative expenses.
7
<PAGE>
TOTAL REVENUE increased 18% to $16,977,000 during the three months
ended March 31, 1999 from $14,430,000 during the comparable period in 1998,
as outlined below.
SOFTWARE LICENSE REVENUE are fees paid by customers for the right to
use the Company's software systems. Software license revenue increased 2% to
$5,431,000 from $5,333,000 during the same quarter in 1998. At the regional
level, Europe and Asia posted increases of 37% and 72%, respectively over the
comparable period in 1998. These increases were partially offset by a decline
in the Americas software revenue of 13% from the same quarter in 1998.
The growth in Europe and Asia was due to improved sales strategies,
an increase in direct sales and increased marketing and lead generating
activities. In the Americas we believe the year 2000 planning cycle has
softened current demand for enterprise software solutions, resulting in a
decline in software license revenue. In addition, the Company has experienced
increased competition in the Americas.
SERVICE REVENUE includes customer support fees, training,
consulting, installation and project management. Service revenue increased
35% to $11,039,000 from $8,197,000 during the same quarter in 1998. Service
revenues showed strong growth due to sustained license revenue growth in
1998. A major portion of professional services are purchased in the three to
six months following the licensing of the software. In addition, service
revenue continues to benefit from the Company's ongoing efforts to expand,
standardize and promote its professional services offerings.
THIRD-PARTY SOFTWARE REVENUE is derived from the resale of
third-party software licenses (complementary applications). These
complementary applications have been integrated to function with the MSS
software and extend the functionality of MSS. Third-party software and other
revenue decreased 44% to $507,000 in the first quarter of 1999 from $900,000
during the same quarter in 1998. This decrease is primarily related to the
decrease in software license revenue in the Americas, since third-party
software is often licensed in conjunction with the licensing of the MSS
product in the Americas.
COST OF LICENSES decreased to $790,000 in the first quarter of 1999
from $954,000 in the same period of 1998. As a percentage of total license
revenue, cost of licenses was 15% in the first quarter of 1999 compared to
18% for the prior year comparable period. The decrease in the cost of
licenses as a percentage of license revenue is primarily due to realization
of cost savings related to a long-term contract entered into in the second
quarter of 1998 with the supplier of a product embedded in and distributed
with the MSS product.
COST OF SERVICES increased to $5,209,000 for the three months ended
March 31, 1999 from $3,963,000 for the same period of 1998. As a percentage
of service revenue, cost of services was 47% for the first quarter of 1999
and 48% for the first quarter of 1998.
COST OF THIRD-PARTY SOFTWARE AND OTHER decreased to $305,000 or 60%
of third-party software and other revenue in the first quarter of 1999 from
$672,000 or 75% of third-party software and other revenue in the same period
of 1998. The decrease in cost of third-party software as a percentage of
third-party software revenue is due to changes in the mix of software
products sold in the quarter.
8
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE increased to $7,798,000 for the
three-month period ended March 31, 1999, up from $7,129,000 for the three
month period ended March 31, 1998. As a percentage of total revenue, selling,
general and administrative expense decreased to 46% of total revenue compared
to 49% for the same period in 1998. The increase in terms of absolute dollars
reflects the addition of sales and marketing personnel and related
commissions earned in connection with the Company's expanded market
penetration. The decrease of selling, general and administrative expenses as
a percent of revenue in the first quarter of 1999 reflects the Company's
focused efforts to control expenses as revenues grow.
PRODUCT DEVELOPMENT expense for the three months ended March 31,
1999 increased to $2,119,000 from $1,808,000 for the three months ended March
31, 1998. As a percentage of total revenue, product development declined to
12% from 13% during the same period in 1998.
In the first quarter of 1999, the Company capitalized $387,000 of
development costs relating to future releases of MSS for OBJECTS. In
addition, the Company amortized $398,000 of previously capitalized
technology. In the first quarter of 1998, the Company capitalized no software
development costs and recorded no amortization expense.
PROVISION FOR INCOME TAXES. The provision for income taxes for the
three months ended March 31, 1999 and 1998 was comprised of U.S. federal,
state and foreign income taxes. The Company's U.S. federal taxes are limited
to alternative minimum taxes due to utilization of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1999, the Company's cash and
cash equivalents increased $175,000 to $10,248,000.
The Company's operating activities provided cash flows of $1,274,000
during the first quarter of 1999. In the first quarter of 1999, net income
adjusted for noncash items and discontinued operations resulted in a cash
source of $1,561,000. The seasonal reduction in sales from fourth quarter to
first quarter resulted in a corresponding decrease in receivables as they
were collected in the first quarter, generating $438,000 of cash. In
addition, the Company's accounts payable increased, generating $1,195,000 of
cash. These sources were offset by a reduction in accrued expenses, resulting
in a use of $2,065,000 of cash. The decrease in accrued expenses reflects the
payment of seasonally high accrued commissions and bonuses.
Investing activities used $979,000 of cash for the three months
ended March 31, 1999. This includes $919,000 for the purchase of furniture,
fixtures and equipment and $387,000 of capitalized development costs. This
was offset by a decrease in the restricted cash balance of $250,000.
Financing activities used $120,000 of cash during the three months
ended March 31, 1999. The primary use of cash was payments of $433,000 for
principal payments on the Company's capital lease obligations. This was
partially offset by proceeds on issuance of common stock of $313,000. In
addition, the Company refinanced $583,000 of its equipment facility in a
cash flow neutral transaction.
In the third quarter of 1998, the Company entered into a four year
$12,000,000 commitment with a third-party database supplier whose product is
embedded in and distributed with the MSS product. The agreement also includes
three three-year renewal options. Payments will be made monthly. The Company
does not anticipate this commitment to materially impact historical margin
levels.
9
<PAGE>
The Company does not have any material scheduled commitments for
capital expenditures. The Company believes that the $10,248,000 of cash and
cash equivalents on hand at March 31, 1999, together with the Company's
available line of credit and anticipated cash flows from operations will be
sufficient to fund operating cash needs over the next twelve months. At March
31, 1999, the Company was in compliance with all related financial
performance covenants under the bank line of credit. If the above sources of
cash are not sufficient to fund operations, the Company may need to seek
additional funds through equity or debt financing.
OTHER
The Company began addressing year 2000 issues in April of 1997. The
Company utilizes both information technology ("IT") and non-IT systems and
assets throughout its worldwide operations.
The Company has three main IT systems that are year 2000 ready. The
main system is the Fourth Shift MSS for OBJECTS Software System. This product
is owned and developed by Fourth Shift and is the product the Company sells
and uses internally to run its business. The Company performed a complete
review of the system for year 2000 readiness in early 1998. Areas of concern
have been corrected and the process used to test for year 2000 readiness has
been certified by the Information Technology Association of America to meet
the information technology industry's best software development practices for
addressing the year 2000 issue. There has been no material financial impact
for the cost of corrections as these were addressed in the normal course of
development of the product. The Company's Payroll and Human Resource systems
were updated in the third quarter of 1998 and are currently year 2000 ready.
The cost associated with this effort has been immaterial and did not
adversely impact the Company's operating results. In addition, the Company's
Customer Support Center's system is a third-party product that is year 2000
ready. All other third-party IT systems sold by the Company and used in its
internal operations are year 2000 ready.
The Company has assessed the year 2000 impact on its non-IT systems
and has purchased a software package to use in testing the Company's hardware
and equipment. The Company will have tested all hardware by the end of the
second quarter of 1999 and will correct any issues in the third quarter of
1999.
The Company is in the process of assessing the impact of
non-compliant vendors. To date the Company has not identified any significant
suppliers who will not be year 2000 ready.
While the Company has exercised its best efforts to identify and
remedy any potential year 2000 issues, the primary remedy of the Company's
contingency plan is to use alternative vendors. Although the Company does not
anticipate a material impact on the Company's financial condition or results
of operations, it is uncertain as to the extent the Company may be affected
by such matters.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 Credit and Security Agreement dated March 31,
1999 between Fourth Shift Corporation and
Norwest Business Credit, Inc.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months
ended March 31, 1999.
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fourth Shift Corporation
May 14, 1999
/s/ DAVID G. LATZKE
---------------------------------
David G. Latzke
Vice President and Chief Financial Officer
(principal financial officer)
12
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----------------------------------------------
----------------------------------------------
CREDIT AND SECURITY AGREEMENT
BY AND BETWEEN
FOURTH SHIFT CORPORATION
AND
NORWEST BUSINESS CREDIT, INC.
Dated as of: MARCH 31, 1999
[LOGO]
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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ARTICLE I Definitions............................................................................................1
Section 1.1 Definitions.......................................................................................1
Section 1.2 Cross References.................................................................................10
ARTICLE II Amount and Terms of the Credit Facility..............................................................10
Section 2.1 Revolving Advances...............................................................................10
Section 2.2 Letters of Credit................................................................................11
Section 2.3 Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement....................12
Section 2.4 Special Account..................................................................................13
Section 2.5 Obligations Absolute.............................................................................13
Section 2.6 Interest; Default Interest; Participations; Usury................................................14
Section 2.7 Fees.............................................................................................14
Section 2.8 Computation of Interest and Fees; When Interest Due and Payable..................................15
Section 2.9 Capital Adequacy; Increased Costs and Reduced Return.............................................16
Section 2.10 Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility by
the Borrower...................................................................................17
Section 2.11 Termination, Line Reduction and Prepayment Fees; Waiver of Termination, Prepayment and Line
Reduction Fees.................................................................................17
Section 2.12 Mandatory Prepayment............................................................................18
Section 2.13 Payment.........................................................................................18
Section 2.14 Payment on Non-Banking Days.....................................................................18
Section 2.15 Use of Proceeds.................................................................................18
Section 2.16 Liability Records...............................................................................18
ARTICLE III Security Interest; Occupancy; Setoff................................................................18
Section 3.1 Grant of Security Interest.......................................................................19
Section 3.2 Notification of Account Debtors and Other Obligors...............................................19
Section 3.3 Assignment of Insurance..........................................................................19
Section 3.4 Occupancy........................................................................................20
Section 3.5 License..........................................................................................20
Section 3.6 Financing Statement..............................................................................20
Section 3.7 Setoff...........................................................................................21
ARTICLE IV Conditions of Lending................................................................................21
Section 4.1 Conditions Precedent to the Initial Revolving Advance and the Initial Letter of Credit...........21
Section 4.2 Conditions Precedent to All Advances and Letters of Credit.......................................23
-i-
<PAGE>
<S> <C>
ARTICLE V Representations and Warranties........................................................................24
Section 5.1 CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT
LOCATIONS; TAX IDENTIFICATION NUMBER.............................................................24
Section 5.2 Capitalization...................................................................................24
Section 5.3 Authorization of Borrowing; No Conflict as to Law or Agreements..................................24
Section 5.4 Legal Agreements.................................................................................25
Section 5.5 Subsidiaries.....................................................................................25
Section 5.6 Financial Condition; No Adverse Change...........................................................25
Section 5.7 Litigation.......................................................................................25
Section 5.8 Regulation U.....................................................................................25
Section 5.9 Taxes............................................................................................26
Section 5.10 Titles and Liens................................................................................26
Section 5.11 Intellectual Property Rights....................................................................26
Section 5.12 Plans...........................................................................................26
Section 5.13 Default.........................................................................................27
Section 5.14 Environmental Matters...........................................................................27
Section 5.15 Submissions to Lender...........................................................................28
Section 5.16 Financing Statements............................................................................28
Section 5.17 Rights to Payment...............................................................................28
ARTICLE VI Borrower's Affirmative Covenants.....................................................................28
Section 6.1 Reporting Requirements...........................................................................29
Section 6.2 Books and Records; Inspection and Examination....................................................31
Section 6.3 Account Verification.............................................................................31
Section 6.4 Compliance with Laws.............................................................................32
Section 6.5 Payment of Taxes and Other Claims................................................................32
Section 6.6 Maintenance of Properties........................................................................32
Section 6.7 Insurance........................................................................................33
Section 6.8 Preservation of Existence........................................................................33
Section 6.9 Delivery of Instruments, etc.....................................................................33
Section 6.10 Collateral Account..............................................................................33
Section 6.11 Performance by the Lender.......................................................................34
Section 6.12 Minimum Current Ratio...........................................................................34
Section 6.13 Minimum Debt Service Coverage Ratio.............................................................34
Section 6.14 MAXIMUM DEBT TO BOOK NET WORTH RATIO............................................................35
Section 6.15 NEW COVENANTS...................................................................................35
Section 6.16 ACCOUNTS AND DOMESTIC MAINTENANCE CONTRACT RECEIVABLES ATTRIBUTABLE TO THE SALE OF
SOFTWARE.......................................................................................35
ARTICLE VII Negative Covenants..................................................................................35
Section 7.1 Liens............................................................................................35
Section 7.2 Indebtedness.....................................................................................36
Section 7.3 Guaranties.......................................................................................36
Section 7.4 Investments and Subsidiaries.....................................................................37
-ii-
<PAGE>
Section 7.5 Dividends........................................................................................37
Section 7.6 SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS OPERATIONS....................................37
Section 7.7 Intellectual Property............................................................................38
Section 7.8 Consolidation and Merger; Asset Acquisitions.....................................................38
Section 7.9 Sale and Leaseback...............................................................................38
Section 7.10 Restrictions on Nature of Business..............................................................38
Section 7.12 ACCOUNTING......................................................................................38
Section 7.13 Discounts, etc..................................................................................38
Section 7.14 Defined Benefit Pension Plans...................................................................38
Section 7.15 Other Defaults..................................................................................39
Section 7.16 Place of Business; Name.........................................................................39
Section 7.17 Organizational Documents........................................................................39
ARTICLE VIII Events of Default, Rights and Remedies.............................................................39
Section 8.1 Events of Default................................................................................39
Section 8.2 Rights and Remedies..............................................................................41
Section 8.3 Certain Notices..................................................................................42
ARTICLE IX MISCELLANEOUS........................................................................................42
Section 9.1 No Waiver; Cumulative Remedies...................................................................42
Section 9.2 Amendments, Etc..................................................................................43
Section 9.3 Addresses for Notices, Etc.......................................................................43
Section 9.4 Further Documents................................................................................44
Section 9.5 Collateral.......................................................................................44
Section 9.6 Costs and Expenses...............................................................................44
Section 9.7 Indemnity........................................................................................44
Section 9.8 Participants.....................................................................................45
Section 9.9 Execution in Counterparts........................................................................45
Section 9.10 Binding Effect; Assignment; Complete Agreement; Exchanging Information..........................45
Section 9.11 Severability of Provisions......................................................................46
Section 9.12 Headings........................................................................................46
Section 9.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial........................................47
</TABLE>
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CREDIT AND SECURITY AGREEMENT
Dated as of March 31, 1999
FOURTH SHIFT Corporation, a Minnesota corporation (the
"Borrower"), and Norwest Business Credit, Inc., a Minnesota corporation (the
"Lender"), hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. For all purposes of this
Agreement, except as otherwise expressly provided or unless the context
otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
"Accounts" means all of the Borrower's accounts, as such term
is defined in the UCC, including without limitation the aggregate
unpaid obligations of customers and other account debtors to the
Borrower arising out of the sale or lease of goods or rendition of
services by the Borrower on an open account or deferred payment basis.
"Advance" means a Revolving Advance.
"Affiliate" or "Affiliates" means any Person controlled by,
controlling or under common control with the Borrower, including
(without limitation) any Subsidiary of the Borrower. For purposes of
this definition, "control," when used with respect to any specified
Person, means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.
"Agreement" means this Credit and Security Agreement, as
amended, supplemented or restated from time to time.
"Availability" means the difference of (i) the Borrowing Base
and (ii) the sum of (A) the outstanding principal balance of the
Revolving Note and (B) the L/C Amount.
