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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended January 31, 1997
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 0-22532
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ULTIMATE ELECTRONICS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 84-0585211
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State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
321A WEST 84TH AVENUE, THORNTON, COLORADO 80221
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(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (303) 412-2500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
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Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 2, 1997 was approximately $13,642,938. The number of
outstanding shares of Common Stock as of April 2, 1997 was 6,995,000.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Annual Report to Stockholders for the fiscal year ended January
31, 1997 are incorporated by reference into Parts II, III and IV of this report.
Portions of the Registrant's definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders to be held June 10, 1997 are incorporated by reference
into Part III of this report.
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PART I
ITEM 1. BUSINESS
The Company is a leading specialty retailer of home entertainment and consumer
electronics in Colorado, Idaho, Nevada, New Mexico, Oklahoma and Utah. The
Company operates eighteen stores, including nine stores in Colorado under the
trade name SoundTrack and nine stores outside Colorado under the trade name
Ultimate Electronics. Since 1993, the Company has opened nine Ultimate
Electronics stores and relocated and expanded four of its Colorado stores to the
larger Ultimate Electronics format. These larger format stores occupy 32,000 to
52,000 square feet (with 18,000 to 30,000 square feet of selling space). The
Company believes that these larger format, full service, upscale stores have
enhanced its ability to compete in new markets as an audio, video and consumer
electronics specialist and will serve as the prototype for the Company's future
expansion. With the exception of the four relocated stores, the Company's
Colorado stores range in size from 10,000 to 16,600 square feet (6,500 to 9,900
square feet of selling space). The Company intends to relocate or consolidate
and expand most of the remaining Colorado stores in the next three years.
The Company strives to appeal to a wide range of customers with an emphasis on
selling mid to upscale products. The Company believes that its larger format
stores enable it to differentiate itself from its competitors by providing a
comprehensive selection of name brand consumer electronics, with an emphasis on
limited distribution upscale brands, as well as by offering an extensive range
of customer services and by displaying multiple home theater and audio
demonstration rooms. The Company believes that these factors, together with its
open and uncrowded merchandise displays and its policy of matching the lowest
prices of its competitors, make it an attractive alternative to
appliance/electronics superstores and mass merchants selling consumer
electronics.
For the year ending January 31, 1997, sales were $261.2 million, a 4% increase
from sales of $251.8 million for the same period in the prior year. The
increase in sales during fiscal 1997 was due primarily to the opening of new
stores in Utah, Idaho and Oklahoma since July 1995 and the relocation and
expansion of three of its Colorado stores in the same period. Comparable store
sales decreased 16% for the year ended January 31, 1997 compared to a decrease
of 2% in comparable store sales for the year ended January 31, 1996. The
decrease in comparable store sales over the past year was due in part to a
sluggish retail environment for certain consumer electronics products and
increased competition in the Company's markets.
BUSINESS STRATEGY
The Company's strategy is to position itself as the upscale, full service
consumer electronics alternative to its competitors and to satisfy consumer
demand for increasingly sophisticated consumer electronics products,
particularly in the core categories of audio and video. Key elements of its
business strategy include:
EXTENSIVE PRODUCT SELECTION. The Company is committed to offering an extensive
selection of high quality, brand name home entertainment and consumer
electronics products. The Company offers over 6,000 stock keeping units
("SKU's") representing approximately 200 brand names, a significant portion of
which are limited distribution brands that are only available through selected
retailers. As a result, the Company carries a larger selection of full-
featured, high quality products than is generally available at the Company's
competitors. Each product category includes a wide range of price points.
EXCELLENT CUSTOMER SERVICE. Since its inception, the Company has been committed
to providing excellent customer service through well-trained sales consultants
and an extensive range of customer services. The Company provides its new sales
consultants with more than two weeks of intensive classroom training and
continues with on-the-job instruction in product and vendor knowledge, sales
techniques and customer service. Most of the Company's stores have service
personnel who are able to evaluate and complete simple repairs on site.
Additionally, the Company has regional service centers in Albuquerque, Boise,
Las Vegas, Salt Lake City and Tulsa enabling it to provide fast service. The
Company also provides a 30-day money-back satisfaction guarantee, an in-stock
guarantee on advertised items, home delivery and set-up, home theater and audio
installation and design, home satellite installation, mobile electronics
installation and extended service contracts.
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ADVERTISING AND MARKETING. The Company's advertising strategy stresses
nationally recognized brands at competitive prices primarily through
newspaper, radio and direct mail media. The Company is a significant
newspaper advertiser in the markets it serves, producing all of its print
advertising through its in-house advertising department. The Company also
employs an outside advertising agency that produces and places the Company's
radio commercials. The Company's marketing programs are designed to create an
awareness of the Company's comprehensive selection of high quality, brand name
merchandise, as well as its competitive pricing. The Company typically
advertises a broader selection of audio and video products than its competitors
and presents a blend of aggressive promotional starting price points on
competing products with higher price points on more fully featured products.
The Company has spent substantial funds on advertising and marketing in various
forms of media to establish name recognition for its new stores and intends to
continue to do so as it enters new markets.
UPSCALE STORE FORMAT. The Company has developed a store format to emphasize and
merchandise mid to upscale products. Each store has displays designed to
provide the customer with a full spectrum of the Company's products upon
entering a store. These displays allow customers to make extensive side-by-side
product comparisons. The Company's new and recently relocated stores have
substantially larger selling space, providing customers with an uncluttered
presentation of the latest technology and featuring multiple demonstration rooms
dedicated to home theater and mobile electronics products.
COMPETITIVE PRICING. The Company emphasizes competitive product pricing and
reinforces this strategy with extensive advertising and a "60-day price
guarantee." The Company monitors pricing at competing stores on a weekly basis
through pricing surveys and adjusts its prices by market as necessary. The
Company believes that competitive pricing enables it to attract new customers as
well as to maintain customer loyalty.
EXPANSION STRATEGY
The Company intends to continue its expansion into select metropolitan areas in
the Rocky Mountain, Midwest and Southwest regions with its larger format stores.
As part of this expansion process, on March 4, 1997, the Company announced the
signing of a definitive merger agreement with Audio King Corporation ("Audio
King") pursuant to which the Company will acquire all of the shares of Audio
King for stock and cash. Audio King, a consumer specialty electronics company,
operates 11 retail stores; eight in Minnesota, two in Iowa and one in South
Dakota. In fiscal 1998, the Company expects to relocate or consolidate and
expand two of its Colorado stores to the larger store format. The Company
expects to expand, consolidate or relocate and expand several of the Audio
King stores. The Company may also change the name of one or more of the
Audio King stores to Ultimate Electronics at any point in time to optimize its
marketing efforts.
The Company's expansion strategy focuses on identification of attractive
metropolitan markets in the Rocky Mountain, the Midwest and the Southwest
regions based on an evaluation of local market opportunities, as well as the
size, strength and merchandising philosophy of potential competitors. The
Company obtains demographic analyses of major metropolitan areas to determine
new store locations and potential sales volumes, as well as the optimum
number of stores to open in a specific market. The Company's specific
location strategy focuses on anchor positions in highly visible shopping
centers or a free-standing location near a regional shopping mall. In
choosing sites within a market, the Company applies standard site selection
criteria which take into account numerous factors including local
demographics, traffic patterns and overall retail activity.
Capital expenditures to relocate and expand existing stores in fiscal 1998
are expected to average approximately $2.0 million per store, excluding
preopening costs ranging from $100,000 to $300,000. Preopening costs include
such items as advertising prior to opening, recruitment and training of new
employees, and any costs of early termination of store leases. Effective
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February 1, 1995, the Company changed its method of accounting for preopening
expenses and began expensing preopening costs as incurred prior to the
relocation or opening of a new store. The initial inventory requirement for
the Company's new larger format stores averages approximately $2.4 million
per store, approximately $1.0 million of which is financed through trade
credit.
MERCHANDISING
PRODUCTS. The Company offers its customers a comprehensive selection of high
quality, brand name television, video, home audio, mobile electronics and home
office products. This selection consists of over 6,000 SKUs, representing
approximately 200 brand names. The Company offers customers a wide range of
price points within each product category, with the greatest depth in middle to
higher priced items. Within its product categories, the Company carries and
actively promotes new models as they become available. The Company does not
carry home appliances.
The following table, which is derived from the Company's internal sales records,
indicates the percentage of sales in each major product group for the Company's
last three fiscal years. The percentages include installation and other
services in these categories. Historical percentages may not be indicative of
the Company's future product mix.
FISCAL YEAR ENDED JANUARY 31,
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1997 1996 1995
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PRODUCT CATEGORY
Television/Satellite 29% 27% 23%
Audio 22% 23% 26%
Home Office 16% 16% 16%
Video 13% 15% 15%
Mobile 12% 11% 12%
Other 8% 8% 8%
PRICING. The Company emphasizes competitive pricing on high visibility items
and reinforces this strategy with extensive advertising. The Company monitors
pricing at competing stores on a weekly basis through pricing surveys and
adjusts its prices by market as necessary. The Company's commitment to offer
competitive prices is supported by its "60-day price guarantee", under which the
Company refunds 110% of the difference between the original purchase price and
any locally available lower price for the same item under the same purchase
conditions. Sales and other special events, which the Company conducts from
time to time, may have lower than normal prices on selected products and product
categories.
PURCHASING. Substantially all of the Company's products are purchased directly
from manufacturers. Each of the Company's buyers has responsibility for
specified product categories. Buyers are assisted by a management information
system which provides them with current inventory quantity, price and sales
information by SKU, thus allowing them to react quickly to market changes. The
Company works closely with its manufacturers and forecasts purchases on a non-
binding basis up to one year in advance.
The Company is a member of a volume buying group, Progressive Retailers'
Organization, consisting of other companies similar to the Company with respect
to the type of merchandise sold. Membership in this organization has enabled
the Company to obtain volume rebates, special buys and access to close-out and
final production items. As a result, the Company believes it is able to obtain
competitive pricing and terms.
During the fiscal year ended January 31, 1997, the Company's ten largest
suppliers accounted for approximately 64% of the merchandise purchased by the
Company. Two of the Company's suppliers, Sony and Mitsubishi, each accounted
for more than 10% of its merchandise mix. The master agreements under which the
Company operates with each of such suppliers are terminable upon 30 to 60 days
notice by either party. The Company does not have commitments of longer than
one year with any of its product suppliers, as is customary in the industry.
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STORE OPERATIONS
STORES. The Company's larger format stores each occupy 32,000 to 52,000 square
feet, with 18,000 to 30,000 square feet of selling space. The Company has
developed this store format to emphasize and merchandise mid to upscale
products. Each store has displays designed to provide the customer with a full
spectrum of the Company's products upon entering a store. These stores have
additional home audio and car stereo demonstration rooms, additional home
theater rooms, expanded portable electronics displays and expanded computer and
home office displays as compared to the smaller store format. In addition, the
new stores offer home installation, home satellite installation, a home planning
center, home theater furniture, and an expanded area for large-screen
televisions. The remaining space is dedicated to a designated play area for
children, a car installation facility, a service facility, a store warehouse and
general office space.
With the exception of four relocated stores, the Company's Colorado stores range
in size from 10,000 to 16,600 square feet (6,500 to 9,900 square feet of selling
space). The Company intends to relocate and expand most of its remaining
Colorado stores in the next three years. The selling space in the Company's
Colorado stores typically contains two audio and two car stereo demonstration
rooms, one home entertainment theater and an automobile equipped with the latest
in car audio and car security products.
DISTRIBUTION. The Company currently distributes products to all of its stores
from a 175,000 square foot warehouse located in Thornton, Colorado, a suburb of
Denver. All of the Company's stores in Colorado are located within
approximately 60 miles of this warehouse. For stores over 100 miles away
from Denver, the Company uses contract carriers for distribution from its
warehouse.
MANAGEMENT INFORMATION SYSTEMS. The Company's management information system,
using proven third party software, was installed in August 1990. During the
fall of 1994, the Company increased its system capabilities significantly with
the installation of Unix-based Hewlett Packard computer hardware. The Company
believes that this system will support the Company's anticipated growth. This
on-line system connects all of the Company's facilities through digital phone
lines which allows sales consultants to determine the location of all of the
Company's inventory at any time. Pricing can be changed immediately in each
geographical market by the Company's buyers and store management to react to
competitor pricing. New signage can be generated on a daily basis.
CUSTOMER SERVICE
Since its inception, the Company has been committed to providing excellent
customer service through well-trained sales consultants and a broad range of
customer services.
SALES CONSULTANTS. The Company provides its sales consultants with a minimum of
two weeks of intensive classroom training which begins with an orientation from
the Company's executive officers and continues with instruction in areas such as
technical knowledge by product category and vendor, policies and procedures of
the Company and various other sales techniques. On an ongoing basis, sales
consultants attend in-house training sessions conducted by dedicated in-house
trainers and manufacturers' representatives and also receive sales, product and
other information in daily store meetings. Certain sales consultants specialize
in particular product categories to provide customers with greater technical
assistance.
The Company's sales consultants are compensated pursuant to a flexible incentive
pay plan with commissions determined on the basis of sales and gross margins.
The Company also motivates its sales consultants by providing opportunities for
advancement within the Company. All of the Company's store management has been
promoted from within the Company. For sales consultants employed by the Company
in excess of one year, turnover has historically been less than 30% per year.
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SERVICES. The Company supports its product sales by providing many important
customer services, including home delivery and set-up, home theater and audio
installation and design, home satellite installation, mobile electronics
installation, extended service contracts and regional service centers that offer
in-home and carry-in repair services. The Company also provides in-store
product instruction and will provide follow-up instruction at a customer's home
upon request.
Virtually all merchandise purchased from the Company may be taken to any of the
Company's stores for repair, whether or not the product is under the
manufacturer's warranty or an extended service contract. In order to provide
maximum service to its customers, the Company has regional service centers in
Albuquerque, Boise, Las Vegas, Salt Lake City and Tulsa. The Company's main
service facility, located at its distribution center in Thornton, provides
backup for each of the Company's regional service centers. The Company employs
over 100 full-time employees in connection with the Company's service business.
Each service department is staffed with product specialists capable of making
complex repairs. In addition, the Company operates a fleet of approximately 50
customer service vehicles to provide in-home repair and delivery, installation
and setup of home satellites, home theater components and televisions.
The Company offers extended service contracts to its customers for most
categories of its products. The extended service contracts cover services or
time periods not covered by the manufacturer's warranty on such products and are
non-cancellable. These contracts are administered for the Company by Warrantech
Corporation, an unaffiliated third party, which pays for the repair service.
Warrentech is required by its agreement with the Company to maintain insurance
to protect the Company in the event that Warrentech fails to fulfill its
obligations under the extended service contracts and the Company is a named
loss-payee under the agreement. The Company sells the extended service
contracts to Warrentech on a non-recourse basis. Gross margins from the sale of
extended service contracts are higher than the average gross margins of the
Company's other products.
The Company has a private label credit card which is financed, operated and
serviced by GE Capital Commercial Finance, Inc. ("GECAF"). The Company entered
into an agreement with GECAF which provides that GECAF will retain all credit
risk associated with the private label credit card. In addition, certain
manufacturers sponsor their own private label credit cards. These arrangements
permit the Company to provide its customers with financing promotions, including
interest-free and deferred payments, without using its working capital.
Approximately 32% of the Company's sales were purchased through these private
label and manufacturer sponsored credit cards in the last twelve months.
COMPETITION
The Company operates in a highly competitive and price sensitive industry. The
Company faces competition from mass merchants, department stores, specialty
stores, appliance/electronics stores and smaller independent merchants. The
Company considers its primary competitors to include consumer electronics
retailers such as Best Buy, Circuit City, and Incredible Universe (which opened
its stores in 1995 in Colorado and Utah and closed these stores in February of
1997), as well as mass merchants such as Sears and Montgomery Ward. The
Company's primary competitors have greater financial and other resources than
the Company. Many of these competitors have recently entered the Company's
markets and continue to add stores, mainly Circuit City in Utah (April 1995),
Colorado (August 1995) and New Mexico (November 1996). Additionally, Las Vegas
has experienced new competition from The Good Guys! with three new stores since
September of 1995, as well as one new store from each of Circuit City and Best
Buy. For fiscal 1997, the Company's operating results were adversely affected
by such increased competition and there can be no assurance that the Company's
operating results will not be adversely affected in fiscal 1998 and beyond by
such increased competition. In addition, if such competitors seek to gain or
retain market share by reducing prices, the Company may be required to reduce
its prices, thereby reducing gross margins and profits. In addition, as the
Company expands into markets where the Company's name may not be recognized, its
success will depend in part on its ability to compete with established and any
future competitors in such markets.
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EMPLOYEES
As of January 31, 1997, the Company employed approximately 1,200 persons,
approximately 1,060 of whom were store, customer delivery or service employees
and approximately 140 of whom were main warehouse or corporate personnel. The
Company considers its employee relations to be good. Most employees, other than
corporate and store support personnel, are paid pursuant to a flexible pay plan.
The Company believes that it provides working conditions and wages that compare
favorably with those of other companies within the industry. The Company's
employees do not have a collective bargaining agreement.
