<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 1999
REGISTRATION NO. 333-36911
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
PAPER WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
------------------------------
<TABLE>
<S> <C> <C>
MINNESOTA 5943 41-1612534
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
------------------------------
7630 EXCELSIOR BOULEVARD
MINNEAPOLIS, MINNESOTA 55426
(612) 936-1000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------
YALE T. DOLGINOW
PRESIDENT AND CHIEF EXECUTIVE OFFICER
7630 EXCELSIOR BOULEVARD
MINNEAPOLIS, MINNESOTA 55426
(612) 936-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
BRUCE A. MACHMEIER, ESQ. DANIEL A. YARANO, ESQ.
Oppenheimer Wolff & Donnelly LLP Fredrikson & Byron, P.A.
Plaza VII, Suite 3400 Suite 1100
45 South Seventh Street 900 Second Avenue South
Minneapolis, Minnesota 55402 Minneapolis, Minnesota 55402
(612) 607-7000 (612) 347-7000
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 14, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES. THIS PROSPECTUS IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
[LOGO]
$4,000,000
9% CONVERTIBLE SUBORDINATED DEBENTURES DUE JUNE 15, 2005
ISSUE PRICE: $1,000 PER DEBENTURE
------------------
We are a growing chain of retail stores specializing in party supplies and
paper goods operating under the names PAPER WAREHOUSE and PARTY UNIVERSE. We
currently have a total of 142 stores, including 97 Company-owned stores and 45
franchise stores, operating in 24 states. Our common stock trades on the Nasdaq
National Market under the trading symbol "PWHS." On June 8, 1999, the last
reported sale price of our common stock was $2.94 per share.
The Debentures will mature and their principal will be payable on June 15,
2005. They will bear interest at a rate of 9% per year, and we will make the
first interest payment on September 15, 1999. After that, we will pay interest
on the Debentures each year on the 15th of December, March, June and September.
The Debentures are convertible into shares of our common stock initially at the
price of $ per share. They are unsecured obligations and your right to payment
is subordinated in right of payment to all of our senior indebtedness. We have
the right to redeem the Debentures after June , 2002. You may require us to
repurchase the Debentures if we experience a change of control.
We plan to use the proceeds from this offering to develop an internet
website to sell party supplies and paper goods, to reduce our outstanding
indebtedness and for other general corporate purposes. The Debentures will not
be listed on any securities exchange or quoted on Nasdaq or any over-the-
counter market. Miller & Schroeder may make a market in the Debentures, but it
is not obligated to do so. We will issue a fully registered Debenture in each
purchaser's name.
<TABLE>
<CAPTION>
PER DEBENTURE TOTAL
<S> <C> <C>
Public offering price................................................................ $ 1,000 $ 4,000,000
Underwriting discounts and commissions............................................... $ 75 $ 300,000
Proceeds to Paper Warehouse.......................................................... $ 925 $ 3,700,000
</TABLE>
THIS INVESTMENT INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
MILLER & SCHROEDER FINANCIAL, INC.
THE DATE OF THIS PROSPECTUS IS JUNE , 1999
<PAGE>
The inside front cover of this prospectus contains 6 photos depicting
products sold in our stores. Three of the photos depict individuals celebrating
the following special occasions: children's birthday, theme parties and
graduations. The other three photos depict products we sell in our stores to
celebrate Valentine's Day, Halloween and Christmas. Below these pictures,
running across the bottom of the page, is a banner carrying the names of various
celebratory events and sayings, such as "Happy New Year," "Be My Valentine,"
"St. Patrick's Day," "Easter," "Passover" and "Mother's Day."
PAPER WAREHOUSE-REGISTERED TRADEMARK-, PARTY UNIVERSE-REGISTERED TRADEMARK- and
PARTY SMART-TM- are our trademarks.
<PAGE>
PROSPECTUS SUMMARY
IN THIS PROSPECTUS, "PAPER WAREHOUSE," "COMPANY," "WE," "OUR," AND "US"
REFER TO PAPER WAREHOUSE, INC. AND OUR SUBSIDIARY, BUT NOT TO MILLER &
SCHROEDER. "YOU" REFERS TO THE READER OF THIS PROSPECTUS. THIS SUMMARY
HIGHLIGHTS THE INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. BECAUSE THIS
IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. FOR A MORE COMPLETE UNDERSTANDING OF THIS OFFERING, WE
ENCOURAGE YOU TO READ THIS ENTIRE PROSPECTUS AND THE DOCUMENTS WE REFER YOU TO.
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE
STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. ALL REFERENCES TO FISCAL
YEARS IN THIS PROSPECTUS REFER TO THE FISCAL YEAR ENDING ON THE FRIDAY NEAREST
JANUARY 31 OF THE FOLLOWING CALENDAR YEAR. FOR EXAMPLE, FISCAL 1998 ENDED ON
JANUARY 29, 1999.
PAPER WAREHOUSE
Paper Warehouse is a growing chain of retail stores specializing in party
supplies and paper goods. As of April 30, 1999, we had 142 stores, including 97
Company-owned stores and 45 franchise stores. These stores are conveniently
located in major retail trade areas to provide customers with easy access to our
stores. We operate these stores under the names PAPER WAREHOUSE and PARTY
UNIVERSE. Our seven principal markets are:
<TABLE>
<S> <C> <C>
- - Minneapolis/St. Paul, MN - Kansas City, MO and KS - Denver, CO
- - Oklahoma City/Tulsa, OK - Seattle, WA - Tucson, AZ
- - Omaha, NE and Des Moines, IA
</TABLE>
Our stores offer an extensive selection of party supplies and paper goods,
at everyday low prices. We offer party supplies and paper goods for a wide
variety of celebratory occasions, everyday uses and seasonal events, including:
<TABLE>
<CAPTION>
CELEBRATORY OCCASIONS AND EVERYDAY
USES SEASONAL EVENTS
- ------------------------------------- ---------------------------------
<S> <C> <C>
- - birthdays - Valentine's - Halloween
- - weddings Day - Christmas
- - baby showers - Easter - Hanukkah
- - graduations - Fourth of July - New Year's
- - other family and religious - Thanksgiving
celebrations
</TABLE>
Through our 8,500 square foot prototype, we offer a comprehensive selection
of over 19,000 different products. This selection provides customers the
convenience of one-stop shopping for party supplies and paper goods. Our
merchandise is organized by party themes. The prominent signage and wide aisles
in our stores allow customers easy access to coordinate the merchandise required
for all party occasions. We believe that our extensive and readily available
merchandise selection often stimulates customers to purchase additional
products.
We believe that total United States retail sales of party supplies and paper
goods, including greeting cards, gift wrap, catering supplies and related items,
was approximately $9.4 billion in 1998. Larger sized stores, such as our 8,500
square foot prototype, have become the fastest growing retail format within the
party supplies and paper goods industry by offering consumers a broader
selection of merchandise at lower prices compared to traditional party goods
retailers.
3
<PAGE>
STRATEGY
Our goal is to be one of the leading suppliers of party supplies and paper
goods in our principal markets and to establish a leading position in new
markets. During fiscal 1998 we added 27 Company-owned stores and we established
9 new franchise stores. We plan to add up to ten new Company-owned stores in
fiscal 1999. We also expect to establish between 10 and 15 franchise stores in
fiscal 1999.
To achieve our goal, we are pursuing the following strategies:
- differentiate Paper Warehouse from its competitors through store layout
and design, merchandising, customer service and party planning services
- cluster multiple Company-owned stores in new or existing metropolitan
markets
- selectively add Company-owned stores in secondary markets that are close
to metropolitan markets where we have existing stores
- establish franchise stores in other markets
- periodically refresh, remodel and expand existing Company-owned stores
- expand our sales and name recognition by developing and implementing an
internet website to sell our party supplies and paper goods
BACKGROUND
The first Paper Warehouse store opened in Minneapolis, Minnesota in 1983.
Two members of our current management team purchased the Paper Warehouse
business in 1986. We incorporated Paper Warehouse in Minnesota in 1987. Our
principal executive offices are located at 7630 Excelsior Boulevard,
Minneapolis, Minnesota, 55426. Our telephone number is (612) 936-1000.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Issuer............................ Paper Warehouse, Inc.
Debentures Offered................ $4,000,000 principal amount of 9% Convertible
Subordinated Debentures due June 15, 2005
Principal Due..................... We will not pay principal over the term of the
Debenture. We plan to pay the entire principal balance
of the outstanding Debentures on June 15, 2005
Price per Debenture............... $1,000
Interest.......................... Annual fixed rate--9%
Payment frequency:
- First payment: September 15, 1999
- Remaining payments on the 15th day of December,
March, June and September
Ranking........................... The Debentures are unsecured, and are subordinate in
right of payment to all of our senior indebtedness, as
more fully described in "Description of Debentures"
under the heading "Subordination."
Conversion Rights................. You may convert the Debentures into our common stock at
any time at a conversion price of $ . This means
that for each $1,000 Debenture you convert you will
receive shares of our common stock. The conversion
price may be adjusted for certain reasons described in
"Description of Debentures" under the heading
"Conversion."
Optional Redemption by Us......... After June , 2002, we may redeem the Debentures at
$1,000 per Debenture plus accrued interest, plus a
premium if we redeem them before June , 2004. See
"Description of Debentures" under the heading "Optional
Redemption by Us."
Mandatory Repurchase.............. If we experience a change of control, you can require us
to purchase all, or part, of your Debentures at $1,020
per Debenture plus accrued interest. See "Description of
Debentures" under the heading "Repurchase at Option of
Holder."
Use of Proceeds................... We will use a portion of the proceeds from this offering
to develop and implement an internet website for the
sale of party supplies and paper goods as described in
"Business" under the heading "Internet and E-commerce."
We will use the remaining proceeds to repay outstanding
debt and for other general corporate purposes.
Trustee........................... Norwest Bank Minnesota, N.A.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FIRST
QUARTER
FISCAL YEAR ENDED ENDED
--------------------------------------------------------------- ---------
JANUARY 27, FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29, MAY 1,
1995 1996 1997 1998 1999 1998
----------- ----------- ----------- ----------- ----------- ---------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 24,084 $ 33,478 $ 43,002 $ 52,949 $ 63,491 $ 12,495
Operating (loss) income..................... 1,494 1,781 2,080 983 (590) (853)
Net (loss) income(1)........................ 1,281 1,286 1,303 (191) (521) (528)
Diluted net loss per share.................. N/A N/A N/A N/A (.11) (.12)
Pro forma net (loss) income(2).............. 794 797 808 (207) N/A N/A
Pro forma diluted net (loss) income per
share(1).................................. .32 .32 .32 (.08) N/A N/A
BALANCE SHEET DATA (AT PERIOD END):
Working capital............................. 2,301 925 1,701 9,383 5,212 8,227
Total assets................................ 8,211 14,934 16,270 21,017 29,528 21,794
Total long-term debt, net of current
maturities................................ 2,300 3,234 3,212 911 862 912
Total debt, excluding capital lease
obligations............................... 3,619 8,021 11,240 1,217 7,864 1,151
Total stockholders' equity.................. $ 2,646 $ 3,124 $ 1,793 $ 14,594 $ 14,090 $ 14,066
OTHER DATA:
Ratio of earnings to fixed charges(3)....... 2.43 1.81 1.58
--- --- ---
EBITDA(4)................................... $ 1,941 $ 2,512 $ 3,077 $ 1,905 $ 1,167 $ (473)
Ratio of EBITDA to Interest Expense(5)...... 8.7 4.8 3.8 2.3 4.2
---
OPERATING DATA (AT PERIOD END):
Number of stores open:
Company-owned stores...................... 42 55 64 73 97 75
Franchise stores.......................... 29 53 50 51 46 52
Comparable store sales increase(6).......... 16.6% 13.6% 9.0% 9.7% 4.2% 3.6%
<CAPTION>
APRIL 30,
1999
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 16,692
Operating (loss) income..................... (1,635)
Net (loss) income(1)........................ (1,217)
Diluted net loss per share.................. (.26)
Pro forma net (loss) income(2).............. N/A
Pro forma diluted net (loss) income per
share(1).................................. N/A
BALANCE SHEET DATA (AT PERIOD END):
Working capital............................. 5,182
Total assets................................ 33,379
Total long-term debt, net of current
maturities................................ 1,076
Total debt, excluding capital lease
obligations............................... 7,777
Total stockholders' equity.................. $ 12,873
OTHER DATA:
Ratio of earnings to fixed charges(3).......
---
EBITDA(4)................................... $ (1,100)
Ratio of EBITDA to Interest Expense(5)......
---
OPERATING DATA (AT PERIOD END):
Number of stores open:
Company-owned stores...................... 97
Franchise stores.......................... 45
Comparable store sales increase(6).......... 4.6%
</TABLE>
- ------------------------
(1) We have historically incurred a loss in our first fiscal quarter. See "Risk
Factors--We Have Recently Experienced Losses and May Not be Profitable" and
"--Our Annual Results Are Dependent on Second and Fourth Quarters," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" and "--Seasonality."
(2) From February 1993 to November 1997, we were an S-Corporation and not
generally subject to corporate income taxes. The Statement of Operations
Data during this period reflects a pro forma provision for income taxes as
if we were subject to corporate income taxes for that period. This pro forma
provision for income taxes is computed using a combined federal and state
tax rate of 38%.
(3) In computing the ratio of earnings to fixed charges, earnings have been
based on income from continuing operations before income taxes and fixed
charges. Fixed charges consist of interest expense and the estimated
interest portion of rents (at one-third of rent expense). Earnings were not
adequate to cover fixed charges by approximately $1.9 million for the first
quarter ended April 30, 1999, by $880,000 for the first quarter ended May 1,
1998, by $844,000 in fiscal 1998 and by $75,000 in fiscal 1997. Assuming
this issuance had occurred at the beginning of the last fiscal year,
earnings would not have been adequate to cover fixed charges by
approximately $1.3 million.
(4) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. EBITDA is presented as additional information because it is a
commonly used financial measure. We also believe it to be a useful indicator
of our ability to meet our debt service requirements. We do not, however,
intend it as an alternative measure of operating results or cash flow from
operations.
(5) EBITDA was not adequate to cover interest expense by $1.3 million for the
first quarter ended April 30, 1999 and by $512,000 for the first quarter
ended May 1, 1998, primarily due to the seasonality of our business.
(6) Company-owned stores enter the comparable stores sale base at the beginning
of their 13th month of operations. For purposes of computing the increase in
comparable store sales, this computation assumes fiscal 1995 was a 52-week
year.
6
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS BEFORE BUYING THE
DEBENTURES. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE
FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT KNOWN TO US OR THAT WE CURRENTLY
DEEM IMMATERIAL MAY ALSO ADVERSELY IMPAIR OUR BUSINESS OPERATIONS OR FINANCIAL
CONDITION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS MAY BE NEGATIVELY EFFECTED. THIS COULD CAUSE
US TO DEFAULT ON THE DEBENTURES. IT COULD ALSO CAUSE THE VALUE OF THE DEBENTURES
AND OUR COMMON STOCK TO DECLINE. YOU COULD LOSE ALL OR A PART OF YOUR
INVESTMENT.
WE HAVE RECENTLY EXPERIENCED LOSSES AND MAY NOT BE PROFITABLE
We incurred a net loss of $1.2 million for first quarter 1999, a net loss of
$521,000 for fiscal 1998 and a pro forma net loss of $207,000 for fiscal 1997.
We attribute these losses principally to:
- increases in competition among party supplies and paper goods retailers in
our geographic markets
- increases in store labor expenses due to the rise in the average hourly
wage rates and the additional staff needed to support our growth
- increases in general and administrative expenses necessary to support
implementation of our growth strategy
- increases in amortization expenses of goodwill from our purchases of
franchise stores
- seasonality of revenues resulted in first quarter losses in 1999
- expenses associated with a canceled acquisition and repayment of debt in
1997
Based upon our current business plans, start-up costs associated with our
internet strategy, and amortization of financing costs associated with these
Debentures, it is likely that we will not be profitable for fiscal 1999. We
cannot assure you that we will generate sufficient revenues, or control
operating expenses, to achieve or sustain profitability in later years.
WE MAY NOT BE ABLE TO PROFITABLY GROW OUR BUSINESS
In order to profitably grow our business we need to increase sales in our
existing markets and open stores in new markets. Additional Company-owned stores
in existing markets could reduce sales from our stores located in or near those
markets. Also, stores added in new markets may not be profitable.
WE MAY NOT BE ABLE TO EFFECTIVELY EXECUTE OUR GROWTH STRATEGY
Our growth strategy requires effective planning and management. Once a new
geographic market is identified, we must obtain suitable store sites on
acceptable terms. Also, the competitive and merchandising challenges we face in
new geographic markets may be different from the challenges we face in our
existing geographic markets. We may have to adapt to regional tastes and customs
and compete against established and familiar local businesses with innovative or
unique techniques for marketing party supplies and paper goods. Entering new
markets may also place significant demands on our management, financial
controls, operations and information systems. This may cause us to incur higher
costs relating to marketing and operations. Expansion will require an increase
in our personnel, particularly store managers and sales associates, to operate
our new stores.