"Banking Day" means a day other than a Saturday, Sunday or
other day on which banks are generally not open for business in
Minneapolis, Minnesota.
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"Base Rate" means the rate of interest publicly announced from
time to time by Norwest Bank Minnesota, National Association as its
"base rate" or, if such bank ceases to announce a rate so designated,
any similar successor rate designated by the Lender.
"Bishop Ranch Lease" means that lease by and between the
Borrower and Alexander Properties Company dated as of May 20, 1994,
pursuant to which the Borrower leases the premises described therein.
"Book Net Worth" means the aggregate of the common and
preferred stockholders' equity in the Borrower, determined in
accordance with GAAP.
"Borrower's Customer Service Program" means the maintenance
program established by the Borrower for its customers in which each
participating customer signs a customer service contract.
"Borrowing Base" means, at any time the lesser of:
(a) the Maximum Line; or
(b) subject to change upon the completion of the
collateral audit provided for in Section 4.1(q) and at any other
time in the Lender's sole discretion, the sum of:
(i) 80% of Eligible Accounts, plus
(ii) 65% of Eligible Domestic Maintenance
Contract Receivables.
"Capital Expenditures" for a period means any expenditure of
money for the lease, purchase or other acquisition of any capital
asset, or for the lease of any other asset whether payable currently or
in the future.
"Capitalized Software Development Costs" has the meaning
assigned to such costs in accordance with GAAP.
"Collateral" means all of the Borrower's Equipment, General
Intangibles, Inventory, Receivables, Investment Property, all sums on
deposit in any Collateral Account, and any items in any Lockbox;
together with (i) all substitutions and replacements for and products
of any of the foregoing; (ii) proceeds of any and all of the foregoing;
(iii) in the case of all tangible goods, all accessions; (iv) all
accessories, attachments, parts, equipment and repairs now or hereafter
attached or affixed to or used in connection with any tangible goods;
(v) all warehouse receipts, bills of lading and other documents of
title now or hereafter covering such goods; and (vi) all sums on
deposit in the Special Account.
"Collateral Account" has the meaning given in the Collateral
Account Agreement.
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"Collateral Account Agreement" means the Collateral Account
Agreement of even date herewith by and among the Borrower, Norwest Bank
Minnesota, National Association and the Lender.
"Collateral Pledge Agreement" means the Collateral Pledge
Agreement of even date herewith by the Borrower in favor of the Lender.
"Commitment" means the Lender's commitment to make Advances
and to cause the Issuer to issue Letters of Credit to or for the
Borrower's account pursuant to Article II.
"Copyright Security Agreement" means the Copyright Security
Agreement by the Borrower in favor of the Lender of even date herewith.
"Credit Facility" means the credit facility being made
available to the Borrower by the Lender pursuant to Article II.
"Current Maturities of Long Term Debt" as of a given date
means the amount of the Borrower's long-term debt and capitalized
leases which became due during the applicable period ending on the
designated date.
"Current Ratio" as of a given date means the ratio of the
Borrower's current assets, excluding all intangible current assets, to
the Borrower's current liabilities (including the outstanding principal
balance of the Revolving Note), each as determined in accordance with
GAAP.
"Debt" of any Person means all items of indebtedness or
liability which in accordance with GAAP would be included in
determining total liabilities as shown on the liabilities side of a
balance sheet of that Person as of the date as of which Debt is to be
determined. For purposes of determining a Person's aggregate Debt at
any time, "Debt" shall also include the aggregate payments required to
be made by such Person at any time under any lease that is considered a
capitalized lease under GAAP.
"Debt Service Coverage Ratio" means the ratio of (i) the sum
of (A) Funds from Operations and (B) Interest Expense MINUS (C)
Unfinanced Capital Expenditures MINUS (D) Capitalized Software
Development Costs to (ii) the sum of (A) Current Maturities of Long
Term Debt and (B) Interest Expense.
"Debt to Book Net Worth Ratio" as of a given date means the
ratio of the Borrower's Debt to the Borrower's Book Net Worth.
"Default" means an event that, with giving of notice or
passage of time or both, would constitute an Event of Default.
"Default Period" means any period of time beginning on the
first day of any month during which a Default or Event of Default has
occurred and ending on the
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date the Lender notifies the Borrower in writing that such Default
or Event of Default has been cured or waived.
"Default Rate" means an annual rate equal to two percent (2%)
over the Floating Rate, which rate shall change when and as the
Floating Rate changes.
"Domestic Maintenance Contract Receivables" means all unpaid
Accounts owed by an account debtor to gain access to the Borrower's
Customer Service Program.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Eligible Accounts" means all unpaid Accounts, net of any
credits, except the following shall not in any event be deemed Eligible
Accounts:
(i) That portion of Accounts unpaid 90 days or more
after the invoice date or, as to a dated Account, that portion
of such Account which is unpaid more than 30 days past the
stated due date or more than 210 days past the invoice date;
(ii) That portion of Accounts that is disputed or
subject to a claim of offset or a contra account, including,
but not limited to, Accounts subject to offset against Prepaid
Maintenance Contracts;
(iii) That portion of Accounts not yet earned by the
final delivery of goods or rendition of services, as
applicable, by the Borrower to the customer;
(iv) Accounts owed by any unit of government,
whether foreign or domestic (provided, however, that there
shall be included in Eligible Accounts that portion of
Accounts owed by such units of government for which the
Borrower has provided evidence satisfactory to the Lender that
(A) the Lender has a first priority perfected security
interest and (B) such Accounts may be enforced by the Lender
directly against such unit of government under all applicable
laws);
(v) Accounts owed by an account debtor located
outside the United States which are not (A) backed by a bank
letter of credit naming the Lender as beneficiary or assigned
to the Lender, in the Lender's possession and acceptable to
the Lender in all respects, in its sole discretion, (B)
covered by a foreign receivables insurance policy acceptable
to the Lender in its sole discretion;
(vi) Accounts owed by an account debtor that is
insolvent, the subject of bankruptcy proceedings or has gone
out of business;
(vii) Accounts owed by a shareholder holding more
than 10% of the capital stock of the Borrower, Subsidiary,
Affiliate, officer or employee of the Borrower;
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(viii) Accounts not subject to a duly perfected
security interest in the Lender's favor or which are subject
to any lien, security interest or claim in favor of any Person
other than the Lender including without limitation any payment
or performance bond, including those Accounts attributable to
the sale of the Borrower's software for which the Borrower has
not complied with those conditions set forth in Section 6.16;
(ix) That portion of Accounts that has been
restructured, extended, amended or modified;
(x) That portion of Accounts that constitutes
advertising, finance charges, service charges (other than with
respect to the Borrower's Customer Service Program) or sales
or excise taxes;
(xi) That portion of Accounts that constitutes
Domestic Maintenance Contract Receivables;
(xii) Accounts owed by an account debtor, regardless
of whether otherwise eligible, if 15% or more of the total
amount due under Accounts from such debtor is ineligible under
clause (i) above; and
(xiii) Accounts, or portions thereof, otherwise
deemed ineligible by the Lender in its sole discretion.
"Eligible Domestic Maintenance Contract Receivables" means all
Domestic Maintenance Contract Receivables of the Borrower; provided,
however, that the following shall not in any event be deemed Eligible
Domestic Maintenance Contract Receivables:
(i) That portion of Domestic Maintenance Contract
Receivables unpaid 90 days or more after the invoice date;
(ii) Domestic Maintenance Contract Receivables owed
by any unit of government, whether foreign or domestic
(provided, however, that there shall be included in Eligible
Domestic Maintenance Contract Receivables that portion of
Domestic Maintenance Contract Receivables owed by such units
of government for which the Borrower has provided evidence
satisfactory to the Lender that (A) the Lender has a first
priority perfected security interest and (B) such Domestic
Maintenance Contract Receivables may be enforced by the Lender
directly against such unit of government under all applicable
laws);
(iii) Domestic Maintenance Contract Receivables owed
by an account debtor located outside the United States which
are not (A) backed by a bank letter of credit naming the
Lender as beneficiary or assigned to the Lender, in the
Lender's possession and acceptable to the Lender in all
respects, in its sole discretion, (B) covered by a foreign
receivables insurance policy acceptable to the Lender in its
sole discretion;
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(iv) Domestic Maintenance Contract Receivables owed
by an account debtor that is insolvent, the subject of
bankruptcy proceedings or has gone out of business;
(v) Domestic Maintenance Contract Receivables owed
by a shareholder holding more than 15% of the capital stock of
the Borrower, Subsidiary, Affiliate, officer or employee of
the Borrower;
(vi) Domestic Maintenance Contract Receivables not
subject to a duly perfected security interest in the Lender's
favor or which are subject to any lien, security interest or
claim in favor of any Person other than the Lender including
without limitation any payment or performance bond, including
those Domestic Maintenance Contract Receivables attributable
to the sale of software for which the Borrower has not
complied with those conditions set forth in Section 6.16;
(vii) That portion of Domestic Maintenance Contract
Receivables that has been restructured, extended, amended or
modified;
(viii) That portion of Domestic Maintenance Contract
Receivables that constitutes advertising, finance charges,
service charges (other than with respect to the Borrower's
Customer Service Program) or sales or excise taxes;
(ix) Domestic Maintenance Contract Receivables owed
by an account debtor, regardless of whether otherwise
eligible, if 10% or more of the total amount due under
Domestic Maintenance Contract Receivables from such debtor is
ineligible under clause (i) above; and
(x) Domestic Maintenance Contract Receivables
otherwise deemed ineligible by the Lender in its sole
discretion.
"Environmental Laws" has the meaning specified in Section
5.14.
"Equipment" means all of the Borrower's equipment, as such
term is defined in the UCC, whether now owned or hereafter acquired,
including but not limited to all present and future machinery,
vehicles, furniture, fixtures, manufacturing equipment, shop equipment,
office and recordkeeping equipment, parts, tools, supplies, and
including specifically (without limitation) the goods described in any
equipment schedule or list herewith or hereafter furnished to the
Lender by the Borrower.
"Event of Default" has the meaning specified in Section 8.1.
"Floating Rate" means an annual rate equal to the sum of the
Base Rate plus one-half of one percent (0.5%), which annual rate shall
change when and as the Base Rate changes.
"Funding Date" has the meaning given in Section 2.1.
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"Funds From Operations" for a given period means the sum of
(i) Net Income, (ii) depreciation and amortization, (iii) deferred
income taxes, and (iv) other non-cash items, each as determined for
such period in accordance with GAAP.
"GAAP" means generally accepted accounting principles, applied
on a basis consistent with the accounting practices applied in the
financial statements described in Section 5.6.
"General Intangibles" means all of the Borrower's general
intangibles, as such term is defined in the UCC, whether now owned or
hereafter acquired, including (without limitation) all present and
future patents, patent applications, copyrights, trademarks, trade
names, trade secrets, customer or supplier lists and contracts,
manuals, operating instructions, permits, franchises, the right to use
the Borrower's name, and the goodwill of the Borrower's business.
"Hazardous Substance" has the meaning given in Section 5.14.
"Interest Expense" means the Borrower's total gross interest
expense during a given period (excluding interest income), and shall in
any event include, without limitation, (i) interest expensed (whether
or not paid) on all Debt, (ii) the amortization of debt discounts,
(iii) the amortization of all fees payable in connection with the
incurrence of Debt to the extent included in interest expense, and (iv)
the portion of any capitalized lease obligation allocable to interest
expense.
"Inventory" means all of the Borrower's inventory, as such
term is defined in the UCC, whether now owned or hereafter acquired,
whether consisting of whole goods, spare parts or components, supplies
or materials, whether acquired, held or furnished for sale, for lease
or under service contracts or for manufacture or processing, and
wherever located.
"Investment Property" means all of the Borrower's investment
property, as such term is defined in the UCC, whether now owned or
hereafter acquired, including but not limited to all securities,
security entitlements, securities accounts, commodity contracts,
commodity accounts, stocks, bonds, mutual fund shares, money market
shares and U.S. Government securities.
"Issuer" means the issuer of any Letter of Credit.
"L/C Amount" means the sum of (i) the aggregate amount
available to be drawn under each issued and outstanding Letters of
Credit and (ii) the unpaid amount of the Obligation of Reimbursement.
"L/C Application" means an application and agreement for
letters of credit in a form acceptable to the Issuer and the Lender.
"Letter of Credit" has the meaning specified in Section 2.2.
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"Loan Documents" means this Agreement, the Note and the
Security Documents.
"Lockbox" has the meaning given in the Lockbox Agreement.
"Lockbox Agreement" means the Lockbox Agreement by and among
the Borrower, Norwest Bank Minnesota, National Association and the
Lender, of even date herewith.
"Maturity Date" means March 31, 2002.
"Maximum Line" means $10,000,000, unless said amount is
reduced pursuant to Section 2.10, in which event it means the amount to
which said amount is reduced.
"Net Income" means fiscal year-to-date pre-tax net income from
continuing operations as determined in accordance with GAAP.
"NISI" means Norwest Investment Services, Inc.
"Note" means the Revolving Note.
"Notice of Pledge and Control Agreement" means the Notice of
Pledge and Control Agreement of even date herewith from the Lender and
the Borrower to NISI, which, among other things, notifies NISI of the
Borrower's pledge to the Lender of account #11248788 up to a value of
$500,000 to further secure the Obligations.
"Obligations" means the Note and each and every other debt,
liability and obligation of every type and description which the
Borrower may now or at any time hereafter owe to the Lender, whether
such debt, liability or obligation now exists or is hereafter created
or incurred, whether it arises in a transaction involving the Lender
alone or in a transaction involving other creditors of the Borrower,
and whether it is direct or indirect, due or to become due, absolute or
contingent, primary or secondary, liquidated or unliquidated, or sole,
joint, several or joint and several, and including specifically, but
not limited to, the Obligation of Reimbursement and all indebtedness of
the Borrower arising under this Agreement, the Note, any L/C
Application completed by the Borrower, or any other loan or credit
agreement or guaranty between the Borrower and the Lender, whether now
in effect or hereafter entered into.
"Obligation of Reimbursement" has the meaning given in
Section 2.3(a).
"Permitted Lien" has the meaning given in Section 7.17.1.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or government or any agency or
political subdivision thereof.
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"Plan" means an employee pension benefit plan or other plan
maintained for the Borrower's employees and covered by Title IV of
ERISA.
"Prepaid Maintenance Contracts" means those maintenance
contracts, in the form of the specimen Borrower delivered to the Lender
before the date of this Agreement, in which the Borrower has contracted
to provide software maintenance services to certain of its customers on
a prepaid basis.
"Premises" means all premises where the Borrower conducts its
business and has any rights of possession, including (without
limitation) the premises legally described in Exhibit C attached
hereto.
"Receivables" means each and every right of the Borrower to
the payment of money, whether such right to payment now exists or
hereafter arises, whether such right to payment arises out of a sale,
lease or other disposition of goods or other property, out of a
rendering of services, out of a loan, out of the overpayment of taxes
or other liabilities, or otherwise arises under any contract or
agreement, whether such right to payment is created, generated or
earned by the Borrower or by some other person who subsequently
transfers such person's interest to the Borrower, whether such right to
payment is or is not already earned by performance, and howsoever such
right to payment may be evidenced, together with all other rights and
interests (including all liens and security interests) which the
Borrower may at any time have by law or agreement against any account
debtor or other obligor obligated to make any such payment or against
any property of such account debtor or other obligor; all including but
not limited to all rights to payment in the nature of present and
future accounts, contract rights, loans and obligations receivable,
chattel papers, bonds, notes and other debt instruments, tax refunds
and rights to payment in the nature of general intangibles.
"Reportable Event" shall have the meaning assigned to that
term in Title IV of ERISA.
"Revolving Advance" has the meaning given in Section 2.1.