SERVICE MARKS
Ultimate Electronics-Registered Trademark- is a registered service mark and
SoundTrack-SM- is a service mark of the Company.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements which are not historical facts contained in this report are forward
looking statements that involve risks and uncertainties that could cause actual
results to differ from projected results. Factors that could cause actual
results to differ materially include, among others, the consummation of the
proposed merger with Audio King, the effects of the proposed merger, the ability
of the Company to combine the two companies profitably, as well as risks
regarding increases in promotional activities of competitors, changes in
consumer buying attitudes, the presence or absence of new products or product
features in the Company's merchandise categories, changes in vendor support for
advertising and promotional programs, changes in the Company's merchandise sales
mix, general economic conditions, the cost and availability of suitable store
locations, cost effective and timely construction of new stores, fluctuations in
consumer demand, the Company's ability to address adequately all of the changing
demands that its planned expansion will impose, the results of financing efforts
and other risk factors detailed in the Company's Securities and Exchange
Commission filings.
As provided for under the Private Securities Litigation Reform Act of 1995, the
Company wishes to caution investors that the following important factors, among
others, in some cases have affected and in the future could affect the Company's
actual results of operations and cause such results to differ materially from
those anticipated in forward-looking statements made in this document and
elsewhere by or on behalf of the Company:
a) Competition. The Company encounters intense competition in all
product categories and competes with national and other companies. Some of the
companies with which the Company competes have greater capital and other
resources.
b) Dependence on Key Suppliers. The Company is dependent on certain
suppliers for delivery of products that contribute significantly to the
Company's net sales. While the Company believes that alternative suppliers are
available, the loss of a key supplier could have an adverse effect on the
Company's business.
c) Industry Factors. The presence or lack of new products or product
features in the product categories that the Company sells has an impact on the
Company's business, as well as the product mix of actual merchandise sold.
d) Economic and Market Conditions. The Company's business is affected by
changes in general economic conditions such as consumer attitudes towards the
economy in general, consumer credit availability, interest rates and inflation.
e) Litigation. Adverse results in significant litigation matters would
affect the Company's earnings to the extent that insurance is not present or
available.
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ITEM 2. PROPERTIES
As of January 31, 1997, the Company operated nine stores in Colorado, four
stores in Utah, two stores in Las Vegas, Nevada, and one store each in
Albuquerque, New Mexico, Boise, Idaho and Tulsa, Oklahoma. Each store, other
than the store located in Thornton, Colorado, is leased. In addition to the
store located at 321 W. 84th Avenue, the Company's Thornton facility is
comprised of 175,000 square feet of warehouse space, 30,000 square feet for
the Company's business offices, 21,000 square feet devoted to a service
department and 18,000 square feet for a training and employee facility and is
secured by the bonds payable. The following table sets forth data regarding
the Company's store locations.
YEAR APPROXIMATE APPROXIMATE LEASE
ORIGINALLY TOTAL RETAIL SELLING EXPIRATION
CURRENT STORE LOCATIONS OPENED SQUARE FEET SQUARE FEET DATE(1)
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COLORADO:
6490 Wadsworth Blvd.
Arvada, CO (2) 1968 14,500 9,500 2006
15022 E. Mississippi Ave.
Aurora, CO (2) (3) 1983 10,900 6,500 1997
1955 28th Street
Boulder, CO 1985 34,700 20,300 2047
1230 N. Academy Blvd.
Colorado Springs, CO 1989 14,900 9,800 1999
1370 S. Colorado Blvd.
Denver, CO 1976 31,600 16,700 2004
4606 S. Mason St.
Fort Collins, CO 1990 16,600 8,400 2005
8262 S. University Blvd.
Littleton, CO (3) 1986 16,600 9,900 2007
8196 W. Bowles Ave.
Littleton, CO 1984 39,100 22,600 2027
321 W. 84th Ave.
Thornton, CO 1985 40,300 25,900 N/A
IDAHO:
1085 N. Milwaukee Ave.
Boise, ID 1995 37,100 (4) 19,500 2025
NEVADA:
2555 E. Tropicana Ave.
Las Vegas, NV 1995 37,300 (4) 17,900 2025
741 S. Rainbow Blvd.
Las Vegas, NV 1994 31,500 17,600 2014
NEW MEXICO:
3821 Menaul Blvd., N.E.
Albuquerque, NM 1994 37,100 (4) 17,700 2014
OKLAHOMA:
10021 E. 71st St.
Tulsa, OK 1995 51,700 (4) 30,400 2025
UTAH:
879 W. Hill Field Rd.
Layton, UT 1995 33,800 18,600 2025
6284 S. State St.
Murray, UT 1994 32,200 18,000 2024
1375 S. State St.
Orem, UT 1993 32,900 17,100 2010
1130 E. Brickyard Rd.
Salt Lake City, UT 1993 33,400 (4) 18,200 2013
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(1) Including renewal options.
(2) These stores are expected to be relocated during fiscal 1998.
(3) The store at 8262 S. University Blvd may be closed if the Company is able
to sublease the space since the Company believes that the customer base
for this area may be better served from the larger format store that will
replace the Company's Aurora store.
(4) Includes regional service center.
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Construction of the Company's main warehouse, business office, service center
and store location in Thornton, Colorado was completed in early fiscal 1997.
This facility, in addition to the retail store, is comprised of 175,000 square
feet of warehouse space, 30,000 square feet for the Company's business offices,
21,000 square feet devoted to a service department and 18,000 square feet for a
training and employee facility. The Company leases its store locations in
Colorado Springs, Colorado and Fort Collins, Colorado from an affiliated party
(see "Certain Relationships and Related Transactions"). The Company is also in
the process of negotiating leases to relocate stores and, from time to time,
analyzing lease opportunities in new markets (see "Business - Expansion
Strategy" and "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Liquidity and Capital Resources").
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings. The Company is,
however, involved in various routine claims and legal actions which arise in the
ordinary course of business. Management of the Company intends to vigorously
defend these claims and believes that the ultimate disposition of these matters
will not have a material adverse effect on the Company's financial condition,
results of operations or cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Certain information required by Part II is omitted from this Report in that the
Registrant will file the 1997 Annual Report to Stockholders (the "1997 Annual
Report to Stockholders"), which report is attached hereto as Exhibit 13, and
certain information included therein is incorporated herein by reference. Only
those sections of the 1997 Annual Report to Stockholders which specifically
address the items set forth herein are incorporated by reference.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The section labeled "Stockholder Information" appearing on the inside back cover
of the 1997 Annual Report to Stockholders is incorporated herein by reference.
As of April 2, 1997, there were approximately 2,860 holders of record of the
Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The section labeled "Selected Financial Data" appearing on page 11 of the 1997
Annual Report to Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The section labeled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing on pages 12 through 14 of the 1997 Annual
Report to Stockholders is incorporated herein by reference.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and financial statements included on pages 15
through 24 of the Company's 1997 Annual Report to Stockholders are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in that the
Registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement which
specifically address the items set forth herein are incorporated by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
section labeled "Directors and Executive Officers" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
section labeled "Compensation of Directors and Executive Officers" excluding the
"Board Compensation Committee Report on Executive Compensation" and the
"Performance Graph" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section labeled "Principal Stockholders" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section labeled "Certain Relationships and Related Transactions" in the Proxy
Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS: The following financial statements of the
Company included in the Registrant's 1997 Annual Report to Stockholders
are incorporated by reference to Item 8:
- Statements of Income for the fiscal years ended January 31, 1997,
1996 and 1995.
- Balance Sheets at January 31, 1997 and 1996.
- Statements of Stockholders' Equity for the fiscal years ended
January 31, 1997, 1996 and 1995.
- Statements of Cash Flows for the fiscal years ended January 31,
1997, 1996 and 1995.
- Notes to Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES: The following financial statement
schedule for the fiscal years ended January 31, 1997, 1996 and 1995 is
filed as part of this Form 10-K:
SCHEDULE DESCRIPTION PAGE
-------- ----------- ----
II Valuation and Qualifying Accounts 14
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the
related instructions or are inapplicable and therefore have been
omitted.
10
<PAGE>
3. EXHIBITS: The following exhibits are filed pursuant to Item 601 of
Regulation S-K.
EXHIBIT # DESCRIPTION OF EXHIBITS
--------- -----------------------
3(i) Amended and Restated Certificate of Incorporation of the
Company. (3)
3(ii) Bylaws of the Company. (3)
4.1 Form of Indenture, dated as of March 23, 1995, between the
Registrant and Colorado National Bank, as Trustee for the
10.25% First Mortgage Bonds Due 2005. (2)
4.2 Rights Agreement, dated as of January 31, 1995, by and between
the Company and Norwest Bank Minnesota, National Association,
as rights agent. (5)
4.3 Amendment No. 1, dated as of January 31, 1995, to the Rights
Agreement, dated as of January 31, 1995, by and between the
Company and Norwest Bank Minnesota, N.A., as rights agent. (6)
10.1 Lease Agreement, dated April 1, 1989, between the Registrant and
William J. and Barbara A. Pearse. (3)
10.2 Lease Agreement, dated October 13, 1989, between the Registrant
and William J. and Barbara A. Pearse. (3)
10.4 Form of Authorized Dealer Agreement between the Registrant and
Panasonic Communications and Systems Company, a Division of
Matsushita Electric Corporation of America. (3)
10.5 Form of Sony Corporation of America Consumer Sales Company Dealer
Agreement between the Registrant and Sony Consumer Sales Company,
a division of Sony Corporation of America. (3)
10.6 Form of Dealer Agreement between the Registrant and Mitsubishi
Electric Sales America, Inc. (3)
10.7 Form of Employee Stock Option Plan. (3)
10.8 Form of Non-employee Directors' Stock Option Plan. (4)
10.9 Ultimate Electronics, Inc. Rule 401(k) Benefit Plan. (3)
10.10 Form of Confidentiality and Non-Competition Agreement. (4)
10.12 Form of Deed of Trust, Assignment of Rents and Security Agreement
between the Registrant, as Grantor, and Colorado National Bank,
as beneficiary. (2)
10.13 Purchase and Sale Agreement, dated May 2, 1995, between the
Company and Cirque Property L.C. (6)
10.14 Commercial Promissory Note and Security Agreement between the
Company and Colorado National Leasing, Inc., dated November 1,
1995. (7)
10.15 Commercial Promissory Note and Security Agreement between the
Company and Colorado National Leasing, Inc., dated December 19,
1995. (7)
10.16 Commercial Promissory Note and Security Agreement between the
Company and Colorado National Leasing, Inc., dated January 22,
1996. (7)
10.17 Commercial Promissory Note and Security Agreement between the
Company and Colorado National Leasing, Inc., dated February 28,
1996. (7)
10.18 Credit Agreement between Ultimate Electronics, Inc. and Norwest
Bank Colorado, National Association and Norwest Business Credit,
Inc., dated November 21, 1996. (1)
11 Computation of Earnings Per Share. (1)
13 Company's 1997 Annual Report to Stockholders. (1)
23.1 Consent of Independent Auditors. (1)
27 Financial Data Schedule (1)
11
<PAGE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the period from
January 31, 1996 to January 31, 1997.
- -------------------
(1) Filed herewith.
(2) Incorporated by reference to Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (File No. 33-88740), filed with the
Commission on March 14, 1995.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-68314), filed with the Commission on September 2,
1993.
(4) Incorporated by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (File No. 33-68314), filed with the
Commission on October 7, 1993.
(5) Incorporated by reference to the Registrant's Form 8-K filed with the
Commission on February 10, 1995.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the period ended April 30, 1995.
(7) Exhibits filed with the Company's Form 10-K Annual Report for the fiscal
year ended January 31, 1996, and are incorporated herewith by reference.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Thornton, State
of Colorado, on this 8th day of April, 1997.
ULTIMATE ELECTRONICS, INC.
By: /s/ William J. Pearse
-------------------------------------
William J. Pearse
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
By: /s/ William J. Pearse Date: April 8, 1997
-------------------------------------
William J. Pearse
Chairman of the Board, Chief
Executive Officer and a Director
(Principal Executive Officer)
By: /s/ David J. Workman Date: April 8, 1997
-------------------------------------
David J. Workman
President, Chief Operating Officer
and a Director
By: /s/ Alan E. Kessock Date: April 8, 1997
-------------------------------------
Alan E. Kessock
Vice President, Chief Financial
Officer, Secretary and a Director
By: /s/ Robert W. Beale Date: April 8, 1997
-------------------------------------
Robert W. Beale
Director
By: /s/ Randall F. Bellows Date: April 8, 1997
-------------------------------------
Randall F. Bellows
Director
13
<PAGE>
ULTIMATE ELECTRONICS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
================================================================================
CHARGED
BALANCE AT TO COSTS BALANCE
BEGINNING AND DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) PERIOD
- --------------------------------------------------------------------------------
Year ended January 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $251 $196 $267(1) $180
Reserve for cash and cooperative
advertising discounts 96 213 237(1) 72
Allowance for obsolete inventory 344 6 84(2) 266
-------------------------------------
Total $691 $415 $588 $518
-------------------------------------
-------------------------------------
Year ended January 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $146 $403 $298(1) $251
Reserve for cash and cooperative
advertising discounts 181 140 225(1) 96
Allowance for obsolete inventory 150 263 69(2) 344
-------------------------------------
Total $477 $806 $592 $691
-------------------------------------
-------------------------------------
Year ended January 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts $101 $218 $173(1) $146
Reserve for cash and cooperative
advertising discounts 144 67 30(1) 181
Allowance for obsolete inventory 150 15 15(2) 150
-------------------------------------
Total $395 $300 $218 $477
-------------------------------------
-------------------------------------
- -------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Write-offs of obsolete inventory.
14
<PAGE>
EXHIBIT 10.18 - CREDIT AGREEMENT BETWEEN ULTIMATE ELECTRONICS, INC.
AND NORWEST BANK COLORADO, NATIONAL ASSOCIATION AND NORWEST BUSINESS
CREDIT, INC.
DATED NOVEMBER 21, 1996
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is dated as of the 21st day of November, 1996, and is
by and among ULTIMATE ELECTRONICS, INC., a Delaware corporation (the
"Borrower"), NORWEST BANK COLORADO, NATIONAL ASSOCIATION (the "Lender") and
NORWEST BUSINESS CREDIT, INC. as administrative agent for the Lender
("Administrative Agent").
RECITALS
The Borrower, the Lender and First Security National Bank of Utah, N.A.
("First Security") are parties to a Credit Agreement dated as of July 24, 1995,
pursuant to which the Lender and First Security agreed to make loans and other
financial accommodations available to the Borrower (the "Original Credit
Agreement").
The parties hereto and First Security have agreed to terminate the Original
Credit Agreement and the Lender has agreed to redocument the credit facilities
provided by the Original Credit Agreement in the name of the Lender with the
Administrative Agent, First Security and, possibly, other lenders purchasing
participations in the loans and other financial accommodations provided by the
Lender.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. The following terms, as used herein, shall
have the following meanings:
"Acceptable Facility" means a distribution facility or retail store
(a) either (i) owned by the Borrower or (ii) leased by the Borrower subject
to a lease acceptable to the Administrative Agent pursuant to which the
landlord under such lease has executed a landlord's waiver acceptable to
the Administrative Agent, and (b) identified in the Security Agreement as a
location at which Inventory will be located or otherwise identified in
writing by the Borrower to the Administrative Agent as a location at which
Inventory will be located.
<PAGE>
"Acceptable Inventory" means consumer electronics products held for
sale, net of any unearned vendors' discounts (a) in which the Lender has a
valid perfected first priority security interest, (b) which are located in
an Acceptable Facility and (c) which are subject to no other lien,
encumbrance or security interest. Without limiting the foregoing, the
following shall not be Acceptable Inventory:
(1) Supplies and packaging inventory;
(2) Inventory that is damaged, defective, obsolete or not
currently saleable in the normal course of the Borrower's operations;
(3) Inventory that the Borrower has returned, has attempted to
return, is in the process of returning or intends to return to the
vendor thereof, including, without limitation, factory returns;
(4) Inventory in an amount equal to the Borrower's invoice
variance reserves;
(5) Discontinued inventory in an amount in excess of 12% of
total Inventory (determined after deducting unearned vendors'
discounts);
(6) Free goods;
(7) That portion of the Borrower's aggregate service and parts
Inventory, and Inventory consisting of cellular phones, promotional
items, custom items and third party warranties which, in the
aggregate, exceeds 12% of total Inventory (determined after deducting
unearned vendors' discounts); and
(8) Inventory otherwise deemed ineligible by the Administrative
Agent in its sole discretion; provided, however, that unless an Event
of Default or event that with notice or the passage of time would
constitute an Event of Default then exists, the Administrative Agent
will give Borrower (20) days' notice of any change in the types or
amount of Inventory which shall be Acceptable Inventory and shall base
any such change on the Administrative Agent's good faith judgment as
to the liquidiation value of such Inventory.
"Accommodation Obligation" means as applied to any Person, any
obligation of such Person guaranteeing or intended to guarantee any
Indebtedness, leases, dividends or other obligations ("primary
obligations") or to hold harmless the owner of such primary obligation
against loss in respect thereof. The amount of any Accommodation
Obligation shall be deemed to be an amount equal to the stated or
determinable amount of the primary obligation in respect of which such
Accommodation Obligation is made
2
<PAGE>
or, if not stated or determinable, the maximum anticipated liability in
respect thereof (assuming such Person is required to perform thereunder) as
determined by the Administrative Agent.
"Administrative Agent" means Norwest Business Credit, Inc. in its
capacity as administrative agent for the Lender hereunder.