OUR CLUSTERING STRATEGY MAY NOT BE PROFITABLE
Our growth strategy focuses on clustering stores in metropolitan markets and
selectively placing stores in secondary markets that are close to the
metropolitan markets in which we already have stores. Our growth strategy
requires us to be able to identify new geographic markets where the demographics
7
<PAGE>
support our strategy to cluster Company-owned stores. Although we believe that
this is the right strategy for Paper Warehouse, this strategy may not be
profitable.
OUR PLANS TO REMODEL AND RELOCATE STORES MAY REDUCE PROFITABILITY
In fiscal 1999 we plan to remodel approximately 20 stores and relocate 4
existing stores. This plan is subject to several risks, including:
- the loss of sales during the remodeling or relocation period
- cost overruns of the remodeling or relocation
- failure to achieve increased sales after the remodeling or relocation
We remodel our stores periodically to maintain a fresh look for the
customer, standardize store layout and fixtures, and improve merchandise
presentation. Remodeling may be as simple as repainting or creating new signage
to as extensive as conducting a total makeover. We relocate a store when it is
too small and there is no room to expand at the existing location or when a
store is not performing in its present location and a better location is
available.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO SUPPORT OUR GROWTH STRATEGY
We may need to raise additional capital in the future to fund our operations
and support our growth strategy. If we decide to raise additional funds through
debt financing, this financing may be senior in right of payment to the
Debentures. If you convert your Debenture into our common stock and we then
raise additional funds by issuing equity securities, your percentage ownership
of our outstanding common stock will be reduced. These new equity securities may
also have rights, preferences or privileges senior to those of our common stock.
Financial difficulties of our competitors may affect our ability to obtain
financing even though our business is performing. Any additional financing may
not be available, or may not be available on favorable terms. If adequate funds
are not available or are not available on acceptable terms, we may be unable to
make payments on the Debentures, develop or enhance our products and services,
implement our growth strategy, take advantage of future opportunities or respond
to competitive pressures.
OUR ANNUAL RESULTS ARE DEPENDENT ON SECOND AND FOURTH QUARTERS
We generate a significant portion of our operating income in our second and
fourth fiscal quarters because of the seasonality of our revenues and
promotional expenses. Any factor that negatively affects our revenues or
increases our operating expenses during the second and fourth fiscal quarters
could negatively affect our annual results of operations. As a result of the
seasonality of our revenues, we expect to incur a loss in the first quarter of
each year for the foreseeable future. Due to increased promotional activities
during our third quarter, we have historically experienced reduced operating
income for this quarter.
COMPETITION MAY REDUCE OUR REVENUES AND OPERATING INCOME
Increased competition by existing or new competitors may reduce our sales
and cause us to incur losses. As a result of competition from other specialty
party supplies and paper goods retailers, we have experienced reduced sales
growth in our existing stores and incurred additional marketing and promotional
expenses. Our stores compete with a variety of smaller and larger retailers,
including:
- specialty party supplies and paper goods retailers, including other
superstores
- card shops and designated departments in mass merchandisers
- discount retailers
- toy stores
- drug stores
8
<PAGE>
- supermarkets
- department stores
Many of our competitors have substantially greater financial and personnel
resources than we do. We may also encounter additional competition from new
entrants in the future in our existing markets.
OUR BUSINESS DEPENDS ON CONTINUED GOOD RELATIONS WITH OUR SUPPLIERS
Our failure to maintain good relationships with our principal suppliers or
the loss of our principal suppliers would hurt our business. In fiscal 1998, our
largest supplier accounted for approximately 14% of our purchases and our eight
largest suppliers represented approximately 51% of our purchases. Many of our
principal suppliers currently provide us with incentives such as volume
purchasing allowances and trade discounts. If our suppliers reduce or
discontinue these incentives, prices from our suppliers would increase and our
profitability would be reduced. We do not have long-term contracts with any of
our suppliers, and any supplier could discontinue selling to us at any time.
WE NEED TO ATTRACT AND RETAIN QUALITY EMPLOYEES
Our success depends on attracting and retaining a large and growing number
of quality employees. Many of our employees are in entry level or part-time
positions with historically high rates of turnover. Our ability to meet our
labor needs while controlling costs is subject to external factors such as
unemployment levels, minimum wage legislation and changing demographics.
WE CANNOT ASSURE CONTINUED TRADING ON THE NASDAQ NATIONAL MARKET
In April 1999, the Nasdaq Stock Market notified us that we were not then in
compliance with one of its maintenance standards requiring that we maintain at
least $5.0 million of "public float"--the total market value of our common stock
held by stockholders who are not insiders. The Nasdaq Stock Market also informed
us that we had 90 calendar days to regain compliance with this standard. On June
9, 1999, Nasdaq notified us that we are in compliance with the $5.0 million
public float requirement, and the matter was closed. We cannot assure you,
however, that we will be able to sustain a $5.0 million public float, and if we
cannot, we may move to the Nasdaq SmallCap Market.
WE MAY EXPERIENCE "YEAR 2000" PROBLEMS
A significant amount of our Year 2000 exposure is in the readiness of third
parties with which we do business, where Year 2000 issues are much less within
our ability to predict or control. A supplier's failure to be Year 2000
compliant may interrupt the flow of products to our stores. We may also
experience a loss in revenues, earnings and cash flow if one or more of our
utility providers are not Year 2000 compliant and our stores are not able to
open because they do not have power, heat or water. It is possible that our
currently installed computer systems, software or other business systems, or
those of our suppliers, will not accept input of data, store data, or manipulate
data for the years 2000 and beyond without error or manipulation. We expect to
develop a formal contingency plan for the Year 2000 problem upon further
identification and assessment of all of the risks.
OUR FAILURE TO EXECUTE OUR FRANCHISE PROGRAM MAY REDUCE OUR PROFITABILITY
Our continued growth and success depends in part upon our ability to
attract, contract with and retain qualified franchisees. It also depends upon
the ability of those franchisees to operate their stores successfully and
promote and develop the Paper Warehouse store concept. During fiscal 1999 we
plan to establish approximately 10 to 15 new franchise stores. Although we have
established criteria to evaluate prospective franchisees, and our franchise
agreements include certain operating standards, each franchisee operates its
store independently. Various laws limit our ability to influence the day-to-day
operations of our franchise stores. We cannot assure you that franchisees will
be able to operate Paper Warehouse stores successfully and in a manner
consistent with our concepts and
9
<PAGE>
standards. As a result, our franchisees may operate their stores in a manner
that reduces the gross revenues of these stores, and therefore reduces our
franchise revenues.
Paper Warehouse, as a franchisor, is subject to both regulation by the
Federal Trade Commission and state laws regulating the offer and sale of
franchises. These regulations limit our ability to terminate or refuse to renew
franchises. Our franchisees are also subject to labor laws, including minimum
wage requirements, overtime, working and safety conditions and citizenship
requirements. Our failure to obtain or maintain approvals to sell franchises, or
a franchisee's violation of any labor law, could cause us to lose or reduce our
franchise revenues.
A CHANGE IN CONSUMER PREFERENCES COULD NEGATIVELY AFFECT OUR BUSINESS
If consumer demand for single-use, disposable party goods were to diminish,
the party supplies and paper goods industry and our revenues would be negatively
affected. For example, if cost increases in raw materials such as paper or
plastic were to cause our prices to increase significantly, consumers might
decide to forgo the convenience associated with single-use, disposable products
and use standard dinnerware and flatware. Similarly, changes in consumer
preferences away from disposable products and in favor of reusable products for
environmental or other reasons could reduce the demand for our products.
REGIONAL RISKS MAY AFFECT OUR BUSINESS
Because our operations are located principally in seven metropolitan areas,
we are subject to certain regional risks, such as the economy, weather
conditions, natural disasters and governmental regulations. If any region in
which we operate stores were to suffer an economic downturn or other adverse
regional risks were to occur, our sales and profitability could decline and our
ability to implement our growth strategy would be hindered.
OUR INTERNET STRATEGY MAY NOT BE PROFITABLE
We intend to use a portion of the proceeds from this offering to develop an
internet website for the sale of party supplies and paper goods. Our website may
not generate any profits and we may not recapture the money invested in our
internet strategy.
OUR FORMER STATUS AS AN S-CORPORATION COULD EXPOSE US TO LIABILITY
From February 1993 to November 1997, we were treated as an S-Corporation
under the Internal Revenue Code of 1986. In connection with the completion of
our initial public offering, we converted to a C-Corporation. If the IRS or any
state taxing authority were to challenge our prior S-Corporation status, we
could be liable to pay corporate taxes on our income, at the effective corporate
tax rate, for all or a part of the period we were an S-Corporation, plus
interest and possibly penalties.
WE NEED TO ANTICIPATE AND RESPOND TO MERCHANDISING TRENDS
Our success depends in part on our ability to anticipate and respond in a
timely manner to changing merchandise trends and consumer demands. We make
merchandising decisions well in advance of the seasons during which we will sell
the merchandise. As a result, if we fail to identify and respond quickly to
emerging trends, consumer acceptance of the merchandise in our stores could
diminish and we may experience a reduction in revenues. We sell certain licensed
products that are in great demand for short time periods, making it difficult to
project our inventory needs for these products. Significantly greater or
less-than-projected product demand, particularly for our licensed products,
could lead to one or more of the following:
- lost sales due to insufficient inventory
- higher carrying costs associated with slower turning inventory
- reduced or eliminated margins due to mark downs on excess inventory
10
<PAGE>
OUR INDEBTEDNESS COULD NEGATIVELY AFFECT OUR FINANCIAL POSITION
After this offering, we expect to have approximately $10.5 million of
borrowings outstanding which includes amounts outstanding under our revolving
line of credit, capital leases, mortgage and the Debentures. We may incur
additional indebtedness in the future. Our level of indebtedness could:
- prevent us from making interest and principal payments on the Debentures
- prevent us from satisfying other debt obligations
- affect our ability to fund our operations
- impair our ability to obtain additional financing
- make us more vulnerable to industry downturns and competitive pressures
- cause a substantial portion of our cash flow from operations to be spent
on principal and interest payments
- prevent us from meeting certain financial tests contained in our debt
obligations, which could lead to a default on those obligations
THE SUBORDINATION PROVISIONS MAY NEGATIVELY AFFECT THE DEBENTURE HOLDERS
The Debentures will be unsecured and subordinated in right of payment to all
our present and future senior debt, as described in "Description of
Debentures--Subordination." As a result, if we file for bankruptcy or liquidate
our business our assets will be available for payment of the Debentures only
after all our senior debt has been paid in full. After payment of all senior
debt there may not be sufficient assets remaining to pay the principal and
accrued interest on the Debentures. The Indenture, as described in "Description
of Debentures," does not prohibit us from incurring additional senior debt. If
we incur additional senior debt, our ability to pay the Debentures could be
substantially impaired.
WE MAY BE UNABLE TO REPURCHASE THE DEBENTURES
At your option, we will be obligated to repurchase the Debentures if we
experience certain types of changes of control. See "Description of
Debentures--Repurchase at Option of Holder." We may not have sufficient funds to
pay the repurchase price if you require us to repurchase your Debentures. If we
are required to repurchase Debentures because of a change of control, the
subordination provisions in the Indenture may prevent us from making any payment
to you, including any payment of the repurchase price, unless we first obtain
the consent of the holders of our senior debt or repay our senior debt in full.
We will not set aside any funds to repurchase the Debentures. We will not
pay principal over the term of the Debentures. We plan to pay the entire
principal balance of outstanding Debentures on June 15, 2005.
THERE IS NO ACTIVE TRADING MARKET FOR THE DEBENTURES
We have no present intention to have the Debentures authorized for quotation
on the Nasdaq system or listed on any securities exchange. Although Miller &
Schroeder has told us that it presently plans to make a market in the
Debentures, it may stop making a market in the Debentures at any time for any
reason. As a result, an active trading market for the Debentures may not develop
or, if one does develop, it may not be maintained. If an active market for the
Debentures does not develop, or cannot be sustained, your ability to sell your
Debenture may be limited or you may not be able to get the best price for your
Debenture.
OUR FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES
This prospectus contains certain statements of a forward-looking nature
relating to future events or our future performance. These forward-looking
statements are based on our current expectations,
11
<PAGE>
assumptions, estimates and projections about us and our industry. When used in
this prospectus, the words "expects," "believes," "anticipates," "estimates,"
"intends," and similar expressions are intended to identify forward-looking
statements. These statements include, but are not limited to, statements of our
plans, strategies and prospects under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and other statements contained
elsewhere in this prospectus.
These forward-looking statements are only predictions and are subject to
risks and uncertainties that could cause actual events or results to differ
materially from those projected. The cautionary statements made in this
prospectus should be read as being applicable to all related forward-looking
statements wherever they appear in this prospectus. We assume no obligation to
update these forward-looking statements publicly for any reason. Actual results
could differ materially from those anticipated in these forward-looking
statements, even if new information becomes available or other events occur in
the future.
USE OF PROCEEDS
The net proceeds to us from the sale of the Debentures are estimated to be
approximately $3.2 million, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us. We intend to use
approximately $1.5 million of the net proceeds to develop our internet website
to sell party supplies and paper goods online. See "Business--Internet and
E-commerce." We intend to use the remaining proceeds to repay outstanding
indebtedness under our revolving credit facility and general corporate purposes.
This debt bears interest at a rate of LIBOR plus 2.5%, which rate was 7.45% on
June 8, 1999. This debt matures in 2002. We use the borrowings under our credit
facility for working capital purposes.
PRICE RANGE OF COMMON STOCK
Our shares of common stock have traded on the Nasdaq National Market under
the symbol "PWHS" since November 25, 1997. The Debentures will not be listed on
any securities exchange or quoted by Nasdaq. The following table summarizes the
high and low sale prices per share of our common stock for the periods
indicated, as reported on the Nasdaq National Market. These prices do not
include commission, mark-ups or mark-downs.
<TABLE>
<CAPTION>
HIGH LOW
-------- ---------
<S> <C> <C>
FISCAL YEAR 1997
Fourth Quarter (since November 25, 1997)...................... $ 8 5/8 $ 5 5/8
FISCAL YEAR 1998
First Quarter................................................. $ 7 1/4 $ 4 5/8
Second Quarter................................................ 5 1/4 3 7/8
Third Quarter................................................. 4 1/4 1 5/8
Fourth Quarter................................................ 4 3/16 1 29/32
FISCAL YEAR 1999
First Quarter................................................. $ 2 5/16 $ 1 5/8
</TABLE>
For a recent closing price of our common stock, see the cover page of this
prospectus. As of June 8, 1999 there were approximately 132 holders of record of
our common stock.
12
<PAGE>
DIVIDEND POLICY
Other than S-Corporation distributions paid to our stockholders with respect
to periods when we were taxed as an S-Corporation, we have never declared or
paid any cash or stock dividends with respect to our common stock since we have
been a C-Corporation. We do not contemplate payment of dividends in the
foreseeable future. We anticipate that any earnings in the near future will be
retained to develop and expand our business. Some of our credit agreements
require the consent of the lender before we can pay dividends. The Indenture
governing the Debentures, as described in "Description of Debentures," includes
restrictions on paying dividends or making distributions on our capital stock.
See "Description of Debentures--Restrictive Covenants."
CAPITALIZATION
The following table sets forth our short-term debt and capitalization:
- as it existed on April 30, 1999
- as adjusted to give effect to the issuance of the Debentures and the
application of the estimated net proceeds from this offering
- as adjusted to give effect to the conversion of the Debentures into our
common stock assuming a conversion price of $3.00 per share
- not adjusted for expenses associated with our internet strategy which may
increase short-term debt approximately $1.5 million
This table should be read together with the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
APRIL 30, 1999
--------------------------------------
ADJUSTED ADJUSTED
FOR FOR
ACTUAL OFFERING CONVERSION
---------- ----------- -------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt (including capital lease obligations)................... $ 7,227 $ 4,007 $ 4,007
---------- ----------- -------------
---------- ----------- -------------
Long-term debt (including capital lease obligations).................... 2,495 6,495 2,495
Stockholders' equity
Serial Preferred Stock, $.01 par value; 10,000,000 shares authorized;
none issued or outstanding.......................................... -- -- --
Common stock, $.01 par value; 40,000,000 shares authorized............ 46 46 59
Additional paid-in capital............................................ 13,834 13,834 17,821
Accumulated deficit................................................... (1,007) (1,007) (1,007)
---------- ----------- -------------
Total stockholders' equity.......................................... 12,873 12,873 16,873
---------- ----------- -------------
Total capitalization................................................ $ 15,368 $ 19,368 $ 19,368
---------- ----------- -------------
---------- ----------- -------------
Total shares issued and outstanding(1).................................. 4,627,936 4,627,936 5,961,269
</TABLE>
- ------------------------
(1) As of April 30, 1999, excludes stock options to purchase 426,300 shares of
our common stock granted to employees and directors at a weighted average
exercise price of $4.89 per share. Also excludes a warrant for 50,000 shares
of our common stock to be issued to Miller & Schroeder in connection with
this offering. See "Management--Stock Option Plans" and Note 9 of the
Consolidated Financial Statements for the Years Ended January 29, 1999 and
January 30, 1998-- Stock Options.