"Revolving Note" means the Borrower's revolving promissory
note, payable to the order of the Lender in substantially the form of
Exhibit A hereto and any note or notes issued in substitution therefor,
as the same may hereafter be amended, supplemented or restated from
time to time.
"Security Documents" means this Agreement, the Collateral
Account Agreement, the Lockbox Agreement, the Copyright Security
Agreement, the Trademark Security Agreement and any other document
delivered to the Lender from time to time to secure the Obligations, as
the same may hereafter be amended, supplemented or restated from time
to time.
"Security Interest" has the meaning given in Section 3.1.
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"Special Account" means a specified cash collateral account
maintained by a financial institution acceptable to the Lender in
connection with Letters of Credit, as contemplated by Section 2.4.
"Subsidiary" means any corporation of which more than 50% of
the outstanding shares of capital stock having general voting power
under ordinary circumstances to elect a majority of the board of
directors of such corporation, irrespective of whether or not at the
time stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency, is at the
time directly or indirectly owned by the Borrower, by the Borrower and
one or more other Subsidiaries, or by one or more other Subsidiaries.
"Termination Date" means the earliest of (i) the Maturity
Date, (ii) the date the Borrower terminates the Credit Facility, or
(iii) the date the Lender demands payment of the Obligations after an
Event of Default pursuant to Section 8.2.
"Two Meridian Crossings Lease" means that lease by and between
the Borrower and Meridian Crossings II LLC dated as of May 1, 1998,
pursuant to which the Borrower leases the premises described therein.
"UCC" means the Uniform Commercial Code as in effect from time
to time in the state designated in Section 9.13 as the state whose laws
shall govern this Agreement, or in any other state whose laws are held
to govern this Agreement or any portion hereof.
"Unfinanced Capital Expenditures" means those Capital
Expenditures the Borrower has not financed through any Person.
Section 1.2 CROSS REFERENCES. All references in this Agreement
to Articles, Sections and subsections, shall be to Articles, Sections and
subsections of this Agreement unless otherwise explicitly specified.
ARTICLE II
AMOUNT AND TERMS OF THE CREDIT FACILITY
Section 2.1 REVOLVING ADVANCES. The Lender agrees, on the
terms and subject to the conditions herein set forth, to make advances to the
Borrower from time to time from the date all of the conditions set forth in
Section 4.1 are satisfied (the "Funding Date") to the Termination Date (the
"Revolving Advances"). The Lender shall have no obligation to make a
Revolving Advance if, after giving effect to such requested Revolving
Advance, the sum of the outstanding and unpaid Revolving Advances under this
Section 2.1 or otherwise would exceed the Borrowing Base less the L/C Amount.
The Borrower's obligation to pay the Revolving Advances shall be evidenced by
the Revolving Note and shall be secured by the Collateral as provided in
Article III. Within the limits set forth in this Section 2.1, the Borrower
may borrow, prepay pursuant to Section 2.10 and reborrow. The
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Borrower agrees to comply with the following procedures in requesting
Revolving Advances under this Section 2.1:
(a) The Borrower shall make each request for a Revolving
Advance to the Lender before 11:00 a.m. (Minneapolis, Minnesota time)
of the day of the requested Revolving Advance. Requests may be made in
writing or by telephone, specifying the date of the requested Revolving
Advance and the amount thereof. Each request shall be by (i) any
officer of the Borrower; or (ii) any person designated as the
Borrower's agent by any officer of the Borrower in a writing delivered
to the Lender; or (iii) any person whom the Lender reasonably believes
to be an officer of the Borrower or such a designated agent.
(b) Upon fulfillment of the applicable conditions set forth in
Article IV, the Lender shall disburse the proceeds of the requested
Revolving Advance by crediting the same to the Borrower's demand
deposit account maintained with Norwest Bank Minnesota, National
Association unless the Lender and the Borrower shall agree in writing
executed by two officers of the Borrower to another manner of
disbursement. Upon the Lender's request, the Borrower shall promptly
confirm each telephonic request for an Advance by executing and
delivering an appropriate confirmation certificate to the Lender. The
Borrower shall repay all Advances even if the Lender does not receive
such confirmation and even if the person requesting an Advance was not
in fact authorized to do so. Any request for an Advance, whether
written or telephonic, shall be deemed to be a representation by the
Borrower that the conditions set forth in Section 4.2 have been
satisfied as of the time of the request.
Section 2.2 LETTERS OF CREDIT.
(a) The Lender agrees, on the terms and subject to the
conditions herein set forth, to cause an Issuer to issue, from the
Funding Date to the Termination Date, one or more irrevocable standby
or documentary letters of credit (each, a "Letter of Credit") for the
Borrower's account. The Lender shall have no obligation to cause an
Issuer to issue any Letter of Credit if the face amount of the Letter
of Credit to be issued would exceed the lesser of:
(i) $5,000,000 less the L/C Amount, or
(ii) the Borrowing Base less the sum of (A) all
outstanding and unpaid Revolving Advances and (B) the L/C
Amount.
Each Letter of Credit, if any, shall be issued pursuant to a separate
L/C Application entered into by the Borrower as applicant and the
Lender as co-applicant for the benefit of the Issuer, completed in a
manner satisfactory to the Lender and the Issuer. The terms and
conditions set forth in each such L/C Application shall supplement the
terms and conditions hereof, but if the terms of any such L/C
Application and the terms of this Agreement are inconsistent, the terms
hereof shall control.
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(b) No Letter of Credit shall be issued with an expiry date
later than the Termination Date in effect as of the date of issuance.
(c) Any request to cause an Issuer to issue a Letter of Credit
under this Section 2.2 shall be deemed to be a representation by the
Borrower that the conditions set forth in Section 4.2 have been
satisfied as of the date of the request.
Section 2.3 PAYMENT OF AMOUNTS DRAWN UNDER LETTERS OF
CREDIT; OBLIGATION OF REIMBURSEMENT. The Borrower acknowledges that the
Lender, as co-applicant, will be liable to the Issuer for reimbursement of
any and all draws under Letters of Credit and for all other amounts required
to be paid under the applicable L/C Application. Accordingly, the Borrower
agrees to pay to the Lender any and all amounts required to be paid under the
applicable L/C Application, when and as required to be paid thereby, and the
amounts designated below, when and as designated:
(a) The Borrower hereby agrees to pay the Lender on the day a
draft is honored under any Letter of Credit a sum equal to all amounts
drawn under such Letter of Credit plus any and all reasonable charges
and expenses that the Issuer or the Lender may pay or incur relative to
such draw and the applicable L/C Application, plus interest on all such
amounts, charges and expenses as set forth below (the Borrower's
obligation to pay all such amounts is herein referred to as the
"Obligation of Reimbursement").
(b) Whenever a draft is submitted under a Letter of Credit,
the Lender shall make a Revolving Advance in the amount of the
Obligation of Reimbursement and shall apply the proceeds of such
Revolving Advance thereto. Such Revolving Advance shall be repayable in
accordance with and be treated in all other respects as a Revolving
Advance hereunder.
(c) If a draft is submitted under a Letter of Credit when the
Borrower is unable, because a Default Period then exists or for any
other reason, to obtain a Revolving Advance to pay the Obligation of
Reimbursement, the Borrower shall pay to the Lender on demand and in
immediately available funds, the amount of the Obligation of
Reimbursement together with interest, accrued from the date of the
draft until payment in full at the Default Rate. Notwithstanding the
Borrower's inability to obtain a Revolving Advance for any reason, the
Lender is irrevocably authorized, in its sole discretion, to make a
Revolving Advance in an amount sufficient to discharge the Obligation
of Reimbursement and all accrued but unpaid interest thereon.
(d) The Borrower's obligation to pay any Revolving Advance
made under this Section 2.3, shall be evidenced by the Revolving Note
and shall bear interest as provided in Section 2.6.
Section 2.4 SPECIAL ACCOUNT. If the Credit Facility is
terminated for any reason whatsoever while any Letter of Credit is
outstanding, the Borrower shall thereupon
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pay the Lender in immediately available funds for deposit in the Special
Account an amount equal to the L/C Amount. The Special Account shall be an
interest bearing account maintained for the Lender by any financial
institution acceptable to the Lender. Any interest earned on amounts
deposited in the Special Account shall be credited to the Special Account.
Amounts on deposit in the Special Account may be applied by the Lender at any
time or from time to time to the Obligations in the Lender's sole discretion,
and shall not be subject to withdrawal by the Borrower so long as the Lender
maintains a security interest therein. The Lender agrees to transfer any
balance in the Special Account to the Borrower at such time as the Lender is
required to release its security interest in the Special Account under
applicable law.
Section 2.5 OBLIGATIONS ABSOLUTE. The Borrower's
obligations arising under Section 2.3 shall be absolute, unconditional and
irrevocable, and shall be paid strictly in accordance with the terms of
Section 2.3, under all circumstances whatsoever, including (without
limitation) the following circumstances:
(a) any lack of validity or enforceability of any Letter of
Credit or any other agreement or instrument relating to any Letter of
Credit (collectively the "Related Documents");
(b) any amendment or waiver of or any consent to departure
from all or any of the Related Documents;
(c) the existence of any claim, setoff, defense or other right
which the Borrower may have at any time, against any beneficiary or any
transferee of any Letter of Credit (or any persons or entities for whom
any such beneficiary or any such transferee may be acting), or other
person or entity, whether in connection with this Agreement, the
transactions contemplated herein or in the Related Documents or any
unrelated transactions;
(d) any statement or any other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect whatsoever;
(e) payment by or on behalf of the Issuer or the Lender under
any Letter of Credit against presentation of a draft or certificate
which does not strictly comply with the terms of such Letter of Credit
unless such payment would constitute gross negligence or willful
misconduct by the Lender; or
(f) any other circumstance or happening whatsoever, whether or
not similar to any of the foregoing.
Section 2.6 INTEREST; DEFAULT INTEREST; PARTICIPATIONS;
USURY. Interest accruing on the Note shall be due and payable in arrears on the
first day of each month.
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(a) REVOLVING NOTE. Except as set forth in Sections 2.6(b) and
2.6(d), the outstanding principal balance of the Revolving Note shall
bear interest at the Floating Rate.
(b) DEFAULT INTEREST RATE. At any time during any Default
Period, in the Lender's sole discretion and without waiving any of its
other rights and remedies, the principal of the Advances outstanding
from time to time shall bear interest at the Default Rate, effective
for any periods designated by the Lender from time to time during that
Default Period.
(c) PARTICIPATIONS. If any Person shall acquire a
participation in the Advances or the Obligation of Reimbursement, the
Borrower shall be obligated to the Lender to pay the full amount of all
interest calculated under this Section 2.6, along with all other fees,
charges and other amounts due under this Agreement, regardless if such
Person elects to accept interest with respect to its participation at a
lower rate than the Floating Rate, or otherwise elects to accept less
than its prorata share of such fees, charges and other amounts due
under this Agreement.
(d) USURY. In any event no rate change shall be put into
effect which would result in a rate greater than the highest rate
permitted by law.
Section 2.7 FEES.
(a) ORIGINATION FEE. The Borrower hereby agrees to pay the
Lender a fully earned and non-refundable origination fee of $50,000,
due and payable upon the execution of this Agreement.
(b) UNUSED LINE FEE. For the purposes of this Section 2.7(b),
"Unused Amount" means the Maximum Line reduced by (1) outstanding
Revolving Advances and (2) the L/C Amount. The Borrower agrees to pay
to the Lender an unused line fee at the rate of one-quarter of one
percent (0.25%) per annum on the average daily Unused Amount from the
date of this Agreement to and including the Termination Date, due and
payable monthly in arrears on the first day of the month and on the
Termination Date PROVIDED, HOWEVER that during any period in which the
Borrower is in default under Sections 6.12, 6.13, or 6.14, in the
Lender's sole discretion and without waiving any of its other rights
and remedies, such fee shall increase to one-half of one percent (0.5%)
of the Unused Amount.
(c) LETTER OF CREDIT FEES. The Borrower agrees to pay the
Lender a fee with respect to each Letter of Credit, if any, accruing on
a daily basis and computed at the annual rate of two percent (1.5%) of
the aggregate amount that may then be drawn on all issued and
outstanding Letters of Credit assuming compliance with all conditions
for drawing thereunder (the "Aggregate Face Amount"), from and
including the date of issuance of such Letter of Credit until such date
as such Letter of Credit shall terminate by its terms or be returned to
the Lender, due and payable monthly in arrears on the first day of each
month and on the Termination Date;
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PROVIDED, HOWEVER that during Default Periods, in the Lender's sole
discretion and without waiving any of its other rights and remedies,
such fee shall increase to four percent (3.5%) of the Aggregate Face
Amount. The foregoing fee shall be in addition to any and all fees,
commissions and charges of any Issuer of a Letter of Credit with
respect to or in connection with such Letter of Credit.
(d) ADMINISTRATIVE FEE. For each month in which the average
amount of the Advances is less than $1,000,000, the Borrower agrees to
pay the Lender an administrative fee of $1,000, due and payable monthly
in arrears on the first day of each month and on the Termination Date.
(e) LETTER OF CREDIT ADMINISTRATIVE FEES. The Borrower agrees
to pay the Lender, on written demand, the administrative fees charged
by the Issuer in connection with the honoring of drafts under any
Letter of Credit, amendments thereto, transfers thereof and all other
activity with respect to the Letters of Credit at the then-current
rates published by the Issuer for such services rendered on behalf of
customers of the Issuer generally.
(f) AUDIT FEES. The Borrower hereby agrees to pay the Lender,
on demand, audit fees in connection with any audits or inspections
conducted by the Lender of any Collateral or the Borrower's operations
or business at the rates established from time to time by the Lender as
its audit fees (which fees are currently $500 per day per auditor),
together with all actual out-of-pocket costs and expenses incurred in
conducting any such audit or inspection; PROVIDED HOWEVER, that if
during the 90 days preceding a scheduled audit the average of the
outstanding Advances is $0 and the Borrower has maintained an average
cash balance of at least $1,000,000, then such scheduled audit will be
waived. The Lender reserves the right to perform collateral audits at
its own expense if scheduled audits would otherwise be waived under
this Section 2.7(f); provided, however, that the Lender shall not
conduct such audits more frequently than once every six (6) months.
Section 2.8 COMPUTATION OF INTEREST AND FEES; WHEN INTEREST
DUE AND PAYABLE. Fees hereunder and interest accruing on the outstanding
principal balance of the Advances and the Obligation of Reimbursement
outstanding from time to time shall be computed on the basis of actual number of
days elapsed in a year of 360 days. Interest shall be payable in arrears on the
first day of each month and on the Termination Date.
Section 2.9 CAPITAL ADEQUACY; INCREASED COSTS AND REDUCED
RETURN.
(a) CAPITAL ADEQUACY. If any Related Lender determines at any
time that its Return has been reduced as a result of any Rule Change,
such Related Lender may require the Borrower to pay it the amount
necessary to restore its Return to what it would have been had there
been no Rule Change subject to the provisions of this Section 2.9(a).
For purposes of this Section 2.9(a):
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(i) "Capital Adequacy Rule" means any law, rule,
regulation, guideline, directive, requirement or request
regarding capital adequacy, or the interpretation or
administration thereof by any governmental or regulatory
authority, central bank or comparable agency, whether or not
having the force of law, that applies generally to financial
institutions of the same classification as a Related Lender.
Such rules include rules requiring financial institutions to
maintain total capital in amounts based upon percentages of
outstanding loans, binding loan commitments and letters of
credit.
(ii) "L/C Rule" means any law, rule, regulation,
guideline, directive, requirement or request regarding letters
of credit, or the interpretation or administration thereof by
any governmental or regulatory authority, central bank or
comparable agency, whether or not having the force of law,
that applies generally to financial institutions of the same
classification as a Related Lender. Such rules include rules
imposing taxes, duties or other similar charges, or mandating
reserves, special deposits or similar requirements against
assets of, deposits with or for the account of, or credit
extended by any Related Lender, on letters of credit.