"Advance" means an advance by the Lender to the Borrower pursuant to
Section 2 or any advance to fund any draw on any Letter of Credit.
"Agreement" shall mean this Credit Agreement and all amendments,
restatements, modification and supplements hereto which may from time to
time become effective hereafter in accordance with the terms hereof.
"Base Rate" shall have the meaning set forth in the Note.
"Base Rate Advance" shall mean an Advance which initially bears
interest at the Base Rate.
"Bond Indebtedness" means Indebtedness not in excess of $13,000,000
incurred in connection with Borrower's issuance of $13,000,000 of first
mortgage bonds due January 31, 2005.
"Borrowing Base" shall mean, and at any time and subject to change
from time to time in the Administrative Agent's sole discretion, 70% of the
value of the Acceptable Inventory determined in accordance with GAAP on a
basis consistent with accounting practices used in the financial statements
of the Borrower referred to in Section 5.8 hereof, subject to audit, review
and adjustment based thereon by the Administrative Agent; provided,
however, that unless an Event of Default or event that with notice or the
passage of time would constitute an Event of Default then exists, the
Administrative Agent will give Borrower (20) days' notice of any change in
the method of calculation of the Borrowing Base, and will base any
reduction in the percentage of Acceptable Inventory used in determining the
Borrowing Base on the Administrative Agent's good faith judgment as to the
liquidation value of such Acceptable Inventory.
"Borrowing Base Certificate" shall mean a schedule of the Borrower's
Acceptable Inventory, which shall be executed by an authorized officer of
the Borrower, the form of which is attached hereto as Exhibit A.
"Business Day" shall have the same meaning set forth in the Note.
3
<PAGE>
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
any successor statute, and the regulations promulgated thereunder and the
rulings issued thereunder, as amended from time to time.
"Collateral" shall have the meaning set forth in the Security
Agreement.
"Collateral Account" shall have the meaning set forth in Section
4.1(a)(iii).
"Collateral Account Agreement" shall have the meaning set forth in
Section 4.1(a)(iii).
"Commitment" shall mean $35,000,000.
"Default Rate" shall have the meaning set forth in the Note.
"EBITDA" means earnings from continuing operations before interest
expense, taxes, amortization and depreciation expense and any miscellaneous
and/or extraordinary gains and losses for the Borrower calculated in
accordance with GAAP, and in each case, on the basis of the four fiscal
quarters immediately preceding the date of calculation.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, or any successor statute and the regulations promulgated
and rulings issued thereunder, as amended from time to time.
"ERISA Affiliate" shall mean any trade or business (whether or not
incorporated) which is a member of a controlled or affiliated group of
which the Borrower or any Subsidiary of the Borrower is a member and which
is under common control, or required to be aggregated with, with the
Borrower or any Subsidiary of the Borrower within the meaning of Section
414(b), (c), (m), or (o) of the Code.
"ERISA Event" shall mean (a) a "reportable event" as such term is
described in Section 4043 of ERISA (other than a "reportable event" not
subject to the provision for 30-day notice to the PBGC under 29 C.F.R.
2615) with respect to any Plan or (b) the withdrawal of the Borrower, any
Subsidiary of the Borrower or any ERISA Affiliate of either of them from a
Plan subject to Section 4063 of ERISA during a plan year in which it was a
"substantial employer," as such term is defined in Section 4001(a)(2) of
ERISA, or the incurrence of liability by the Borrower, any Subsidiary of
the Borrower or any ERISA Affiliate of either of them under Section 4064 of
ERISA upon the termination of a Multiple Employer Plan, or (c) an event
described in Section 4068(a) of ERISA, or (d) the filing of a notice of
intent to terminate a Plan pursuant to Section 4041 or 4041A of ERISA, the
treatment of a Plan amendment as a termination under Section 4041 of
4
<PAGE>
ERISA or (e) the failure by the Borrower, a Subsidiary of the Borrower or
any ERISA Affiliate of either of them to make a payment to a Plan pursuant
to Section 302(f)(1) of ERISA or (f) the adoption of any amendment to a
Plan requiring the provision of security to such Plan pursuant to Section
307 of ERISA, or (g) the imposition of any liability under Title IV of
ERISA, other than PBGC premiums due but not delinquent under Section 4007
of ERISA, upon the Borrower, any Subsidiary of the Borrower, or any ERISA
Affiliate of either of them, or (h) any other event or condition which
might constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Plan, or (i) an
application for a funding waiver or an extension of any amortization period
pursuant to Section 412 of the Code with respect to any Plan, or (j) a
nonexempt prohibited transaction that occurs with respect to any Plan for
which the Borrower or any Subsidiary of the Borrower may be directly or
indirectly liable.
"Events of Default" shall mean any and all events of default described
in Section 7 hereof.
"Financial Covenants" means the covenants of the Borrower set forth in
Section 6.13 of this Agreement.
"Funded Indebtedness" means all Indebtedness of the Borrower other
than Manufacturer Payables and trade payables and accrued expenses incurred
in the ordinary course of business.
"Indebtedness" of any Person means, without duplication (a)
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, (b) the principal portion of obligations of
such Person as lessee under leases which have been or should be, in
accordance with GAAP, recorded as capital leases, (c) all Accommodation
Obligations of such Person in respect of borrowed money, (d) at the date of
such determination thereof the aggregate amount which may then be drawn
under, plus the aggregate amount of all unreimbursed drawings in respect
of, letters of credit issued for the account of such Person, and (e) all
indebtedness, obligations or other liabilities of such Person or of others
for borrowed money secured by a lien on any property of such Person,
whether or not such indebtedness, obligations or liabilities are assumed by
such Person.
"Inventory" shall have the meaning set forth in the Security
Agreement.
"Insufficiency" means, with respect to any Plan, the excess of its
benefit liabilities, as defined in Section 4001(a)(16) of ERISA over the
current value of such Plan's assets, determined in accordance with the
assumptions used by the Plan's actuaries for funding the Plan pursuant to
Section 412 of the Code for the applicable plan year.
5
<PAGE>
"Lender" shall mean Norwest Bank Colorado, National Association.
"Letter of Credit Application" means the form of an application for a
Letter of Credit which shall be the form of application then generally used
by the Lender, or, if Norwest Minnesota is to issue the Letter of Credit,
Norwest Minnesota.
"Letter of Credit Liability" means, without duplication (a) the
maximum amount available to be drawn under all outstanding Letters of
Credit (converted to U.S. Dollars based on the exchange rate generally
offered by the Lender at the time Letter of Credit Liability is
determined), PLUS (b) the maximum face amount of any Letters of Credit that
the Lender has committed in writing to issue or to cause to be issued on
behalf of the Borrower (even if such commitment is conditioned or otherwise
qualified).
"Letters of Credit" means collectively all Letters of Credit issued
pursuant to the terms of this Agreement.
"LIBOR Rate" shall have the meaning set forth in the Note.
"LIBOR Rate Advance" means an Advance which initially bears interest
at the LIBOR Rate.
"Loan" means the loan made by the Lender to the Borrower pursuant to
this Agreement consisting of all Advances hereunder and all other amounts
advanced pursuant hereto.
"Loan Documents" means this Agreement, the Note, the Security
Agreement, the Collateral Account Agreement, and any and all other
documents, instruments or agreements evidencing, governing, securing or
otherwise relating to the Loan, as any such document may be amended,
extended, renewed, restated or modified at any time or from time to time,
and "Loan Document" means any one of the foregoing.
"Loan Expenses" means all charges, costs, fees and expenses of any
nature whatsoever of or incurred by either or both of the Lender and the
Administrative Agent at any time in connection with the making,
administration, modification, amendment, repayment or enforcement of the
Loan or the Loan Documents, all recording and filing fees, charges and
taxes, collateral audit fees, document preparation fees, reasonable fees
and disbursements of attorneys acting jointly for the Lender and the
Administrative Agent and their staff (including allocated costs of in-house
counsel), search fees, and credit reporting and investigation fees.
"Manufacturer Payables" means Indebtedness of the Borrower to the
manufacturers, suppliers, providers, vendors or distributors of the
Borrower's Inventory
6
<PAGE>
incurred by Borrower for the acquisition of such Inventory, which
Indebtedness is not secured by any lien, security interest or encumbrance.
"Material Inventory Supplier" means any supplier, provider,
manufacturer, vendor or distributor of Borrower's Inventory from whom
Borrower purchases, directly or indirectly, one and one-half percent (1
1/2%) or more of the total Inventory purchased by Borrower.
"Maximum Loan Amount" means, at any given time, an amount equal to (a)
the lesser of (i) the Commitment or (ii) the Borrowing Base, minus (b) the
Letter of Credit Liability.
"Maturity Date" shall mean the earlier of the date on which the
maturity date of the Note is accelerated or September 30, 1998.
"Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Section 4001 (a)(3) of ERISA to which the Borrower, any Subsidiary of the
Borrower or any ERISA Affiliate of either of them is making or accruing an
obligation to make contributions or has within any of the preceding three
plan years made or accrued an obligation to make contributions.
"Multiple Employer Plan" shall mean an employee benefit plan, other
than a Multiemployer Plan, subject to Title IV of ERISA to which the
Borrower, any Subsidiary of the Borrower or any ERISA Affiliate of the
Borrower or any Subsidiary of the Borrower, and more than one employer
other than the Borrower, any Subsidiary of the Borrower, or an ERISA
Affiliate of the Borrower or any Subsidiary of the Borrower, is making or
accruing an obligation to make contributions or, in the event that any such
plan has terminated, to which the Borrower, any Subsidiary of the Borrower
or any ERISA Affiliate of the Borrower or any Subsidiary of the Borrower
made or accrued an obligation to make contributions during any of the five
plan years preceding the date of termination of such plan.
"Net Worth" shall mean the sum of the par or stated value of all
outstanding capital stock, surplus and undivided profits of the Borrower,
less any amounts attributable to treasury stock, and any intangible assets,
including, but not limited to, goodwill, patents, copyrights, mailing
lists, catalogues, trademarks, bond discount and underwriting expenses,
organization expenses and other like intangibles, all as determined in
accordance with generally accepted accounting principles; PROVIDED HOWEVER,
that capitalized offering costs in the amount of $715,000 and organization
and trademark costs in the amount of $30,000 which are included as assets
on Borrower's financial statements as of July 31, 1996 shall not be
considered to be intangible assets.
7
<PAGE>
"Norwest Minnesota" means Norwest Bank Minnesota, National
Association.
"Note" shall mean the promissory note from the Borrower payable to the
Lender evidencing the Loan, as such promissory note may be amended,
extended, renewed, restated or modified at any time and from time to time.
"Obligations" shall mean all obligations and liabilities of the
Borrower under or in connection with the Loan Documents, now existing or
hereafter created, contingent or not, due or not, arising by operation of
law or otherwise.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a
government or political subdivision or an agency or instrumentality
thereof.
"Plan" means an employee pension benefit plan (other than a
Multiemployer Plan) within the meaning of Section 3(2) of ERISA, which is
or has been maintained for employees of the Borrower, any Subsidiary of the
Borrower or any ERISA Affiliate of the Borrower or ERISA Affiliate of any
Subsidiary of the Borrower.
"Request for Advance" means a request from Borrower for an Advance of
the Loan in the form of Exhibit C attached hereto.
"Security Agreement" shall mean the General Security Agreement dated
July 24, 1995, as amended, from the Borrower to the Lender, pursuant to
which, among other things, the Borrower grants the Lender a security
interest in the Collateral, and any and all other security agreements,
assignments, pledges and other similar documents pursuant to which the
Borrower grants to the Lender a security interest in the property of the
Borrower, as any such agreement may be amended, extended, restated or
modified at any time and from time to time.
"Security Documents" means the Security Agreement and the Collateral
Account Agreement, together with all other documents, instruments or
agreements securing the Loan.
"Subsidiary" shall mean any corporation or other entity of which
securities or other ownership interests have ordinary voting power to elect
a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by the Borrower.
8
<PAGE>
"Welfare Plan" means an "employee welfare benefit plan" as defined in
Section 3(l) of ERISA maintained for the benefit of employees of the
Borrower, any Subsidiary of the Borrower or any ERISA Affiliate of the
Borrower or any Subsidiary of the Borrower.
Section 1.2 ACCOUNTING TERMS AND TERMINATIONS. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared, in accordance with
generally accepted accounting principles as in effect from time to time, applied
on a basis consistent (except for changes concurred in by the Borrower's
independent public accountants) with the most recent audited consolidated
financial statements of the Borrower delivered to the Administrative Agent
("GAAP"). The parties hereto further agree that in the event that any change in
accounting principles from those used in the preparation of the financial
statements of the Borrower to be delivered to the Administrative Agent pursuant
to the terms of this Agreement hereafter occasioned by the promulgation of
rules, regulations, pronouncements and opinions by or required by the Financial
Accounting Standards Board or Accounting Principles Board of the American
Institute of Certified Public Accountants (or successors thereto or agencies
with similar functions) results in any change in the method of calculation of
Financial Covenants, standards or terms found in this Agreement, the parties
hereto agree to likewise enter into negotiations to amend the Financial
Covenants, terms or standards contained in this Agreement to reflect equitably
such change in accounting principles with the desired result that the criteria
for evaluating the Borrower's financial condition shall be the same after such
change as if such change had not been made. If the parties cannot agree on such
an amendment as contemplated under the immediately preceding sentence, then the
Financial Covenants shall be computed without giving effect to such change in
accounting principles.
ARTICLE II
THE LOAN
Section 2.1 THE LOAN. Subject to the terms and conditions of this
Agreement, the Lender agrees to make advances to Borrower (each such advance is
called an "ADVANCE") from time to time prior to the Maturity Date, in an
aggregate principal amount outstanding at any time not to exceed the Maximum
Loan Amount. So long as an Event of Default or event that with notice or the
passage of time would constitute an Event of Default has not occurred and is
continuing, Borrower may borrow, repay and reborrow under the Loan prior to the
Maturity Date in accordance with the terms of this Agreement.
Section 2.2 MAXIMUM LOAN AMOUNT. No Advance requested hereunder (other
than to fund a draw on a Letter of Credit) shall be requested by the Borrower
if, immediately after such requested Advance, the aggregate principal amount of
the Loan which would be
9
<PAGE>
outstanding, would exceed the Maximum Loan Amount. If at any time the aggregate
outstanding amount of the Loan exceeds the Maximum Loan Amount, the Borrower
shall, within five days after notice from the Administrative Agent, repay the
Loan in an amount at least equal to such excess.
Section 2.3 INTEREST RATE. The Loan shall bear interest at the LIBOR
Rate or the Base Rate as determined pursuant to the Note and be payable in
accordance with the terms of the Note.
Section 2.4 MATURITY OF THE LOAN. The principal of the Loan and all
accrued and unpaid interest and all other amounts due under the Loan Documents
shall be due and payable at the Maturity Date.
Section 2.5 PAYMENTS OF PRINCIPAL AND INTEREST. Principal and interest
under the Loan shall be payable as follows:
(a) Accrued but unpaid interest on the Loan shall be payable monthly
in arrears on the last day of each month commencing on the last day of
November, 1996 and continuing on the last day of each month thereafter and
with respect to portions of the Loan bearing interest at the LIBOR Rate, on
the last day of each Interest Period (as such term is defined in the Note).
Notwithstanding the foregoing, if the aggregate interest accruing on the
Loan in any calendar month is less than $20,000, the Borrower shall, on the
first day of the next succeeding month, pay the Lender a minimum interest
charge equal to the difference between $20,000 and the aggregate interest
accruing in such month.
(b) The entire principal balance of the Loan together with all
accrued but unpaid interest thereon and all other amounts due the Lender or
the Administrative Agent pursuant to the Loan Documents shall be due and
payable in full on the Maturity Date.
Section 2.6 PREPAYMENT; TERMINATION OF CREDIT FACILITY. Except as
otherwise provided in the Note with respect to LIBOR Rate Advances, the Borrower
may pay the Loan from time to time without penalty or premium. The Borrower may
terminate the Agreement and obtain a release of any security interests in the
Collateral only upon thirty days prior written notice to the Administrative
Agent, and, if such termination is on a date other than the Maturity Date,
payment of a termination fee determined as follows:
Date of Termination Fee
------------------- ---
On or before September 30, 1997 1.5% of the Commitment
After September 30, 1997 1% of the Commitment;
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provided, however, that (i) no termination fee shall be payable if the Loan is
refinanced by a direct or indirect subsidiary of Norwest Corporation, and (ii)
provided that the termination occurs after September 30, 1997, the termination
fee shall be 1/2 of 1% of the Commitment if the termination date occurs within
30 days of the acquisition by a Person and any of the "affiliates" of such
Person within the meaning of Rule 12b-2 promulgated under the Securities
Exchange Act of 1934, as amended, (other than any current affiliate of the
Borrower) of an aggregate of 75% or more of the assets or capital stock of the
Borrower.
Section 2.7 FEES. The Borrower shall pay to the Lender the following
fees in connection with the Loan and this Agreement:
(a) Annually in advance an administrative fee equal to one-eighth of
one percent of the Commitment. Payment of the administrative fee shall be due
on the date of this Agreement and annually on the same date each year
thereafter.