13
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data are derived
from our Consolidated Financial Statements. The selected consolidated financial
and operating data should be read together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our Consolidated
Financial Statements and Notes thereto appearing elsewhere in this prospectus.
The consolidated statement of operations data, and the consolidated balance
sheet data, as of and for the five years ended January 29, 1999 are derived from
our consolidated financial statements, which have been audited by KPMG Peat
Marwick LLP, independent auditors. The selected data presented below for the
quarters ended April 30, 1999 and May 1, 1998 and as of April 30, 1999 and May
1, 1998 are derived from our unaudited consolidated financial statements
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------
JANUARY 27, FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Company-owned stores................................... $ 23,641 $ 32,414 $ 41,892 $ 51,788 $ 62,219
Franchise related fees................................. 443 1,064 1,110 1,161 1,272
----------- ----------- ----------- ----------- -----------
Total revenues....................................... 24,084 33,478 43,002 52,949 63,491
Costs and expenses:
Costs of products sold and occupancy costs............. 15,474 21,880 27,946 34,966 41,253
Store operating expenses............................... 4,635 6,367 8,733 11,484 15,185
General and administrative expenses.................... 2,481 3,450 4,243 5,516 7,643
----------- ----------- ----------- ----------- -----------
Total costs and expenses............................. 22,590 31,697 40,922 51,966 64,081
----------- ----------- ----------- ----------- -----------
Operating (loss) income(1)........................... 1,494 1,781 2,080 983 (590)
Interest expense, net.................................... 208 490 772 797 254
Expenses of canceled acquisition......................... 261
--- --- --- ---
-----------
----------- ----------- ----------- -----------
(Loss) income before income taxes, extraordinary charge
and cumulative effect of accounting change............. 1,286 1,291 1,308 (75) (844)
Income tax benefit (expense)............................. (5) (5) (5) (6) 323
----------- ----------- ----------- ----------- -----------
(Loss) income before extraordinary charge and cumulative
effect of accounting change............................ 1,281 1,286 1,303 (81) (521)
Extraordinary charge, net................................ (110)
--- --- --- ---
Cumulative effect of accounting change, net..............
---
--- --- --- ---
-----------
----------- ----------- ----------- -----------
Net (loss) income.................................... $ 1,281 $ 1,286 $ 1,303 $ (191) $ (521)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted net loss per share........................... N/A N/A N/A N/A $ (0.11)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Pro forma provision for income taxes(2).................. (487) (489) (495) (16) N/A
Pro forma net (loss) income(2)........................... 794 797 808 (207) N/A
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Pro forma diluted net (loss) income per share(2)......... $ 0.32 $ 0.32 $ 0.32 $ (0.08) N/A
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SELECTED OPERATING DATA (AT PERIOD END):
Number of stores open:
Company-owned stores................................... 42 55 64 73 97
Franchise stores....................................... 29 53 50 51 46
Comparable store sales increase(3)....................... 16.6% 13.6% 9.0% 9.7% 4.2%
BALANCE SHEET DATA (AT PERIOD END):
Working capital.......................................... $ 2,301 $ 925 $ 1,701 $ 9,383 $ 5,212
Total assets............................................. 8,211 14,934 16,270 21,017 29,528
Total long-term debt, net of current maturities.......... 2,300 3,234 3,212 911 862
Total debt, excluding capital lease obligations.......... 3,619 8,021 11,240 1,217 7,864
Total stockholders' equity............................... 2,646 3,124 1,793 14,594 14,090
OTHER DATA:
Ratio of earnings to fixed charges(4).................... 2.43 1.81 1.58
--- ---
EBITDA(5)................................................ $ 1,941 $ 2,512 $ 3,077 $ 1,905 $ 1,167
Ratio of EBITDA to interest expense(6)................... 8.7 4.8 3.8 2.3 4.2
<CAPTION>
FIRST QUARTER ENDED
--------------------
MAY 1, APRIL 30,
1998 1999
--------- ---------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Company-owned stores................................... $ 12,192 $ 16,419
Franchise related fees................................. 303 273
--------- ---------
Total revenues....................................... 12,495 16,692
Costs and expenses:
Costs of products sold and occupancy costs............. 8,454 11,406
Store operating expenses............................... 3,187 4,674
General and administrative expenses.................... 1,707 2,247
--------- ---------
Total costs and expenses............................. 13,348 18,327
--------- ---------
Operating (loss) income(1)........................... (853) (1,635)
Interest expense, net.................................... 27 216
Expenses of canceled acquisition.........................
--- ---
--------- ---------
(Loss) income before income taxes, extraordinary charge
and cumulative effect of accounting change............. (880) (1,851)
Income tax benefit (expense)............................. 352 743
--------- ---------
(Loss) income before extraordinary charge and cumulative
effect of accounting change............................ (528) (1,108)
Extraordinary charge, net................................
--- ---
Cumulative effect of accounting change, net.............. (109)
---
---------
---------
Net (loss) income.................................... $ (528) $ (1,217)
--------- ---------
--------- ---------
Diluted net loss per share........................... $ (.12) $ (.26)
--------- ---------
--------- ---------
Pro forma provision for income taxes(2).................. N/A N/A
Pro forma net (loss) income(2)........................... N/A N/A
--------- ---------
--------- ---------
Pro forma diluted net (loss) income per share(2)......... N/A N/A
--------- ---------
--------- ---------
SELECTED OPERATING DATA (AT PERIOD END):
Number of stores open:
Company-owned stores................................... 75 97
Franchise stores....................................... 52 45
Comparable store sales increase(3)....................... 3.6% 4.6%
BALANCE SHEET DATA (AT PERIOD END):
Working capital.......................................... $ 8,227 $ 5,182
Total assets............................................. 21,794 33,379
Total long-term debt, net of current maturities.......... 912 1,076
Total debt, excluding capital lease obligations.......... 1,151 7,777
Total stockholders' equity............................... 14,066 12,873
OTHER DATA:
Ratio of earnings to fixed charges(4)....................
--- ---
EBITDA(5)................................................ $ (473) $ (1,100)
Ratio of EBITDA to interest expense(6)...................
--- ---
</TABLE>
14
<PAGE>
- --------------------------
(1) We have historically incurred a loss in our first fiscal quarter. See "Risk
Factors--We Have Recently Experienced Losses and May Not be Profitable" and
"--Our Annual Results Are Dependent on Second and Fourth Quarters," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" and "--Seasonality."
(2) From February 1993 to November 1997, we were an S-Corporation and not
generally subject to corporate income taxes. The Statement of Operations
Data during this period reflects a pro forma provision for income taxes as
if we were subject to corporate income taxes for such period. This pro forma
provision for income taxes is computed using a combined federal and state
tax rate of 38%.
(3) Company-owned stores enter the comparable stores sale base at the beginning
of their 13th month of operations. For purposes of computing the increase in
comparable store sales, this computation assumes fiscal 1995 was a 52-week
year.
(4) In computing the ratio of earnings to fixed charges, earnings have been
based on income from continuing operations before income taxes and fixed
charges. Fixed charges consist of interest expense and the estimated
interest portion of rents (at one-third of rent expense). Earnings were not
adequate to cover fixed charges by approximately $1.9 million for the first
quarter ended April 30, 1999, by $880,00 for the first quarter ended May 30,
1998, by $844,000 in fiscal 1998 and by $75,000 in fiscal 1997. Assuming
this issuance had occurred at the beginning of the last fiscal year,
earnings would not have been adequate to cover fixed charges by
approximately $1.3 million.
(5) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. EBITDA is presented as additional information because it is a
commonly used financial measure. We also believe it to be a useful indicator
of our ability to meet our debt service requirements. We do not, however,
intend it as an alternative measure of operating results or cash flow from
operations.
(6) EBITDA was not adequate to cover interest expense by $1.3 million for the
first quarter ended April 30, 1999 and by $512,000 for the first quarter
ended May 1, 1998, primarily due to the seasonality of our business.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a growing chain of retail stores specializing in party supplies and
paper goods operating under the names PAPER WAREHOUSE and PARTY UNIVERSE. Two
members of our current management team purchased the business in 1986 and
incorporated it in Minnesota in 1987. At the time of the acquisition, we
consisted of three stores located in the Minneapolis/St. Paul metropolitan area.
In 1987, we began granting franchises. Over the past 12 years, we have grown to
a total of 142 stores, including 97 Company-owned stores and 45 franchise stores
throughout 24 states. In growing the number of Company-owned stores, our
management has employed a strategy of clustering stores in our principal markets
to provide our customers with convenient store locations, expand our total
market share and achieve favorable economies of scale.
We completed our initial public offering in late 1997, selling 1,985,800
shares of our common stock and raising net proceeds of $13.1 million. The
proceeds from that offering were used to retire our revolving line of credit,
prepay subordinated debt and retire other existing indebtedness. The balance of
the proceeds was used to finance new store openings and fund further expansion.
Before November 1997, we elected to be treated for federal and state income
tax purposes as an S-Corporation under the Internal Revenue Code of 1986 and
comparable state tax laws. For the purpose of discussion and analysis, we have
presented a pro forma tax provision and pro forma net income. These pro forma
amounts represent what the income tax provision and the net income would have
been if we had been a C-Corporation and thus subject to federal income taxation
for the entire period. This pro forma provision is computed using a combined
federal and state income tax rate of 38%.
Total revenues consist of Company-owned store sales and franchise revenues.
Company-owned stores enter the comparable store sales base at the beginning of
their 13th month of operations. Franchise revenues are generated from royalties
we receive on sales, generally 4% of the store's sales, and initial franchise
fees, which we recognize at the time the franchisee signs a lease for a store.
Cost of products sold and occupancy costs includes the direct cost of
merchandise, plus handling and distribution, and certain occupancy costs. Store
operating expenses include all costs incurred at the store level, such as
advertising, credit card processing fees and store payroll. General and
administrative expenses include corporate administrative expense for
Company-owned stores and expenses relating to franchising, primarily payroll,
legal, travel and advertising.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain costs and
expenses as a percentage of total revenues and Company-owned store sales:
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
FISCAL YEAR ENDED
------------------------------------------- ------------------------
JANUARY 31, JANUARY 30, JANUARY 29, APRIL 30,
1997 1998 1999 MAY 1, 1998 1999
------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Costs of products sold and occupancy costs:
as % of total revenues............................... 65.0% 66.0% 65.0% 67.7% 68.3%
as % of Company-owned stores sales................... 66.7% 67.5% 66.3% 69.3% 69.5%
Store operating expenses:
as % of total revenues............................... 20.3% 21.7% 23.9% 25.5% 28.0%
as % of Company-owned stores sales................... 20.8% 22.2% 24.4% 26.1% 28.5%
General and administrative expenses:
as % of total revenues............................... 9.9% 10.4% 12.0% 13.7% 13.5%
as % of Company-owned stores sales................... 10.1% 10.7% 12.3% 14.0% 13.7%
Number of Company-owned stores......................... 64 73 97 75 97
</TABLE>
FIRST QUARTER ENDED APRIL 30, 1999 COMPARED TO FIRST QUARTER ENDED MAY 1, 1998
REVENUES. Company-owned stores sales of $16.4 million for the first quarter
ended April 30, 1999, increased $4.2 million, or 34.7% over Company-owned stores
sales for the comparable period in the prior year. Of this increase,
approximately $3.7 million is the result of new store growth and approximately
$551,000 is attributable to comparable store sales. During the first quarter
ended April 30, 1999, the Company opened one new Company-owned store, and closed
one Company-owned store, keeping the total Company-owned stores at 97 as of
April 30, 1999, compared to 75 at the end of the first fiscal quarter of 1998.
First fiscal quarter 1999 comparable store sales increased 4.6% over the prior
year comparable period. This growth rate favorably compares with a comparable
store sales increase of 3.6% for the first fiscal quarter of 1998.
Franchise related fees for the first quarter ended April 30, 1999 of
approximately $273,000 decreased 10.0% from franchise related fees of
approximately $303,000 for the first quarter ended May 1, 1998. The
year-over-year decrease reflects the Company's purchases throughout fiscal 1998
of 10 franchise stores, reducing the Company's royalties received on product
sales from these former franchise stores. During the first fiscal quarter of
1999, the Company closed one franchise store, bringing the total to 45 franchise
stores at the end of first fiscal quarter 1999 compared with 52 franchise stores
at the end of first fiscal quarter 1998.
COST OF PRODUCTS SOLD AND OCCUPANCY COSTS. Cost of products sold and
occupancy costs totaled $11.4 million or 69.5% of Company-owned stores sales for
the first quarter ended April 30, 1999, as compared to $8.5 million or 69.3% of
Company-owned stores sales for the first quarter ended May 1, 1998. The increase
primarily reflects higher occupancy costs, resulting from the increased store
base, partially offset by higher product margins.
STORE OPERATING EXPENSES. Store operating expenses for the first quarter
ended April 30, 1999 were $4.7 million or 28.5% of Company-owned stores sales,
as compared to $3.2 million or 26.1% of Company-owned stores sales for the
comparable period in the prior year. This unfavorable variance reflects the
Company's new store growth, and corresponding store labor expense increases, in
addition to continued increases in hourly compensation due to tight labor
markets.
GENERAL AND ADMINISTRATIVE EXPENSES. For the first quarter ended April 30,
1999 general and administrative expenses were $2.2 million or 13.5% of total
revenues compared to $1.7 million or
17
<PAGE>
13.7% of total revenues for the comparable period in the prior year. The dollar
increase is primarily the result of higher payroll and benefit costs resulting
from the addition of several corporate positions, necessary to support the
Company's continued growth.
INTEREST EXPENSE. Interest expense, net of interest income, of
approximately $216,000 or 1.3% of total revenues for the first quarter ended
April 30, 1999, increased $189,000, over net interest expense for the first
quarter ended May 1, 1998. The increase reflects the Company's borrowings under
its revolving credit facility during the first three months of 1999 necessary to
fund working capital requirements. The Company did not borrow under its
revolving credit facility during the first three months of 1998. The Company
expects interest expense to increase throughout the remainder of the year,
primarily related to the anticipated issuance of the Debentures.
INCOME TAX BENEFIT. The Company's estimated annual effective income tax
rate is 40% for 1999, unchanged from the first quarter 1998 estimated annual
rate.
NET LOSS. As a result of the factors discussed above, the Company reported
a net loss of approximately $1.2 million, or $.26 per share, for the first
quarter ended April 30, 1999, compared to a net loss of approximately $528,000,
or $.12 per share for the first quarter ended May 1, 1998. The net loss for
first quarter 1999 included the net impact of a cumulative effect of accounting
change of approximately $109,000 ($.02 per share) from the adoption in the first
quarter of a newly issued accounting pronouncement. The principal reasons for
the loss in first quarter of fiscal 1999 were the seasonality of revenues and
the large number of stores opened in the past nine months which have expenses
without a fully established revenue base.
FISCAL YEAR ENDED JANUARY 29, 1999 (FISCAL 1998) COMPARED TO FISCAL YEAR ENDED
JANUARY 30, 1998 (FISCAL 1997)
REVENUES. Company-owned store revenues increased 20.1% to $62.2 million for
fiscal 1998 from $51.8 million for fiscal 1997, primarily due to an increase in
the number of Company-owned stores from 73 stores at the end of fiscal 1997 to
97 stores at the end of fiscal 1998. Approximately $1.1 million of the increase
in revenues was attributable to comparable store sales increases and
approximately $9.3 million was attributable to new and remodeled Company-owned
stores. Comparable store sales increased 4.2% for the fiscal year ended 1998
over the prior period. In fiscal 1998, we opened 17 Company-owned stores,
purchased 10 franchise stores and closed 3 stores. Stores whose leases expired
were either closed or relocated to larger spaces.
The number of franchise stores decreased from 51 stores at the end of fiscal
1997 to 46 stores at the end of fiscal 1998. We opened nine new franchise
stores, purchased ten franchise stores, closed two franchise stores and
terminated two franchise stores. Franchise revenues increased 9.5% from $1.2
million for fiscal 1997 to $1.3 million for fiscal 1998. Initial franchise fees
increased 84.5% or $60,000 due to an increase in the number of franchise store
openings in fiscal 1998. The increase in initial franchise fees was augmented by
increased royalty payments resulting from increased sales in the franchise
stores. Royalty payments averaged 4% of sales in the franchise stores.