(iii) "Related Lender" includes (but is not limited
to) the Lender, the Issuer, any parent corporation of the
Lender or the Issuer and any assignee of any interest of the
Lender hereunder and any participant in the loans made
hereunder.
(iv) "Return", for any period, means the return as
determined by a Related Lender on the Advances and Letters of
Credit based upon its total capital requirements and a
reasonable attribution formula that takes account of the
Capital Adequacy Rules and L/C Rules then in effect, costs of
issuing or maintaining any Letter of Credit and amounts
received or receivable under this Agreement or the Notes with
respect to any Advance or Letter of Credit. Return may be
calculated for each calendar quarter and for the shorter
period between the end of a calendar quarter and the date of
termination in whole of this Agreement.
(v) "Rule Change" means any change in any Capital
Adequacy Rule or L/C Rule occurring after the date of this
Agreement, but the term does not include any changes in
applicable requirements that at the date of this Agreement are
scheduled to take place under the existing Capital Adequacy
Rules or L/C Rules or any increases in the capital that any
Related Lender is required to maintain to the extent that the
increases are required due to a regulatory authority's
assessment of the financial condition of such Related Lender.
The Lender will promptly notify the Borrower in writing of any event of
which it has knowledge, occurring after the date hereof, which will
entitle the Lender to compensation pursuant to this Section 2.9 and the
Borrower shall, within thirty (30) days after written notice and demand
from the Lender, pay to the Related Lender
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additional amounts sufficient to compensate the Related Lender for
such additional costs. Certificates of any Related Lender sent to
the Borrower from time to time claiming compensation under this
Section 2.9, stating the reason therefor and setting forth in
reasonable detail the calculation of the additional amount or
amounts to be paid to the Related Lender hereunder to restore its
Return shall be conclusive absent manifest error. In determining
such amounts, the Related Lender may use any reasonable averaging
and attribution methods.
Section 2.10 VOLUNTARY PREPAYMENT; REDUCTION OF THE MAXIMUM
LINE; TERMINATION OF THE CREDIT FACILITY BY THE BORROWER. Except as otherwise
provided herein, the Borrower may prepay the Revolving Advances in whole at any
time or from time to time in part. The Borrower may terminate the Credit
Facility or reduce the Maximum Line at any time if it (vi) gives the Lender at
least 20 days' prior written notice and (vii) pays the Lender the prepayment,
termination or line reduction fees in accordance with Section 2.11. Any
reduction in the Maximum Line must be in an amount not less than $1,000,000 or
an integral multiple thereof. If the Borrower reduces the Maximum Line to zero,
all Obligations shall be immediately due and payable. Upon termination of the
Credit Facility and payment and performance of all Obligations, the Lender shall
release or terminate the Security Interest and the Security Documents to which
the Borrower is entitled by law.
Section 2.11 TERMINATION, LINE REDUCTION AND PREPAYMENT FEES;
WAIVER OF TERMINATION, PREPAYMENT AND LINE REDUCTION FEES.
(a) TERMINATION AND LINE REDUCTION FEES. If the Lender or the
Borrower terminates the Credit Facility for any reason as of a date
other than the Maturity Date, or if the Borrower reduces the Maximum
Line, the Borrower shall pay the Lender a fee in an amount equal to
$4,166.66 multiplied by the number of months, or fractions thereof,
remaining until the Maturity Date; provided, however, if a Default or
an Event of Default has not occurred and the Lender terminates the
Credit Facility, the Lender is not entitled to the termination fee
provided in this Section 2.11(a).
(b) WAIVER OF TERMINATION FEES. The Borrower will not be
required to pay the termination fees otherwise due under this Section
2.11 if such termination is made because of refinancing by an affiliate
of the Lender.
Section 2.12 MANDATORY PREPAYMENT. Without notice or demand,
if the sum of the outstanding principal balance of the Revolving Advances plus
the L/C Amount shall at any time exceed the Borrowing Base, the Borrower shall
(i) first, immediately prepay the Revolving Advances to the extent necessary to
eliminate such excess; and (ii) if prepayment in full of the Revolving Advances
is insufficient to eliminate such excess, pay to the Lender in immediately
available funds for deposit in the Special Account an amount equal to the
remaining excess. Any payment received by the Lender under this Section 2.12 or
under Section 2.10 may be applied to the Obligations, in such order and in such
amounts as the Lender, in its discretion, may from time to time determine.
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Section 2.13 PAYMENT. All payments to the Lender shall be made
in immediately available funds and shall be applied to the Obligations one (1)
Banking Day after receipt by the Lender. The Lender may hold all payments not
constituting immediately available funds for three (3) additional days before
applying them to the Obligations. Notwithstanding anything in Section 2.1, the
Borrower hereby authorizes the Lender, in its discretion at any time or from
time to time without the Borrower's request and even if the conditions set forth
in Section 4.2 would not be satisfied, to make a Revolving Advance in an amount
equal to the portion of the Obligations from time to time due and payable.
Section 2.14 PAYMENT ON NON-BANKING DAYS. Whenever any payment
to be made hereunder shall be stated to be due on a day which is not a Banking
Day, such payment may be made on the next succeeding Banking Day, and such
extension of time shall in such case be included in the computation of interest
on the Advances or the fees hereunder, as the case may be.
Section 2.15 USE OF PROCEEDS. The Borrower shall use the
proceeds of Advances, and each Letter of Credit, if any, in accordance with
Schedule 2.15.
Section 2.16 LIABILITY RECORDS. The Lender may maintain from
time to time, at its discretion, liability records as to the Obligations. All
entries made on any such record shall be presumed correct until the Borrower
establishes the contrary. Upon the Lender's demand, the Borrower will admit and
certify in writing the exact principal balance of the Obligations that the
Borrower then asserts to be outstanding. Any billing statement or accounting
rendered by the Lender shall be conclusive and fully binding on the Borrower
unless the Borrower gives the Lender specific written notice of exception within
60 days after receipt.
ARTICLE III
SECURITY INTEREST; OCCUPANCY; SETOFF
Section 3.1 GRANT OF SECURITY INTEREST. The Borrower hereby
pledges, assigns and grants to the Lender a security interest (collectively
referred to as the "Security Interest") in the Collateral, as security for the
payment and performance of the Obligations.
Section 3.2 NOTIFICATION OF ACCOUNT DEBTORS AND OTHER
OBLIGORS. The Lender may at any time during a Default Period or if the Lender
shall believe in good faith that the prospect of payment of all or any part
of the Obligations or the performance by the Borrower under the Loan
Documents is impaired, notify any account debtor or other person obligated to
pay the amount due that such right to payment has been assigned or
transferred to the Lender for security and shall be paid directly to the
Lender. The Borrower will join in giving such notice if the Lender so
requests. At any time after the Borrower or the Lender gives such notice to
an account debtor or other obligor, the Lender may, but need not, in the
Lender's name or in the Borrower's name, (a) demand, sue for, collect or
receive any money or property at any time payable or receivable on account
of, or securing, any such right to payment, or grant any extension to, make
any compromise or settlement with or otherwise
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agree to waive, modify, amend or change the obligations (including collateral
obligations) of any such account debtor or other obligor; and (b) as the
Borrower's agent and attorney-in-fact, notify the United States Postal
Service to change the address for delivery of the Borrower's mail to any
address designated by the Lender, otherwise intercept the Borrower's mail,
and receive, open and dispose of the Borrower's mail, applying all Collateral
as permitted under this Agreement and holding all other mail for the
Borrower's account or forwarding such mail to the Borrower's last known
address.
Section 3.3 ASSIGNMENT OF INSURANCE. As additional security
for the payment and performance of the Obligations, the Borrower hereby
assigns to the Lender any and all monies (including, without limitation,
proceeds of insurance and refunds of unearned premiums) due or to become due
under, and all other rights of the Borrower with respect to, any and all
policies of insurance now or at any time hereafter covering the Collateral or
any evidence thereof or any business records or valuable papers pertaining
thereto, and the Borrower hereby directs the issuer of any such policy to pay
all such monies directly to the Lender. At any time, whether or not a Default
Period then exists, the Lender may (but need not), in the Lender's name or in
the Borrower's name, execute and deliver proof of claim, receive all such
monies, endorse checks and other instruments representing payment of such
monies, and adjust, litigate, compromise or release any claim against the
issuer of any such policy.
Section 3.4 OCCUPANCY.
(a) The Borrower hereby irrevocably grants to the Lender the
right to take exclusive possession of the Premises at any time during a
Default Period.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise
dispose of goods that are Collateral and for other purposes that the
Lender may in good faith deem to be related or incidental purposes.
(c) The Lender's right to hold the Premises shall cease and
terminate upon the earlier of (i) payment in full and discharge of all
Obligations and termination of the Commitment, and (ii) final sale or
disposition of all goods constituting Collateral and delivery of all
such goods to purchasers.
(d) The Lender shall not be obligated to Borrower to pay or
account for any rent or other compensation for the possession,
occupancy or use of any of the Premises, other than for damages caused
by the Lender's gross negligence or willful misconduct, provided,
however, that if the Lender does pay or account for any rent or other
compensation for the possession, occupancy or use of any of the
Premises, the Borrower shall reimburse the Lender promptly for the full
amount thereof, other than for damages caused by the Lender's gross
negligence or willful misconduct. In addition, the Borrower will pay,
or reimburse the Lender for, all taxes, fees, duties, imposts, charges
and expenses at any time incurred by or imposed upon the Lender by
reason of the execution, delivery, existence, recordation, performance
or enforcement
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of this Agreement or the provisions of this Section 3.4, other than
expenses incurred as a result of the Lender's gross negligence or
willful misconduct.
Section 3.5 LICENSE. Without limiting the generality of the
Copyright Security Agreement, the Borrower hereby grants to the Lender a
non-exclusive, worldwide and royalty-free license to use or otherwise exploit
all trademarks, franchises, trade names, copyrights and patents of the Borrower
for the purpose of selling, leasing, licensing or otherwise disposing of any or
all Collateral during any Default Period.
Section 3.6 FINANCING STATEMENT. A carbon, photographic or
other reproduction of this Agreement or of any financing statements signed by
the Borrower is sufficient as a financing statement and may be filed as a
financing statement in any state to perfect the security interests granted
hereby. For this purpose, the following information is set forth:
Name and address of Debtor:
FOURTH SHIFT Corporation
Two Meridian Crossings
Minneapolis, Minnesota 55423-3962
Federal Tax Identification No. 41-1437794
Name and address of Secured Party:
Norwest Business Credit, Inc.
Roanoke Building, Suite 400
Seventh Street and Marquette Avenue
Minneapolis, Minnesota 55479-0152
Federal Tax Identification No. 41-1237652
Section 3.7 SETOFF. The Borrower agrees that the Lender may at
any time or from time to time, at its sole discretion and without demand and
without notice to anyone, setoff any liability owed to the Borrower by the
Lender, whether or not due, against any Obligation, whether or not due. In
addition, each other Person holding a participating interest in any Obligations
shall have the right to appropriate or setoff any deposit or other liability
then owed by such Person to the Borrower, whether or not due, and apply the same
to the payment of said participating interest, as fully as if such Person had
lent directly to the Borrower the amount of such participating interest.
ARTICLE IV
CONDITIONS OF LENDING
Section 4.1 CONDITIONS PRECEDENT TO THE INITIAL REVOLVING
ADVANCE AND THE INITIAL LETTER OF CREDIT. The Lender's obligation to make the
initial Revolving Advance or to cause to be issued the initial Letter of
Credit hereunder shall be subject to the condition
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precedent that the Lender shall have received all of the following, each in
form and substance satisfactory to the Lender:
(a) This Agreement, properly executed by the Borrower.
(b) The Note, properly executed by the Borrower.
(c) A true and correct copy of the Two Meridian Crossings
Lease and the Bishop Ranch Lease, together with a landlord's disclaimer
and consent with respect to the Two Meridian Crossings Lease.
(d) The Collateral Account Agreement, properly executed by
the Borrower and Norwest Bank Minnesota, National Association.
(e) The Lockbox Agreement, properly executed by the Borrower
and Norwest Bank Minnesota, National Association.
(f) The Copyright Security Agreement, properly executed by the
Borrower.
(g) The Trademark Security Agreement, properly executed by the
Borrower.
(h) The Collateral Pledge Agreement, properly executed by the
Borrower.
(i) The Notice of Pledge and Control Agreement, properly
executed by the Borrower.
(j) Current searches of appropriate filing offices showing
that (i) no state or federal tax liens have been filed and remain in
effect against the Borrower, (ii) no financing statements or
assignments of patents, trademarks or copyrights have been filed and
remain in effect against the Borrower except those financing statements
and assignments of patents, trademarks or copyrights relating to
Permitted Liens or to liens held by Persons who have agreed in writing
that upon receipt of proceeds of the Advances, they will deliver UCC
releases and/or terminations and releases of such assignments of
patents, trademarks or copyrights satisfactory to the Lender, and (iii)
the Lender has duly filed all financing statements necessary to perfect
the Security Interest, to the extent the Security Interest is capable
of being perfected by filing.
(k) A certificate of the Borrower's secretary or assistant
secretary certifying as to (i) the resolutions of the Borrower's
directors and if required, shareholders, authorizing the execution,
delivery and performance of the Loan Documents, (ii) the Borrower's
articles of incorporation and bylaws, and (iii) the signatures of the
Borrower's officers or agents authorized to execute and deliver the
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Loan Documents and other instruments, agreements and certificates,
including Advance requests, on the Borrower's behalf.
(l) A current certificate issued by the Secretary of State of
Minnesota, certifying that the Borrower is in compliance with all
applicable organizational requirements of the State of Minnesota.
(m) Evidence that the Borrower is duly licensed or qualified
to transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it
makes such licensing or qualification necessary.
(n) An opinion of counsel to the Borrower, addressed to the
Lender.
(o) Certificates of the insurance required hereunder, with all
hazard insurance containing a lender's loss payable endorsement in the
Lender's favor and with all liability insurance naming the Lender as an
additional insured.
(p) Payment of the fees and commissions due through the date
of the initial Advance or Letter of Credit under Section 2.7 and
expenses incurred by the Lender through such date and required to be
paid by the Borrower under Section 9.6, including all legal expenses
incurred through the date of this Agreement.
(q) Completion of a collateral audit within the ninety (90)
days prior to the initial Revolving Advance or issuance of the initial
Letter of Credit not separately secured showing that on the date of the
initial Revolving Advance or issuance of the initial Letter of Credit,
the Borrower has a minimum of $1,000,000 of excess Availability after
paying out trade payables older than 60 days from invoice date, any
book or bank overdraft and the fees and commissions due under this
Agreement. If such collateral audit will need to be completed, the
Borrower must give the Lender at least forty-five (45) days notice
before the initial Revolving Advance or issuance of the initial Letter
of Credit to enable the Lender to complete such audit.
(r) Such other documents as the Lender in its sole discretion
may require.
Section 4.2 CONDITIONS PRECEDENT TO ALL ADVANCES AND LETTERS
OF CREDIT. The Lender's obligation to make each Advance or to cause the Issuer
to issue any Letter of Credit shall be subject to the further conditions
precedent that on such date:
(a) Completion of a collateral audit within the ninety (90)
days prior to the each Revolving Advance or issuance of any Letter of
Credit not separately secured showing that on the date of the Revolving
Advance or issuance of a Letter of Credit, the Borrower has a minimum
of $1,000,000 of excess Availability after paying out trade payables
older than 60 days from invoice date, any book or bank overdraft and
the fees and commissions due under this Agreement. If such collateral
audit will need to be completed, the Borrower must give the Lender at
least forty-five (45) days
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notice before the Revolving Advance or issuance of the Letter of
Credit to enable the Lender to complete such audit.