(b) Monthly in arrears on the last day of November, 1996 and on the
last day of each month thereafter, an unused commitment fee of one eighth of one
percent per annum of the difference between the Commitment and the daily average
sum of the aggregate outstanding principal balance of the Loan and Borrower's
Letter of Credit Liability during such month.
Section 2.8 SECURITY. The Loan shall be secured by a first priority
security interest in the Collateral.
Section 2.9 REQUEST FOR ADVANCE UNDER THE LOAN.
The Borrower agrees to comply with the following procedures in
requesting Advances:
(a) Each request for a Base Rate Advance shall be made to the
Administrative Agent prior to 11:00 a.m. (Colorado time) of the day of the
requested Advance, and each request for a LIBOR Rate Advance shall be made to
the Administrative Agent prior to 11:00 a.m. (Colorado time) of the day three
days prior to the date of the requested Advance. Each request for an Advance
shall be made 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 reasonably believed by the Lender to be an
officer of the Borrower or such a designated agent, by delivery to the
Administrative Agent of a Request for an Advance.
(b) Upon fulfillment of the applicable conditions therefore, the
Lender, or the Administrative Agent acting on behalf of the Lender, shall
disburse loan proceeds by crediting the same to the Borrower's demand deposit
account maintained with the Lender unless the
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Lender and the Borrower shall agree in writing to another manner of
disbursement. The Borrower shall be obligated to repay all Advances
notwithstanding the fact that the person requesting the same was not in fact
authorized to do so. Any request for an Advance shall be deemed to be a
representation by the Borrower that (i) the conditions set forth in Section 2.2
hereof have been met, and (ii) the conditions set forth in Section 4.2 hereof
have been met as of the time of the request.
(c) Each request for a Base Rate Advance under the Loan shall be in
an amount of at least $100,000 or such lesser amount equal to the unadvanced
portion of the Loan, and each request for a LIBOR Rate Advance shall be in an
amount of $1,000,000 or an integer multiple thereof.
(d) Each request for an Advance under the Loan shall be irrevocable
and binding upon the Borrower from and after the time that a Request for Advance
is received by the Administrative Agent and the submission of a Request for
Advance to the Administrative Agent shall obligate Borrower to accept such
Advance.
(e) If any Person shall acquire a participation in the Loan, the
Borrower shall be obligated to the Lender to pay the full amount of all interest
calculated under the Note, 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, or otherwise elects to accept
less than its prorata share of such fees, charges or other amounts due under
this Agreement.
Section 2.10 PAYMENTS BY BORROWER. All payments of principal and
interest on the Loan shall be made to the Administrative Agent for the account
of the Lender in immediately available funds. The Borrower hereby authorizes
the Lender, in its discretion at any time or from time to time and without
request by the Borrower, to make an Advance in an amount equal to the accrued
interest from time to time due and payable to the Lender hereunder and in the
amount of any fees, costs or expenses due to the Lender or the Administrative
Agent hereunder or under any other Loan Documents.
Section 2.11 REPAYMENT OF EXISTING INDEBTEDNESS. The Borrower hereby
requests that the Lender make an initial Advance of the Loan in an amount equal
to the outstanding principal amount and all accrued but unpaid interest and all
the fees and expenses due in connection with the indebtedness of the Borrower
under the Original Credit Agreement and that such advance be remitted directly
to the Persons entitled thereto to pay the Borrower's outstanding obligations
under the Original Credit Agreement.
<PAGE>
ARTICLE III
LETTERS OF CREDIT
Section 3.1 LETTERS OF CREDIT. Subject to the terms and conditions of
this Agreement, the Lender agrees, upon request of Borrower, to issue or to
cause Norwest Minnesota to issue one or more stand-by or documentary letters of
credit for such purposes as Borrower may reasonably request and the
Administrative Agent may reasonably approve; provided, however, that the
Borrower shall not request any Letter of Credit if immediately after the
issuance thereof, the Letter of Credit Liability would exceed $500,000. The
Letter of Credit Liability shall be evidenced by the Note and secured by all of
the Security Documents. The issuance of any Letter of Credit in accordance with
the provisions of this Section 3.1 shall require the satisfaction of each
condition set forth in this Article III.
Section 3.2 LETTER OF CREDIT APPLICATION.
(a) Whenever Borrower desires the issuance of a Letter of Credit, it
shall deliver to the Administrative Agent a Letter of Credit Application no
later than 12:00 noon, Denver time, at least five Business Days or such shorter
period as may be agreed to by the Administrative Agent, in advance of the
proposed date of issuance. The Letter of Credit Application shall specify (i)
the proposed date of issuance (which shall be a Business Day), (ii) the face
amount and text of the Letter of Credit, (iii) the expiration date of the Letter
of Credit, which shall be no later than the earlier of 365 days after the date
of issuance thereof or the Maturity Date and (iv) the name and address of the
beneficiary, with respect to such Letter of Credit.
(b) Prior to the date of issuance, Borrower shall specify a precise
description of the form of Letter of Credit and related documents and the
verbatim text of any certificate to be presented by the beneficiary of such
Letter of Credit which, if presented by such beneficiary prior to the expiration
date of such Letter of Credit, would require the Lender to make payment under
such Letter of Credit; PROVIDED that the Administrative Agent or the Lender, in
its sole judgment, may, prior to the date of issuance, require changes in the
form of Letter of Credit and any such documents and certificates; and PROVIDED,
FURTHER, that no Letter of Credit shall require payment against a conforming
draft to be made thereunder sooner than the third Business Day after
presentation of the conforming draft.
Section 3.3 CONDITIONS TO ISSUANCE OF LETTER OF CREDIT. The Lender's
obligation to issue or to cause any Letter of Credit to be issued by Norwest
Minnesota shall be subject to satisfaction of the following conditions in a
manner acceptable to the Lender prior to the issuance of such Letter of Credit:
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(a) Receipt of the Letter of Credit Application in accordance with
the provisions of Section 3.2(a) above.
(b) Receipt of the Letter of Credit fee in accordance with the
provisions of Section 3.5 below.
(c) Satisfaction of all of the conditions set forth in Sections 4.1
AND 4.2, below.
(d) The outstanding principal amount of the Loan shall not exceed the
Maximum Loan Amount (taking into account the face amount of the Letter of Credit
being
requested).
(e) Such other conditions as the Lender may reasonably require.
Section 3.4 PAYMENT OF AMOUNTS DRAWN UNDER LETTERS OF CREDIT. Any
drawing under a Letter of Credit (whether before or after the Maturity Date)
shall be deemed to be a Base Rate Advance under the Loan made by the Lender to
Borrower on the date such drawing was paid by the Lender and shall remain
outstanding under the Loan and be payable in accordance with the terms and
conditions of other Advances; PROVIDED, HOWEVER, if any Advance deemed made to
cover a draw on a Letter of Credit would cause the outstanding amount of the
Loan to exceed the Maximum Loan Amount, Borrower shall immediately repay the
Loan in an amount sufficient to reduce the outstanding amount of the Loan to an
amount equal to no greater than the Maximum Loan Amount.
Section 3.5 LETTER OF CREDIT FEES AND COMPENSATION. Borrower agrees to
pay the following amounts to the Lender:
(a) With respect to the issuance of each Letter of Credit which is a
standby Letter of Credit, a fee equal to the greater of $250.00 or one and one-
half percent (1 1/2%) per annum of the face amount of the Letter of Credit,
calculated for the term of the Letter of Credit.
(b) With respect to issuance of each Letter of Credit which is a
documentary Letter of Credit, a fee equal to the Lender's then standard issuance
fee for documentary letters of credit based on the face amount of such Letter of
Credit.
(c) With respect to any amendment or transfer of any Letter of
Credit, documentary and processing charges in accordance with the Lender's
standard schedule for such charges in effect at the time of such drawing.
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(d) With respect to drawing made under any Letter of Credit,
processing charges in accordance with the Lender's standard schedule for such
charges in effect at the time of such drawing.
(e) Amounts payable under this Section 3.5 shall be paid to the
Administrative Agent for the account of the Lender in immediately available
funds and shall be payable in full on the date of such issuance, amendment,
transfer or drawing, as the case may be.
Section 3.6 OBLIGATIONS ABSOLUTE. The obligation of Borrower to
reimburse the Lender for Advances made to fund drawings under the Letters of
Credit shall be unconditional and irrevocable and shall be paid strictly in
accordance with the terms of this Agreement under all circumstance including,
without limitation, the following circumstances:
(a) Any lack of validity or unenforceability of any Letter of Credit;
(b) The existence of any claim, set-off, defense or other right which
Borrower or any affiliate of Borrower may have at any time against a beneficiary
or any transferee of any Letter of Credit (or any person or entities for whom
any such beneficiary or transferee may be acting), the Lender or any other
Person, whether in connection with this Agreement, the transactions contemplated
herein or any unrelated transaction (including any underlying transaction
between Borrower and the beneficiary for which the Letter of Credit was
procured);
(c) Any draft, demand, certificate 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 other than solely as the result of gross negligence or willful
misconduct of the Lender or Norwest Minnesota as issuer of the Letter of Credit;
(d) Payment by the Lender or Norwest Minnesota as issuer of the
Letter of Credit under any Letter of Credit against presentation of a demand,
draft or certificate or other document which does not comply with the terms of
such Letter of Credit other than if said payment is solely the result of the
gross negligence or willful misconduct of the Lender or Norwest Minnesota as the
issuer of the Letter of Credit;
(e) Any other circumstance or happening whatsoever, which is similar
to any of the foregoing; or
(f) The fact that an Event of Default or an event that with notice or
the passage of time might constitute an Event of Default shall have occurred.
Section 3.7 INDEMNIFICATION: NATURE OF THE LENDER'S DUTIES.
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(a) In addition to amounts payable as elsewhere provided in this
Article III, without duplication, Borrower hereby agrees to protect, indemnify,
pay and hold harmless the Lender, the Administrative Agent and Norwest Minnesota
from and against any and all claims, demands, liabilities, judgments, damages,
losses, costs, charges and expenses (including reasonable attorneys' fees) which
the Lender or the Administrative Agent may incur or be subject to as a
consequence, direct or indirect, of (i) the issuance of the Letters of Credit,
other than solely as a result of the gross negligence or willful misconduct of
the Lender, the Administrative Agent or Norwest Minnesota or (ii) the failure of
the Lender or Norwest Minnesota as the issuer of such Letter of Credit to honor
a drawing under any Letter of Credit as a result of any act or omission, whether
rightful or wrongful, of any present or future DE JURE or DE FACTO government or
governmental authority or court (all such acts or omissions herein called
"GOVERNMENT ACTS").
(b) Borrower assumes all risks of the acts and omissions of, or
misuses of the Letters of Credit by the respective beneficiaries of such Letters
of Credit. In furtherance and not in limitation of the foregoing, neither the
Lender, the Administrative Agent nor Norwest Minnesota shall be responsible: (i)
for the form, validity, sufficiency, accuracy, genuineness or legal effects of
any document submitted by any party in connection with the application for and
issuance of such Letters of Credit, even if it should in fact prove to be in any
or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii)
for the validity or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign any such Letter of Credit or the rights or
benefits thereunder or proceeds thereof, in whole or in part, which may prove to
be invalid or ineffective for any reason (unless the Lender acts upon such
transfer and such transfer is expressly prohibited on the face of this Letter of
Credit); (iii) for failure of the beneficiary of any such Letter or Credit to
comply fully with conditions required in order to draw upon such Letter of
Credit; (iv) for errors, omissions, interruptions or delays in transmission or
delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether
or not they be in cipher; (v) for errors in interpretation of technical terms;
(vi) for any loss or delay in the transmission or otherwise of any document
required in order to make a drawing under any such Letter of Credit or of the
proceeds thereof, (vii) for the misapplication by the beneficiary of any such
Letter of Credit of the proceeds of any drawing under such Letter of Credit; and
(viii) for any consequences arising from causes beyond the control of the
Lender, the Administrative Agent or Norwest Minnesota, including, without
limitation, any Government Acts. None of the above shall affect, impair, or
prevent the vesting of any of the Lender's rights or powers hereunder, all of
which shall be borne by Borrower.
(c) In furtherance and not in limitation of the specific provisions
hereinabove set forth, any action taken or omitted by the Lender, the
Administrative Agent or Norwest Minnesota under or in connection with any Letter
of Credit or the related certificates, if taken or omitted in good faith, shall
not put the Lender, the Administrative Agent or Norwest Minnesota under any
resulting liability to Borrower.
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(d) Notwithstanding anything to the contrary contained in this
Section 3.7, Borrower shall not have any obligation to indemnify the Lender, the
Administrative Agent or Norwest Minnesota in respect of any liability incurred
by the Lender, the Administrative Agent or Norwest Minnesota arising solely out
of the gross negligence or willful misconduct of the Lender, the Administrative
Agent or Norwest Minnesota.
Section 3.8 RELEASE OF COLLATERAL. The Lender shall not be under any
obligation whatsoever to release any Collateral until such time as all Letters
of Credit have expired or been surrendered for cancellation and the Lender has
no obligation to renew any such Letter of Credit, or any other obligation to
make any payments in connection with any Letter of Credit.
Section 3.9 ISSUANCE OF LETTERS OF CREDIT. Notwithstanding anything to
the contrary herein, all Letters of Credit will be issued by the Lender, Norwest
Minnesota or another affiliate of Norwest Corporation. In the event that any
Letter of Credit is issued by Norwest Minnesota or any other affiliate of
Norwest Corporation, the Lender shall reimburse the issuer thereof for the
amount drawn under such Letter of Credit. The fact that any Letter of Credit
may be issued by Norwest Minnesota or an affiliate of Norwest Corporation, shall
in no way alter or affect Borrower's obligations with respect to such Letter of
Credit set forth in this Article III.
ARTICLE IV
CONDITIONS PRECEDENT
Section 4.1 INITIAL ADVANCE. The Lender shall not be obligated to make
the first Advance of the Loan hereunder or issue the first Letter of Credit
hereunder unless and until all of the following shall have been complied with in
a manner acceptable to the Administrative Agent:
(a) EXECUTION AND DELIVERY OF DOCUMENTS. The Borrower shall have
delivered the following to the Administrative Agent:
(i) The Loan Documents, duly executed by the Borrower;
(ii) Financing statements evidencing the security interest
granted by the Security Agreement, duly executed by the Borrower;
(iii) A Collateral Account Agreement, duly executed by the
Borrower, the Administrative Agent and the Lender (the "Collateral Account
Agreement"), pursuant to which the Borrower and the Lender establish a
depository account (the "Collateral Account") in the name of and under the sole
and exclusive control of the Lender, from which finally collected funds shall be
transferred to Lender for application to the Advances;
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(iv) Separate Support Agreements duly executed by William J.
Pearse, David J. Workman, Alan E. Kessock, Neal Bobrick and J. Edward McEntire;
(v) A copy, of the Borrower's certificate of incorporation
certified by the Borrower's corporate secretary;
(vi) Certificates, as of the most recent dates practicable, of
the Secretary of State of the States of Colorado, Utah, New Mexico, Nevada,
Idaho and Oklahoma that the Borrower is qualified and in good standing as a
foreign corporation in each such state;
(vii) A certified copy of the Borrower's Articles of
Incorporation and Bylaws;
(viii) A copy of a resolution of the Borrower's board of
directors authorizing the execution, delivery and performance of this Agreement,
the Note, the Security Agreement, the Loan Documents and each other document to
be delivered pursuant hereto, certified by the Secretary of the Borrower;
(ix) A certificate of the Borrower's corporate secretary as to
the incumbency and signatures of the officers of the Borrower signing this
Agreement, the Note, all the other Loan Documents, and each other document to be
delivered pursuant hereto;
(x) Certificates of insurance, in form and substance
reasonably acceptable to the Lender, evidencing that Borrower's insurance
coverage is in compliance with the provisions of this Agreement and the Security
Agreement;
(xi) A written opinion from the Borrower's legal counsel in
form and substance satisfactory to the Lender;
(xii) An initial Borrowing Base Certificate; and
(xiii) Such other documents as the Administrative Agent may
reasonably request.
(b) NO DEFAULT. (i) The Borrower shall have complied with all of the
conditions, terms, covenants and agreements contained in this Agreement, the
Note, and all other Loan Documents, (ii) all representations and warranties of
the Borrower contained in any of the Loan Documents shall be true as of the date
of any Advance as if first made on that date, (iii) immediately before and after
such Advance, no default shall have occurred under any of the Loan Documents and
no event shall have occurred that with notice or the passage of time or both
would constitute a default under any of the Loan Documents and (iv) no material
adverse
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change shall have occurred in the assets, liabilities, properties, business,
operation or financial condition of the Borrower.
(c) LOAN EXPENSES. The Borrower shall have paid all of the Loan
Expenses incurred by the Lender or the Administrative Agent and invoiced to the
Borrower in connection with the transactions contemplated hereby.
(d) REQUEST FOR ADVANCE. The Borrower shall have provided the
Administrative Agent with a Request for Advance.
(e) LIEN CONFIRMATION. The Administrative Agent shall have received
a search of the Uniform Commercial Code records of the Secretary of State of the
States of Colorado, Utah, New Mexico, Nevada, Idaho and Oklahoma which shall
confirm that there are no liens, security interests or encumbrances against the
Collateral.
(f) SUPPLIER AGREEMENTS. The Administrative Agent shall have
received from the Borrower a certificate signed by an authorized officer of the
Borrower certifying that attached thereto are (i) a list of all Material
Inventory Suppliers and (ii) true and correct copies of all agreements in effect
as of such date between the Borrower and each Material Inventory Supplier.