COST OF PRODUCTS SOLD AND OCCUPANCY COSTS. Cost of products sold and
occupancy costs for fiscal 1998 were $41.3 million or 66.3% of Company-owned
store revenues, as compared to $35.0 million or 67.5% of Company-owned store
revenues for fiscal 1997. Cost of products sold and occupancy costs reflects the
direct cost of merchandise and store occupancy costs, including rent, common
area maintenance costs, and real estate taxes. The decrease as a percentage of
Company-owned store revenues was primarily related to one-time events that
decreased the cost of product.
STORE OPERATING EXPENSES. Store operating expenses for fiscal 1998 were
$15.2 million or 24.4% of Company-owned store revenues, as compared to $11.5
million or 22.2% of Company-owned store revenues in fiscal 1997. The increased
percentage was primarily attributable to increases in store labor,
18
<PAGE>
and secondarily attributable to increased store operating expenses. The largest
increase was in payroll and related benefits. The average hourly wage rates
continued to increase due to tight labor markets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $7.6 million or 12.0% of total revenues in fiscal 1998 compared to $5.5
million or 10.4% of total revenues in fiscal 1997. The increase in general and
administrative expenses was primarily attributable to increases in necessary
infrastructure and additional staff to support the growing Company-owned store
base. Amortization expense of goodwill increased due to our purchases of
franchise stores.
INTEREST EXPENSE. Interest expense, net of interest income, decreased from
$798,000 (1.5% of total revenues in fiscal 1997) to $254,000 (.4% of total
revenues in fiscal 1998). We used the net proceeds of our initial public
offering to repay certain bank debt, subordinated debt, and stockholder notes,
and to fund new store growth. We did not borrow under our bank revolving line of
credit until late in the second quarter of fiscal 1998.
NET LOSS. As a result of the factors discussed above, we had a net loss of
$521,000 in fiscal 1998. This compares to a pro forma net loss of $207,000 in
fiscal 1997. The principal reasons for the loss in fiscal 1998 were increased
competition, increased store labor expenses and increased marketing and
promotional expenses.
FISCAL YEAR ENDED JANUARY 30, 1998 (FISCAL 1997) COMPARED TO FISCAL YEAR ENDED
JANUARY 31, 1997 (FISCAL 1996)
REVENUES. Company-owned store revenues increased 23.6% from $41.9 million
for fiscal 1996 to $51.8 million for fiscal 1997. This increase was partially
attributable to an increase in the number of Company-owned stores from 64 stores
at the end of fiscal 1996 to 73 stores at the end of fiscal 1997. Approximately
$3.0 million of the increase in revenues was attributable to comparable store
sales increases and approximately $6.9 million was attributable to new and
remodeled Company-owned stores. Comparable store sales increased 9.7% for the
fiscal year ended January 31, 1997 over the prior period.
The number of franchise stores increased from 50 franchise stores at the end
of fiscal 1996 to 51 at the end of fiscal 1997. Franchise revenues increased
4.6% from $1.1 million for fiscal 1996 to $1.2 million for fiscal 1997. Initial
franchise fees decreased 57.0% or $94,000 due to a reduction in the number of
franchise store openings in fiscal 1997. The decrease in initial franchise fees
was offset by increased royalty payments resulting from increased sales in the
franchise stores. Royalty payments averaged 4% of sales in the franchise stores.
COST OF PRODUCTS SOLD AND OCCUPANCY COSTS. Cost of products sold and
occupancy costs for fiscal 1997 were $35.0 million or 67.5% of Company-owned
store revenues, as compared to $27.9 million or 66.7% of Company-owned store
revenues for fiscal 1996. Cost of products sold and occupancy costs reflects the
direct cost of merchandise and store occupancy costs, including rent, common
area maintenance costs, and real estate taxes. The increase as a percentage of
Company-owned store revenues was primarily related to increases in occupancy
costs, particularly increases in real estate taxes and common area maintenance
charges.
STORE OPERATING EXPENSES. Store operating expenses for fiscal 1997 were
$11.5 million or 22.2% of Company-owned store revenues, as compared to $8.7
million or 20.8% of Company-owned store revenues in fiscal 1996. The increase as
a percentage of Company-owned store revenues was primarily attributable to
increases in store labor, advertising and credit card fees. The largest increase
was in payroll and related benefits, resulting from an increase in the federal
minimum wage in third quarter and a tight labor market, especially in the third
and fourth quarter, which caused hourly labor rates to increase. Advertising
increased during the important Halloween and Christmas selling seasons. A new
poster flyer concept was introduced for Halloween. Credit card fees also
increased as a result of a
19
<PAGE>
change in our strategy in late fiscal 1996 to begin accepting credit cards. The
roll out of credit card acceptance was completed in mid-1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $5.5 million or 10.4% of total revenues in fiscal 1997, as compared to $4.2
million or 9.9% in fiscal 1996. The increase in general and administrative
expenses was primarily attributable to necessary infrastructure and additional
staff to support the growing Company-owned store base. Additionally, in fiscal
1997, we added members to our senior management team.
INTEREST EXPENSE. Interest expense, net of interest income, increased
$26,000 from $772,000 or 1.8% of total revenues in fiscal 1996 to $798,000, or
l.5% of total revenues in fiscal 1997. We used the net proceeds of our initial
public offering to repay certain bank debt, subordinated notes, and stockholder
notes, changing our status from a "net borrower" to a "net investor" by fiscal
year end.
EXTRAORDINARY CHARGE AND EXPENSES OF CANCELED ACQUISITION. As a result of
the early retirement of the subordinated notes in connection with our initial
public offering, we incurred a one-time charge to earnings in the fourth quarter
of $183,000 for the unamortized portion of our expenses related to issuance of
the subordinated notes. Additionally, we took a fourth quarter charge of
$261,000 related to the expenses associated with our proposed acquisition of The
Paper Factory of Wisconsin, Inc. which we terminated on January 26, 1998.
PRO FORMA NET (LOSS) INCOME. As a result of the factors discussed above, we
realized a pro forma net loss of $207,000 in fiscal 1997 as compared to pro
forma net income of $808,000 for fiscal 1996. Pro forma net (loss) income
includes a benefit (provision) for federal and state income taxes. The principal
reasons for the loss in fiscal 1997 were the expenses associated with the
terminated acquisition and the noncash charge associated with the early payment
of the subordinated notes.
SEASONALITY
Our results of operations have historically fluctuated from quarter to
quarter because of variations in revenues and operating expenses. We generate a
significant portion of our operating income in our second and fourth fiscal
quarters because of seasonal events. Any factor that negatively affects our
revenues or increases our operating expenses during the second and fourth fiscal
quarters could negatively affect our annual results of operations. As a result
of the seasonality of our revenues, we expect to incur a loss in the first
quarter of each year for the foreseeable future. Due to increased promotional
activities during our third quarter, we have historically experienced reduced
operating income for this quarter.
Our results of operations also fluctuate from quarter to quarter as a result
of our expansion strategy for the following reasons:
- the timing of new store openings
- costs associated with the opening of new stores
- expenses incurred to support our expansion strategy
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for ongoing operations, principally
inventory and capital improvements to support the continued growth of new
Company-owned stores as well as the remodeling or relocation of existing
Company-owned stores. Our primary sources of liquidity have been:
- cash from operations
- payment terms from vendors
20
<PAGE>
- borrowings under our revolving line of credit
- proceeds from financings such as our initial public offering
Our liquidity as measured by our working capital, was $5.2 million at April
30, 1999 and at January 29, 1999, and was $9.4 million at January 30, 1998. The
Company's current ratio was 1.3 to 1.0 at April 30, 1999 compared to 1.4 to 1.0
at January 29, 1999 and 3.1 to 1.0 at January 30, 1998.
Net cash provided by operations totaled approximately $407,000 for the first
quarter ended April 30, 1999 compared to net cash used for operations of
approximately $189,000 for the same period in 1998. The increase in cash flows
from operations primarily reflects the increase in merchandise inventories and
accounts payable related to new store growth, in addition to enhanced accounts
payable leveraging. At the end of fiscal 1997 it was $9.4 million. Cash (used
for) provided by operations for each of the last three fiscal years was
approximately ($2.2 million) in fiscal 1998, $746,000 in fiscal 1997, and
$85,000 in fiscal 1996. The decrease in cash flows from operations in fiscal
1998 compared to fiscal 1997 was primarily attributable to an increase in
merchandise inventories to support new and existing Company-owned stores.
Merchandise inventories have increased approximately $2.7 million from the
end of fiscal 1998, reflecting necessary purchases in order to support the new
store base and for our upcoming seasonal events. This inventory growth was more
than fully funded by a $4.0 million increase in accounts payable at the end of
our first fiscal quarter. At the end of fiscal 1998 our accounts payable were
$4.4 million. At the end of fiscal 1997 they were $3.0 million. The increase in
accounts payable for fiscal 1998 over fiscal 1997 was primarily attributable to
increased merchandise inventory.
Net cash used for investing activities was approximately $558,000 for the
first quarter ended April 30, 1999 and $1.0 million for the first quarter ended
May 1, 1998. Net cash used for investing activities was approximately $6.7
million for fiscal 1998, $2.5 million for fiscal 1997 and $1.2 million for
fiscal 1996. These expenditures were primarily related to opening and remodeling
existing Company-owned stores and upgrading our information systems.
During the first three months of fiscal 1999, we made capital expenditures
of approximately $574,000, compared with approximately $816,000 of capital
expenditures for the prior year comparable period. Capital expenditures in the
first quarter of fiscal 1999 included approximately $121,000 of costs related to
new stores. During fiscal 1998, we had capital expenditures of approximately
$4.3 million, including approximately $3.2 million related to new stores. We
have invested and will continue to evaluate our needs for additional investment
in information technology and infrastructure capabilities in order to gain
operational efficiencies. We anticipate that we will spend an aggregate of
approximately $2.7 million on capital expenditures during fiscal 1999. If the
number of Company-owned stores we plan to open in fiscal 1999 increases or
decreases, this estimate may change accordingly. The number of Company-owned
stores may vary from planned primarily based upon the availability of suitable
locations on acceptable terms. These capital expenditures will be for new store
openings, fixturing, remodeling or relocating existing stores, and information
systems. We intend to continue to finance all of our new store fixtures and
equipment with long-term capital leases, assuming availability and reasonable
terms.
Net cash provided by financing activities was approximately $878,000 for the
first fiscal quarter of 1999 compared to net cash used for financing activities
of $90,000 for the first fiscal quarter of 1998. The year-over-year increase
reflects the net proceeds received during the first fiscal quarter of 1999 from
the refinancing of our mortgage and the financing of our capital leases. Net
cash provided by financing activities was $6.9 million for fiscal 1998, $3.5
million for fiscal 1997 and $585,000 for fiscal 1996. Cash provided by financing
activities in fiscal 1998 reflects our borrowing under our revolving line of
credit with our bank. Cash provided by financing activities in fiscal 1997 was
primarily from our initial public offering.
21
<PAGE>
In early June 1999, we obtained a $15 million three-year revolving line of
credit facility with BankBoston Retail Finance for general working capital
purposes, that replaced our previous $7.5 million credit facility. Borrowings
outstanding under the new line of credit bear interest, at a variable rate and
are secured by substantially all of our assets. The agreement with respect to
the credit facility contains covenants, which require us to satisfy certain
financial tests, and restrictions on our ability to pay dividends. We cannot
assure you that when our revolving line of credit expires we will be able to
renew it or replace it on comparable terms.
We anticipate opening up to ten Company-owned stores during fiscal 1999. In
addition, we may seek to acquire existing stores from franchisees. At present,
we have no agreement to acquire any franchise store. We expect that the average
new store cost for Company-owned stores will be approximately $186,000. These
expenditures include approximately $131,000 for fixtures and equipment,
including point-of-sale equipment, and $55,000 for store inventory, net of
accounts payable. Pre-opening expenses are expensed as incurred. We seek to
lease sites for our Company-owned stores rather than own real estate. Typically
we lease approximately 8,500 square feet for our Company-owned stores.
Out of our planned Company-owned stores to be opened in fiscal 1999, as of
April 30, 1999, we have signed leases for five new locations. Most of these
leases are for ten-year terms, with five-year renewal options.
On April 8, 1999, we refinanced our corporate office building. The new $1.1
million term note is payable in monthly installments of $8,612, including
interest at 7.125% per year, through May 2009. This note is secured by a first
mortgage on our corporate headquarters.
We expect to fund our operations, capital expenditures and the growth of our
business, from cash generated from operations, available borrowing capacity
under our revolving credit facility and proceeds from this offering.
INFLATION
We believe that inflation has not had a material impact upon our historical
operating results, and do not expect it to have such an impact in the future.
There can be no assurance that our business will not be affected by inflation in
the future.
IMPACT OF YEAR 2000
OVERVIEW. The Year 2000 problem arose because many existing computer
programs use only the last two digits to refer to a year. These computer
programs, therefore, do not properly recognize a year that begins with "20,"
instead of the current "19." If not corrected, many computer applications could
fail or create erroneous results. The impact of the Year 2000 problem is not yet
known, and if not timely corrected, could affect the global economy. It is
possible that our currently installed computer systems, software, other business
systems, or those systems of our suppliers, will not accept input of, store, or
manipulate output dates for the years 2000 and beyond without error or
manipulation.
STATE OF READINESS. We are actively engaged in the process of evaluating
the status of our internal Information Technology ("IT") and non-IT systems for
compliance with Year 2000 issues. We have hired an outside consultant to assist
us with this process and to document our efforts and results regarding Year 2000
compliance in a Year 2000 depository to be maintained at our headquarters. We
continue to solicit verification from our largest suppliers, as well as other
business partners, that they are Year 2000 compliant. The majority of our
exposure is in the readiness of third parties, where the situation is much less
within our ability to predict or control. The first phase, evaluating our
internal systems, is substantially complete. The second phase, evaluating third
party systems, was commenced in the second quarter of fiscal 1998, and we expect
to be substantially complete by mid-fiscal 1999. In addition, while we value our
established relationships with our key suppliers, we are in the process of
22
<PAGE>
identifying secondary suppliers in the event that any of our business partners
are delayed in achieving Year 2000 compliance. We monitor our progress in
achieving Year 2000 compliance on a regular basis and regularly report our
progress to our management and board of directors.
NON-IT SYSTEMS. We believe that the failure of any internal non-IT systems
(E.G., alarms, telephone system, voicemail, access cards, locks, heating and
cooling systems, etc.) to be compliant for the Year 2000 would have little
effect on our business, operations, or financial condition as a whole. We
continue to review our non-IT systems, and will continue to take steps to
modify, upgrade or replace non-IT systems as necessary to be Year 2000
compliant. We do not anticipate that expenses for these replacement or
conversions will be material. We believe that any additional modifications or
replacements will not have a material impact on our business, operations or
financial condition.
MAJOR IT SYSTEMS. During 1998 and 1997, we upgraded or replaced our mission
critical data processing system, which controls our financial records, inventory
management and purchasing. We believe that these systems will function properly
with respect to dates in the Year 2000 and beyond. We have received
certification from many of our hardware and software suppliers of the upgraded
or replaced systems that the systems should function correctly in Year 2000 and
beyond. We are in the process of testing the certification received from our
hardware and software suppliers, which should be completed by third quarter
1999. We are in the process of upgrading our cash registers and personal
computers as necessary, in order to achieve Year 2000 compliance. All registers
that are not Year 2000 compliant will be upgraded by December 31, 1999. We
believe that any additional modifications or replacements will not have a
material impact on our business, operations or financial condition.
THIRD PARTY SYSTEMS. We have been in contact with our major suppliers and
service providers to understand their state of Year 2000 readiness. We have
asked our major suppliers and service providers to complete a survey on their
state of Year 2000 readiness, and we are assessing how this could hurt us. A
supplier's failure to be Year 2000 compliant may interrupt the flow of products
to our stores for sale. Depending on how long product supply to our stores is
interrupted, our business could suffer. Multiple sources of product supply
available to us, however, lessen this concern. We may also experience some
inconvenience if one or more of our utility providers are not Year 2000
compliant. Even if utility providers are not able to provide electricity, water,
heat, etc., to our stores following January 1, 2000, we will still attempt to
open all stores. If a utility failure would continue for more than several days,
the result could decrease our revenues, earnings and cash flow.
COSTS TO ADDRESS YEAR 2000 ISSUES. To date, our costs associated with Year
2000 readiness have been immaterial. We expect that any additional costs of
being Year 2000 compliant will also be immaterial.
RISKS TO THE COMPANY FOR YEAR 2000 ISSUES. Some risks associated with the
Year 2000 problem are beyond our ability to control, including the extent to
which our suppliers and service providers can address their Year 2000 problems.
We cannot estimate, therefore, the impact on us if third parties are not Year
2000 compliant. The failure by a supplier to adequately address the Year 2000
issue could hurt the supplier and disrupt our business. Our most likely worst
case Year 2000 scenario is if one or more of our stores does not have power,
heat or water. The stores affected could still open for business, however, using
a cash box to make sales and flashlights to provide light.
CONTINGENCY PLANS. We expect to develop a formal contingency plan related
to the Year 2000 problem upon further identification and assessment of all of
our risks.