(b) the representations and warranties contained in Article V
are correct on and as of the date of such Advance or issuance of Letter
of Credit as though made on and as of such date, except to the extent
that such representations and warranties relate solely to an earlier
date; and
(c) no event has occurred and is continuing, or would result
from such Advance or the issuance of such Letter of Credit, as the case
may be, which constitutes a Default or an Event of Default.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender as follows:
Section 5.1 CORPORATE EXISTENCE AND POWER; NAME; CHIEF
EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER.
The Borrower is a corporation, duly organized, validly existing and in good
standing under the laws of the State of Minnesota and is duly licensed or
qualified to transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it makes
such licensing or qualification necessary, and the failure to do so would have a
material adverse effect upon the Borrower. No dissolution or termination of the
Borrower has occurred, and no notice of dissolution or articles of termination
have been filed with respect to the Borrower. The Borrower has all requisite
power and authority, corporate or otherwise, to conduct its business, to own its
properties and to execute and deliver, and to perform all of its obligations
under, the Loan Documents. During its existence, the Borrower has done business
solely under the names set forth in Schedule 5.1 hereto. The Borrower's chief
executive office and principal place of business is located at the address set
forth in Schedule 5.1 hereto, and all of the Borrower's records relating to its
business or the Collateral are kept at that location. All Inventory and
Equipment is located at that location or at one of the other locations set forth
in Schedule 5.1 hereto. The Borrower's tax identification number is correctly
set forth in Section 3.6 hereto.
Section 5.2 CAPITALIZATION. Schedule 5.2 constitutes a correct
and complete list of all shareholders holding more than a 15% interest in the
capital stock of the Borrower or rights to acquire shareholder interests,
including the amount and record holder thereof.
Section 5.3 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW
OR AGREEMENTS. The execution, delivery and performance by the Borrower of the
Loan Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of the Borrower's shareholders; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department,
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commission, board, bureau, agency or instrumentality, domestic or foreign, or
any third party, except such authorization, consent, approval, registration,
declaration, filing or notice as has been obtained, accomplished or given
prior to the date hereof; (iii) violate any provision of any law, rule or
regulation (including, without limitation, Regulation X of the Board of
Governors of the Federal Reserve System) or of any order, writ, injunction or
decree presently in effect having applicability to the Borrower or of the
Borrower's articles of incorporation and bylaws; (iv) result in a breach of
or constitute a default under any indenture or loan or credit agreement or
any other material agreement, lease or instrument to which the Borrower is a
party or by which it or its properties may be bound or affected; or (v)
result in, or require, the creation or imposition of any mortgage, deed of
trust, pledge, lien, security interest or other charge or encumbrance of any
nature (other than the Security Interest) upon or with respect to any of the
properties now owned or hereafter acquired by the Borrower.
Section 5.4 LEGAL AGREEMENTS. This Agreement constitutes and,
upon due execution by the Borrower, the other Loan Documents will constitute the
legal, valid and binding obligations of the Borrower, enforceable against the
Borrower in accordance with their respective terms, subject to limitations as to
enforceability which might result from bankruptcy, insolvency, moratorium and
other similar laws affecting creditors' rights generally and subject to
limitations on the availability of equitable remedies.
Section 5.5 SUBSIDIARIES. The Borrower has no Subsidiaries
other than the Subsidiaries identified on Schedule 5.5.
Section 5.6 FINANCIAL CONDITION; NO ADVERSE CHANGE. The
Borrower has heretofore furnished to the Lender audited financial statements
dated as of December 31, 1997, and unaudited interim financial statements dated
as of December 31, 1998 and those statements fairly present the Borrower's
financial condition on the dates thereof and the results of its operations and
cash flows for the periods then ended and were prepared in accordance with
generally accepted accounting principles subject to year-end adjustments and in
the absence of footnotes. Since the date of the most recent financial
statements, there has been no material adverse change in the Borrower's
business, properties or condition (financial or otherwise).
Section 5.7 LITIGATION. There are no actions, suits or
proceedings pending or, to the Borrower's knowledge, threatened against or
affecting the Borrower or any of its Affiliates or the properties of the
Borrower or any of its Affiliates before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
which, if determined adversely to the Borrower or any of its Affiliates, would
have a material adverse effect on the financial condition, properties or
operations of the Borrower or any of its Affiliates taken as a whole.
Section 5.8 REGULATION U. The Borrower is not engaged in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulation U of the Board of Governors of
the Federal Reserve System), and no part of
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the proceeds of any Advance will be used to purchase or carry any margin
stock or to extend credit to others for the purpose of purchasing or carrying
any margin stock.
Section 5.9 TAXES. The Borrower and its Affiliates have
paid or caused to be paid to the proper authorities when due all federal,
state and local taxes required to be withheld by each of them. The Borrower
and its Affiliates have filed all federal, state and local tax returns which
to the knowledge of the officers of the Borrower or any Affiliate, as the
case may be, are required to be filed, and the Borrower and its Affiliates
have paid or caused to be paid to the respective taxing authorities all taxes
as shown on said returns or on any assessment received by any of them to the
extent such taxes have become due.
Section 5.10 TITLES AND LIENS. The Borrower has good and
absolute title to all Collateral described in the collateral reports provided
to the Lender and all other Collateral, properties and assets reflected in
the latest financial statements referred to in Section 5.6 and all proceeds
thereof, free and clear of all mortgages, security interests, liens, adverse
claims and encumbrances, except for Permitted Liens. No financing statement
naming the Borrower as debtor is on file in any office except to perfect only
Permitted Liens.
Section 5.11 INTELLECTUAL PROPERTY RIGHTS. The Borrower (a)
owns or has the exclusive right to use, free and clear of all material liens,
claims and restrictions, all patents, trademarks, service marks, trade names,
copyrights, licenses and rights with respect to the foregoing, used in the
conduct of its business as now conducted; (b) is not obligated or under any
liability whatsoever to make any payments of a material nature by way of
royalties, fees or otherwise to any owner of, licensor of, or other claimant
to, any patent, trademark, trade name, copyright or other intangible asset,
with respect to the use thereof or in connection with the conduct of its
business or otherwise, (c) owns or has the unrestricted right to use all
trade secrets, including know-how, inventions, designs, processes, computer
programs and technical data necessary to the development, operation and sale
of all products and services sold or proposed to be sold by it, free and
clear of any rights, liens or claims of others, and (d) is not using any
confidential information or trade secrets of others in violation of an
agreement thereof. The Borrower is not, nor has it received notice with
respect to, infringing upon or otherwise acting adversely to any known right
or claimed right of any person under or with respect to any patents,
trademarks, service marks, trade names, copyrights, licenses or rights with
respect to the foregoing.
Section 5.12 PLANS. Except as disclosed to the Lender in
writing prior to the date hereof, neither the Borrower nor any of its
Affiliates maintains or has maintained any Plan. Neither the Borrower nor any
Affiliate has received any notice or has any knowledge to the effect that it
is not in full compliance with any of the requirements of ERISA. No
Reportable Event or other fact or circumstance which may have an adverse
effect on the Plan's tax qualified status exists in connection with any Plan.
Neither the Borrower nor any of its Affiliates has:
(a) Any accumulated funding deficiency within the meaning of
ERISA; or
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(b) Any liability or knows of any fact or circumstances which
could result in any liability to the Pension Benefit Guaranty
Corporation, the Internal Revenue Service, the Department of Labor or
any participant in connection with any Plan (other than accrued
benefits which or which may become payable to participants or
beneficiaries of any such Plan).
Section 5.13 DEFAULT. The Borrower is in compliance with all
provisions of all agreements, instruments, decrees and orders to which it is a
party or by which it or its property is bound or affected, the breach or default
of which could have a material adverse effect on the Borrower's financial
condition, properties or operations.
Section 5.14 ENVIRONMENTAL MATTERS.
(a) DEFINITIONS. As used in this Agreement, the following
terms shall have the following meanings:
(i) "Environmental Law" means any federal, state,
local or other governmental statute, regulation, law or
ordinance dealing with the protection of human health and the
environment.
(ii) "Hazardous Substances" means pollutants,
contaminants, hazardous substances, hazardous wastes,
petroleum and fractions thereof, and all other chemicals,
wastes, substances and materials listed in, regulated by or
identified in any Environmental Law.
(b) To the Borrower's best knowledge, there are not present
in, on or under the Premises any Hazardous Substances in such form or
quantity as to create any liability or obligation for either the
Borrower or the Lender under common law of any jurisdiction or under
any Environmental Law, and no Hazardous Substances have ever been
stored, buried, spilled, leaked, discharged, emitted or released in, on
or under the Premises in such a way as to create any such liability.
(c) To the Borrower's best knowledge, the Borrower has not
disposed of Hazardous Substances in such a manner as to create any
liability under any Environmental Law.
(d) To the Borrower's best knowledge, there are not and there
never have been any requests, claims, notices, investigations, demands,
administrative proceedings, hearings or litigation, relating in any way
to the Premises or the Borrower, alleging liability under, violation
of, or noncompliance with any Environmental Law or any license, permit
or other authorization issued pursuant thereto. To the Borrower's best
knowledge, no such matter is threatened or impending.
(e) To the Borrower's best knowledge, the Borrower's
businesses are and have in the past always been conducted in accordance
with all Environmental Laws and all licenses, permits and other
authorizations required pursuant to any
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Environmental Law and necessary for the lawful and efficient
operation of such businesses are in the Borrower's possession and
are in full force and effect. No permit required under any
Environmental Law is scheduled to expire within 12 months and there
is no threat that any such permit will be withdrawn, terminated,
limited or materially changed.
(f) To the Borrower's best knowledge, the Premises are not and
never have been listed on the National Priorities List, the
Comprehensive Environmental Response, Compensation and Liability
Information System or any similar federal, state or local list,
schedule, log, inventory or database.
(g) The Borrower has delivered to Lender all environmental
assessments, audits, reports, permits, licenses and other documents
describing or relating in any way to the Premises or Borrower's
businesses.
Section 5.15 SUBMISSIONS TO LENDER. All financial and other
information provided to the Lender by or on behalf of the Borrower in connection
with the Borrower's request for the credit facilities contemplated hereby is
true and correct in all material respects and, as to projections, valuations or
proforma financial statements, present a good faith opinion as to such
projections, valuations and proforma condition and results.
Section 5.16 FINANCING STATEMENTS. The Borrower has provided
to the Lender signed financing statements sufficient when filed to perfect the
Security Interest and the other security interests created by the Security
Documents. When such financing statements are filed in the offices noted
therein, the Lender will have a valid and perfected security interest in all
Collateral and all other collateral described in the Security Documents which is
capable of being perfected by filing financing statements. None of the
Collateral or other collateral covered by the Security Documents is or will
become a fixture on real estate, unless a sufficient fixture filing is in effect
with respect thereto.
Section 5.17 RIGHTS TO PAYMENT. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation.
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ARTICLE VI
BORROWER'S AFFIRMATIVE COVENANTS
So long as the Obligations shall remain unpaid, or the Credit
Facility shall remain outstanding, the Borrower will comply with the following
requirements, unless the Lender shall otherwise consent in writing:
Section 6.1 REPORTING REQUIREMENTS. The Borrower will deliver,
or cause to be delivered, to the Lender each of the following, which shall be in
form and detail acceptable to the Lender:
(a) as soon as available, and in any event within 90 days
after the end of each fiscal year of the Borrower, the Borrower's
audited financial statements with the unqualified opinion of
independent certified public accountants selected by the Borrower and
acceptable to the Lender, which annual financial statements shall
include the Borrower's balance sheet as at the end of such fiscal year
and the related statements of the Borrower's income, retained earnings
and cash flows for the fiscal year then ended, prepared, if the Lender
so requests, on a consolidating and consolidated basis to include any
Affiliates, all in reasonable detail and prepared in accordance with
GAAP, together with (i) copies of all management letters prepared by
such accountants; and (ii) a certificate of the Borrower's chief
financial officer stating that such financial statements have been
prepared in accordance with GAAP, fairly represent the Borrower's
financial position and the results of its operations, and whether or
not such officer has knowledge of the occurrence of any Default or
Event of Default hereunder and, if so, stating in reasonable detail the
facts with respect thereto;
(b) as soon as available and in any event within 30 days after
the end of each month, an unaudited/internal balance sheet and
statements of income and retained earnings of the Borrower as at the
end of and for such month and for the year to date period then ended,
prepared, if the Lender so requests, on a consolidating and
consolidated basis to include any Affiliates, in reasonable detail and
stating in comparative form the figures for the corresponding date and
periods in the previous year, all prepared in accordance with GAAP,
subject to year-end audit adjustments; and accompanied by a certificate
of the Borrower's chief financial officer, substantially in the form of
Exhibit B hereto stating (i) that such financial statements have been
prepared in accordance with GAAP, subject to year-end audit adjustments
and the absence of footnotes, and fairly represent the Borrower's
financial position and the results of its operations, (ii) whether or
not such officer has knowledge of the occurrence of any Default or
Event of Default hereunder not theretofore reported and remedied and,
if so, stating in reasonable detail the facts with respect thereto, and
(iii) all relevant facts in reasonable detail to evidence, and the
computations as to, whether or not the Borrower is in compliance with
the requirements set forth in Sections 6.12, 6.13, 6.14, and 6.15;
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(c) within 15 days after the end of each month in which the
average of the outstanding Advances is greater than $0, or more
frequently if the Lender so requires, agings of the Borrower's accounts
receivable and its accounts payable and a calculation of the Borrower's
Accounts, Eligible Accounts, Domestic Maintenance Contract Receivables
and Eligible Domestic Maintenance Contract Receivables as at the end of
such month or shorter time period; provided, however, that if the
outstanding L/C Amount is greater than $0, the Borrower shall deliver
the reports provided for in this Section 6.1(c) if the Lender shall so
require.
(d) at least 30 days before the beginning of each fiscal year
of the Borrower, the projected balance sheets and income statements for
each month of such year, each in reasonable detail, representing the
Borrower's good faith projections and certified by the Borrower's chief
financial officer as being the most accurate projections available and
identical to the projections used by the Borrower for internal planning
purposes, together with such supporting schedules and information as
the Lender may in its discretion require;
(e) immediately after the commencement thereof, notice in
writing of all litigation and of all proceedings before any
governmental or regulatory agency affecting the Borrower of the type
described in Section 5.14 or which seek a monetary recovery against the
Borrower in excess of $250,000
(f) as promptly as practicable (but in any event not later
than five business days) after an officer of the Borrower obtains
knowledge of the occurrence of any breach, default or event of default
under any Security Document or any event which constitutes a Default or
Event of Default hereunder, notice of such occurrence, together with a
detailed statement by a responsible officer of the Borrower of the
steps being taken by the Borrower to cure the effect of such breach,
default or event;
(g) as soon as possible and in any event within 30 days after
the Borrower knows or has reason to know that any Reportable Event with
respect to any Plan has occurred, the statement of the Borrower's chief
financial officer setting forth details as to such Reportable Event and
the action which the Borrower proposes to take with respect thereto,
together with a copy of the notice of such Reportable Event to the
Pension Benefit Guaranty Corporation;
(h) as soon as possible, and in any event within 10 days after
the Borrower fails to make any quarterly contribution required with
respect to any Plan under Section 412(m) of the Internal Revenue Code
of 1986, as amended, the statement of the Borrower's chief financial
officer setting forth details as to such failure and the action which
the Borrower proposes to take with respect thereto, together with a
copy of any notice of such failure required to be provided to the
Pension Benefit Guaranty Corporation;
(i) promptly upon knowledge thereof, notice of (i) any
disputes or claims by the Borrower's customers exceeding $250,000
individually or $750,000 in the
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aggregate during any fiscal year; (ii) credit memos exceeding
$250,000 individually or $750,000 in the aggregate during any fiscal
year; (iii) any goods returned to or recovered by the Borrower
exceeding $250,000 individually or $750,000 in the aggregate during
any fiscal year; and (iv) any change in the persons constituting the
Borrower's officers and directors;
(j) promptly upon knowledge thereof, notice of material loss
of or material damage to any Collateral or other collateral covered by
the Security Documents or of any substantial adverse change in any
Collateral or such other collateral or the prospect of payment thereof;
(k) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall have
sent to its stockholders;
(l) promptly after the sending or filing thereof, copies of
all regular and periodic reports which the Borrower shall file with the
Securities and Exchange Commission or any national securities exchange;
(m) promptly upon knowledge thereof, notice of the Borrower's
violation of any law, rule or regulation, the non-compliance with which
could materially and adversely affect the Borrower's business or its
financial condition; and
(n) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment
schedules, copies of invoices to account debtors, shipment documents
and delivery receipts for goods sold, and such other material, reports,
records or information as the Lender may request.