(g) LANDLORD'S WAIVERS. The Borrower shall deliver to the
Administrative Agent a landlord's waiver from the landlord of any premises at
which the Collateral is located.
(h) OTHER DOCUMENTS AND INFORMATION. The Administrative Agent shall
have received such additional information and documents, in form and substance
satisfactory to the Administrative Agent, as the Administrative Agent may
reasonably request.
Section 4.2 SUBSEQUENT ADVANCES. The Lender will not be obligated to
make any Advance in connection with the Loan or to issue any Letters of Credit
unless and until all of the following shall have been complied with in a manner
acceptable to the Lender:
(a) REQUEST FOR ADVANCE. The Borrower shall have provided the
Administrative Agent with a Request for Advance, or, in the case of a Letter of
Credit, a Letter of Credit Application.
(b) NO DEFAULT. (i) The Borrower shall have complied with all of the
conditions, terms, covenants and agreements contained in this Agreement, the
Note, and all other Loan Documents, (ii) all representations and warranties of
the Borrower contained in any of the Loan Documents shall be true as of the date
of any Advance as if first made on that date, (iii) immediately before and after
such Advance, no default shall have occurred and be continuing under any of the
Loan Documents and no event shall have occurred and be
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continuing that with notice or the passage of time or both would constitute a
default under any of the Loan Documents and (iv) no material adverse change
shall have occurred in the assets, liabilities, properties, business, operation
or financial condition of the Borrower or its Subsidiaries.
(c) LIEN CONFIRMATION. Borrower shall have provided the
Administrative Agent with such confirmation as the Administrative Agent may
reasonably request that there are no liens, security interests or encumbrances
against the Collateral.
(d) OTHER DOCUMENTS. The Borrower shall have provided the
Administrative Agent with such other documents and information as the
Administrative Agent may reasonably request.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
To induce the Lender to enter into this Agreement, the Borrower represents
and warrants to the Lender as of the date hereof and as of the date of any
Advance hereunder as follows:
Section 5.1 ORGANIZATION; AUTHORITY; POWER; ETC. The Borrower (a) is a
corporation duly organized, validly existing and in good standing under the laws
of Delaware, (b) has the power and authority to own its properties and to carry
on its business in every jurisdiction in which the nature of its business or its
properties makes such qualification necessary, and (c) is in material compliance
with all laws, regulations, ordinances, and orders of public authorities
applicable to it.
Section 5.2 VALIDITY OF LOAN DOCUMENTS. The execution, delivery and
performance by the Borrower of this Agreement and all of the other Loan
Documents delivered to the Lender in connection herewith (a) are within the
power of the Borrower, (b) have been duly authorized by all requisite actions on
the part of the Borrower, and (c) do not require approval of any governmental
authority. This Agreement and all of the other Loan Documents are, or upon
execution and delivery will be, the legal, valid and binding obligations of the
Borrower, fully enforceable in accordance with their respective terms except to
the extent the enforceability thereof is limited by bankruptcy, insolvency or
other laws relating to or affecting the enforcement of creditors' rights or by
the general principles of equity.
Section 5.3 NO CONFLICT. The execution, delivery and performance by the
Borrower of this Agreement and all of the other Loan Documents will not (a)
violate any provision of any law, rule, regulation, writ, order, judgment,
injunction, decree, determination or award of any court or other governmental
authority applicable to the Borrower, or conflict with any of the
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provisions of the certficiate of incorporation or bylaws of the Borrower, or (b)
result in a breach of, or constitute a default under any indenture, agreement or
other instrument to which the Borrower is or will be a party or by which it or
its properties are bound.
Section 5.4 NO LITIGATION OR ADVERSE PROCEEDINGS. There is no pending
or, to the best of the Borrower's knowledge, threatened, action, suit,
proceeding, arbitration or investigation against or affecting the Borrower or
the Collateral which, in any case, might materially adversely affect the value
of the Collateral or any of the Borrower's operations, business, assets,
properties, condition (financial or otherwise) or ability to perform its
obligations to the Lender hereunder. If, in the future, such action, suit,
proceeding, arbitration or investigation is pending or threatened, the Borrower
shall immediately provide the Lender with detailed notification thereof.
Section 5.5 NO DEFAULTS OR VIOLATION. The Borrower is not in default, in
any manner which would materially adversely affect its properties, assets,
operations or condition (financial or otherwise), in the performance, observance
or fulfillment of any of the obligations, covenants or conditions set forth in
any agreement or instrument to which it is a party or by which it or any of its
properties, assets or revenues may be bound or affected, or any law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award of
any court or governmental authority.
Section 5.6 ERISA.
(a) Neither the Borrower nor any of its Subsidiaries participates in
any Multiemployer Plans.
(b) Each Plan and Welfare Plan is in compliance in all material
respects with the applicable provisions of ERISA, the Code, and other Federal or
state law, including all requirements under the Code or ERISA for filing reports
(that are true and correct in all material respects as of the date filed), and
benefits have been paid in accordance with the provisions of the Plan and
Welfare Plan.
(c) No ERISA Event has occurred or is reasonably expected to occur
with respect to any Plan that would result in any liability of the Borrower, any
Subsidiary of the Borrower, or any ERISA Affiliate of the Borrower or any
Subsidiary of the Borrower.
(d) With respect to each Plan which is an "employee pension benefit
plan" within the meaning of Section 3(2) of ERISA and which is intended to
qualify under Section 401 of the Code and each trust created thereunder, a
favorable determination letter has been received from the Internal Revenue
Service stating that such Plan so qualifies and is exempt from tax, and nothing
has occurred since the date of the issuance of such determination letter
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which would cause such Plan and trust to cease to qualify under Section 401 of
the Code or to lose tax-exempt status under Section 501 of the Code.
(e) None of the transactions contemplated by this Agreement or by any
Plan constitute a prohibited transaction as such term is defined in Section 406
of ERISA or Section 4976 of the Code.
(f) There is no outstanding liability that has been asserted or
assessed under Title IV of ERISA with respect to any Plan maintained or
sponsored by the Borrower, any Subsidiary of the Borrower, or any ERISA
Affiliate of the Borrower or any Subsidiary of the Borrower, nor with respect to
any Plan to which the Borrower, any Subsidiary of the Borrower, or any ERISA
Affiliate of the Borrower or any Subsidiary of the Borrower contributes or is
obligated to contribute.
(g) No Plan subject to Title IV of ERISA has any Insufficiency as of
the most recent valuation date for such Plan.
(h) Neither the Borrower, any Subsidiary of the Borrower, nor any
ERISA Affiliate of the Borrower or any Subsidiary of the Borrower has ever
represented, promised or contracted (whether in oral or written form) to any
current or former employee (either individually or to any employees as a group)
that such current or former employee(s) would be provided, at any cost to the
Borrower, any Subsidiary of the Borrower, or any ERISA Affiliate of the Borrower
or any Subsidiary of the Borrower, with life insurance or employee welfare plan
benefits (within the meaning of Section 3(3) of ERISA) following retirement or
termination of employment. To the extent that the Borrower, any Subsidiary of
the Borrower or any ERISA Affiliate of the Borrower or any Subsidiary of the
Borrower has made any such representation, promise or contract, such person has
expressly reserved the right to amend or terminate such life insurance or
employee welfare plan benefits with respect to claims not yet incurred.
(i) The Borrower, each Subsidiary of the Borrower, and each ERISA
Affiliate of the Borrower or any ERISA Affiliate of any Subsidiary of the
Borrower have complied in all respects with the notice and continuation coverage
requirements of Section 4980B of the Code.
(j) There are no pending or threatened claims, actions or lawsuits,
other than routine claims for benefits in the usual and ordinary course,
asserted or instituted against any Plan, Welfare Plan, or any fiduciary with
respect to any Plan or Welfare Plan.
(k) Neither the Borrower, any Subsidiary of the Borrower, nor any
ERISA Affiliate of the Borrower or any ERISA Affiliate of any Subsidiary of the
Borrower has incurred or reasonably expects to incur any liability under Title
IV of ERISA (other than premiums due and not delinquent under Section 4007 of
ERISA) with respect to a Plan.
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(l) Neither the Borrower, any Subsidiary of the Borrower, nor any
ERISA Affiliate of the Borrower or any ERISA Affiliate of any Subsidiary of the
Borrower has transferred any Insufficiency to a person other than the Borrower,
any Subsidiary of the Borrower, or any ERISA Affiliate of the Borrower or any
ERISA Affiliate of any Subsidiary of the Borrower or otherwise engaged in a
transaction that could be subject to Section 4069 or 4212(c) of ERISA.
(m) Neither the Borrower, any Subsidiary of the Borrower, nor any
ERISA Affiliate of the Borrower or any ERISA Affiliate of any Subsidiary of the
Borrower has engaged, directly or indirectly, in a nonexempt prohibited
transaction (as defined in Section 406 of ERISA or Section 4975 of the Code) in
connection with any Plan.
Section 5.7 COMPLIANCE WITH FEDERAL RESERVE BOARD REGULATIONS. No part
of the proceeds of the Loan will be used, directly or indirectly, for the
purpose of purchasing or carrying any "margin stock" within the meaning of
Regulation U or G of the Board of Governors of the Federal Reserve System.
Section 5.8 FINANCIAL CONDITION. The audited financial statements of
the Borrower dated January 31, 1996 and the unaudited statements dated July 31,
1996 heretofore delivered to the Lender (collectively, the "Financial
Statements") are accurate and complete in all material respects, have been
prepared in accordance with GAAP and presents fairly the financial condition of
the Borrower as of the respective dates thereof. The Borrower does not know of
any material contingent liabilities affecting the Borrower or the Collateral
that are not disclosed in the Financial Statements. Since the date of the
Financial Statements delivered to the Lender, there has been no material adverse
change in the Borrower's financial condition, assets, liabilities or business
nor has any other vent or condition of any character occurred or arisen that
materially and adversely affects or that could materially and adversely affect
the business, or, to the extent reasonably foreseeable, the prospects of the
Borrower. No additional material obligations have been entered into by the
Borrower since the date of the Financial Statements.
Section 5.9 GOVERNMENTAL REGULATIONS. The Borrower is not subject to
any federal or state statute or regulation limiting its ability to incur
Indebtedness.
Section 5.10 VARIOUS REPRESENTATIONS TO THE LENDER OR ADMINISTRATIVE
AGENT. None of the statements or any certificate, document or statement
furnished to the Lender or the Administrative Agent (or to be furnished to the
Lender or the Administrative Agent) by or on behalf of the Borrower, and none of
the representations and warranties in this Agreement or any other Loan Document
contains (or will contain) any untrue statement of a material fact or omits (or
will omit) to state a material fact necessary in order to make the statements
contained herein or therein not misleading. There is no fact which materially
adversely affects or in the future (so far as the Borrower can now reasonably
foresee) may materially adversely affect the ability of the Borrower to perform
its obligations to the Lender which has not been set forth herein or
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in a certificate or opinion of counsel or other written statement furnished to
the Lender by or on behalf of the Borrower. All balance sheets, statements of
profit and loss, and other financial data that have been given (or will be
given) to the Lender or the Administrative Agent with respect to the Borrower
(a) are (or will be) complete and correct in all material respects, (b)
accurately present (or will present) the financial condition of the Borrower as
of the dates, and the results of its operations for the periods for which, the
same have been (or will be) furnished, (c) have been (or will be) prepared in
accordance with GAAP consistently followed throughout the periods covered
thereby.
Section 5.11 TAXES. The Borrower has filed all tax returns which are
required to be filed by the Borrower and has paid all indebtedness, obligations,
assessments, governmental charges and taxes, real and personal, including
federal and state income taxes, levied upon or assessed against it or against
its properties or income which are currently due.
Section 5.12 TRADEMARKS, PATENTS, ETC. The Borrower possesses all the
trademarks, trade names, copyrights, patents, licenses, or rights in any
thereof, adequate in all material respects for the conduct of its business as
now conducted and presently proposed to be conducted, without conflict with the
rights or claimed rights of others. The Borrower has not within the four-year
period preceding the date hereof received any notice of any deemed rights of
others with respect to the foregoing.
Section 5.13 SUBSIDIARIES AND AFFILIATES. Borrower does not have any
affiliates or Subsidiaries.
Section 5.14 PARTNERSHIPS AND JOINT VENTURES. Borrower is not a partner
in any partnership, a member of any limited liability company or a partner or a
party to any joint venture or similar agreement.
ARTICLE VI
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that so long as any indebtedness or
Obligations remain outstanding hereunder, unless the Lender or the
Administrative Agent shall otherwise consent in writing in advance, it will:
Section 6.1 PAY NOTE. Duly and punctually pay or cause to be paid the
principal of and interest on the Note on the dates, in the places and in the
manner set forth therein and herein, without notice or demand.
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Section 6.2 PERFORM OTHER OBLIGATIONS. Promptly and strictly perform
and comply with all other terms, conditions, covenants and prohibitions required
by the terms of any of the Loan Documents.
Section 6.3 COLLATERAL ACCOUNT. The Borrower agrees to deposit in the
Collateral Account or, at the Lender's option, to deliver to the Lender all
collections on Receivables, contract rights, chattel paper and other rights to
payment constituting Collateral, and all other cash proceeds of Collateral,
which the Borrower may receive directly, immediately upon receipt thereof, in
the form received, except for the Borrower's endorsement when deemed necessary;
provided, however, that the Borrower may establish depository accounts to clear
collections provided that (i) in the case of any depository account established
in the State of Colorado, such account is swept to the Collateral Account on
each Business Day, (ii) in the case of depository accounts established in states
other than the State of Colorado, such accounts are swept to the Collateral
Account at least one time per week (or more frequently if the Administrative
Agent shall request), and (iii) at the request of the Administrative Agent, all
depository accounts are assigned to the Lender as additional security for the
Loan on terms and conditions satisfactory to the Administrative Agent in its
sole discretion. The Borrower further agrees to irrevocably require all
processors of credit card receipts to remit all payments due in respect thereof
directly to the depository account maintained in the State of Colorado. Until
delivered to the Lender or deposited in the Collateral Account, all proceeds or
collections of Collateral shall be held in trust by the Borrower for and as the
property of the Lender and shall not be commingled with any other funds or
property of the Borrower. 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. All such collections shall
constitute proceeds of Collateral and shall not constitute payment of any
Obligation. Collected funds from the Collateral Account shall be transferred to
the Lender's general account, and the Lender may deposit in its general account
or in the Collateral Account any and all collections received by it directly
from the Borrower. The Lender may commingle such funds with other property of
the Lender or any other person. The Lender shall apply such collected funds in
the Collateral on a daily basis to the payment of any and all Obligations, in
any order or manner of application satisfactory to the Lender provided, however,
that in lieu of applying any such amounts to payment of LIBOR Rate Advances
prior to the maturity thereof, the Lender may, at its option, remit such amounts
to the Borrower. All items delivered to the Lender or 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, the amount
of that item, or the Lender 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.
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Section 6.4 CORPORATE. Maintain and preserve the existence, rights,
privileges and franchises of the Borrower in good standing under the laws of
Delaware and maintain its right to transact business in all other states,
including Colorado, Utah and any other states in which the Borrower has any
retail operation or where its activities and ownership of assets are such that
qualification to transact business is necessary under the laws of such states.
Section 6.5 ACCOUNTS AND RECORDS. Keep and maintain full and accurate
accounts and records of its operations in accordance with GAAP applicable to
businesses of the type in which the Borrower is engaged and consistent with
principles heretofore applied by the Borrower in preparation of the Financial
Statements, including, without limitation, records of the Borrower's
verification of the validity of accounts.
Section 6.6 INSPECTION/AUDIT RIGHTS. Permit the Administrative Agent,
the Lender or any representatives thereof at any reasonable time, and from time
to time, to examine and make copies of and abstract from the files, records and
books of account of the Borrower and to discuss the affairs, finances and
accounts of the Borrower with any of its officers or directors and their
independent public accountants. The Administrative Agent and the Lender shall
have the right to inspect the Collateral upon reasonable notice to the Borrower
during the Borrower's normal business hours. In addition, the Administrative
Agent and the Lender shall have a right to conduct an audit of the Inventory at
any time and from time to time to confirm, among other things, the existence and
value of such Inventory and the Borrower shall be responsible for paying the
cost of such audit (including the internal costs of the Administrative Agent's
and the Lender's own employees at the rate of $50 per hour or the Administrative
Agent's or the Lender's then current per hour auditor charge, if different);
provided that the Borrower shall have the obligation to pay the cost of such
audit no more frequently than four times in each twelve month period provided
there is no Event of Default. The Administrative Agent shall also have the
right to obtain an appraisal of the Borrower's Inventory annually (or more
frequently if an Event of Default has occurred and is continuing), at the
expense of the Borrower.
Section 6.7 REPORTING REQUIREMENTS.
(a) ANNUAL FINANCIAL STATEMENT. Within ninety (90) days after the
end of each fiscal year, deliver to the Administrative Agent audited year-end
financial statements of the Borrower (including balance sheets, statements of
income and statements of cash flow), unqualified as to scope of review,
prepared by certified public accountants reasonably acceptable to the
Administrative Agent, together with a compliance certificate signed by the chief
financial officer or other officer of the Borrower satisfactory to the
Administrative Agent showing the calculation of the Financial Covenants set
forth in Section 6.13 and certifying that no Event of Default exists under this
Agreement or any of the other Loan Documents, in the form of Exhibit B attached
hereto or such other form as the Administrative Agent may require.