The costs of our Year 2000 compliance programs and the timetable on which we
plan to complete these programs are based on our best estimates, and reflect
assumptions regarding the availability and cost of personnel trained in this
area, the compliance plans of third parties and similar uncertainties. However,
due to the complexity and pervasiveness of the Year 2000 issue, and in
particular the uncertainty regarding the compliance programs of third parties,
these estimates may not be achieved, and our actual results could be
significantly different from those anticipated.
23
<PAGE>
BUSINESS
Paper Warehouse is a growing chain of retail stores specializing in party
supplies and paper goods. As of April 30, 1999, we had 142 stores, including 97
Company-owned stores and 45 franchise stores. These stores are conveniently
located in major retail trade areas to provide customers with easy access to our
stores. We operate these stores under the names PAPER WAREHOUSE and PARTY
UNIVERSE. Our seven principal markets are:
<TABLE>
<S> <C> <C>
- - Minneapolis/St. Paul, MN - Kansas City, MO and KS - Denver, CO
- - Oklahoma City/Tulsa, OK - Seattle, WA - Tucson, AZ
- - Omaha, NE and Des Moines, IA
</TABLE>
Our stores offer an extensive selection of party supplies and paper goods,
at everyday low prices. We offer party supplies and paper goods for a wide
variety of celebratory occasions, everyday uses and seasonal events, including:
<TABLE>
<CAPTION>
CELEBRATORY OCCASIONS AND EVERYDAY
USES SEASONAL EVENTS
- ------------------------------------- ---------------------------------
<S> <C> <C>
- - birthdays - Valentine's - Halloween
- - weddings Day - Christmas
- - baby showers - Easter - Hanukkah
- - graduations - Fourth of July - New Year's
- - other family and religious - Thanksgiving
celebrations
</TABLE>
Through our 8,500 square foot prototype, we offer a comprehensive selection
of over 19,000 different products. This selection provides customers the
convenience of one-stop shopping for all party supplies and paper goods. Our
merchandise is organized by party themes. The prominent signage and wide aisles
in our stores allow customers easy access to coordinate the merchandise required
for all party occasions. We believe that our extensive and readily available
merchandise selection often stimulates customers to purchase additional
products.
PAPER WAREHOUSE STORES
FORMAT. We developed our current store prototype based on our management's
experience in the industry, other extensive retail experience and customer
research. We operate stores that range in size from 3,000 square feet to 8,500
square feet of retail space. Our management introduced our current 8,500 square
foot prototype store in 1994 and believes it is the optimal store format for our
future growth. Of the 97 Company-owned stores, approximately 87% are 6,000
square feet or larger.
Our stores are designed to create a customer-friendly environment. We use
vibrant colors, theme-oriented merchandise displays and unique products to
create a fun and festive shopping experience. The focal point of our stores is
the seasonal display located at the front of each store, which creates a
"store-within-a-store" appearance. This display maximizes the season's selling
impact and is updated continuously to promote a fresh image within the store. To
assist customers in coordinating party supplies for any occasion, we locate
related departments, such as gift-wrap and greeting cards, adjacent to one
another and display related merchandise such as party hats, plates, cups and
napkins together within a department. Customers are able to easily move about
the different departments and find specific product categories due to prominent,
easy-to-read signage, bright lighting and wide aisles. We believe that our store
layout assists customers in finding and coordinating their party supply needs,
and also encourages browsing, impulse purchases and repeat visits.
In 1998 we introduced the "concept store." A concept store has a different
look and feel than our other stores. These stores have more colorful ceilings,
lower shelves in the front of the store, carpeting and confetti-tiled floors,
and new vibrant uncluttered signage. We store all extra merchandise out of
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<PAGE>
sight. These features give the store a very open and organized feel, allow
customers to see merchandise throughout the store, and provide a more fun and
festive shopping atmosphere. Of our 97 Company-owned stores, 19 are concept
stores. We anticipate that new Company-owned stores will be concept stores, and
we will selectively remodel existing stores to concept stores where the revenue
potential justifies the investment. We believe that our concept stores will
assist us in creating our brand awareness, will generate strong sales per square
foot and can be readily transferred to new markets.
PARTY SMART. We are seeking to distinguish our business from our
competitors by positioning Paper Warehouse as the party expert. We believe that
we have the opportunity to create a distinct identity for ourselves, one in
which customers equate us with the word "PARTY" in every possible way. To
achieve this recognition, we are beginning to implement a program in our stores
called PARTY SMART. We will introduce the PARTY SMART concept in our stores
through July 1999. PARTY SMART means being able to provide a customer with all
the information and resources necessary to throw a party. Our goals for this
program are to:
- increase average purchases per customer visit
- increase the frequency of store visits
- develop customers' preference for us over our competitors
In order to get customers to think of us as PARTY SMART we plan to:
- provide helpful and engaging in-store presentations to add value to the
shopping experience
- communicate our expertise by giving customers party ideas, decorating
tips, referrals and planning advice
- create a "party planning resource center" in each store carrying different
types of brochures for different types of parties and seasonal events such
as entertainment and catering ideas, games to play at children's birthday
parties and shopping checklists
- advertise our PARTY SMART concept through shopping bag inserts, window and
aisle signs, buttons for employees, in-store audio messages, radio
broadcasting and over the internet
CUSTOMER SERVICE. We seek to provide a high level of customer service to
enhance our customer-friendly store environment. Store managers and sales
associates are trained to assist customers with party planning and event
coordination. In connection with our PARTY SMART program, all employees are
being trained on how to provide nontraditional customer service to our shoppers.
We want our employees to be able to offer our shoppers party ideas, decorating
tips, and referrals in addition to helping shoppers find and purchase products.
In addition, we provide party planning guides and checklists. Our "no hassle"
return policy makes it easy for customers to return or exchange products, which
we believe encourages customers to purchase additional product quantities.
Certain products that require additional sales assistance, such as balloons and
custom printing, are located near checkout counters where sales associates can
readily assist customers. We continually monitor our level of customer service
by regular store visits and by employing anonymous "mystery shoppers." Mystery
shoppers visit all Company-owned stores at least once per quarter to evaluate
personnel on various aspects of customer service, including responsiveness,
quality of product displays and store cleanliness. A portion of store managers'
compensation is based on the results of these mystery shopper surveys.
OPERATIONS AND TRAINING. Each Company-owned store is typically operated by
a store manager, one assistant manager and a varying number of full-time and
part-time sales associates, depending on the store size, sales volume and
selling season. Store managers are responsible for all aspects of the store's
day-to-day operations, including employee hiring and training, work scheduling,
expense control and customer service. These managers report to a district or
operations manager, each of whom is responsible for approximately 10 to 18
stores. Within each geographic market, we use floating managers
25
<PAGE>
to assist in smaller stores that cannot support both a store manager and an
assistant manager. In addition, floating managers support store managers during
busy holiday seasons and substitute for store managers during vacations and
other absences. The floating managers also work with newly hired store managers
to ensure a smooth transition for sales personnel and customers.
Before opening a new Company-owned store, we usually train store managers
intensely for two weeks, depending on prior experience. During the new store
set-up, our district management team provides additional training to our store
managers. After the store opening, corporate headquarters personnel spend
considerable time overseeing the operations. Each district has a dedicated
trainer who visits the stores to work with the store managers, reinforcing prior
training and providing on-going training. We schedule periodic training sessions
for store managers in the central or district offices on various topics,
including human resources, merchandising, loss prevention and employee
supervision. We cover additional training topics at monthly managers' meetings
and through monthly mailings and our monthly newsletter.
Paper Warehouse stores are typically open:
<TABLE>
<S> <C>
9:00 a.m. to 9:00
Monday through Friday................................ p.m.
9:00 a.m. to 6:00
Saturday............................................. p.m.
11:30 a.m. to 5:00
Sunday............................................... p.m.
</TABLE>
SITE SELECTION AND LOCATIONS
SITE SELECTION. In order to select the optimal location for our stores, we
use a site selection process that considers various criteria, including:
- population density
- demographics, including age and income
- parking availability
- storefront visibility and presence
- local competition
- lease rates
- traffic counts
We locate our stores in or near visible high traffic strip mall centers in
close proximity to prominent mass merchandisers, and discount or grocery store
anchors. Our strategy of clustering stores in metropolitan markets promotes
customer convenience and creates favorable economies of scale for marketing,
advertising and operations.
26
<PAGE>
LOCATIONS. As of April 30, 1999, we had 97 Company-owned stores in the
following locations:
<TABLE>
<CAPTION>
LOCATIONS NUMBER OF STORES
- ---------------------------------------------------------------------------- ---------------------
<S> <C>
Arizona
Tucson Metropolitan Area.................................................. 4
Colorado
Denver Metropolitan Area.................................................. 13
Colorado Springs.......................................................... 1
Iowa
Des Moines Metropolitan Area.............................................. 4
Cedar Falls............................................................... 1
Fort Dodge................................................................ 1
Iowa City................................................................. 1
Sioux City................................................................ 1
Kansas/Missouri
Kansas City Metropolitan Area............................................. 15
Columbia.................................................................. 1
Salina.................................................................... 1
St. Joseph................................................................ 1
Minnesota
Minneapolis/St. Paul Metropolitan Area.................................... 26
Mankato................................................................... 1
Rochester................................................................. 1
St. Cloud................................................................. 1
Nebraska
Omaha Metropolitan Area................................................... 2
Oklahoma
Oklahoma City Metropolitan Area........................................... 8
Tulsa..................................................................... 4
Washington
Seattle Metropolitan Area................................................. 8
Wisconsin
Onalaska.................................................................. 1
Eau Claire................................................................ 1
--
Total Company-owned stores.................................................. 97
--
--
</TABLE>
MERCHANDISING
OVERVIEW. Through our 8,500 square foot store prototype, we offer a
comprehensive selection of over 19,000 different products, providing customers
the convenience of one-stop shopping for all party supplies and paper goods. Our
merchandise is organized by party themes. The prominent signage and wide aisles
in our stores allow customers easy access to coordinate the merchandise required
for all party occasions. We also believe that our extensive and readily
available merchandise selection often stimulates customers to purchase
additional products.
PARTY SUPPLIES. We offer an extensive selection of complementary and
coordinating party supplies in unique and traditional patterns, colors and
designs. Our party supplies include:
<TABLE>
<S> <C> <C> <C> <C> <C>
- - invitations - plates - napkins - party - streamers - giftware
- - banners - candles - balloons favors - candy - seasonal
- party novelties
snacks
</TABLE>
27
<PAGE>
Our 8,500 square foot store prototype offers over 150 ensembles of party
goods for many occasions, which include party hats, plates, napkins and cups. A
significant portion of our party goods ensembles involves the use of movie and
television figures, animated characters and celebrity likenesses licensed to the
manufacturer of these ensembles.
GIFT WRAPPING PRODUCTS. We offer a wide assortment of gift wrapping
products in various patterns and colors, including gift wrap, gift bags, gift
boxes, tissue paper, ribbons, bows, shred and gift tags. In addition to holiday
selections, we offer distinctive gift packaging products for special occasions
such as birthdays, graduations, weddings, baby showers and other family and
religious celebrations.
GREETING CARDS. We feature a wide variety of special occasion, seasonal and
everyday greeting cards. Our 8,500 square foot store prototype offers over
10,000 titles. We carry traditional, humorous and contemporary brand name
greeting cards at significantly lower prices than national greeting card chain
stores.
HOUSEHOLD AND CATERING FOOD SERVICE SUPPLIES. We offer paper supplies such
as toilet paper, paper towels, dispenser towels, plates, cups, serving trays and
bowls and table coverings. In addition to offering these products to our regular
party goods customers, we are a paper product supplier for many commercial users
of paper products, including catering companies and non-profit organizations.
LOW PRICES. We provide customers with everyday low pricing on all products,
at discounts ranging from 10% to 50% off the manufacturer's suggested retail
price. In addition, we guarantee that we will meet or beat any advertised price
on the products we offer. We reinforce our everyday low price strategy with
signs prominently displayed throughout our stores and extensive promotional
advertising.
PRODUCT SOURCING AND INVENTORY MANAGEMENT
We purchase our merchandise from approximately 150 suppliers. In fiscal
1998, our largest supplier, Amscan Holdings, Inc., accounted for approximately
14% of our purchases and our eight largest suppliers represented approximately
51% of our purchases. We do not have long-term purchase commitments or exclusive
contracts with any of our suppliers. We believe that alternative sources of
product are available at comparable terms and conditions. We consider numerous
factors in supplier selection, including price, payment terms, product offerings
and product quality.
We negotiate pricing with suppliers on behalf of all Company-owned and
franchise stores. We believe that this buying power enables us to receive
favorable pricing terms and to more readily obtain high demand merchandise.
Although franchise stores are responsible for purchasing their own inventory,
franchisees are able to make purchases on our negotiated pricing terms. As we
add new stores, we believe we will increase the volume of our inventory
purchases and benefit further from increased discounts and trade allowances and
more favorable payment terms from our suppliers.
More than 95% of our merchandise is shipped directly from the supplier to
our stores. Shipping merchandise directly to our stores provides us with
flexibility in pursuing new markets without the geographical constraints and
costs associated with a central distribution system. Deliveries are processed
and inventory items are inspected, sorted and priced in a segregated receiving
area in the back of the store (approximately 10% of total gross square feet per
store) before being placed on the selling floor. We believe that we realize
substantial savings by not maintaining a central distribution system.
Some of our suppliers, such as overseas suppliers, will not ship directly to
our stores. These suppliers instead ship products directly to one store in each
of our major metropolitan markets, which then separates and ships the products
to our other stores within that market. This approach allows us to make
opportunistic volume purchases. We maintain space in at least one of our stores
in each of our principal markets, including Minneapolis/St. Paul, Denver, Kansas
City, Oklahoma City, Tucson, Omaha and Seattle, for the separation and
redistribution of products to our other stores within that market.
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<PAGE>
We maintain a small warehouse in Minneapolis from which we separate and
distribute merchandise systemwide, including to our franchise stores.
ADVERTISING AND MARKETING
We maintain aggressive advertising and marketing programs. Our strategy of
clustering stores in metropolitan markets enables us to cost effectively employ
a variety of media. We advertise primarily through newspaper, direct mail
inserts and radio. We also promote products through the use of direct mail
mini-catalogs as well as through in-store coupon books and party planning aids.
Our advertising efforts are designed to educate consumers about our
convenient store locations, promote the breadth and value of our product
offering and stress the customer service levels of our sales associates. Our
advertising consists primarily of full color newspaper and direct mail inserts
designed around major holidays and the spring and summer seasons. In fiscal
1998, we distributed 17 newspaper and direct mail inserts. We supplement inserts
by radio advertising for New Year's, Easter, the spring season, graduation,
Halloween, and Christmas. In addition, we typically advertise the opening of new
stores in newspaper and direct mail inserts as well as on the radio.
We have initiated a targeted direct mail program to increase sales for
special events. We currently mail mini-catalogs of wedding and graduation party
goods to brides-to-be and families of high school graduates. We have recently
expanded this direct mail program to other special occasions such as a child's
first birthday, and to organizations purchasing basic party supplies and paper
goods for commercial or institutional use. Our institutional customers include a
variety of small businesses, caterers, food service companies, schools,
synagogues, churches, civic groups and other organizations.
In fiscal 1998, we spent approximately 75% of our marketing budget on full
color newspaper and direct mail inserts, approximately 20% for television and
radio advertising and the remainder on direct mail mini-catalogs and in-store
sales promotions. We plan to increase our marketing efforts in fiscal 1999 to
support our PARTY SMART concept and our e-commerce activities.
INFORMATION SYSTEMS
Our information systems are integral to continuing our expansion and
enhancing our competitive position in the industry. We completed the
installation of Point of Sale ("POS") terminals in all our Company-owned stores
in the third quarter of fiscal 1996. The POS terminals allow price lookup and
inventory tracking by product. By polling transaction data nightly from each
store's POS terminals, the system provides daily sales information and inventory
levels at store, department, class and product level. This information allows
the corporate office to monitor daily sales, gross profit, pricing and inventory
by product across our entire store base. Also, our automatic merchandise
replenishment system uses this information to allocate goods to individual
stores based on specific product requirements.
We completed the installation of JDA Retail Software Package in the first
quarter of fiscal 1998. The JDA Retail Software Package operates on an IBM
AS/400 platform, which required us to purchase new hardware. Switching hardware
platforms provided us with the benefit of parallel operations during the
conversion process. In addition, we have made extensive use of JDA's Minneapolis
consulting office in both the implementation and data conversion process.
The JDA system supports the complete range of retail cycle functions in the
areas of finance, merchandising and distribution, providing our management with
more sophisticated tools to utilize the information collected by our POS
terminals. Our previous information systems were already performing most of the
functions of the JDA Retail Software Package. Our management believes, however,
that JDA has improved the efficiency of these tasks. In addition, we plan to
develop enhancements such as
29
<PAGE>
data warehousing and electronic data interchange to improve our ability to
systematically manage our inventory.