Section 6.2 BOOKS AND RECORDS; INSPECTION AND EXAMINATION. The
Borrower will keep accurate books of record and account for itself pertaining to
the Collateral and pertaining to the Borrower's business and financial condition
and such other matters as the Lender may from time to time request in which true
and complete entries will be made in accordance with GAAP and, upon the Lender's
request, will permit any officer, employee, attorney or accountant for the
Lender to audit, review, make extracts from or copy any and all corporate and
financial books and records of the Borrower at all times during ordinary
business hours, to send and discuss with account debtors and other obligors
requests for verification of amounts owed to the Borrower, and to discuss the
Borrower's affairs with any of its directors, officers, employees or agents;
PROVIDED, HOWEVER, that the Lender will not discuss the Borrower's affairs with
employees or agents of the Borrower, other than directors, officers or
authorized signatories, without prior notice to the Borrower. The Borrower will
permit the Lender, or its employees, accountants, attorneys or agents, to
examine and inspect any Collateral, other collateral covered by the Security
Documents or any other property of the Borrower at any time during ordinary
business hours.
Section 6.3 ACCOUNT VERIFICATION. The Lender may at any time
and from time to time send or require the Borrower to send requests for
verification of accounts or notices
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of assignment to account debtors and other obligors. The Lender may also at any
time and from time to time telephone account debtors and other obligors to
verify accounts.
Section 6.4 COMPLIANCE WITH LAWS.
(a) The Borrower will (i) comply with the requirements of
applicable laws and regulations, the non-compliance with which would
materially and adversely affect its business or its financial condition
and (ii) use and keep the Collateral, and require that others use and
keep the Collateral, only for lawful purposes, without violation of any
federal, state or local law, statute or ordinance.
(b) Without limiting the foregoing undertakings, the Borrower
specifically agrees that it will comply with all applicable
Environmental Laws and obtain and comply with all permits, licenses and
similar approvals required by any Environmental Laws, and will not
generate, use, transport, treat, store or dispose of any Hazardous
Substances in such a manner as to create any liability or obligation
under the common law of any jurisdiction or any Environmental Law.
Section 6.5 PAYMENT OF TAXES AND OTHER CLAIMS. The Borrower
will pay or discharge, when due, (a) all taxes, assessments and governmental
charges levied or imposed upon it or upon its income or profits, upon any
properties belonging to it (including, without limitation, the Collateral) or
upon or against the creation, perfection or continuance of the Security
Interest, prior to the date on which penalties attach thereto, (b) all federal,
state and local taxes required to be withheld by it, and (c) all lawful claims
for labor, materials and supplies which, if unpaid, might by law become a lien
or charge upon any properties of the Borrower; provided, that the Borrower shall
not be required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which adequate reserves have been set aside.
Section 6.6 MAINTENANCE OF PROPERTIES.
(a) The Borrower will keep and maintain the Collateral, the
other collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition,
repair and working order (normal wear and tear excepted) and will from
time to time replace or repair any worn, defective or broken parts;
provided, however, that nothing in this Section 6.6 shall prevent the
Borrower from discontinuing the operation and maintenance of any of its
properties if such discontinuance is, in the Lender's judgment,
desirable in the conduct of the Borrower's business and not
disadvantageous in any material respect to the Lender.
(b) The Borrower will defend the Collateral against all claims
or demands of all persons (other than the Lender) claiming the
Collateral or any interest therein.
(c) The Borrower will keep all Collateral and other collateral
covered by the Security Documents free and clear of all security
interests, liens and encumbrances except Permitted Liens.
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Section 6.7 INSURANCE. The Borrower will obtain and at all
times maintain insurance with insurers believed by the Borrower to be
responsible and reputable, in such amounts and against such risks as may from
time to time be required by the Lender, but in all events in such amounts and
against such risks as is usually carried by companies engaged in similar
business and owning similar properties in the same general areas in which the
Borrower operates. Without limiting the generality of the foregoing, the
Borrower will at all times maintain business interruption insurance including
coverage for force majeure and keep all tangible Collateral insured against
risks of fire (including so-called extended coverage), theft, collision (for
Collateral consisting of motor vehicles) and such other risks and in such
amounts as the Lender may reasonably request, with any loss payable to the
Lender to the extent of its interest, and all policies of such insurance shall
contain a lender's loss payable endorsement for the Lender's benefit acceptable
to the Lender. All policies of liability insurance required hereunder shall name
the Lender as an additional insured.
Section 6.8 PRESERVATION OF EXISTENCE. The Borrower will
preserve and maintain its existence and all of its rights, privileges and
franchises necessary or desirable in the normal conduct of its business and
shall conduct its business in an orderly, efficient and regular manner.
Section 6.9 DELIVERY OF INSTRUMENTS, ETC. Upon request by the
Lender, the Borrower will promptly deliver to the Lender in pledge all
instruments, documents and chattel papers constituting Collateral, duly endorsed
or assigned by the Borrower.
Section 6.10 COLLATERAL ACCOUNT.
(a) If, notwithstanding the instructions to debtors to make
payments to the Lockbox, the Borrower receives any payments on
Receivables, the Borrower shall deposit such payments into the
Collateral Account. Until so deposited, the Borrower shall hold all
such payments in trust for and as the property of the Lender and shall
not commingle such payments with any of its other funds or property.
(b) Amounts deposited in the Collateral Account shall not bear
interest and shall not be subject to withdrawal by the Borrower, except
after full payment and discharge of all Obligations.
(c) All deposits in the Collateral Account shall constitute
proceeds of Collateral and shall not constitute payment of the
Obligations until applied thereto in accordance with the terms of this
Agreement. The Lender from time to time at its discretion may, after
allowing one (1) Banking Day, apply deposited funds in the Collateral
Account to the payment of the Obligations, in any order or manner of
application satisfactory to the Lender, by transferring such funds to
the Lender's general account.
(d) All items deposited in the Collateral Account shall be
subject to final payment. If any such item is returned uncollected, the
Borrower will immediately pay the Lender, or, for items deposited in
the Collateral Account, the bank
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maintaining such account, the amount of that item, or such bank at
its discretion may charge any uncollected item to the Borrower's
commercial account or other account. The Borrower shall be liable as
an endorser on all items deposited in the Collateral Account,
whether or not in fact endorsed by the Borrower.
Section 6.11 PERFORMANCE BY THE LENDER. If the Borrower at any
time fails to perform or observe any of the foregoing covenants contained in
this Article VI or elsewhere herein, and if such failure shall continue for a
period of ten calendar days after the Lender gives the Borrower written notice
thereof (or in the case of the agreements contained in Sections 6.5, 6.7 and
6.10, immediately upon the occurrence of such failure, without notice or lapse
of time), the Lender may, but need not, perform or observe such covenant on
behalf and in the name, place and stead of the Borrower (or, at the Lender's
option, in the Lender's name) and may, but need not, take any and all other
actions which the Lender may reasonably deem necessary to cure or correct such
failure (including, without limitation, the payment of taxes, the satisfaction
of security interests, liens or encumbrances, the performance of obligations
owed to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrower shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Lender in connection with or as a result of the performance or
observance of such agreements or the taking of such action by the Lender,
together with interest thereon from the date expended or incurred at the
Floating Rate. To facilitate the Lender's performance or observance of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender,
or the Lender's delegate, acting alone, as the Borrower's attorney in fact
(which appointment is coupled with an interest) with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file in the name and on behalf of the Borrower any and all instruments,
documents, assignments, security agreements, financing statements, applications
for insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by the Borrower under this Section 6.11.
Section 6.12 MINIMUM CURRENT RATIO. The Borrower will maintain
its Current Ratio for each month, determined as at the end of each month, at or
above .75 to 1.00 through December 31, 1999, and will maintain its Current Ratio
at or above 1.00 to 1.00 for each month thereafter.
Section 6.13 MINIMUM DEBT SERVICE COVERAGE RATIO. Beginning on
March 31, 1999, the Borrower will maintain during the previous twelve-month
period, determined as at the end of each month, its Debt Service Coverage Ratio
at not less than 1.50 to 1.00.
Section 6.14 MAXIMUM DEBT TO BOOK NET WORTH RATIO. The
Borrower will maintain the ratio of its Debt to its Book Net Worth for each
month, determined as at the end of each month, at not more than 3.5 to 1.00
through December 31, 1999, and will maintain the ratio of its Debt to its Book
Net Worth at not more than 3.00 to 1.00 for each month thereafter.
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Section 6.15 NEW COVENANTS. On or before March 31, 2000, the
Borrower and the Lender shall agree on new covenant levels for Sections 6.12,
6.13, 6.14, and 6.15 for periods after such date. The new covenant levels will
be based on the Borrower's projections for such periods and shall be no less
stringent than the present levels.
Section 6.16 ACCOUNTS AND DOMESTIC MAINTENANCE CONTRACT
RECEIVABLES ATTRIBUTABLE TO THE SALE OF SOFTWARE. The Borrower shall take the
following actions with respect to copyrights:
(a) Establish a reporting and monitoring process with
respect to the Borrower's existing and after-acquired copyrights;
(b) Register all after-acquired copyrights;
(c) Execute additional Copyright Security Agreements as the
Borrower acquires additional copyrights and record such Agreements with
the U.S. Copyright Office; and
(d) Take any additional action necessary to provide the Lender
with a first priority security interest in the Borrower's copyrights
and all products and proceeds thereof.
ARTICLE VII
NEGATIVE COVENANTS
So long as the Obligations shall remain unpaid, or the Credit
Facility shall remain outstanding, the Borrower agrees that, without the
Lender's prior written consent:
Section 7.1 LIENS. The Borrower will not create, incur or
suffer to exist any mortgage, deed of trust, pledge, lien, security interest,
adverse claim, assignment or transfer upon or of any of its assets, now owned or
hereafter acquired, to secure any indebtedness; EXCLUDING, HOWEVER, from the
operation of the foregoing, the following (collectively, "Permitted Liens"):
(a) in the case of any of the Borrower's property which is not
Collateral or other collateral described in the Security Documents,
covenants, restrictions, rights, easements and minor irregularities in
title which do not materially interfere with the Borrower's business or
operations as presently conducted;
(b) mortgages, deeds of trust, pledges, liens, security
interests and assignments in existence on the date hereof and listed in
Schedule 7.1 hereto, securing indebtedness for borrowed money permitted
under Section 7.2;
(c) the Security Interest and liens and security
interests created by the Security Documents;
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(d) purchase money security interests relating to the
acquisition of machinery and equipment of the Borrower not exceeding
the lesser of cost or fair market value thereof not exceeding $250,000
for any one purchase or $2,500,000 in the aggregate during any fiscal
year and so long as no Default Period is then in existence and none
would exist immediately after such acquisition;
(e) pledges or liens incurred to secure payment of workers'
compensation, unemployment insurance, old age pensions or other social
security obligations in the ordinary course of business of the
Borrower; and
(f) banker's liens and rights of setoff incurred on deposits
made in the ordinary course of business of the Borrower.
Section 7.2 INDEBTEDNESS. The Borrower will not incur, create,
assume or permit to exist any indebtedness or liability on account of deposits
or advances or any indebtedness for borrowed money or letters of credit issued
on the Borrower's behalf, or any other indebtedness or liability evidenced by
notes, bonds, debentures or similar obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness of the Borrower in existence on the date
hereof and listed in Schedule 7.2 hereto;
(c) indebtedness relating to liens permitted in accordance
with Section 7.1; and
(d) contingent liabilities permitted under Section 7.3.
Section 7.3 GUARANTIES. The Borrower will not assume,
guarantee, endorse or otherwise become directly or contingently liable in
connection with any obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the Borrower
for deposit or collection or similar transactions in the ordinary
course of business; and
(b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons, in
existence on the date hereof and listed in Schedule 7.2 hereto.
Section 7.4 INVESTMENTS AND SUBSIDIARIES.
(a) The Borrower will not purchase or hold beneficially any
stock or other securities or evidences of indebtedness of, make or
permit to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person, including
specifically but without limitation any partnership, joint venture or
Subsidiary, except:
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(i) investments in direct obligations of the
United States of America or any agency or instrumentality
thereof whose obligations constitute full faith and credit
obligations of the United States of America having a maturity
of one year or less, commercial paper issued by U.S.
corporations rated "A-1" or "A-2" by Standard & Poors
Corporation or "P-1" or "P-2" by Moody's Investors Service or
certificates of deposit or bankers' acceptances having a
maturity of one year or less issued by members of the Federal
Reserve System having deposits in excess of $100,000,000
(which certificates of deposit or bankers' acceptances are
fully insured by the Federal Deposit Insurance Corporation);
(ii) travel advances to the Borrower's officers and
employees not exceeding at any one time for any one employee
$20,000;
(iii) loans to the Borrower's officers and
employees not exceeding at any one time to any one employee
$50,000; and
(iv) advances in the form of progress payments,
prepaid rent not exceeding six months or security deposits.
(b) The Borrower will not create or permit to exist any
Subsidiary without giving the Lender 10 days prior written notice
thereof, other than those subsidiaries listed on the attached Schedule
5.5.
Section 7.5 DIVIDENDS. The Borrower will not declare or pay
any dividends (other than dividends payable solely in stock of the Borrower)
without prior written notice to the Lender on any class of its stock or make any
payment on account of the purchase, redemption or other retirement of any shares
of such stock or make any distribution in respect thereof, either directly or
indirectly.
Section 7.6 SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS
OPERATIONS. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than the
sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The Borrower will not in any manner
transfer any property without prior or present receipt of full and adequate
consideration.
Section 7.7 INTELLECTUAL PROPERTY. The Borrower will not sell,
assign or grant licenses to use, any of its applications for patents, patents,
copyrights, trademarks, trade secrets, trade names or other intellectual
property to any other Person other than in the ordinary course of its business.
Section 7.8 CONSOLIDATION AND MERGER; ASSET ACQUISITIONS. The
Borrower will not consolidate with or merge into any Person, or permit any other
Person to merge into it, or acquire (in a transaction analogous in purpose or
effect to a consolidation or merger) all or substantially all the assets of any
other Person, provided that, any Subsidiary may merge
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into any other Subsidiary, and the Borrower may merge with any Subsidiary if
the Borrower is the surviving corporation following such merger.
Section 7.9 SALE AND LEASEBACK. The Borrower will not enter
into any arrangement, directly or indirectly, with any other Person whereby
the Borrower shall sell or transfer any real or personal property, whether
now owned or hereafter acquired, and then or thereafter rent or lease as
lessee such property or any part thereof or any other property which the
Borrower intends to use for substantially the same purpose or purposes as the
property being sold or transferred.
Section 7.10 RESTRICTIONS ON NATURE OF BUSINESS. The
Borrower will not engage in any line of business materially different from
that presently engaged in by the Borrower and will not purchase, lease or
otherwise acquire assets not related to its business.