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(b) QUARTERLY FINANCIAL STATEMENTS. Within forty-five (45) days
after the end of each fiscal quarter, deliver to the Administrative Agent a copy
of the Borrower's internally prepared quarterly financial statement (including a
balance, sheet and income statement) prepared consistently with fiscal year-end
statements and certified by the chief financial officer of the Borrower as being
true and correct in all material respects together with a compliance certificate
signed by the chief financial officer of the Borrower showing the calculation of
the Financial Covenants set forth in Section 6.13 and certifying that no Event
of Default exists under this Agreement or any of the other Loan Documents, in
the form of Exhibit B attached hereto or such other form as the Administrative
Agent may require.
(c) MONTHLY FINANCIAL STATEMENTS. Within thirty (30) days after the
end of each fiscal month, deliver to the Administrative Agent monthly internally
prepared financial statements (including a balance sheet and income statement)
of the Borrower prepared consistently with fiscal year-end statements and
certified by the chief financial officer of the Borrower as being true and
correct in all material respects.
(d) MONTHLY ACCOUNTS PAYABLE AGING. Within thirty (30) days after
the end of each fiscal month, deliver to the Administrative Agent a copy of the
Borrower's internally prepared monthly accounts payable aging.
(e) BORROWING BASE CERTIFICATE. Within fifteen (15) days after the
end of each fiscal month, deliver to the Administrative Agent a Borrowing Base
Certificate and an Inventory Report (with such supporting schedules as the
Administrative Agent may request) signed by the chief financial officer or other
officer of the Borrower satisfactory to the Administrative Agent, provided,
however, that if excess Borrowing Base availability is less than or equal to
$2,500,000, the Borrower shall deliver the Borrowing Base Certificate to the
Administrative Agent on a weekly basis. Notwithstanding the foregoing, the
Borrower shall deliver a Borrowing Base Certificate more frequently than
otherwise provided herein at the request of the Administrative Agent.
(f) ANNUAL PROJECTIONS. Before the first day of each fiscal year,
deliver to the Administrative Agent financial statement projections prepared on
a monthly basis for the following fiscal year.
(g) MATERIAL INVENTORY SUPPLIER LIST. Within thirty (30) days after
the end of each calendar year, deliver to the Administrative Agent a list of all
Material Inventory Suppliers during the prior fiscal year.
(h) SEC FILINGS. Within five (5) days after filing with the
Securities and Exchange Commission, deliver to the Administrative Agent a copy
of the Borrower's Forms 10-K, 10-Q and any other material non-confidential
filings with the SEC.
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(i) ADDITIONAL INFORMATION. Deliver to the Administrative Agent such
additional financial information, statements and reports as the Administrative
Agent may reasonably request from time to time, including a Borrowing Base
Certificate more frequently than monthly if the Administrative Agent so
requests.
Section 6.8 INSURANCE. Carry and maintain in full force and effect at
all times with financially sound and reputable insurance companies (a) all
insurance required pursuant to the Security Agreement, (b) insurance acceptable
to the Lender covering all of its property of an insurable nature (including,
without limitation, the Inventory) against casualty risks of such types and in
such amounts as such insurance is usually carried by businesses of established
reputation and comparable type and size and as may be acceptable to the Lender;
including, without limitation, liability on account of damage to persons or
property and applicable workers' compensation insurance, and (c) and such other
insurance as the Lender may reasonably require. The Borrower shall deliver to
the Administrative Agent from time to time at the Administrative Agent's request
schedules setting forth all insurance then in effect and shall cause the Lender
to be named as additional insured or loss payee and provide the Lender with such
certificates of insurance as the Lender may require.
Section 6.9 MAINTENANCE OF PROPERTY. Maintain and preserve all of its
properties in good working order and condition, so that the efficiency of the
Borrower's operations and business shall be fully maintained and preserved.
Section 6.10 COMPLIANCE WITH LAWS. Comply in all material respects with
all laws, regulations, rules and orders of governmental authorities applicable
to he Borrower or to its operations, business or property.
Section 6.11 TAXES AND OTHER CHARGES. Duly pay and discharge all
indebtedness, obligations, assessments, governmental charges and taxes, real and
personal, including federal and state income taxes, levied upon or assessed
against it or against its properties or income prior to the date on which
penalties are attached thereto, unless, and only to the extent that, such shall
be contested in good faith and by appropriate proceedings diligently conducted
by the Borrower (unless and until foreclosure, distraint, sale or other similar
proceedings shall have been commenced) and provided that such reserve or other
appropriate provision, if any, as shall be required by GAAP has been made.
Section 6.12 FURTHER ASSURANCE. Execute and deliver to the Lender or the
Administrative Agent such other and further instruments, security agreements,
documents and information and do such other and further acts as may be
reasonably required and requested by the Lender or the Administrative Agent in
order to fully vest, perfect and maintain in the Lender any security interests
or other rights herein contemplated.
Section 6.13 FINANCIAL COVENANTS. Maintain the following:
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(a) A ratio of current assets to the sum of current liabilities plus
the aggregate outstanding balance under the Loan of at least 1.10 to 1.00
computed monthly as at the end of each month. Current assets and current
liabilities shall be calculated in accordance with GAAP. For purposes of this
Section 6.13(a), prepaid expenses and stockholder receivables included in the
calculation of current assets shall not exceed $1,250,000.
(b) Maintain during each of the periods set forth below, a minimum
Net Worth calculated as at the end of each month in such period in an amount
which is greater than or equal to the amount set forth opposite such period;
PROVIDED THAT the minimum Net Worth that the Borrower is required to maintain
shall be increased by the sum of (i) 100% of the net proceeds received by the
Borrower for the sale of any equity securities after the date of this Agreement,
and (ii) 75% of the amount, if any, by which the Borrower's net after-tax income
determined in accordance with GAAP for the fiscal year of the Borrower ending
January 31, 1997 exceeds $2,900,000:
Period Minimum Net Worth
------ -----------------
Date hereof to and including $39,000,000
December 30, 1996
December 31, 1996 to and including $42,000,000
December 30, 1997
December 31, 1997 to and including $44,500,000
September 30, 1998
(c) Maintain on each of the dates set forth below a maximum ratio of
Funded Debt to EBITDA determined for the four fiscal quarters of the Borrower
ending on such date that is less than or equal to the ratio set forth opposite
such date;
Date Ratio
---- -----
January 31, 1997 3.5 to 1.0
April 30, 1997 3.5 to 1.0
July 31, 1997 3.5 to 1.0
October 31, 1997 3.5 to 1.0
January 31, 1998 3.5 to 1.0
April 30, 1998 3.5 to 1.0
July 31, 1998 3.5 to 1.0
Section 6.14 NOTIFICATIONS. Promptly after learning thereof, notify the
Administrative Agent in writing of the occurrence of (a) any Event of Default or
any act, condition or event that with the giving of notice and/or the passage of
time would constitute an Event of Default,
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which notification shall include a statement of the chief executive or financial
officer of the Borrower setting forth details of such act, condition or event
and the action the Borrower proposes to take with respect thereto; (b) any
material adverse change in the business, operations or financial condition of
the Borrower; or (c) the pendency or threat of any investigation or material
litigation or arbitration and of any tax deficiency or other proceeding before
any governmental body or official affecting the Borrower.
Section 6.15 PRIMARY DEPOSIT RELATIONSHIP. Maintain the Borrower's
primary deposit relationship with the Lender and its affiliates.
Section 6.16 CHANGE IN MANAGEMENT. Immediately notify the Administrative
Agent of any change in the senior management (which shall mean vice president or
above) of the Borrower.
Section 6.17 INDEMNITY. The Borrower shall indemnify and hold harmless
the Lender and the Administrative Agent and persons or entities owned or
controlled by or affiliated with the Lender or the Administrative Agent and
their directors, officers, shareholders, partners, employees, consultants and
agents (herein individually called an "INDEMNIFIED PARTY," and collectively
called "INDEMNIFIED PARTIES") from and against, and reimburse and pay
Indemnified Parties with respect to, any and all claims, demands, liabilities,
losses, damages (including, without limitation, actual, consequential, exemplary
and punitive damages), causes of action, judgments, penalties, fees, costs and
expenses (including, without limitation, attorneys' fees, court costs and legal
expenses and consultants' and experts' fees and expenses), of any and every kind
or character, known or unknown, fixed or contingent, that may be imposed upon,
asserted against or incurred or paid by or on behalf of any Indemnified Party on
account of, in connection with, or arising out of (a) any act performed or
omitted to be performed hereunder or the breach of or failure to perform any
warranty, representation, indemnity, covenant, agreement or condition contained
in any of the Loan Documents, (b) any transaction, act, omission, event or
circumstance arising out of or in any way connected with the Collateral or the
Borrower's performance or obligation under any of the Loan Documents, (c) the
Borrower's violation of or failure to comply with any statute, law, rule,
regulation or order now existing or hereafter occurring, including, without
limitation, environmental laws and statutes, laws, rules, regulations and orders
relating to pollutants, contaminants, wastes or hazardous, dangerous or toxic
substances, and (d) the Borrower's failure to pay any expense associated with
the Loan. Without limiting the generality of the foregoing, it is the intention
of the Borrower and the Borrower agrees that the foregoing indemnities shall
apply to each Indemnified Party with respect to claims, demands, liabilities,
losses, damages (including, without limitation, actual, consequential, exemplary
and punitive damages, causes of action, judgments, penalties, fees, costs and
expenses (including without limitation, attorneys' fees, court costs and legal
expenses and consultants' and experts' fees and expenses) of any and every kind
or character, known or unknown, fixed or contingent, that in whole or in part
are caused by or arise out of the negligence of such Indemnified Party; however,
such indemnities shall not apply to any
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Indemnified Party to the extent the subject of that indemnification is caused by
or arises out of the gross negligence or willful misconduct of such Indemnified
Party. The foregoing indemnities shall not terminate upon release or
foreclosure of the Collateral, but shall survive foreclosure of the liens and
security interests created by the Loan Documents or conveyance in lieu of
foreclosure and the repayment and performance of the Loan and the discharge and
release of the liens and security interest created by the other Loan Documents.
Any amount to be paid hereunder by the Borrower or for which the Borrower has
indemnified an Indemnified Party shall be a demand obligation owing by the
Borrower to the Lender or the Administrative Agent and shall bear interest at
the Default Rate until paid, and shall constitute a part of the Obligations and
be indebtedness secured and evidenced by the Loan Documents.
Section 6.18 LANDLORD'S WAIVERS. The Borrower shall deliver to the
Administrative Agent a landlord's waiver in form and substance acceptable to the
Administrative Agent from the landlord of any premises at which any of the
Collateral is located.
Section 6.19 LOAN EXPENSES. Within five (5) days after demand by the
Lender or the Administrative Agent, pay to the Administrative Agent any Loan
Expenses incurred by either the Lender or the Administrative Agent.
Section 6.20 MATERIAL INVENTORY SUPPLIER. Promptly after entering
into any agreement with any Material Inventory Supplier or any amendment to
any agreement with any Material Inventory Supplier (other than any amendment
which adds additional retail locations at which the Borrower is transacting
business), provide the Administrative Agent with a copy of such agreement or
amendment.
ARTICLE VII
NEGATIVE COVENANTS
Without the Lender's or the Administrative Agent's prior written consent,
so long as any or Obligations remain outstanding hereunder, the Borrower will
not:
Section 7.1 FIXED ASSET EXPENDITURES. Make any capital expenditures (as
such term is defined in accordance with GAAP) or expenditures for fixed assets
in excess of $8,000,000 during any fiscal year of the Borrower.
Section 7.2 INDEBTEDNESS. Create, incur, permit, assume or suffer to
exist any Indebtedness, except (a) the obligations created hereby; (b)
Indebtedness created or incurred in the ordinary course of business which
constitutes trade payables or obligations other than indebtedness for borrowed
money or Indebtedness representing the deferred purchase price of goods, (c)
leases which are or should be classified as operating leases in accordance with
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GAAP; (d) Manufacturer Payables, (e) the Bond Indebtedness, and (f) the capital
leases and term debt described on Schedule7.2 hereto and additional capital
leases for store locations entered into in the ordinary course of business.
Section 7.3 LIENS. Create, incur, permit, assume or suffer to exist any
liens on any Collateral not permitted by the Security Agreement.
Section 7.4 SELL, MERGE, DISPOSE OF ASSETS. Merge or consolidate into
or with any other corporation, or permit any other corporation to merge into the
Borrower, or dissolve or liquidate, or sell, lease or otherwise dispose of, in a
single transaction or a series of related transactions, all or a substantial
part of its assets or operating properties or the Collateral.
Section 7.5 CAPITAL STRUCTURE. Effect any recapitalization, alter or
amend its capital structure, or sell, transfer or otherwise convey any or all of
the stock of the Borrower the result of which would be to effectuate a change in
control of the Borrower.
Section 7.6 CHANGE OF BUSINESS. Change materially the nature of the
business conducted by the Borrower, engage to any material extent in a kind of
business materially different from that presently conducted or change the
Borrower's fiscal year.
Section 7.7 LOAN. Make any loan or salary advance to any Person; except
loans or salary advances to Borrower's officers, directors, shareholders or
employees not in excess of $100,000 in the aggregate outstanding at any one time
for all such loans and advances.
Section 7.8 ERISA COMPLIANCE. Permit any Plan maintained by it to (a)
engage in any "prohibited transaction" as such term is defined in Section 4975
of the Code, (b) incur any "accumulated funding deficiency" as such term is
defined in Section 302 of ERISA, (c) terminate in a manner which could result in
liability to the Borrower, any Subsidiary of the Borrower, or any ERISA
Affiliate of the Borrower or any ERISA Affiliate of any Subsidiary of the
Borrower that exceeds $1,200,000 or in the imposition of a lien on the property
of the Borrower pursuant to Section 4068 of ERISA or (d) experience an ERISA
Event or any other event or condition that may reasonably be expected to result
in liability to the Borrower, any ERISA Affiliate of any Subsidiary of the
Borrower, or any ERISA Affiliate of the Borrower or any Subsidiary of the
Borrower in an aggregate amount exceeding $1,200,000, or (e) have nonforfeitable
accrued benefits with a present value in excess of the fair market value of Plan
assets by $1,200,000 or more, all determined as of the most recent actuarial
valuation date for each such Plan based upon the actuarial assumptions used by
the Plan's actuaries for purposes of determining the funding for the Plan
pursuant to Section 412 of the Code. The Borrower will not, and will not permit
any Subsidiary of the Borrower or any ERISA Affiliate of either of them to,
create or suffer to exist any liability, including, without limitation,
liabilities with respect to terminated employees, with respect to a Welfare
Plan, if, immediately after giving effect to such liability, the aggregate
annualized cost (including, without limitation, the cost of
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insurance premiums) with respect to Welfare Plans for which the Borrower, all
Subsidiaries of the Borrower and all ERISA Affiliates thereof are or may become
liable in any fiscal year of the Borrower would exceed $1,200,000.
Section 7.9 DISTRIBUTIONS, DIVIDENDS. Declare, pay, set aside funds for
or make any distribution or dividend, in cash or assets or trust, to or for the
benefit of the Borrower's shareholders.
Section 7.10 ASSIGNMENT. Assign or attempt to assign any of its rights
or delegate any of its duties under this Agreement or any other Loan Document.
Section 7.11 USE OF FUNDS. Use funds advanced under this Agreement for
any purpose other than for ordinary working capital purposes.
Section 7.12 ACCOUNTING PROCEDURES. Make a material change in the
Borrower's accounting procedures, whether for tax purposes or otherwise, except
as may be required by GAAP.
Section 7.13 BORROWING BASE CONFORMITY. The Borrowing Base shall not at
any time include Inventory which the Borrower knows or should know to be other
than Acceptable Inventory.
Section 7.14 SUBSIDIARY OR AFFILIATE. Form or consent to or take part in
the formation of any Subsidiary or affiliate.
Section 7.15 AMENDMENTS TO ORGANIZATIONAL DOCUMENTS. Amend or permit any
amendments to its Certificate of Incorporation, Bylaws or other governing
documents.
Section 7.16 INVESTMENTS AND NEW BUSINESSES. Make any acquisitions of or
capital contributions to or other investments in any Person other than (a)
investments in open market commercial paper, maturing within 365 days after
acquisition thereof, with a credit rating of at least A-1 or P-1 by either
Standard & Poor's Corporation or Moody's Investors Service, Inc., (b) marketable
obligations issued or unconditionally guaranteed by the United States of America
or an instrumentality or agency thereof and entitled to the full faith and
credit of the United States of America, (c) municipal bonds with a credit rating
of at least A by either Standard & Poor's or Moody's, and (d) demand deposits,
time deposits (including certificates of deposit), and money market accounts.
Section 7.17 BURDENSOME UNDERTAKINGS. Undertake, or become contractually
bound to undertake, any action that is reasonably likely to have a material
adverse affect on Borrower or its present or future business, properties,
assets, operations or financial condition.