INTERNET AND E-COMMERCE
The internet is a network linking computers throughout the U.S. and the
world. International Data Corporation ("IDC") estimates that more than 56
million people in the United States used the internet in 1998 and that more than
136 million people will use the internet by the year 2002. Women, our principal
customers, now make up half of all U.S. adult internet users, up from 18% of
users three years ago. This growing use of the internet represents a significant
opportunity for businesses to conduct commerce online. IDC projects that by the
year 2000, 46 million consumers in America will be buying online. While online
retail is still in its infancy, party supplies and paper goods online retailing
is even more underdeveloped. We believe that prior to 18 months ago no company
had a website offering party goods. Today, there appear to be only a few
substantial websites offering party goods.
We believe that the internet provides us an opportunity to grow our
business. We expect that it will allow us to attract new customers in our
existing markets and reach customers in geographic markets not currently served
by our stores. We also expect that it will enable us to better serve our current
customers. From the proceeds of this offering, we plan to design, implement and
support our online retail business. We believe that our conventional retail
infrastructure, established name recognition, management experience and supplier
relationships will support our entrance into the online market. Additional sales
of our products online will increase the volume of our inventory purchases,
allowing us to benefit further from increased discounts and trade allowances and
more favorable payment terms from suppliers. If we are able to take advantage of
additional benefits from suppliers, we expect to be able to offer lower prices.
We believe low prices will ultimately be one of the single most important
factors stimulating purchasing on the internet.
One part of our website strategy is to offer our PARTY SMART program on the
internet. Initially we plan to promote and sell a "party in a box" concept. This
means that a customer will be able to purchase a package of party goods
containing all the items necessary to throw a specific type of party (e.g., baby
showers, birthdays, theme parties and anniversaries).
We intend to develop a website that, when fully developed, will allow a
shopper to, among other things:
- preview our store to learn more about our history, products and services
- put together an entire party with one visit to our website
- obtain party advice, ideas and tips
- access a list of our local and national strategic partners (e.g.,
entertainers, caterers, rental supply firms, and operators of bowling
alleys, skating rinks and pools)
- pay for everything at one time at a check-out screen
- return to check on the status of orders that have already been placed
- receive e-mail from us about new items that would fit the selected party
theme, or items asked about but were unavailable when the order was placed
- contact customer service about the products and services available on our
website
- evaluate our performance and the performance of our website following the
party
- receive other information about us, such as franchising opportunities,
investor relations and career opportunities
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We designed our current website, PAPERWAREHOUSE.COM, to offer business
opportunities to individuals interested in owning a Paper Warehouse franchise.
This website only contains a homepage and we plan to update the content of this
website and provide links to other websites with a portion of the proceeds from
this offering.
We intend to design, develop and implement our website with a strategic
technical partner. We intend to contract with an internet fulfillment service
provider to process and ship orders, acknowledge and track orders, handle
returns and canceled orders and provide other customer services.
Our current implementation plan to launch our new website involves three
stages:
- upgrading the content of PAPERWAREHOUSE.COM so that visitors will be able
to easily access our other company information which we expect to complete
by the end of Summer 1999
- developing and implementing the new website, including its e-commerce
capabilities, which we expect to complete in time for Halloween 1999
- providing maintenance and enhancements to improve our customer's shopping
experience
The costs to develop and implement our internet strategy, and the timetable
on which we plan to launch this strategy, are based on our best estimates. The
following factors, among others, may negatively impact the success of our
internet strategy:
- failure of our strategic partners to efficiently and timely perform
- changes in technology
- failure to attract customers to our website
- increased competition in party suppliers and paper goods online retailing
- changes in consumer preferences
- problems associated with Year 2000
If any of the above were to occur, our estimates may not be achieved, and
our actual results could be significantly different from those anticipated.
31
<PAGE>
FRANCHISING
We have offered franchises of our Paper Warehouse store concept since
October 1987. As of April 30, 1999, we had 32 franchisees operating 45 franchise
stores located in the following states:
<TABLE>
<CAPTION>
LOCATIONS NUMBER OF STORES
- ---------------------------------------------------------------------------- ---------------------
<S> <C>
Arizona..................................................................... 1
Colorado.................................................................... 5
Florida..................................................................... 1
Georgia..................................................................... 2
Illinois.................................................................... 2
Iowa........................................................................ 2
Kansas...................................................................... 2
Kentucky.................................................................... 1
Louisiana................................................................... 4
Maryland.................................................................... 1
Minnesota................................................................... 1
Mississippi................................................................. 1
Missouri.................................................................... 1
Montana..................................................................... 2
Nebraska.................................................................... 3
Nevada...................................................................... 1
North Dakota................................................................ 4
South Dakota................................................................ 5
Tennessee................................................................... 1
Texas....................................................................... 3
Wyoming..................................................................... 2
--
Total Franchise Stores...................................................... 45
--
--
</TABLE>
We establish franchise stores in markets outside of metropolitan areas with
Company-owned stores. We believe that these markets typically are not served
adequately by the party supplies and paper goods industry. In addition to
generating franchise revenues, franchise stores benefit us through increased
name recognition and increased buying power from our suppliers.
We assist franchisees in opening and operating a Paper Warehouse store.
During the pre-opening phase, our support includes:
- site evaluation and assistance with lease negotiations
- store build-out assistance
- fixture, equipment, supplies and inventory procurement
- opening advertising materials
- operations training
We make available to our franchisees services such as business planning,
operations and promotional activities. In addition, we perform the merchandising
process for our franchisees. We make periodic inspections of the franchise
stores to ensure that the franchisee is complying with our various requirements
and quality standards. We may, in the future, enter into multiple store
development agreements with franchisees granting to them certain exclusive
rights to develop stores in specified markets, so long as the franchisee meets a
stated development schedule and complies with other provisions of the
development agreement and the franchise agreement.
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<PAGE>
Our franchise revenues are comprised of initial franchise fees and
continuing royalty payments. Our current initial franchise fee ranges from
$19,000 to $25,000 for new franchisees, depending on the type of store. We may
offer a discount franchise fee for developers opening multiple stores. If a
franchisee enters into a second or third franchise agreement it will receive a
discount on the initial fee associated with the second or third store.
Franchisees are also required to pay us a continuing royalty equal to a
percentage of their weekly gross sales. Historically, this percentage has varied
from 3% to 5%. Currently, new franchises pay us a continuing royalty of 4% of
gross sales.
The franchisee's initial investment depends primarily upon store size. This
investment includes the initial franchise fee, real estate and leasehold
improvements, fixtures and equipment, signs, point-of-sale systems, deposits and
business licenses, initial inventory, opening promotional expenses and working
capital. We may also require franchisees to pay a weekly advertising fee not to
exceed 1% of gross sales, although to date we have not charged this fee. Each
franchisee is granted a license from us for the right to use certain
intellectual property rights, including the mark PAPER WAREHOUSE or PARTY
UNIVERSE and related designs. Our franchise agreements provide for a ten-year
term and contain conditional renewal options.
COMPETITION
The party supplies and paper goods retailing business is highly competitive.
In order to compete successfully against other party supplies and paper goods
retailers, we believe we must maintain convenient locations, broad merchandise
selections, competitive pricing and strong customer service. Our stores compete
with a variety of smaller and larger retailers, including:
- specialty party supply retailers
- other superstores such as Party City and Factory Card Outlet
- card shops such as Hallmark
- designated departments in mass merchandisers, discount retailers, toy
stores, drug stores, supermarkets and department stores
Many of our competitors have substantially greater financial and personnel
resources than we do. We may also encounter additional competition from new
entrants in the future in our existing or planned new markets. Increased
competition by existing or future competitors may reduce our sales and cause us
to incur a loss.
Two of our major competitors are currently having significant financial
difficulties. In March 1999, Factory Card Outlet filed for reorganization under
Chapter 11 of the bankruptcy code. Party City has not yet released its financial
results for 1998, has experienced significant management turnover since January
1, 1999 and has defaulted under its secured credit facility. We do not believe
that the problems facing Party City and Factory Card Outlet are indicative of a
weakness in the party goods industry or with our business. We believe that the
following factors distinguish our business from that of Factory Card Outlet and
Party City:
- we have grown our number of stores in a more controlled manner
- our clustering growth strategy creates a critical mass of stores in our
principal markets, which allows us to promote customer convenience and
create favorable economies of scale for marketing, advertising and
operations
- we have a strong senior management team with significant retail experience
We expect competition in the e-commerce market to increase from a growing
number of companies selling goods and services over the internet, including
companies focusing exclusively on party goods and services.
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<PAGE>
Increased competition from these and other sources could require us to
respond to competitive pressures by establishing pricing, marketing and other
programs or seeking out additional strategic alliances or acquisitions that may
be less favorable to us than we could otherwise establish or obtain. This could
negatively effect our business.
TRADEMARKS AND SERVICE MARKS
We use the marks PAPER WAREHOUSE, PARTY UNIVERSE and PARTY SMART. PAPER
WAREHOUSE and PARTY UNIVERSE are federally registered trademarks. We have
recently submitted an application to register the trademark PARTY SMART. We are
aware of the common law usage of the name PAPER WAREHOUSE by several companies
in various parts of the United States, which may prevent us from using that name
in certain regional markets. In markets where we cannot use PAPER WAREHOUSE, we
intend to use the name PARTY UNIVERSE. Because of our regional approach to
advertising and store clustering, we believe that the use of a single trademark
within each market is more important to our growth and business strategy than
the use of one mark nationally.
GOVERNMENT REGULATION
As a franchisor, we comply with rules and regulations adopted by the Federal
Trade Commission and with state laws that regulate the offer and sale of
franchises. We also comply with a number of state laws that regulate certain
substantive aspects of the franchisor-franchisee relationship. These laws
regulate the franchise relationship, for example, by requiring the franchisor to
deal with franchisees in good faith, by prohibiting interference with the right
of free association among franchisees and by regulating illegal discrimination
among franchises with regard to charges, royalties or fees. To date, those laws
have not kept us from seeking franchisees in any given area and have not
effected our operations.
All of our stores comply with regulations adopted by federal agencies and
with licensing and other regulations enforced by state and local health,
sanitation, safety, fire and other departments. More stringent and varied
requirements of local governmental bodies with respect to zoning, land use and
environmental factors and difficulties or failures in obtaining the required
licenses or approvals can delay and sometimes prevent the opening of a new
store. In addition, we comply with the Fair Labor Standard Act and various state
laws governing matters such as minimum wage, overtime and other working
conditions. We also comply with the provisions of the Americans with
Disabilities Act of 1990, which generally requires that employers provide
reasonable accommodation for employees with disabilities and that stores be
accessible to customers with disabilities.
EMPLOYEES
As of April 30, 1999, we employed approximately 325 full-time and
approximately 870 part-time employees. We consider our relationships with our
employees to be good. None of our employees are covered by a collective
bargaining agreement.
FACILITIES
We own a 23,000 square foot building in a suburb of Minneapolis, Minnesota,
in which our headquarters are located. We lease a 17,000 square foot building in
a suburb of Minneapolis, Minnesota for warehouse space. We lease all the
locations for our 97 Company-owned stores. We anticipate that our new
Company-owned stores will typically have ten-year leases with at least one
five-year renewal option.
LEGAL PROCEEDINGS
We are not a party to any material litigation. We are not aware of any
threatened litigation that would negatively impact our business.
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<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL
The following table contains certain information about our directors and
executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Yale T. Dolginow(2)............. 56 President, Chief Executive Officer and Chairman of the
Board
Brent D. Schlosser.............. 45 Executive Vice President and Director
Cheryl W. Newell................ 46 Vice President and Chief Financial Officer
Diane C. Dolginow............... 55 Secretary and Director
Steven P. Durst................. 31 Vice President of Merchandising
Arthur H. Cobb(1)............... 48 Director
Marvin W. Goldstein(1)(2)....... 55 Director
Martin A. Mayer(1)(2)........... 56 Director
Jeffrey S. Halpern.............. 56 Director
</TABLE>
The following table contains certain information about other key personnel:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Diana G. Purcel................. 32 Controller
Michael A. Anderson............. 38 Vice President of Franchising
Steven R. Anderson.............. 52 Vice President and Chief Information Officer
Carol A. Carroll................ 48 Vice President of Stores
Willard V. Lewis................ 64 Vice President of Store Development
Kristen Lenn.................... 31 Director of Human Resources
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
YALE T. DOLGINOW currently serves as President, Chief Executive Officer and
a director and was part of the original management team that purchased the Paper
Warehouse business in 1986. Mr. Dolginow has been in the retail business since
1968 and has served in various capacities with numerous retail and mail-order
companies, such as President and Chief Executive Officer of Carlson Catalog
Showrooms, Inc., Assistant to the President of Dayton Hudson Corporation,
President of Modern Merchandising, Inc. and Chief Executive Officer and
President of Dolgin's, Inc. Mr. Dolginow and Diane C. Dolginow are husband and
wife.
BRENT D. SCHLOSSER currently serves as Executive Vice President and a
director and was also part of the original management team that purchased the
Paper Warehouse business in 1986. From 1982 to 1986, Mr. Schlosser served in
various capacities, including Vice President Marketing/Buying and Executive Vice
President Marketing/Merchandising at Carlson Catalog Showrooms, Inc. From 1977
to 1982, Mr. Schlosser served as director of Marketing for Modern Merchandising,
Inc. From 1975 to 1977, Mr. Schlosser was advertising director for Dolgin's,
Inc.
CHERYL W. NEWELL currently serves as Vice President and Chief Financial
Officer and joined us in August 1997. From 1991 to August 1997, Ms. Newell was a
Vice President with the Corporate Banking
35
<PAGE>
Group at U.S. Bancorp, a bank holding company, responsible for management of
desktop technology, disaster recovery and training and development. From 1986 to
1991, Ms. Newell was a Vice President with Citicorp, a bank holding company.
From 1976 to 1986, Ms. Newell was a Vice President at Norwest Bank n/k/a Wells
Fargo Corporation.
DIANE C. DOLGINOW currently serves as our Secretary and a director and
joined us in 1986. Ms. Dolginow was a director of Dolgin's Inc. from 1968 to
1976, and since 1994 has been a director on the National Advisory Board of the
School of Education at University of Kansas. Ms. Dolginow and Mr. Dolginow are
husband and wife.
STEVEN P. DURST currently serves as Vice President of Merchandising and
joined us in 1995. Mr. Durst joined us as Director of Information Systems,
became Vice President of Information Systems in 1997 and assumed his current
position in 1998. From 1995 to 1997 Mr. Durst served as Director of Information
Systems for the Company. From 1990 to 1995 Mr. Durst was employed by Exxon
Corporation where he performed various engineering and business planning
functions. Mr. Durst is the son-in-law of Mr. and Mrs. Dolginow.
ARTHUR H. COBB has served as a director since 1992. He is a consultant and
certified public accountant. Since 1978, he has been engaged in providing
financial consulting services and is President of Cobb & Associates, Ltd. Mr.
Cobb was a partner with Peat Marwick Mitchell & Co., n/k/a KPMG Peat Marwick
LLP, a public accounting firm.
MARVIN W. GOLDSTEIN has served as a director since 1996. Mr. Goldstein is
currently a financial consultant. From April 1997 through August 1997, Mr.
Goldstein was Executive Vice President and Chief Operating Officer of Regis
Corp., a national chain of hair salons. From August 1995 through April 1997, Mr.
Goldstein was Chairman of the Board, Chief Executive Officer and President of
Pet Food Warehouse, Inc., a specialty retailer. From February 1988 to September
1994, Mr. Goldstein served in various positions at the Department Store Division
of Dayton Hudson Corporation, including President and Chief Operating Officer,
Chairman and Chief Executive Officer. Mr. Goldstein is a director, and serves on
the compensation committee, of each of the following companies: Wilson's, The
Leather Experts, Inc., Buffet's, Inc., A.R.C.A., Inc., Greenspring, Inc. and
kidBoard, inc.
MARTIN A. MAYER has served as a director since 1992. He has been an adjunct
professor of marketing at the University of San Diego since 1995 and has been an
independent financial consultant since 1992. Mr. Mayer was a partner with Peat
Marwick Mitchell & Co., n/k/a KPMG Peat Marwick LLP, a public accounting firm,
from 1973 until 1992. Mr. Mayer is a certified public accountant.
JEFFREY S. HALPERN has served as a director since 1997. He has been Chairman
of the Board and Chief Executive Officer of Southwest Casino and Hotel Corp.
since 1993. Mr. Halpern was a partner in the law firm of Popham, Haik,
Schnobrich & Kaufman, Ltd. from 1989 until 1993, and a founding partner of
Halpern & Druck from 1980 to 1989.
DIANA G. PURCEL currently serves as Controller and joined us in April 1999.
Before joining the Company and since March 1998, Ms. Purcel was Divisional
Controller for Corporate Planning and Reporting for Damark International, Inc.