Section 7.11 ACCOUNTING. The Borrower will not adopt any
material change in accounting principles other than as required by GAAP. The
Borrower will not adopt, permit or consent to any change in its fiscal year.
Section 7.12 DISCOUNTS, ETC. After notice from the Lender,
the Borrower will not grant any discount, credit or allowance to any customer
of the Borrower or accept any return of goods sold, or modify, amend,
subordinate, cancel or terminate the obligation of any account debtor or
other obligor of the Borrower.
Section 7.13 DEFINED BENEFIT PENSION PLANS. The Borrower
will not adopt, create, assume or become a party to any defined benefit
pension plan, unless disclosed to the Lender pursuant to Section 5.12.
Section 7.14 OTHER DEFAULTS. The Borrower will not permit
any breach, default or event of default to occur under any note, loan
agreement, indenture, lease, mortgage, contract for deed, security agreement
or other contractual obligation binding upon the Borrower which, after
expiration of any applicable grace period without cure or waiver, would
permit a Person to exercise its remedies thereunder.
Section 7.15 PLACE OF BUSINESS; NAME. The Borrower will not
transfer its chief executive office or principal place of business, or during
a Default Period, move, relocate, close or sell any business location. The
Borrower will not permit any tangible Collateral or any records pertaining to
the Collateral to be located in any state or area in which, in the event of
such location, a financing statement covering such Collateral would be
required to be, but has not in fact been, filed in order to perfect the
Security Interest. The Borrower will not change its name without thirty (30)
days prior written notice to the Lender.
Section 7.16 ORGANIZATIONAL DOCUMENTS. The Borrower will
not amend its articles of incorporation and bylaws without prior written
approval of the Lender. The Borrower will not become an S Corporation within
the meaning of the Internal Revenue Code of 1986, as amended.
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ARTICLE VIII
EVENTS OF DEFAULT, RIGHTS AND REMEDIES
Section 8.1 EVENTS OF DEFAULT. "Event of Default",
wherever used herein, means any one of the following events:
(a) Default in the payment of the Obligations when they become
due and payable;
(b) Failure to pay when due any amount specified in Section
2.3 relating to the Borrower's Obligation of Reimbursement, or failure
to pay immediately when due or upon termination of the Credit Facility
any amounts required to be paid for deposit in the Special Account
under Section 2.4 or;
(c) Default in the payment of any fees, commissions, costs or
expenses required to be paid by the Borrower under this Agreement;
(d) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement;
(e) The Borrower shall be or become insolvent, or admit in
writing its inability to pay its debts as they mature, or make an
assignment for the benefit of creditors; or the Borrower shall apply
for or consent to the appointment of any receiver, trustee, or similar
officer for it or for all or any substantial part of its property; or
such receiver, trustee or similar officer shall be appointed without
the application or consent of the Borrower; or the Borrower shall
institute (by petition, application, answer, consent or otherwise) any
bankruptcy, insolvency, reorganization, arrangement, readjustment of
debt, dissolution, liquidation or similar proceeding relating to it
under the laws of any jurisdiction; or any such proceeding shall be
instituted (by petition, application or otherwise) against the
Borrower; or any judgment, writ, warrant of attachment or execution or
similar process shall be issued or levied against a substantial part of
the property of the Borrower;
(f) A petition shall be filed by or against the Borrower under
the United States Bankruptcy Code naming the Borrower as debtor;
(g) Any representation or warranty made by the Borrower in
this Agreement or by the Borrower (or by any of its officers) in any
agreement, certificate, instrument or financial statement or other
statement contemplated by or made or delivered pursuant to or in
connection with this Agreement shall prove to have been incorrect in
any material respect when deemed to be effective;
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(h) The rendering against the Borrower of a final judgment,
decree or order for the payment of money in excess of $50,000 or
$100,000 in the aggregate and the continuance of such judgment, decree
or order unsatisfied and in effect for any period of 30 consecutive
days without a stay of execution;
(i) A default under any bond, debenture, note or other
evidence of indebtedness of the Borrower owed to any Person other than
the Lender, or under any indenture or other instrument under which any
such evidence of indebtedness has been issued or by which it is
governed, or under any lease of any of the Premises, and the expiration
of the applicable period of grace, if any, specified in such evidence
of indebtedness, indenture, other instrument or lease which has a
material adverse effect on the Borrower;
(j) Any Reportable Event, which the Lender determines in good
faith might constitute grounds for the termination of any Plan or for
the appointment by the appropriate United States District Court of a
trustee to administer any Plan, shall have occurred and be continuing
30 days after written notice to such effect shall have been given to
the Borrower by the Lender; or a trustee shall have been appointed by
an appropriate United States District Court to administer any Plan; or
the Pension Benefit Guaranty Corporation shall have instituted
proceedings to terminate any Plan or to appoint a trustee to administer
any Plan; or the Borrower shall have filed for a distress termination
of any Plan under Title IV of ERISA; or the Borrower shall have failed
to make any quarterly contribution required with respect to any Plan
under Section 412(m) of the Internal Revenue Code of 1986, as amended,
which the Lender determines in good faith may by itself, or in
combination with any such failures that the Lender may determine are
likely to occur in the future, result in the imposition of a lien on
the Borrower's assets in favor of the Plan;
(k) An event of default shall occur under any Security
Document or under any other security agreement, mortgage, deed of
trust, assignment or other instrument or agreement securing any
obligations of the Borrower hereunder or under any note;
(l) The Borrower shall liquidate, dissolve, terminate or
suspend its business operations or otherwise fail to operate its
business in the ordinary course, or sell all or substantially all of
its assets, without the Lender's prior written consent;
(m) The Borrower shall fail to pay, withhold, collect or remit
any tax or tax deficiency when assessed or due (other than any tax
deficiency which is being contested in good faith and by proper
proceedings and for which it shall have set aside on its books adequate
reserves therefor) or notice of any state or federal tax liens shall be
filed or issued;
(n) Default in the payment of any amount owed by the Borrower
to the Lender other than any indebtedness arising hereunder;
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(o) Any event or circumstance with respect to the Borrower
shall occur such that the Lender shall believe in good faith that the
prospect of payment of all or any part of the Obligations or the
performance by the Borrower under the Loan Documents is impaired or any
material adverse change in the business or financial condition of the
Borrower shall occur; or
(p) Any breach, default or event of default by or attributable
to any Affiliate under any agreement between such Affiliate and the
Lender.
Section 8.2 RIGHTS AND REMEDIES. During any Default Period,
the Lender may exercise any or all of the following rights and remedies:
(a) the Lender may, by notice to the Borrower, declare the
Commitment to be terminated, whereupon the same shall forthwith
terminate;
(b) the Lender may, by notice to the Borrower, declare the
Obligations to be forthwith due and payable, whereupon all Obligations
shall become and be forthwith due and payable, without presentment,
notice of dishonor, protest or further notice of any kind, all of which
the Borrower hereby expressly waives;
(c) the Lender may, without notice to the Borrower and without
further action, apply any and all money owing by the Lender to the
Borrower to the payment of the Obligations;
(d) the Lender may make demand upon the Borrower and,
forthwith upon such demand, the Borrower will pay to the Lender in
immediately available funds for deposit in the Special Account pursuant
to Section 2.12 an amount equal to the aggregate maximum amount
available to be drawn under all Letters of Credit then outstanding,
assuming compliance with all conditions for drawing thereunder;
(e) the Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including, without limitation, the right to take possession of
Collateral, or any evidence thereof, proceeding without judicial
process or by judicial process (without a prior hearing or notice
thereof, which the Borrower hereby expressly waives) and the right to
sell, lease or otherwise dispose of any or all of the Collateral, and,
in connection therewith, the Borrower will on demand assemble the
Collateral and make it available to the Lender at a place to be
designated by the Lender which is reasonably convenient to both
parties;
(f) the Lender may exercise and enforce its rights and
remedies under the Loan Documents; and
(g) the Lender may exercise any other rights and remedies
available to it by law or agreement.
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Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (e) or (f) of Section 8.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.
Section 8.3 CERTAIN NOTICES. If notice to the Borrower of any
intended disposition of Collateral or any other intended action is required by
law in a particular instance, such notice shall be deemed commercially
reasonable if given (in the manner specified in Section 9.3) at least ten
calendar days before the date of intended disposition or other action.
ARTICLE IX
MISCELLANEOUS
Section 9.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or
delay by the Lender in exercising any right, power or remedy under the Loan
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy under the
Loan Documents. The remedies provided in the Loan Documents are cumulative and
not exclusive of any remedies provided by law.
Section 9.2 AMENDMENTS, ETC. No amendment, modification,
termination or waiver of any provision of any Loan Document or consent to any
departure by the Borrower therefrom or any release of a Security Interest shall
be effective unless the same shall be in writing and signed by the Lender, and
then such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given. No notice to or demand on the Borrower
in any case shall entitle the Borrower to any other or further notice or demand
in similar or other circumstances.
Section 9.3 ADDRESSES FOR NOTICES, ETC. Except as otherwise
expressly provided herein, all notices, requests, demands and other
communications provided for under the Loan Documents shall be in writing and
shall be (a) personally delivered, (b) sent by first class United States mail,
(c) sent by overnight courier of national reputation, or (d) transmitted by
telecopy, in each case addressed or telecopied to the party to whom notice is
being given at its address or telecopier number as set forth below:
If to the Borrower:
FOURTH SHIFT Corporation
Two Meridian Crossings
Minneapolis, Minnesota 55423-3962
Telecopier: (612) 851-1584
Attention: David G. Latzke
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If to the Lender:
Norwest Business Credit, Inc.
Roanoke Building, Suite 400
Seventh Street and Marquette Avenue
Minneapolis, Minnesota 55479-0152
Telecopier: 612-341-2472
Attention: Kate F. Wahlberg
or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II shall not be
effective until received by the Lender.
Section 9.4 FURTHER DOCUMENTS. The Borrower will from time to
time execute and deliver or endorse any and all instruments, documents,
conveyances, assignments, security agreements, financing statements and other
agreements and writings that the Lender may reasonably request in order to
secure, protect, perfect or enforce the Security Interest or the Lender's rights
under the Loan Documents (but any failure to request or assure that the Borrower
executes, delivers or endorses any such item shall not affect or impair the
validity, sufficiency or enforceability of the Loan Documents and the Security
Interest, regardless of whether any such item was or was not executed, delivered
or endorsed in a similar context or on a prior occasion). Without limiting the
generality of the foregoing, the Borrower will obtain any additional landlord's
disclaimers and consents as the Lender may request in its sole and absolute
discretion.
Section 9.5 COLLATERAL. This Agreement does not contemplate a
sale of accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application.
Section 9.6 COSTS AND EXPENSES. The Borrower agrees to pay
on demand in writing all reasonable costs and expenses, including (without
limitation) reasonable attorneys' fees, incurred by the Lender in connection
with the Obligations, this Agreement,
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the Loan Documents, any Letters of Credit, and any other document or
agreement related hereto or thereto, and the transactions contemplated
hereby, including without limitation all such costs, expenses and fees
incurred in connection with the negotiation, preparation, execution,
amendment, administration, performance, collection and enforcement of the
Obligations and all such documents and agreements and the creation,
perfection, protection, satisfaction, foreclosure or enforcement of the
Security Interest. The Lender acknowledges receipt of $15,000 toward payment
of the fees, costs and expenses described herein and in Section 2.7(f).
Section 9.7 INDEMNITY. In addition to the payment of expenses
pursuant to Section 9.6, the Borrower agrees to indemnify, defend and hold
harmless the Lender, and any of its participants, parent corporations,
subsidiary corporations, affiliated corporations, successor corporations, and
all present and future officers, directors, employees, attorneys and agents of
the foregoing (the "Indemnitees") from and against any of the following, except
for loss or damage resulting from the gross negligence or willful misconduct of
the Indemnitees (collectively, "Indemnified Liabilities"):
(i) any and all transfer taxes, documentary taxes,
assessments or charges made by any governmental authority by
reason of the execution and delivery of the Loan Documents or
the making of the Advances;
(ii) any claims, loss or damage to which any
Indemnitee may be subjected if any representation or warranty
contained in Section 5.14 proves to be incorrect in any
respect or as a result of any violation of the covenant
contained in Section 6.4(b); and
(iii) any and all other liabilities, losses,
damages, penalties, judgments, suits, claims, costs and
expenses of any kind or nature whatsoever (including, without
limitation, the reasonable fees and disbursements of counsel)
in connection with the foregoing and any other investigative,
administrative or judicial proceedings, whether or not such
Indemnitee shall be designated a party thereto, which may be
imposed on, incurred by or asserted against any such
Indemnitee, in any manner related to or arising out of or in
connection with the making of the Advances and the Loan
Documents or the use or intended use of the proceeds of the
Advances.
If any investigative, judicial or administrative proceeding arising from any
of the foregoing is brought against any Indemnitee, upon such Indemnitee's
request, the Borrower, or counsel designated by the Borrower and satisfactory
to the Indemnitee, will resist and defend such action, suit or proceeding to
the extent and in the manner directed by the Indemnitee, at the Borrower's
sole costs and expense. Each Indemnitee will use its best efforts to
cooperate in the defense of any such action, suit or proceeding. If the
foregoing undertaking to indemnify, defend and hold harmless may be held to
be unenforceable because it violates any law or public policy, the Borrower
shall nevertheless make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible
under applicable law. The Borrower's obligation under this Section 9.7 shall
survive the
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termination of this Agreement and the discharge of the Borrower's other
obligations hereunder.
Section 9.8 PARTICIPANTS. The Lender and its participants, if
any, are not partners or joint venturers, and the Lender shall not have any
liability or responsibility for any obligation, act or omission of any of its
participants. All rights and powers specifically conferred upon the Lender may
be transferred or delegated to any of the Lender's participants, successors or
assigns.
Section 9.9 EXECUTION IN COUNTERPARTS. This Agreement and
other Loan Documents may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which counterparts, taken together, shall constitute but one and the same
instrument.
Section 9.10 BINDING EFFECT; ASSIGNMENT; COMPLETE AGREEMENT;
EXCHANGING INFORMATION. The Loan Documents shall be binding upon and inure to
the benefit of the Borrower and the Lender and their respective successors and
assigns, except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the Lender's prior written consent.
This Agreement, together with the Loan Documents, comprises the complete and
integrated agreement of the parties on the subject matter hereof and supersedes
all prior agreements, written or oral, on the subject matter hereof. Without
limiting the Lender's right to share information regarding the Borrower and its
Affiliates with the Lender's participants, accountants, lawyers and other
advisors, the Lender, Norwest Corporation, and all direct and indirect
subsidiaries of Norwest Corporation, may exchange any and all information they
may have in their possession regarding the Borrower and its Affiliates, and the
Borrower waives any right of confidentiality it may have with respect to such
exchange of such information.
Section 9.11 SEVERABILITY OF PROVISIONS. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
Section 9.12 HEADINGS. Article and Section headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
Section 9.13 GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF
JURY TRIAL. The Loan Documents shall be governed by and construed in
accordance with the substantive laws (other than conflict laws) of the State
of Minnesota. The parties hereto hereby (i) consent to the personal
jurisdiction of the state and federal courts located in the State of
Minnesota in connection with any controversy related to this Agreement; (ii)
waive any argument that venue in any such forum is not convenient, (iii)
agree that any litigation initiated by the Lender or the Borrower in
connection with this Agreement or the other Loan Documents shall be venued in
either the District Court of Hennepin County, Minnesota, or the United States
District Court, District of Minnesota, Fourth Division; and (iv) agree that a
final judgment in any such suit, action or proceeding shall be conclusive and
may be enforced in
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other jurisdictions by suit on the judgment or in any other manner provided
by law. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly
authorized as of the date first above written.