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ARTICLE VIII
EVENTS OF DEFAULT
The occurrence of any one or more of the following events or existence of
one or more of the following conditions shall, at the election of the Lender,
constitute an Event of Default under this Agreement and all other Loan
Documents:
Section 8.1 FAILURE TO PAY NOTE. The Borrower shall fail to pay the
principal of or interest on the Note, or any installment thereof (whether due
on the date provided for therein or by acceleration or otherwise).
Section 8.2 OTHER OBLIGATIONS. The failure of the Borrower properly to
observe or perform any other obligation, covenant or agreement set forth herein,
which failure is not cured within 10 days after notice from the Lender or the
Administrative Agent.
Section 8.3 MISREPRESENTATION. Any representation or warranty made by
the Borrower to the Lender herein or in connection with the making of the Loan,
or in any certificate, statement or report made pursuant to this Agreement is
false, misleading or erroneous in any material respect.
Section 8.4 DEFAULT UNDER LOAN DOCUMENTS. The occurrence of any default
by the Borrower, or the occurrence of any event or circumstance defined as an
event of default, under any of the Loan Documents, not cured within the
applicable cure period, if any, set forth therein.
Section 8.5 BANKRUPTCY. The Borrower or any of its Subsidiaries shall
make an assignment for the benefit of creditors; file a petition in bankruptcy;
be adjudicated insolvent or bankrupt or admit in writing the inability to pay
debts as they mature; petition or apply to any tribunal for the appointment of a
receiver of any trustee or similar officer for the Borrower or a substantial
part of the assets of the Borrower; or shall commence any proceeding under any
bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, whether now or hereafter in
effect; or if there shall have been filed any such petition or application, or
any such proceeding shall have been commenced against the Borrower that remains
undismissed for a period of sixty (60) days or more; or the Borrower by any act
or omission shall indicate its consent to, approval of or acquiescence in any
such petition, application or proceeding, or the appointment of a receiver of or
any trustee or similar officer for the Borrower, or the Collateral or any
substantial part of any of the properties of the Borrower, or shall suffer any
such receivership or trusteeship to continue undischarged for a period of thirty
days or more; 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
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Borrower, and such judgment, writ or similar process shall not be released,
vacated or fully bonded within sixty days after its issue or levy.
Section 8.6 INDEBTEDNESS. The Borrower shall fail to pay when due the
principal or interest on any Indebtedness of the Borrower in excess of $250,000
in the aggregate, or a default by the Borrower in the observance or performance
of any term, covenant or agreement of the Borrower in any agreement relating to
any indebtedness of the Borrower, and the passage of any period of grace with
respect thereto, the effect of which default is to permit the holder of such
indebtedness to declare the same due prior to the date fixed for its payment
under the terms thereof.
Section 8.7 LOAN DOCUMENTS. This Agreement or any Loan Document shall
at any time for any reason cease to be in full force and effect.
Section 8.8 CONTEST LOAN DOCUMENTS. The Borrower shall contest the
validity or enforceability of, or deny that it has any or further liability or
obligations under, this Agreement or any Loan Document.
Section 8.9 MATERIAL ADVERSE CHANGE. There shall occur a material
adverse change, as reasonably determined by the Lender acting in good faith, in
the condition, value or marketability of the Collateral or in the financial
condition of the Borrower.
Section 8.10 LITIGATION. The commencement of any litigation or
proceeding which may reasonably be expected, in the good faith determination of
the Lender, to materially and adversely affect the ability of the Borrower to
perform its obligations under the Loan Documents, which has not been dismissed
within 120 days after filing.
Section 8.11 JUDGMENTS. The entry of a final judgment against the
Borrower in excess of $250,000 which shall not be discharged or execution
thereon stayed pending appeal or, in the event of such stay, such judgment
shall not be discharged immediately after such stay expires.
Section 8.12 ERISA. Any ERISA Event shall have occurred with respect to
a Plan and, thirty days after notice thereof shall have been given to the
Borrower by the Lender or the Administrative Agent (i) such ERISA Event shall
still exist and (ii) in the case of an ERISA Event described in clauses (a),
(e), (f), (i) and (j) of the definition of ERISA Event, the sum (determined as
of the date of occurrence of such ERISA Event) of the insufficiency of such Plan
and the Insufficiency of any and all other Plans with respect to which an ERISA
Event shall have occurred and then exist is equal to or greater than $1,200,000.
Section 8.13 SECURITY INTEREST. Borrower shall grant or permit the
manufacturer, supplier, vendor or distributor of any of Borrower's Inventory or
any other Party to have any
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security interest in any of Borrower's Inventory, including, without limitation,
any purchase money security interest.
Section 8.14 QUALIFIED OPINION. The auditor's opinion accompanying the
audited financial statements provided by the Borrower pursuant to Section 6.7
shall contain any qualifications not acceptable to the Administrative Agent in
its reasonable discretion.
ARTICLE IX
REMEDIES
Section 9.1 RIGHT TO ACCELERATE. Upon the occurrence of any Event of
Default and at any time thereafter during the continuance thereof, the Lender
shall be under no further obligation to make Advances of the Loan hereunder or
take any other action with respect to this Agreement, and all amounts advanced
under the Loan shall, at the option of the Lender, bear interest from the date
of such Event of Default at the Default Rate of interest. Upon the occurrence
of an Event of Default, the Loan with all accrued interest and other amounts
payable hereunder, shall, at the option of the Lender during the continuance of
such Event of Default, become immediately due and payable without presentment,
demand, protest or other notice of any kind, all of which are expressly waived
by the Borrower. Except as set forth in the preceding sentence, the Lender may
declare a default under all other Loan Documents, and the Administrative Agent
or the Lender (as applicable) may proceed with every remedy available at law or
in equity or provided for herein or in any other Loan Documents, and all
expenses incurred by the Lender or the Administrative Agent (including, but not
limited to, reasonable attorneys' fees and disbursements) in connection with any
remedy shall be deemed Obligations of the Borrower to the Lender and a part of
the Obligations owed by the Borrower to the Lender hereunder.
Section 9.2 NO WAIVER; REMEDIES CUMULATIVE. No delay or failure of the
Lender or the Administrative Agent in the exercise of any right or remedy
provided for hereunder shall be deemed a waiver of the right by the Lender or
the Administrative Agent, and no exercise or partial exercise or waiver of any
right or remedy shall be deemed a waiver of any further exercise of such right
or remedy or of any other right or remedy that the Lender or the Administrative
Agent may have. The enforcement of any rights of the Lender or the
Administrative Agent as to any security for the Loan shall not affect the rights
of the Lender to enforce payment of the Loan and to recover judgment for any
portion thereof remaining unpaid. The rights and remedies herein expressed are
cumulative and not exclusive of any right or remedy that the Lender or the
Administrative Agent shall otherwise have.
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ARTICLE X
THE ADMINISTRATIVE AGENT
Section 10.1 APPOINTMENT. The Lender hereby irrevocably designates and
appoints the Administrative Agent as its agent under this Agreement and the
other Loan Documents, and irrevocably authorizes the Administrative Agent as the
agent for such Lender, to take such action on its behalf under the provisions of
this Agreement and the other Loan Documents and to exercise such powers and
perform such duties as are expressly delegated to the Administrative Agent by
the terms of this Agreement and the other Loan Documents, together with such
other powers as are reasonably incidental thereto. Notwithstanding any
provision to the contrary contained elsewhere in this Agreement, the
Administrative Agent shall not have any duties or responsibilities, except those
expressly set forth herein, or any fiduciary relationship with the Lender, and
no implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Loan Document or
otherwise exist against the Administrative Agent.
Section 10.2 DELEGATION OF DUTIES. The Administrative Agent may execute
any of its duties under this Agreement and the other Loan Documents by or
through agents or attorneys-in-fact and shall be entitled to rely on advice of
counsel concerning all matters pertaining to such duties. The Administrative
Agent shall not be responsible to the Lender for the negligence or misconduct of
any agents or attorneys-in-fact selected by them, provided that the
Administrative Agent selects such agent or attorney-in-fact with reasonable
care.
Section 10.3 EXCULPATORY PROVISIONS. Neither the Administrative Agent
nor any of its officers, directors, employees, agents, attorneys-in-fact or
affiliates shall be (a) liable to Lender for any action lawfully taken or
omitted to be taken by it or such Person or entity under or in connection with
this Agreement or any other Loan Document (except for its or such Person's or
entity's own gross negligence or willful misconduct), or (b) responsible in any
manner to the Lender for any recitals, statements, representations or warranties
made by Borrower or any representative thereof or any other Person contained in
this Agreement or any other Loan Document or in any certificate, report,
statement or other document referred to or provided for in, or received by the
Administrative Agent under or in connect on with this Agreement or any other
Loan Document or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or the Note or any other Loan
Document or for any failure of Borrower to perform its obligations hereunder or
thereunder. The Administrative Agent shall not be under any obligation to the
Lender to ascertain or to inquire as to the observance or performance of any of
the agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of the Borrower.
Section 10.4 RELIANCE BY THE ADMINISTRATIVE AGENT. The Administrative
Agent shall be entitled to rely, and shall be fully protected in relying, upon
(a) any writing, resolution, notice,
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consent, certificate, affidavit, letter, telecopy or telex message, statement,
order or other document or conversation believed by it to be genuine and correct
and to have been signed, sent or made by the proper Person or Persons, (b)
advice and statements of legal counsel (including, without limitation, counsel
to the Borrower), (c) independent accountants and (d) other experts selected by
the Administrative Agent. The Administrative Agent shall be fully justified in
failing or refusing to take any action under this Agreement or any other Loan
Document unless it shall first receive such advice or concurrence of the Lender
(except as otherwise expressly provided herein) as it deems appropriate or it
shall first be indemnified to its satisfaction by the Lender against any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action. The Administrative Agent shall in all cases
be fully protected in acting, or in refraining from acting, under this Agreement
and the Note and the other Loan Documents in accordance with a request of the
Lender (except as otherwise expressly provided herein), and such request and any
action taken or failure to act pursuant thereto shall be binding upon all the
Lender and all future holders of the Note.
Section 10.5 INDEMNIFICATION. The Lender agrees to indemnify the
Administrative Agent in its capacity as such (to the extent not reimbursed by
the Borrower and without limiting the obligation of the Borrower to do so), from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind
whatsoever which may at any time (including, without limitation, at any time
following the payment of the Note) be imposed on, incurred by or asserted
against the Administrative Agent in any way relating to or arising out of this
Agreement, any of the other Loan Documents or the transactions contemplated
hereby or thereby or any action taken or omitted the Administrative Agent under
or in connection with any of the foregoing; PROVIDED THAT the Lender shall not
be liable for the payment of any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting solely from the Administrative Agent's gross negligence
or willful misconduct. The agreements in this subsection shall survive the
payment of the Note and all other amounts payable hereunder.
Section 10.6 ADMINISTRATIVE AGENT IN ITS INDIVIDUAL CAPACITY. The
Administrative Agent and its affiliates may participate in the Loan and make
loans to, accept deposits from and generally engage in any kind of business with
Borrower as though it was not an Administrative Agent, hereunder and under the
other Loan Documents.
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ARTICLE XI
RIGHTS AND DUTIES OF LENDER
Section 11.1 ASSIGNMENTS AND PARTICIPATIONS. The Lender shall be
entitled at any time, and from time to time, to grant a participation interest
in portions of its interest in the Loan provided that the Lender shall continue
to act on behalf of itself and all participants hereunder and such participants'
interests in the Loan and the Loan Documents shall be confined solely to the
contractual relationship between the Lender and its participants and such
participants shall not be deemed a direct Lender hereunder, or to sell an
assignment of the Loan; provided, however, that no such participation or sale of
an assignment (other than the first three such participations) shall result in
any additional expense to the Borrower or shall alter any of the rights or
obligations of the Borrower hereunder. The Borrower acknowledges that the
Lender intends to sell participating interests in the Loan and the Loan
Documents and may sell an assignment of the Loan and agrees to cooperate with
the Lender in the sale of any such participating interests or assignment.
Section 11.2 RELIANCE UPON ATTORNEYS. The Lender and the Administrative
Agent may rely upon advice received from time to time from attorneys,
experienced as bank counsel, and any action taken by the Lender or the
Administrative Agent upon the basis (if any such advice shall be deemed to be
reasonable.
Section 11.3 ACCEPTANCE AND CONSENT BY THE LENDER. Unless otherwise
indicated herein, the phrases "acceptable to the Lender," and "as the Lender may
require" or other similar phrases used in this Agreement, shall mean acceptable
to the Lender, in its sole and absolute discretion and as the Lender, may
require in its sole and absolute discretion. In addition, any consent by or
other action required by the Lender or the Administrative Agent hereunder or
under any other Loan Document or any discretion to be rendered by the Lender or
the Administrative Agent hereunder or under any other Loan Document shall be in
the Lender's or the Administrative Agent's sole and absolute discretion unless
otherwise indicated.
ARTICLE XII
MISCELLANEOUS
Section 12.1 COMMUNICATION.
(a) Any notice, request, demand, consent, approval or other
communication required or permitted hereunder to be given by the Borrower to the
Lender or the Administrative Agent shall be in writing and shall be deemed to
have been given when personally delivered, when delivered if by overnight
delivery service or three days after having
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been mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the Lender or the Administrative Agent
at the address adjacent to such party's name on the signature page hereto.
(b) Any notice, request, demand, consent, approval or other
communication required or permitted hereunder to be given to the Borrower shall
be deemed to have been given when personally delivered, when delivered if sent
by overnight delivery service, or three days after having been mailed by United
States registered or certified mail, return receipt requested, postage prepaid,
addressed to the Borrower at the address adjacent to Borrower's name on the
signature page hereto.
(c) Any party may change its address for purposes of receipt of any
such communication by giving ten (10) days' prior written notice of such change
to the other parties in the manner above prescribed.
Section 12.2 SEVERABILITY. In the event any provision of this Agreement
or any other Loan Document shall be held invalid or unenforceable by any court
of competent jurisdiction, such holding shall not invalidate or render
unenforceable any other provision hereof or thereof, nor affect the validity or
enforceability of such provision in any other jurisdiction.
Section 12.3 WAIVERS. No course of dealing on the part of any Lender or
the Administrative Agent, or the officers, employees, consultants or agents
thereof, nor any failure or delay by the Lender or the Administrative Agent with
respect to exercising any right, remedy, power or privilege under any Loan
Document or at law or in equity shall operate as a waiver thereof, nor shall a
single or partial exercise thereof preclude any other or further exercise or the
exercise of any other right, remedy, power or privilege. No waiver or consent
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 12.4 CUMULATIVE RIGHTS. The enforcement of any rights of the
Lender as to any security for the Loan shall not affect the Lender's rights to
enforce payment of the Loan and to recover judgment for any portion thereof
remaining unpaid. The rights and remedies herein expressed are cumulative and
not exclusive of any right or remedy that the Lender, shall otherwise have.
Section 12.5 RIGHT OF SETOFF. The Borrower hereby confirms the
Lender's rights of banker's lien and setoff and nothing in this Agreement, or
any other Loan Document shall be deemed a waiver, limitation or prohibition of
such right of banker's lien or setoff.
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Section 12.6 COLORADO LAW. The substantive law of Colorado shall govern
all the terms, conditions and interpretations of the Loan, this Agreement and
all other Loan Documents.
Section 12.7 VENUE AND JURISDICTION. In the event of litigation
concerning the Loan, this Agreement or any other Loan Documents, the parties
hereto agree that the exclusive venue and place of jurisdiction shall be the
State of Colorado, City and County of Denver, including the United States
District Court for the District of Colorado.
Section 12.8 ASSIGNMENT. The Borrower may not assign any of its rights
hereunder without the prior written consent of the Lender. Any assignment
without such consent shall be void and shall constitute a default hereunder.
Subject to Section 11.1, the Lender may sell, assign, transfer or grant
participations in all or any part of the Loan without the prior written consent
of the Borrower.
Section 12.9 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon, and shall inure to the benefit of and be enforceable by, the Borrower the
Administrative Agent and the Lender and their respective successors and assigns.
Section 12.10 HEADINGS. The paragraph headings herein are for convenience
only and shall not affect the construction hereof.
Section 12.11 THIRD-PARTY BENEFICIARY. This Agreement and all
instruments, documents or agreements executed pursuant hereto are not intended
to benefit any person other than the Borrower and the Lender.
Section 12.12 ENTIRE AGREEMENT. This Agreement and the other Loan
Documents contain the entire agreement between the Borrower, the Lender and the
Administrative Agent with respect to the subject matter contained herein and
therein, and supersede and cancel any prior agreement or understanding, oral or
written, with respect to such subject matter.
Section 12.13 CONFLICT. In the event of a conflict between the terms,
covenants and conditions stated herein and those stated in any other Loan
Document, this Agreement shall govern.
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Section 12.14 SURVIVAL OF REPRESENTATION AND WARRANTIES. All
representations and warranties contained in this Agreement or made in writing by
or on behalf of the Borrower in connection with the transactions contemplated
hereby shall survive the execution and delivery of this Agreement and of the
Note, regardless of any investigation at any time made by the Lender or on any
of their behalf. All statements contained in any certificate or other
instrument delivered by or on behalf of the Borrower hereunder or in connection
with the transactions contemplated hereby shall be deemed representations and
warranties of the Borrower hereunder.
Section 12.15 EXECUTED COUNTERPARTS. This Agreement may be executed in
any number of counterparts, each of which shall be an original, but all of which
together shall constitute one agreement.