From 1994 to 1998, Ms. Purcel was a Senior Analyst with Dayton Hudson
Corporation. Before joining Dayton Hudson Corporation and since 1988, Ms. Purcel
was an auditor with Arthur Andersen, LLP.
MICHAEL A. ANDERSON currently serves as Vice President of Franchising and
joined us in 1991. Mr. Anderson joined us as Controller and assumed his current
position in 1999. From 1987 to 1991, Mr. Anderson was an accountant at Luri,
Eiger, Besikof & Company, a Minneapolis public accounting firm. From 1982 to
1986, Mr. Anderson was a staff accountant with Marvin O. Anderson, LPA, a public
accounting firm located in Minnesota.
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<PAGE>
STEVEN R. ANDERSON currently serves as Vice President and Chief Information
Officer of the Company and joined us in December 1998. From May 1997 until June
1998, Mr. Anderson was Senior Vice President and Chief Information Officer for
County Seat, a publicly-held specialty soft goods retailer. From 1986 to 1997,
Mr. Anderson held a number of information systems positions, including Senior
Vice President and Chief Information Officer at Best Buy Co., a publicly-held
specialty retailer.
CAROL A. CARROLL currently serves as Vice President of Stores and joined us
in 1994. Ms. Carroll joined us as Director of Stores and until she assumed her
current position in 1997. From 1992 to 1994, Ms. Carroll was Director of Stores
of CBR, Inc., a privately-owned retailer, specializing in airport retail. From
1976 to 1992, Ms. Carroll served as a District Manager, managing 17 stores in a
five-state area, for Best Products, Inc.
WILLARD V. LEWIS currently serves as Vice President of Store Development and
joined us in 1992. Mr. Lewis joined us as Director of Development and assumed
his current position in 1997. From 1990 to 1992, Mr. Lewis served as Vice
President of Network Facilities Professionals, Inc., a Minnesota-based computer
software firm. Mr. Lewis was employed by Dolgin's, Inc. from 1970 to 1985.
KRISTEN LENN currently serves as Director of Human Resources and joined us
in August 1997. From 1994 to 1997, Ms. Lenn was a Senior Consultant with
McGladrey & Pullen, LLP, a public accounting firm, and provided a wide range of
human resources generalist services to clients.
DIRECTOR COMPENSATION
DIRECTORS' FEES. We pay non-employee directors $1,000 for each meeting
attended, plus we reimburse all out-of-pocket expenses incurred on behalf of
Paper Warehouse.
DIRECTOR OPTIONS. Eligible directors participate in the Director Stock
Option Plan (the "Director Plan"). The Board administers the Director Plan.
Under the terms of the Director Plan, the Board automatically grants each newly
elected non-employee director a non-statutory option to purchase 10,000 shares
of our common stock at an exercise price equal to the fair market value of our
common stock on the date of grant. These options vest in one-third increments
beginning on the first anniversary of the date of grant and on each of the next
two anniversaries of this date. On November 24, 1997, the Board granted each of
the non-employee directors an option to acquire 10,000 shares of our common
stock at an exercise price of $7.50 per share. These options have a term of ten
years from November 24, 1997 and vest in one-third increments on each of
November 24, 1998, 1999 and 2000.
On June 4, 1998, the Board granted each of the non-employee directors a
non-statutory option outside of the Director Plan to acquire 5,000 shares of our
common stock at an exercise price of $4.25 per share, the closing sale price of
our common stock on the date of grant. On December 7, 1998, the Board granted
each of the non-employee directors another non-statutory option outside of the
Director Plan to acquire 6,250 shares of our common stock at an exercise price
of $2.75 per share, the closing sale price of our common stock on the date of
grant. All options granted to non-employee directors outside of the Director
Plan, have a term of ten years from the date of grant and vest in one-third
increments beginning on the first anniversary of the date of grant and on each
of the next two anniversaries of this date.
All options granted to these non-employee directors will become immediately
exercisable in full if any of the following events occur:
- the death of the director
- the removal of the director from the Board without cause
- the director is not re-nominated or re-elected as a director
37
<PAGE>
- a change in control of Paper Warehouse, as defined in any existing
agreements between us and our senior officers
- the director voluntarily resigns from the Board
CONSULTING FEES. In fiscal 1998, we paid Martin A. Mayer $1,800 plus
expenses for strategic planning services Mr. Mayer rendered to us in connection
with senior management strategic planning meetings. We also paid Marvin W.
Goldstein $12,000 in fiscal 1998 for consulting services Mr. Goldstein rendered
to us in connection with providing merchandising training and strategic
planning.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
AUDIT COMMITTEE. Our board of directors has an Audit Committee. The Audit
Committee is currently comprised of Messrs. Cobb, Goldstein and Mayer. The Audit
Committee:
- assists the Board with its accounting, auditing, operating and reporting
practices
- analyzes our annual financial statements
- selects and works with our independent auditors
- monitors the adequacy of our internal controls for compliance with
corporate policies and directives
COMPENSATION COMMITTEE. Our board of directors also has a Compensation
Committee. The Compensation Committee is currently comprised of Messrs.
Dolginow, Mayer and Goldstein. The Compensation Committee:
- reviews and recommends to the Board the compensation of our directors,
executive officers and key employees
- administers our 1997 Stock Option and Compensation Plan
38
<PAGE>
EXECUTIVE COMPENSATION
The following table provides summary information concerning cash and
non-cash compensation for each of the last three fiscal years paid to or earned
by our President and Chief Executive Officer and our three other most highly
compensated executive officers, each of whose total annual salary and bonus
exceeded $100,000 in the fiscal year ended January 29, 1999 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES
NAME AND ----------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)(1)
- ---------------------------------------------- --------- ---------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Yale T. Dolginow.............................. 1998 $ 285,000 $ -- -- $ 27,405
PRESIDENT AND 1997 285,000 -- -- 27,335
CHIEF EXECUTIVE OFFICER 1996 285,000 -- -- 27,005
Brent D. Schlosser............................ 1998 145,000 -- -- 1,394
EXECUTIVE VICE PRESIDENT 1997 145,000 -- -- 1,450
1996 145,000 -- -- 1,394
Cheryl W. Newell(2)........................... 1998 125,000 15,000 17,000 481
VICE PRESIDENT AND 1997 62,749 -- 17,000 --
CHIEF FINANCIAL OFFICER 1996 -- -- -- --
Steven P. Durst............................... 1998 93,462 10,000 11,200 787
VICE PRESIDENT OF 1997 70,000 5,000 11,200 700
MERCHANDISING 1996 55,000 -- -- 254
</TABLE>
- ------------------------
(1) Represents amounts of matching contributions we made to the Named Executive
Officers' respective 401(k) accounts, except for Mr. Dolginow which amounts
also include $25,727 in each of 1998, 1997 and 1996 as the value of benefits
for Mr. Dolginow, determined as prescribed by the SEC for this type of
valuation, under a "split dollar" life insurance arrangement.
(2) Ms. Newell has been Vice President and Chief Financial Officer of the
Company since August 1997.
39
<PAGE>
OPTION GRANTS
The following table summarizes option grants during the fiscal year ended
January 29, 1999 to the Named Executive Officers and the potential realizable
value of the options.
OPTION GRANTS IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
% OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------
NAME GRANTED (#) YEAR 1998 ($/SHARE) DATE 5% 10%
- ----------------------------------------------- ------------- --------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cheryl W. Newell............................... 17,000 9.3% $ 2.75 12/07/08 $ 69,228 $ 110,234
Steven P. Durst................................ 11,200 6.2% 2.75 12/07/08 45,609 72,625
</TABLE>
- ------------------------
(1) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises depend upon our common stock's
future performance, overall market conditions and the executive's continued
involvement with us. The amounts represented in this table will not
necessarily be achieved.
All options set forth in the above table vest in one-third increments
beginning on the first anniversary of the date of grant and on each of the next
two anniversaries of this date with all options granted becoming fully vested
three years from the date of grant. See "Stock Option Plans--Employee Stock
Option Plan" for change in control provisions.
OPTION EXERCISES
The following table summarizes option exercises during the fiscal year ended
January 29, 1999 and the number and value of options held by the Named Executive
Officers as of January 29, 1999.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND 1998 FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE JANUARY 29, 1999 (#) JANUARY 29, 1999 ($)(1)(2)
ACQUIRED ON REALIZED ---------------------------- ------------------------------
NAME EXERCISE (#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- --------------- ----------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Yale T. Dolginow..................... -- $ -- -- -- $ -- $ --
Brent D. Schlosser................... -- -- -- -- -- --
Cheryl W. Newell..................... 0 0 5,666 28,334 0 0
Steven P. Durst...................... 0 0 3,733 18,667 0 0
</TABLE>
- ------------------------
(1) Based on the January 29, 1999 closing price of the common stock of $2.125.
(2) The "Value Realized" and the "Value of Unexercised In-the-Money Options"
amounts are calculated based on the excess of the market value of our common
stock on the date of exercise or January 29, 1999 over the exercise price.
The exercise price of options may be paid in cash or in shares of our common
stock valued at fair market value on the day prior to the date of exercise.
EMPLOYMENT AGREEMENTS
In July 1997, Cheryl W. Newell entered into an employment agreement with us
to serve as Chief Financial Officer. Ms. Newell will receive an annual base
salary of $115,000, subject to increase by the Board based upon her performance,
appropriate industry guideline data and other factors. Ms. Newell
40
<PAGE>
may also receive an annual bonus based upon her performance. Upon the completion
of our initial public offering of common stock, Ms. Newell received an option to
purchase 17,000 shares of our common stock as provided in her employment
agreement. Under her agreement, Ms. Newell may not disclose confidential
information about us for the term of the agreement and for one year thereafter
and may not compete with us for a two-year period after termination of her
employment with us. Ms. Newell may terminate her employment with us upon 30
days' written notice to us at any time for any reason.
STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLAN. We have adopted a 1997 Stock Option and
Compensation Plan (the "Employee Stock Plan"). We may grant officers, key
employees, and subject to stockholder approval, non-employee directors and
independent contractors, stock options, stock appreciation rights, stock awards,
performance shares and cash awards under the Employee Stock Plan. Subject to
stockholder approval, we have reserved an aggregate 1,025,000 shares of our
common stock for issuance under the Employee Stock Plan.
The Compensation Committee of our Board administers the Employee Stock Plan.
The Compensation Committee is authorized to determine, among other things, the
following:
- the participants to whom, and the times at which, options and other
benefits are to be granted
- the number of shares subject to each option
- the applicable vesting schedule
- the exercise price
The Compensation Committee will also determine the treatment to be afforded
to a participant in the Employee Stock Plan in the event of termination of
employment for any reason, including death, disability or retirement.
Under the Employee Stock Plan the maximum term of a stock option is ten
years for incentive stock options and ten years plus one day for non-statutory
stock options. No option may be exercised during the first 12 months after the
date of grant. Upon the occurrence of a "change in control," unless otherwise
determined by our board of directors and a majority of the "continuing
directors" ("continuing directors" are directors who were in office before the
occurrence of or public announcement of a "change in control," directors in
office for a period of more than two years and directors nominated and approved
by the continuing directors):
- the restrictions on all shares of restricted stock awards lapse
immediately
- all outstanding options and stock appreciation rights will become
exercisable immediately
- all performance shares shall be deemed to be met and payment made
immediately
For purposes of the Employee Stock Plan, a "change in control" occurs when:
- any person or group becomes the beneficial owner of 30% or more of any of
our equity security entitled to vote for the election of directors
- a majority of the members of our board of directors is replaced within the
period of less than two years by directors not nominated and approved by
our board of directors
- our stockholders approve an agreement to merge or consolidate with or into
another corporation or an agreement to sell or otherwise dispose of all or
substantially all of our assets (including a plan of liquidation)
41
<PAGE>
Pursuant to our Employee Stock Plan, we have granted options to purchase an
aggregate of 327,200 shares at an exercise price equal to the fair market value
on the date of grant. These options vest over a three-year period beginning on
the first anniversary of the date of grant and expire ten years from the date of
grant.
DIRECTORS STOCK OPTION PLAN. We have adopted the Director Plan. The Board
administers the Director Plan. We have reserved an aggregate of 40,000 shares of
our common stock for issuance under the Director Plan. See "Director
Compensation--Director Options."
EMPLOYEE STOCK PURCHASE PLAN
On December 7, 1998, our Board approved an Employee Stock Purchase Plan,
subject to stockholder approval. The Employee Stock Purchase Plan reserves
150,000 shares of our common stock for issuance and purchase by our employees to
assist them in acquiring a stock ownership interest in us and to encourage them
to remain our employees. The Employee Stock Purchase Plan is intended to qualify
under Section 423 of the Internal Revenue Code and permits eligible employees to
purchase shares of our common stock at a discount through payroll deductions
during specified six-month offering periods. No employee may purchase more than
$25,000 worth of stock in any calendar year or 5,000 shares of our common stock
in any one offering period. Our Compensation Committee administers the Employee
Stock Purchase Plan. Generally, the purchase price of our common stock under the
Employee Stock Purchase Plan must not be less than 85% of the fair market value
of the common stock on the first or last day of the offering period, whichever
is lower. As of April 30, 1999, no shares have been purchased under the Employee
Stock Purchase Plan. The stockholders will be asked to approve the Employee
Stock Purchase Plan at our annual meeting on June 11, 1999. If approved, the
first offering period will begin on August 1, 1999.
42
<PAGE>
CERTAIN TRANSACTIONS
We employ Steven P. Durst as Vice President of Merchandising, a position he
has held since June 1998. Before that time Mr. Durst served as our Vice
President of Information Systems and as our Director of Information Systems. Mr.
Durst joined us in 1995 and is the son-in-law of Yale T. Dolginow, our President
and Chief Executive Officer, and Diane C. Dolginow, our Secretary. During fiscal
1998, we paid Mr. Durst $103,462 in annual compensation.
Before our initial public offering, we were treated as an S-Corporation
under the Internal Revenue Code for federal and certain state income tax
purposes. As a result, our earnings were taxed directly to our then current
stockholders, Mr. Dolginow and Mr. Schlosser (the "S-Corporation Stockholders")
rather than to us. To provide the S-Corporation Stockholders with the funds to
pay income taxes on these earnings and as a return on their investment, we paid
annual distributions to them. In connection with our initial pubic offering, we
converted from an S-Corporation to a C-Corporation under the Code. In January
1997, the Board declared a cash dividend payable to the S-Corporation
Stockholders, which the board of directors intended to equal the balance of
accumulated taxable income from the date of the last dividend to the
S-Corporation Stockholders (January 13, 1997) through July 31, 1997. The precise
amount of the cash dividend was to be later determined by us and our auditors
upon the completion of our tax returns. Before our initial public offering, we
estimated the cash dividend to be equal to $166,000. Because the amount of the
cash dividend was not finalized at the closing of the initial public offering,
it was not actually paid at that time. In October 1998, we completed all of our
required tax returns for the period when we were an S-Corporation and determined
that the actual amount of the cash dividend should have been $133,000 and not
$166,000. On October 8, 1998, we paid the S-Corporation Stockholders a total of
$133,000 to satisfy our obligation to pay the S-Corporation Stockholders the
cash dividend, which payment was consistent with the tax agreement described
below.
Paper Warehouse and both Messrs. Dolginow and Schlosser are parties to an
S-Corporation Tax Allocation and Indemnification Agreement relating to their
respective income tax liabilities. The tax agreement provides that we will
indemnify Messrs. Dolginow and Schlosser for any adjustments causing an increase
in their federal and state income tax liability (including interest and
penalties) related to our tax years before our initial public offering. They are
not indemnified if the adjustments result in or are related to a corresponding
decrease in their federal and state income tax liability with respect to another
S-Corporation taxable year.
Subject to certain limitations, the tax agreement also provides that Messrs.
Dolginow and Schlosser will indemnify us with respect to federal and state
income taxes (plus interest and penalties) in connection with shifting from an
S-Corporation taxable year to a C-Corporation taxable year subsequent to our
initial public offering. Since neither Mr. Dolginow nor Mr. Schlosser have given
any security for their indemnification obligations, our ability to collect these
payments depends upon their financial condition at the time of any these
indemnification obligation arises. We are not aware of any tax adjustments that
may arise under the tax agreement.
The tax agreement further provides that to the extent that our accumulated
taxable income prior to our conversion to a C-Corporation is less than the cash
dividends, Messrs. Dolginow and Schlosser will make a payment equal to the
difference to us, and if the accumulated taxable income is greater than the
aggregate amount of the cash dividends, we will make an additional distribution
equal to the difference to them, in either case, with interest thereon. Any
payment we make to them pursuant to the tax agreement may be considered by the
Internal Revenue Service or the state taxing authorities to be nondeductible by
us for income tax purposes.