NORWEST BUSINESS CREDIT, INC. FOURTH SHIFT CORPORATION
By By
--------------------------------- ---------------------------
Kate F. Wahlberg Its
Its Assistant Vice President -------------------
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Table of Exhibits and Schedules
<TABLE>
<S> <C>
Exhibit A Form of Revolving Note
Exhibit B Form of Compliance Certificate
Exhibit C Premises
-------------------
Schedule 2.15 Sources and Uses of Funds
Schedule 5.1 Trade Names, Chief Executive Office, Principal Place of
Business, and Locations of Collateral
Schedule 5.2 Capital Stock
Schedule 5.5 Subsidiaries
Schedule 7.1 Permitted Liens
Schedule 7.2 Permitted Indebtedness and Guaranties
</TABLE>
<PAGE>
Exhibit A to Credit and Security
Agreement
REVOLVING NOTE
$10,000,000 Minneapolis, Minnesota
March 31, 1999
For value received, the undersigned, FOURTH SHIFT
Corporation, a Minnesota corporation (the "Borrower"), hereby promises to pay
on the Termination Date under the Credit Agreement (defined below), to the
order of Norwest Business Credit, Inc., a Minnesota corporation (the
"Lender"), at its main office in Minneapolis, Minnesota, or at any other
place designated at any time by the holder hereof, in lawful money of the
United States of America and in immediately available funds, the principal
sum of Ten Million Dollars and No Cents ($10,000,000) or, if less, the
aggregate unpaid principal amount of all Revolving Advances made by the
Lender to the Borrower under the Credit Agreement (defined below) together
with interest on the principal amount hereunder remaining unpaid from time to
time, computed on the basis of the actual number of days elapsed and a
360-day year, from the date hereof until this Note is fully paid at the rate
from time to time in effect under the Credit and Security Agreement of even
date herewith (as the same may hereafter be amended, supplemented or restated
from time to time, the "Credit Agreement") by and between the Lender and the
Borrower. The principal hereof and interest accruing thereon shall be due and
payable as provided in the Credit Agreement. This Note may be prepaid only in
accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit
Agreement, which provides, among other things, for acceleration hereof. This
Note is the Revolving Note referred to in the Credit Agreement. This Note is
secured, among other things, pursuant to the Credit Agreement and the
Security Documents as therein defined, and may now or hereafter be secured by
one or more other security agreements, mortgages, deeds of trust, assignments
or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection,
including attorneys' fees and legal expenses in the event this Note is not
paid when due, whether or not legal proceedings are commenced.
Except as provided in the Credit Agreement, presentment or
other demand for payment, notice of dishonor and protest are expressly waived.
FOURTH SHIFT CORPORATION
By
-------------------------------
Its
-----------------
A-1
<PAGE>
Exhibit B to Credit and Security
Agreement
COMPLIANCE CERTIFICATE
To: Kate F. Wahlberg
Norwest Business Credit, Inc.
Date: ,
------------------ -------
Subject: FOURTH SHIFT Corporation
Financial Statements
In accordance with our Credit and Security Agreement dated
as of March 31, 1999 (the "Credit Agreement"), attached are the financial
statements of FOURTH SHIFT Corporation (the "Borrower") as of and for
________________, _____ (the "Reporting Date") and the year-to-date period
then ended (the "Current Financials"). All terms used in this certificate
have the meanings given in the Credit Agreement.
I certify that the Current Financials have been prepared in
accordance with GAAP, subject to year-end audit adjustments, and fairly
present the Borrower's financial condition and the results of its operations
as of the date thereof.
EVENTS OF DEFAULT. (Check one):
/ / The undersigned does not have knowledge of the
occurrence of a Default or Event of Default under the Credit
Agreement.
/ / The undersigned has knowledge of the occurrence of a
Default or Event of Default under the Credit Agreement and
attached hereto is a statement of the facts with respect to
thereto.
FINANCIAL COVENANTS. I further hereby certify as follows:
1. MINIMUM CURRENT RATIO. Pursuant to Section 6.12 of the
Credit Agreement, as of the Reporting Date, the Borrower's Current
Ratio was _____ to 1.00 which / / satisfies / / does not satisfy
the requirement that such ratio be at or above .75 to 1.00 on the
Reporting Date for each month through December 31, 1999, and at or
above 1.00 to 1.00 on the Reporting Date for each month thereafter.
B-1
<PAGE>
2. MINIMUM DEBT SERVICE COVERAGE RATIO. Pursuant to Section
6.13 of the Credit Agreement, as of the Reporting Date, the Borrower's
Debt Service Coverage Ratio was _____ to 1.00 which / / satisfies
/ / does not satisfy the requirement that such ratio be at not less
than 1.50 to 1.00 on the Reporting Date.
3. MAXIMUM DEBT TO BOOK NET WORTH RATIO. Pursuant to Section
6.14 of the Credit Agreement, as of the Reporting Date, the ratio of
the Borrower's Debt to its Book Net Worth was _____ to 1.00 which / /
satisfies / / does not satisfy the requirement that on the Reporting
Date such ratio be no more than 3.5 to 1.00 for each month through
December 31, 1999, and 3.00 to 1.00 for each month thereafter.
Attached hereto are all relevant facts in reasonable detail
to evidence, and the computations of the financial covenants referred to
above. These computations were made in accordance with GAAP.
FOURTH SHIFT CORPORATION
By
--------------------------------
David G. Latzke
Its Chief Financial Officer
B-2
<PAGE>
Exhibit C to Credit and Security
Agreement
PREMISES
The Borrower's principal place of business referred to in the
Credit and Security Agreement is legally described as follows:
Lot 2, Block 3, Cloverleaf Addition, according to the recorded plat thereof, and
situate in Hennepin County, Minnesota.
C-1
<PAGE>
Schedule 2.15 to Credit and Security
Agreement
Sources and Uses of Funds
Silicon Valley Bank $0
Ordinary Working Capital Purposes $10,000,000
2.15-1
<PAGE>
Schedule 5.1 to Credit and Security
Agreement
Trade Names, Chief Executive Office, Principal Place of Business, and
Locations of Collateral
TRADE NAMES
FOURTH SHIFT Corporation
[To be completed by Borrower]
CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS
FOURTH SHIFT Corporation
Two Meridian Crossings
Minneapolis, Minnesota 55423-3962
OTHER INVENTORY AND EQUIPMENT LOCATIONS
FOURTH SHIFT ASIA COMPUTER CORPORATION, LTD.
Wan Hai Office Building
No. 1, Section 8 Wei Di Road
Xi Nan Lou, Hexi District
Tianjin, 300201
Telephone: 011-86-22-8231-9852
Fax: 011-86-22-2831-9853
Contact Person: Yang Yong Ping
FOURTH SHIFT CORPORATION (WORLDWIDE HEADQUARTERS OFFICE)
Two Meridian Crossings
Minneapolis, MN 55423-3962
Telephone: 612-851-1500
Fax: 612-851-1500
Contact Person: Ibby Hammett (612-851-4853)
5.1-1
<PAGE>
FOURTH SHIFT EUROPE
U.K. - Reading
Fourth Shift House
11 Worton Drive
Reading, Berkshire
RG2 0LX
Telephone: 011-44-118-975-4000
Fax: 011-44-118-975-4010
Contact Person: Peter Francis
FOURTH SHIFT CORPORATION
3000 Executive Parkway
Suite 140
San Ramon, CA 94583
Telephone: 925-866-0111
Fax: 925-866-0727
Contact Person: Kay Mladinich
FOURTH SHIFT DE MEXICO S.A. DE C.V.
Carr, Picacho Ajusco No. 130
Desp. 604
Col Jardines en la Montana
Telephone: 011-52-55-631-3725
Fax: 011-52-631-4027
Contact Person: Juan Manuel Sevilla (General Manager)
5.1-2
<PAGE>
Schedule 5.2 to Credit and Security
Agreement
CAPITAL STOCK OF SHAREHOLDERS WITH A 15% OR GREATER INTEREST
IN THE BORROWER
<TABLE>
<CAPTION>
- ------------------------------ ------------------------ -------------------------
TYPE/CLASS/SERIES OF STOCK NUMBER OF AUTHORIZED NUMBER OF ISSUED AND
SHARES OUTSTANDING SHARE
- ------------------------------ ------------------------ -------------------------
<S> <C> <C>
Common None
- ------------------------------ ------------------------ -------------------------
Preferred None
- ------------------------------ ------------------------ -------------------------
- ------------------------------ ------------------------ -------------------------
- ------------------------------ ------------------------ -------------------------
</TABLE>
5.2-1
<PAGE>
Schedule 5.5 to Credit and Security
Agreement
SUBSIDIARIES
NAME OF SUBSIDIARY
FOURTH SHIFT Asia Computer
Corporation, Ltd.
FOURTH SHIFT U.K.
Limited
FOURTH SHIFT de Mexico
S.A. de C.V.
FOURTH SHIFT South
Africa Johannesburg, S.A.
FOURTH SHIFT Asia
Pacific(S) PTE, LTD
FOURTH SHIFT Canada,
Ltd.
FOURTH SHIFT Corporation
SDN.BHD.
5.1-2
<PAGE>
Schedule 7.1 to Credit and Security
Agreement
PERMITTED LIENS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
NAME JURISDICTION SECURED PARTY FILING NO. FILING DATE COLLATERAL OR LIEN AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VoiceCom VMX Credit Corporation 1714798 11/7/94 Specific Equipment
Systems, Inc.
Fourth Shift Co.
- ---------------------------------------------------------------------------------------------------------------------------------
Fourth Shift Hewlett-Packard Company 1715293 11/8/94 [not legible]
Corporation
- ---------------------------------------------------------------------------------------------------------------------------------
Hewlett-Packard Company 1731221 1/18/95 [not legible]
- ---------------------------------------------------------------------------------------------------------------------------------
Winthrop Resources Corp 1732152 1/23/95 Lease agreement and specific
equipment
- ---------------------------------------------------------------------------------------------------------------------------------
Sanwa Leasing Corp 1735262 2/3/95 Computer software, other
computers
- ---------------------------------------------------------------------------------------------------------------------------------
Sanwa Leasing Corp 1741288 2/28/95 Specific Equipment
- ---------------------------------------------------------------------------------------------------------------------------------
Norwest Equipment Finance, 1766637 6/5/95 Specific Equipment
Inc.
- ---------------------------------------------------------------------------------------------------------------------------------
Sanwa Leasing Corp 1771103 6/23/95 Computers
- ---------------------------------------------------------------------------------------------------------------------------------
AT&T Capital Leasing 1780009 8/2/95 Specific equipment
Services, Inc.
- ---------------------------------------------------------------------------------------------------------------------------------
Hewlett Packard Co 1788017 9/8/95 Lessee's right and interest
in equipment
- ---------------------------------------------------------------------------------------------------------------------------------
Sanwa Leasing Corp 1788545 9/11/95 Computers
- ---------------------------------------------------------------------------------------------------------------------------------
Sanwa Leasing Corp 1795768 10/12/95 5 Bell computers
- ---------------------------------------------------------------------------------------------------------------------------------
Sanwa Leasing Corp 1803406 11/13/95 6 Bell computers
- ---------------------------------------------------------------------------------------------------------------------------------
Lease Partners Inc. 1821784 2/1/96 Specific equipment
- ---------------------------------------------------------------------------------------------------------------------------------
Sanwa Leasing Corp 1833000 3/18/96 3 bell computers
- ---------------------------------------------------------------------------------------------------------------------------------
GTE Leasing Corp 1836966 4/2/96 Specific equipment
- ---------------------------------------------------------------------------------------------------------------------------------
7.1-1
<PAGE>
- ---------------------------------------------------------------------------------------------------------------------------------
Lease Partners Inc. 1858722 6/21/96 Specific equipment
- ---------------------------------------------------------------------------------------------------------------------------------
Sanwa Leasing Corp 1859218 6/24/96 4 Bell computers
- ---------------------------------------------------------------------------------------------------------------------------------
Sanwa Leasing Corp 1859220 6/24/96 Computers
- ---------------------------------------------------------------------------------------------------------------------------------
Sanwa Leasing Corp 1869667 8/9/96 Computers
- ---------------------------------------------------------------------------------------------------------------------------------
Winthrop Resources Corp 1904319 12/30/96 Lease agreement, Fourth
Shift lessee
- ---------------------------------------------------------------------------------------------------------------------------------
Norwest Equipment Finance, 1921956 3/5/97 Specific equipment
Inc.
- ---------------------------------------------------------------------------------------------------------------------------------
Norwest Equipment Finance, 1921957 3/5/97 Specific equipment
Inc.
- ---------------------------------------------------------------------------------------------------------------------------------
Richfield Bank & Trust Co 1926376 3/21/97 Lease/Protective filing
- ---------------------------------------------------------------------------------------------------------------------------------
IBM Credit Corp 1961680 7/30/97 IBM equipment
- ---------------------------------------------------------------------------------------------------------------------------------
Richfield Bank & Trust Co 1987878 11/12/97 Lease/Protective filing
- ---------------------------------------------------------------------------------------------------------------------------------
IBM Credit Corp 2003826 1/13/98 Specific equipment
- ---------------------------------------------------------------------------------------------------------------------------------
IBM Credit Corp 2040359 5/27/98 Specific equipment
- ---------------------------------------------------------------------------------------------------------------------------------
Tokai Financial Services, 2078276 10/23/98 All office equipment leased
Inc. under the master lease
- ---------------------------------------------------------------------------------------------------------------------------------
California Winthrop Resources Corp 9503060047 1/23/95 Specific equipment
Secretary of State
- ---------------------------------------------------------------------------------------------------------------------------------
Norwest Equipment Finance, 9515860478 6/5/95 Specific equipment
Inc.
- ---------------------------------------------------------------------------------------------------------------------------------
Winthrop Resources Corp 9700260243 12/30/96 Lease agreement
- ---------------------------------------------------------------------------------------------------------------------------------
Lease Partners Inc. 9617661097 6/19/96 Specific Equipment
- ---------------------------------------------------------------------------------------------------------------------------------
Norwest Equipment Finance, 9707160989 3/12/97 Specific Equipment
Inc.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7.1-2
<PAGE>
Schedule 7.2 to Credit and Security
Agreement
PERMITTED INDEBTEDNESS AND GUARANTIES
INDEBTEDNESS
<TABLE>
<CAPTION>
CREDITOR PRINCIPAL MATURITY MONTHLY COLLATERAL
AMOUNT DATE PAYMENT
<S> <C> <C> <C> <C>
None
</TABLE>
GUARANTIES
<TABLE>
<CAPTION>
PRIMARY OBLIGOR AMOUNT AND DESCRIPTION OF BENEFICIARY OF GUARANTY
OBLIGATION GUARANTEED
<S> <C> <C>
None
</TABLE>
7.2-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Statements of Operations contained in the
Company's Form 10-Q as of and for the three-month period ended March 31, 1999
and is qualified in entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,248
<SECURITIES> 0
<RECEIVABLES> 13,416<F1>
<ALLOWANCES> 0
<INVENTORY> 71
<CURRENT-ASSETS> 24,808
<PP&E> 16,380
<DEPRECIATION> (11,553)
<TOTAL-ASSETS> 33,068
<CURRENT-LIABILITIES> 24,245
<BONDS> 0
0
0
<COMMON> 103
<OTHER-SE> 7,968
<TOTAL-LIABILITY-AND-EQUITY> 33,068
<SALES> 5,938
<TOTAL-REVENUES> 16,977
<CGS> 1,095
<TOTAL-COSTS> 6,304
<OTHER-EXPENSES> 27
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> 683
<INCOME-TAX> 180
<INCOME-CONTINUING> 503
<DISCONTINUED> 30
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 533
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
<FN>
<F1>These assets represent amounts net of allowance for doubtful accounts.
</FN>
</TABLE>