Section 12.16 WAIVER OF JURY TRIAL. The Borrower, the Lender and the
Administrative Agent hereby waive any right either may have to a jury trial in
the event of litigation concerning the Loan, this Agreement, or any other Loan
Document.
Section 12.17 NO ORAL AGREEMENTS. This document and all other documents
relating hereto constitute a credit agreement under C.R.S. Section 38-10-101 et
seq. which represents the final agreement between the parties and may not be
contradicted by evidence of prior, contemporaneous, or subsequent oral agreement
between the parties.
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Section 12.18 AMENDMENTS. This Agreement may be amended only by a written
agreement executed by the Borrower, the Lender and the Administrative Agent.
BORROWER:
ULTIMATE ELECTRONICS, INC., a
Delaware corporation
By: /s/ David J. Workman
-----------------------------------------
David J. Workman, President
By: /s/ Alan Kessock
-----------------------------------------
Alan Kessock, Vice President, Finance
and Administration
321A W. 84th Avenue
Thornton, Colorado 80221
LENDER:
NORWEST BANK COLORADO, NATIONAL
ASSOCIATION, a National Banking Association
By: /s/ Karen I. Hardy
-----------------------------------------
Karen I. Hardy, Vice President
1740 Broadway
Denver, Colorado 80274-8673
Attention: Karen I. Hardy
ADMINISTRATIVE AGENT:
NORWEST BUSINESS CREDIT, INC.,
a Minnesota corporation
By: /s/ David Larsen
-----------------------------------------
David Larsen, Vice President
1740 Broadway
Denver, Colorado 80274-8625
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EXHIBIT A
(Attached to and forming a part of Credit
Agreement between Ultimate Electronics, Inc. and
Norwest Business Credit, Inc. and
Norwest Bank Colorado, National Association)
BORROWING BASE CERTIFICATE
This Borrowing Base Certificate is delivered pursuant to the terms of a
Credit Agreement ("Credit Agreement") dated November _____, 1996, between
Ultimate Electronics, Inc. ("Borrower") and Norwest Business Credit, Inc. and
Norwest Bank Colorado National Association in connection with a revolving line
of credit in the maximum amount of $35,000,000 from the Lender to Borrower. All
capitalized terms used but not defined herein shall have the meaning given them
in the Credit Agreement.
BORROWING BASE
DATE
Gross Inventory
Less: Unearned Discounts ______________________
Net Inventory
INELIGIBLES:
Defectives (Loc #82)
Free Goods (GL)
Factory Returns (Loc#81)
Variance Reserve (GL)
Excess Discontinued Inv.
Excess Restricted Inv. ______________________
Total Ineligibles ______________________
Advance Rate: 70%
Borrowing Base _____________________
Loan Outstanding _____________________
Excess _____________________
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RESTRICTED ITEMS:
DISCONTINUED INVENTORY:
Audio (Dept#12)
Video (Dept#24)
Television (Dept# 28)
Car (Dept# 32)
Portables (Dept# 42)
Home Office (Dept# 52)
Computer (Dept # 57) ______________________
Total Discontinued
LIMIT: 12% NET INVENTORY
----------------------------------------------------------
EXCESS DISCONTINUED INVENTORY
OTHER RESTRICTED INVENTORY:
Service/Parts (Loc#s 70-75 & 79)
Cellular Phones (Dept #35)
Promotion Items (Dept# 69)
3rd Party Warranty (Dept# 71)
Custom Items (Dept#65) ______________________
Total Other Restricted Items
LIMIT: 12% NET INVENTORY
----------------------------------------------------------
EXCESS OTHER RESTRICTED INVENTORY
The undersigned, as an authorized officer or representative of Borrower,
hereby certifies that (1) all information set forth in this Borrowing Base
Certificate is true and correct in all material respects, (2) all Acceptable
Inventory (as defined in the Credit Agreement) is not subject to any lien,
security interest or encumbrance except those in favor of the Lender, (3) that
Borrower is in compliance of all of the terms and conditions of the Credit
Agreement and that there is no Event of Default (as defined in the Credit
Agreement) or event that, with notice or the passage of time, or both, would
constitute an Event of Default under the Credit Agreement, and (4) all the
representations and warranties set forth in the Credit Agreement are true and
correct as of the date hereof.
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ULTIMATE ELECTRONICS, INC.
By:______________________________
Name:____________________________
Title:___________________________
46
<PAGE>
EXHIBIT B
(Attached to and forming a part of the Credit Agreement
between Ultimate Electronics, Inc. and Norwest Business Credit, Inc.
and Norwest Bank Colorado, National Association)
COVENANT COMPLIANCE
This Compliance Certificate is delivered pursuant to the terms of a Credit
Agreement ("Credit Agreement") dated November _____, 1996 between Ultimate
Electronics, Inc. ("Borrower"), Norwest Business Credit, Inc. and Norwest Bank
Colorado, National Association, in connection with a revolving line of credit in
the maximum amount of $35,000,000 from the Lender to Borrower. All capitalized
terms used but not defined herein shall have the meanings given them in the
Credit Agreement.
The following is based on Borrower's Financial Statements dated as of
______________ __, 199_. All covenant calculations herein are made in
accordance with the terms and conditions of Section 6.13 of the Credit
Agreement.
COVENANT COMPLIANCE
Actual Required
Current Ratio
Current Assets $
Current Liabilities ------- $
Ratio -------
: 1.1:1.0
--- --- --------
Net Worth $ $
------- -------
Funded Debt to EBITDA
Funded Debt $
EBITDA -------
$
-------
Ratio : :
--- --- --------
Capital Expenditures $ $8,000,000
-------
The undersigned, as chief financial officer of Borrower, hereby certifies that
(1) all information set forth in this Compliance Certificate is true, complete
and correct in all material respects, (2) that Borrower is in compliance of all
the terms and conditions of the Credit Agreement and that
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<PAGE>
there is no Event of Default or event that with notice or the passage of time
might constitute an Event of Default, (3) Borrower is in compliance with all of
the covenants set forth in the Credit Agreement, and (4) all of the
representations and warranties set forth in the Credit Agreement are true and
accurate as of the date of this certificate.
ULTIMATE ELECTRONICS, INC.
By:________________________________
Name:______________________________
Chief Financial Officer
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EXHIBIT C
(Attached to and forming a part of the Credit Agreement
between Ultimate Electronics, Inc. and Norwest Business Credit, Inc.
and Norwest Bank Colorado, National Association)
REQUEST FOR ADVANCE
This Request for Advance is given pursuant to Section 2.09 of that certain
Credit Agreement, dated as of November _____, 1996, as the same may have been
amended to the date hereof (the "Credit Agreement"), between Ultimate
Electronics, Inc. ("Borrower"), Norwest Business Credit, Inc. and Norwest Bank
Colorado, National Association. Terms defined in the Credit Agreement are used
herein with the same meanings.
The Borrower hereby gives the Lender irrevocable notice that Borrower requests
an Advance under the Credit Agreement as follows:
1. Date of Advance. The requested date of the proposed Advance is
___________ __, 19_, which is a Business Day and which complies with the
provisions of the Credit Agreement.
2. Details of Advance.
(a) Amount of Advance. The requested aggregate amount of the
proposed Advance is: $_________________.
(b) Type of Advance and Interest Period. The requested type of
Advance and Interest Period (if applicable) for the proposed Advance is (check
(A) or (B) as applicable):
[ ] (A) A LIBOR Rate Advance for an Interest Period of (check
one, as applicable):
[ ] One month
[ ] Two months
[ ] Three months
[ ] (B) A Base Rate Advance.
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If the LIBOR Rate is selected, Borrower hereby represents that there
are currently no more than two Interest Periods to which the LIBOR Rate applies.
The undersigned hereby certifies that the following statements are true on the
date hereof, and will be true on the date of the proposed Advance, before and
after giving effect the proposed Advance:
(a) All conditions precedent under the Credit Agreement to the making
of the proposed Advance are satisfied;
(b) All representations and warranties contained in the Credit
Agreement and in the Loan Documents are true on the date of this requested
Advance as if then given, and Borrower has performed or observed all terms,
agreements, conditions and obligations under the Credit Agreement and under
the Loan Documents to be performed or observed on or prior to the date of
this requested Advance.
(c) No Event of Default or event that with the notice or the passage
of time could constitute an Event of Default has occurred and is continuing
or will result from the making of the requested Advance.
(d) Since the date of the most recent Advance preceding this Request
for Advance (or, if this is the first Request for Advance, the date of the
Credit Agreement), there has been no material adverse change in the
business, financial position or results of operations of Borrower.
Dated: ______________________ __, 19__.
ULTIMATE ELECTRONICS, INC.
By:________________________________
Name: _____________________________
Title: ____________________________
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<PAGE>
FIRST AMENDMENT
TO
CREDIT AGREEMENT
This First Amendment is made this ____ day of February, 1997, by and
between ULTIMATE ELECTRONICS, INC., a Delaware corporation (the "Borrower"),
NORWEST BANK COLORADO, NATIONAL ASSOCIATION (the "Lender") and NORWEST BUSINESS
CREDIT, INC, a Minnesota corporation, as administrative agent for the Lender
(the "Administrative Agent").
RECITALS
The Borrower, the Lender and the Administrative Agent entered into a Credit
Agreement dated as of November 21, 1996 (the "Credit Agreement").
The Borrower has requested that the Lender change certain affirmative
covenants in the Credit Agreement and the Lender is willing to do so on the
terms and subject to the conditions set forth herein.
NOW THEREFORE, in consideration of the premises and the mutual promises
herein contained, the parties hereto agree as follows:
1. Section 6.7 of the Credit Agreement is hereby amended by amending
subsection (d) thereof to read in its entirety as follows:
"(d) MONTHLY ACCOUNTS PAYABLE AGING. Within thirty (30) days after the end
of each fiscal year, deliver to the Administrative Agent a copy of a
summary of the Borrower's internally prepared monthly accounts payable
aging for the applicable month and such additional information as the
Administrative Agent may reasonably request from time to time, provided,
however, that if excess Borrowing Base availability is less than or equal
to $2,500,000, the Borrower shall deliver a complete copy of the Borrower's
internally prepared monthly accounts payable aging."
2. Section 6.7 of the Credit Agreement is hereby further amended by
amending subsection (e) thereof to read in its entirety as follows:
"(e) BORROWING BASE CERTIFICATE. Within thirty (30) days after the end of
each fiscal month, deliver to the Administrative Agent a Borrowing Base
Certificate and an Inventory Report (with such supporting schedules as the
Administrative Agent may request) signed by the chief financial officer or
other officer of the Borrower satisfactory to the Administrative Agent,
provided, however, that if excess Borrowing Base availability is less than
or equal to $2,500,000, the Borrower shall deliver the Borrowing Base
Certificate to the Administrative Agent on a weekly basis. Notwithstanding
the foregoing, the Borrower shall
<PAGE>
deliver a Borrowing Base Certificate more frequently than otherwise
provided herein at the request of the Administrative Agent."
3. Except as specifically amended hereby, the Credit Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be duly executed as of the day and year first above written.
ULTIMATE ELECTRONICS, INC.
By:__________________________________________
Its:_________________________________________
NORWEST BANK COLORADO, NATIONAL ASSOCIATION
By:__________________________________________
Its:_________________________________________
NORWEST BUSINESS CREDIT, INC.
By:__________________________________________
Its:_________________________________________
-2-
<PAGE>
SECOND AMENDMENT
TO
CREDIT AGREEMENT
This Second Amendment is made this 11th day of March, 1997, by and between
ULTIMATE ELECTRONICS, INC., a Delaware corporation (the "Borrower"), NORWEST
BANK COLORADO, NATIONAL ASSOCIATION (the "Lender") and NORWEST BUSINESS CREDIT,
INC, a Minnesota corporation, as administrative agent for the Lender (the
"Administrative Agent").
RECITALS
The Borrower, the Lender and the Administrative Agent entered into a Credit
Agreement dated as of November 21, 1996, as amended (the "Credit Agreement").
The Borrower has requested that the Lender change certain affirmative
covenants in the Credit Agreement and waive certain defaults. The Lender is
willing to do so on the terms and subject to the conditions set forth herein.
NOW THEREFORE, in consideration of the premises and the mutual promises
herein contained, the parties hereto agree as follows:
1. Section 6.13 of the Credit Agreement is hereby amended to read in its
entirety as follows:
"Section 6.13 FINANCIAL COVENANTS. Maintain the following:
(a) A ratio of current assets to the sum of current liabilities plus
the aggregate outstanding balance under the Loan of at least 1.10 to 1.00
computed monthly as at the end of each month. Current assets and current
liabilities shall be calculated in accordance with GAAP. For purposes of this
Section 6.13(a), prepaid expenses and stockholder receivables included in the
calculation of current assets shall not exceed $1,250,000.
(b) Maintain during each of the periods set forth below, a minimum
Net Worth calculated as at the end of each month in such period in an amount
which is greater than or equal to the amount set forth opposite such period;
PROVIDED THAT the minimum Net Worth that the Borrower is required to maintain
shall be increased by the sum of 100% of the net proceeds received by the
Borrower for the sale of any equity securities after the date of this Agreement:
Period Minimum Net Worth
------ -----------------
February 28, 1997 to and including $41,000,000
November 30, 1997
<PAGE>
December 1, 1997 to and including $43,000,000
January 31, 1998
(c) Maintain on each of the dates set forth below a maximum ratio of
Funded Indebtedness to EBITDA determined for the four fiscal quarters of the
Borrower ending on such date that is less than or equal to the ratio set forth
opposite such date:
Date Ratio
---- -----
April 30, 1997 4.0 to 1.0
July 31, 1997 4.0 to 1.0
October 31, 1997 3.5 to 1.0
January 31, 1998 3.0 to 1.0
2. The Lender hereby waives any default or Event of Default of the
Borrower, occurring on or prior to January 31, 1997 under the Financial
Covenants in Section 6.13(b) and 6.13(c) of the Credit Agreement as of the date
any such default or Event of Default occurred.
3. Except as specifically amended hereby, the Credit Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed as of the day and year first above written.
ULTIMATE ELECTRONICS, INC.
By: /s/ [Illegible]
------------------------------
Its: Vice President
------------------------------
NORWEST BANK COLORADO, NATIONAL
ASSOCIATION
By: /s/ [Illegible]
------------------------------
Its: Vice President
------------------------------
NORWEST BUSINESS CREDIT, INC.
By: /s/ [Illegible]
------------------------------
Its: Assistant Vice President
------------------------------
-2-
<PAGE>
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
==============================================================================
YEAR ENDED JANUARY 31,
1997 1996 1995
------ ------ ------
(in thousands, except per share data)
Average shares outstanding 6,995 5,861 5,500
Net effect of dilutive stock
options based on the
treasury stock method using
average market price - 45 83
------ ------ ------
Total 6,995 5,906 5,583
------ ------ ------
------ ------ ------
Income or pro forma income
before cumulative effect
of change in accounting
method $ 785 $3,832 $4,890
------ ------ ------
------ ------ ------
Net income or pro forma net
income (1) $ 785 $2,844 $4,212
------ ------ ------
------ ------ ------
Earnings or pro forma earnings
per share before cumulative
effect of change in
accounting method $ .11 $ .65 $ .88
------ ------ ------
------ ------ ------
Earnings or pro forma earnings
per share $ .11 $ .48 $ .76
------ ------ ------
------ ------ ------
- -------------------
(1) - During fiscal 1996, the Company changed its accounting method for
preopening expenses, resulting in a cumulative effect adjustment of
($0.17) per share, net of taxes. Net income includes certain pro
forma adjustments for the years prior to fiscal 1996 to reflect this
change in accounting method.
<PAGE>
EXHIBIT 23.1 - CONSENT OF INDEPENDENT AUDITORS
===============================================================================
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Ultimate Electronics, Inc. of our report dated March 7, 1997, included in
the 1997 Annual Report to Stockholders of Ultimate Electronics, Inc.
Our audits also included the financial statement schedule of Ultimate
Electronics, Inc. listed in Item 14(a). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion
based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-94636, No. 33-92256 and No. 33-92258)
pertaining to the SoundTrack 401(k) Retirement Savings Plan, the Non-employee
Director Stock Option Plan and the Employee Stock Option Plan, respectively,
of Ultimate Electronics, Inc. of our report dated March 7, 1997 with respect
to the financial statements and schedule of Ultimate Electronics, Inc.
included or incorporated by reference in this Annual Report (Form 10-K) for
the year ended January 31, 1997.
Ernst & Young LLP
Denver, Colorado
April 8, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 764
<SECURITIES> 0
<RECEIVABLES> 13,968
<ALLOWANCES> 180
<INVENTORY> 41,414
<CURRENT-ASSETS> 56,608
<PP&E> 53,536
<DEPRECIATION> 8,904
<TOTAL-ASSETS> 103,310
<CURRENT-LIABILITIES> 28,740
<BONDS> 32,173
0
0
<COMMON> 70
<OTHER-SE> 41,633
<TOTAL-LIABILITY-AND-EQUITY> 103,310
<SALES> 261,154
<TOTAL-REVENUES> 261,154
<CGS> 191,903
<TOTAL-COSTS> 64,786
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,210
<INCOME-PRETAX> 1,225
<INCOME-TAX> 470
<INCOME-CONTINUING> 785
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 785
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