In December 1998, we entered into an Asset Purchase Agreement with Prickly
Pear Paper, Inc. and Susan Hazan. Prickly Pear operated four franchise stores in
Tucson, Arizona, and Ms. Hazan was president and a 95% stockholder of Prickly
Pear. Ms. Hazan is Mr. Dolginow's sister. Mr. Dolginow was Prickly Pear's Vice
President. We purchased all of the assets of the four franchise stores for
43
<PAGE>
approximately $1.2 million cash and 70,749 shares of our common stock for an
aggregate purchase price of $1,349,974. We allocated the purchase price based on
the fair market value of the net assets and recorded any excess as goodwill. We
now employ Ms. Hazan as a district manager. Before the acquisition, Prickly Pear
paid franchise, continuing and other fees to us in fiscal 1998 in the aggregate
amount of approximately $88,728.
In March 1996, we sold a Paper Warehouse store located in Lawrence, Kansas
to Sunflower Party and Paper, Inc. for an aggregate amount of $144,000 plus the
assumption of some of our liabilities relating to that store. Sunflower operates
this store as a franchise store and is wholly-owned by Larry and Patty
Schlosser, the brother and sister-in-law of Mr. Schlosser. During fiscal 1998,
Sunflower paid us an aggregate of approximately $24,810 in franchise and other
fees. On February 28, 1998, Sunflower renewed its sublease with us through
January 30, 2002. Total payments to us under the terms of the sublease were
approximately $66,227 during fiscal 1998.
Mr. Dolginow is a director of Richfield Bank & Trust Co. We had a $7,500,000
line of credit with Richfield Bank, which was paid-in-full on June 7, 1999. On
April 8, 1999 we refinanced the loan from Richfield Bank for our corporate
headquarters. As part of the refinancing, Mr. Dolginow was released from his
personal guarantee to the U.S. Small Business Administration in the original
principal amount of $433,000, the proceeds of which were also used to finance,
in part, the acquisition of the our corporate headquarters.
We believe that all prior transactions between us and our officers,
directors and other affiliates have been on terms no less favorable than could
have been obtained from unaffiliated third parties. Any future transactions and
loans with our officers, directors or 5% stockholders will be on terms no less
favorable to us than could be obtained from unaffiliated third parties and will
be approved by a majority of the independent outside members of our board of
directors who do not have an interest in the transactions.
44
<PAGE>
PRINCIPAL SHAREHOLDERS AND BENEFICIAL
OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of June 1, 1999, unless otherwise noted by:
- each stockholder who we know beneficially owns more than 5% of our
outstanding common stock
- each director and nominee for election to our Board
- each executive officer named in the Summary Compensation Table above
- all of our executive officers and directors as a group
The address for all of our executive officers and directors is 7630
Excelsior Boulevard, Minneapolis, Minnesota 55426.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED(1)
-----------------------
PERCENT
OF
NAME AMOUNT CLASS(2)
- ----------------------------------- -------------- ------
<S> <C> <C>
Yale T. Dolginow................... 1,917,443(3) 41.4%
Brent D. Schlosser................. 286,375 6.2%
Diane C. Dolginow.................. (4)0 *
Arthur H. Cobb..................... 5,999(5) *
Marvin W. Goldstein................ 14,999(6) *
Martin A. Mayer.................... 48,322(7) 1.0%
Jeffrey S. Halpern................. 4,999(8) *
Cheryl W. Newell................... 8,666(9) *
Steven P. Durst.................... 3,733(10) *
Wellington Management Company LLP
75 State Street
Boston, Massachusetts 02109...... 444,900(11) 9.6%
All directors and executive
officers as a group (9
persons)......................... 2,290,536(12) 48.8%
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares.
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or member of a group to acquire them within 60 days are treated
as outstanding only when determining the amount and percent owned by the
person or group. Unless otherwise noted, all of the shares shown are held
by individuals or entities possessing sole voting and investment power with
respect to these shares of common stock.
(2) Based on 4,627,936 shares of our common stock outstanding as of June 1,
1999.
(3) Includes 301,000 shares held in trust for Mr. Dolginow's daughters.
(4) Does not include shares beneficially owned by Yale T. Dolginow, Ms.
Dolginow's husband.
(5) Includes options to purchase 4,999 shares of our common stock exercisable
within 60 days.
(6) Includes options to purchase 4,999 shares of our common stock exercisable
within 60 days.
(7) Includes options to purchase 43,322 shares of our common stock exercisable
within 60 days, of which 38,323 shares represent shares issuable upon
exercise of a stock option granted to Mr. Mayer by Mr. Dolginow.
45
<PAGE>
(8) Includes options to purchase 4,999 shares of our common stock exercisable
within 60 days.
(9) Includes options to purchase 5,666 shares of our common stock exercisable
within 60 days.
(10) Includes options to purchase 3,733 shares of our common stock exercisable
within 60 days.
(11) Based solely on a Schedule 13G dated December 31, 1998, reporting
beneficial ownership of 444,900 shares of our common stock held by
Wellington Management Company, LLP, as an investment adviser, which are
all held of record by clients of Wellington Management. Wellington
Management has shared voting power over 364,900 shares and shared
dispositive power over 444,900 shares.
(12) Includes options to purchase 67,718 shares of our common stock exercisable
within 60 days.
46
<PAGE>
DESCRIPTION OF DEBENTURES
We will issue the Debentures under an Indenture dated as of June , 1999
between us and Norwest Bank Minnesota, N.A., as trustee. Many of the terms and
conditions applicable to the Debentures will be contained in the Indenture. The
following summarizes some, but not all, of the provisions of the Debentures and
the Indenture. Prospective buyers of the Debentures should refer to the actual
terms of the Debentures and the Indenture for the definitive terms and
conditions. Copies of the proposed forms of Indenture and Debentures are filed
as exhibits to the Registration Statement of which this prospectus is a part. As
used in this Description of Debentures, the words "we," "us," or "our" do not
include any of our subsidiaries unless expressly stated. Capitalized terms used,
but not defined, in this Description of Debentures have the meanings given in
the Indenture.
GENERAL
The total principal amount of the Debentures will be limited to $4,000,000.
The Debentures represent our general unsecured obligations and are subordinate
in right of payment to our Senior Debt as described under "--Subordination." We
will issue the Debentures in fully registered form only, without coupons, in
denominations of $1,000 each and any integral multiple of $1,000. The Debentures
will mature on June 15, 2005 unless converted, redeemed or repurchased before
the maturity date. See "--Conversion," "--Optional Redemption by Us" and
"--Repurchase at Option of Holder."
The Debentures will accrue interest at an annual rate of 9%. We will pay the
first interest payment on September 15, 1999, and quarterly after that date on
the 15th day of December, March, June and September. We will also pay all
accrued interest upon maturity, conversion, redemption and repurchase of the
Debentures. Interest will be payable to the person in whose name the Debenture
is registered at the close of business on the Regular Record Date for the
interest installment, which is the 15th day of the calendar month preceding each
Interest Payment Date. If any payment date falls on a day that is not a business
day, we will make the payment on the next business day and we will not pay any
additional interest. We will generally make all interest payments on the
Debentures by check mailed to the holders entitled to the interest. Whenever
interest is paid, the payment will include interest accrued to, but excluding,
the interest payment date or the date of redemption, conversion, repurchase or
maturity. We will compute interest on the Debentures on the basis of a 360-day
year comprised of 12 30-day months.
The Indenture restricts our ability to enter into transactions, unless we
first satisfy certain conditions described in the Indenture. If the transaction
involves a "Change of Control," you will have the right to require us to
repurchase your Debentures, in the manner described in "--Repurchase at Option
of Holder." Dividends, stock splits and other distributions may result in an
adjustment to the conversion price of the Debentures.
The Debentures will have no sinking fund. A sinking fund is a custodial or
similar account into which regularly scheduled deposits are made for purposes of
funding the redemption or repurchase of the principal amount of the Debentures.
As long as we are a reporting company under the Exchange Act, we must
furnish to the Trustee and all Debenture holders all reports required to be
filed with the Commission under the Exchange Act.
The holder of any Debenture, may present such Debenture for registration,
transfer or exchange at an office of Norwest Bank Minnesota, as trustee, located
in the continental United States. The Trustee will maintain a registry for the
Debentures. We will not charge any fee for registration, transfer or exchange of
any Debentures. We may request reimbursement for taxes incurred by us in
connection with any registration, transfer or exchange of Debentures. We are not
required to register the transfer
47
<PAGE>
or exchange of any Debenture that has been previously surrendered for
repurchase, conversion or redemption.
CONVERSION
You may convert your Debenture, in whole or in part, into our common stock
at an initial conversion price equal to $ principal amount of Debentures
for each share of common stock. You may convert your Debenture at any time
before the close of business on June 15, 2005. If we call the Debentures for
redemption or you submit the Debentures for repurchase, your conversion rights
will expire at the close of business on the Redemption Date or the Repurchase
Date, as applicable.
You may exercise the right to convert your Debentures in denominations of
integral multiples of $1,000 by delivering your Debentures to the trustee's
designated office in the U.S. accompanied by a written notice that you elect to
convert your Debentures. If the date of conversion occurs after a Regular Record
Date, but before the next Interest Payment Date, and we have not called the
Debentures for redemption, we will pay you the interest due on the next Interest
Payment Date, regardless of the conversion, but only interest to the date of
conversion. If the principal amount you wish to convert is not evenly divisible
by the conversion price, instead of issuing a fractional share, we will pay you
a cash adjustment in an amount equal to the same fraction of the conversion
price per share of common stock.
If you present a Debenture for conversion, you will not be required to pay
any taxes or duties relating to the issuance of our common stock (except to the
extent relating to exchange or currency control matters or the status of the
person converting the Debentures), but you will be required to pay any tax or
duty resulting from the issuance of common stock in the name of any other
person.
The conversion price may be adjusted upon certain events including:
- our issuing common stock or other capital stock as a dividend or
distribution to the holders of our common stock
- our dividing or combining our outstanding shares of common stock into a
different number of shares
- our issuing common stock as a result of reclassification of our common
stock
- subject to certain exceptions, our fixing a record date for making a
rights offering to our stockholders
- our Board determining that a reduction is in our best interest, to the
extent permitted by law
In the event of any reclassification or other change in our common stock, or
our consolidation, merger, or combination with or into another entity or a sale
or conveyance to another person of our property and assets as an entirety or
substantially as an entirety, that results in the holders of our common stock
becoming entitled to receive stock, other securities, cash or other property or
assets on or in exchange for their shares of common stock, you will generally be
entitled to convert your Debentures into the type and amount of property or
assets, including cash, that you would have received had the Debentures been
converted immediately before the event. All references in this Description of
Debentures to "common stock" in the context of your right to convert, should be
construed to mean either our common stock or the other property into which the
Debenture is convertible.
You may, in certain circumstances, be deemed to have received a distribution
or dividend subject to U.S. income tax as a result of an adjustment (or the
nonoccurrence of an adjustment) to the conversion price of your Debentures. See
"--Certain United States Federal Income Tax Considerations."
48
<PAGE>
Unless the adjustment in the conversion price requires an increase or
decrease of at least $.01 per share, we will not be required to make any
adjustments in the conversion price. Any adjustment not made will be taken into
account in subsequent adjustments.
OPTIONAL REDEMPTION BY US
On or after June , 2002, we may elect to redeem the Debentures. If we
elect to redeem the Debentures, we must redeem all of them. We will not be
allowed to redeem the Debentures before June , 2002. We will provide the
holders of the Debentures at least 30 but not more than 60 days notice of our
intent to redeem the Debentures.
The Redemption Price for the Debentures (expressed as a percentage of the
principal amount of each Debenture thereof) will be as follows for Debentures
redeemed in the 12-month periods beginning on June of each of the following
years:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEARS EACH DEBENTURE
- ----------------------------------------------------------------------------- ---------------
<S> <C>
1999-2001.................................................................... No call
2002......................................................................... 108%
2003......................................................................... 104%
2004 and thereafter.......................................................... 100%
</TABLE>
We will also pay accrued interest through the Redemption Date. If an
Interest Payment Date occurs before the Redemption Date, the interest payable on
such Interest Payment Date will be paid to the holder of record as of the
relevant Record Date. Interest not so paid will be paid to the party to whom the
Redemption Price is paid.
We have no right to redeem the Debentures during any period when an Event of
Default, or an event which, with notice or lapse of time or both, would
constitute an Event of Default, has occurred and is continuing.
REPURCHASE AT OPTION OF HOLDER
If we experience a Change of Control before June 15, 2005, you will have the
right, at your option, to require us to repurchase all or part of your
Debentures on the 45th calendar day after the date that we mail a notice to you
of the occurrence of a Change of Control. We will pay the Repurchase Price in
cash and the Repurchase Price will be 102% of the principal amount of the
Debentures. We will also pay accrued interest up to the Repurchase Date. If an
Interest Payment Date is on or before the Repurchase Date, we will pay the
interest payable on such Interest Payment Date to the holder of record on the
relevant Record Date. Interest not so paid will be paid to the party to whom the
Repurchase Price is paid.
You may exercise your repurchase rights by delivering written notice
indicating, among other things, that you have elected to exercise your
repurchase rights to the Trustee on or before the close of business on the 30th
calendar day after the date of our repurchase notice. The notice is to be
accompanied by the Debentures, endorsed for transfer to us.
The Indenture defines "Change of Control" as follows:
- "Change of Control" of Paper Warehouse will be deemed to have occurred at
such time as any Person is or becomes the beneficial owner (as defined in
Rule 13d-3 under the Exchange Act) of shares of our capital stock
entitling such Person to exercise 50% or more of the total voting
49
<PAGE>
power of all shares of our capital stock entitled to vote in elections of
directors. A "Change of Control" will not be deemed to have occurred if
any of the following has occurred:
TRIANGLE the Person is Yale T. Dolginow, or an Affiliate of his, and
such Person does not become the beneficial owner of shares of
our capital stock entitling such Person to exercise 66% or
more of the total voting power of all shares of our capital
stock entitled to vote in elections of directors;
TRIANGLE the closing price of our common stock equals or exceeds 125%
of the effective conversion price on any five trading days
during the ten trading-day period immediately preceding the
date of the Change of Control; or
TRIANGLE all the consideration (excluding cash payments for fractional
shares) to be paid for our common stock in the transaction(s)
constituting a Change of Control consists of shares of common
stock traded on a national securities exchange or quoted on
the Nasdaq National Market System and as a result of such
transaction(s) the Debentures become convertible solely into
such common stock.
In the event that we are required to repurchase the Debentures, there can be
no assurances that we will have sufficient funds to pay the Repurchase Price. A
Change of Control may result in a default (directly or by way of a cross-default
provision) under one or more agreements governing our Senior Debt. In such a
circumstance, the subordination provisions contained in the Indenture may
prevent us from making any payment on the Debentures, including a payment of the
Repurchase Price, unless we first obtain the consent of the holders of defaulted
Senior Debt or repay the Senior Debt in full.
Your right to require us to repurchase Debentures as a result of a Change of
Control may have the effect of delaying, deferring or preventing a Change of
Control or other attempt to acquire control of us. Consequently, the right may
make more difficult a merger, consolidation or tender offer, or an assumption of
control by a holder of a large block of our shares and the removal of incumbent
management. The Change of Control repurchase feature is a result of negotiations
between us and Miller & Schroeder and is not the result of our knowledge of any
specific effort to accumulate shares of common stock or to obtain control of us
by means of a merger, tender offer, solicitation or otherwise, or part of a plan
by us to adopt a series of anti-takeover provisions. We have no present
intention to engage in a transaction involving a Change of Control, although it
is possible that we would decide to do so in the future.
Rule 13e-4 under the Exchange Act requires the distribution of certain
information to security holders in the event of certain issuer tender offers and
may apply in the event of a repurchase. We will comply with this rule to the
extent applicable.
SUBORDINATION
All payments under the Debentures are, to the extent provided in the
Indenture, subordinate and junior to the prior payment in full of all Senior
Debt. The subordination provisions apply to existing Senior Debt as well as
Senior Debt incurred after the date of this prospectus. The Debentures will be
senior in right of payment to any Subordinated Debt and to any debt (other than
the Debentures) held by an affiliate of ours, whether outstanding at the closing
of this offering or created thereafter.
Upon any distribution of our assets, dissolution, winding up, liquidation or
reorganization of us, the payments on the Debentures will be subordinated in
right of payment to the prior payment in full of all Senior Debt. Moreover, if
the Debentures are accelerated following an Event of Default, the holders of any
Senior Debt then outstanding will be entitled to payment in full before the
holders of the Debentures are entitled to receive any payment on the Debentures.
However, our obligations to make payments with respect to the Debentures will
not otherwise be affected. We are the sole obligor on the Debentures.
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In addition, the subordination provisions will prevent us from making any
payments on the Debentures if:
- we fail to pay any payment of principal, interest, premium, or other
obligation, if any, due on any Senior Debt beyond the applicable grace
period
- any other default occurs and is continuing under any Senior Debt that
permits holders of the Senior Debt to accelerate the maturity of any
Senior Debt
We may resume making payments on the Debentures once the default on the
Senior Debt is cured or waived or otherwise ceases to exist.
The Indenture defines "Senior Debt" as follows:
"Senior Debt' means the principal of, premium (if any) and interest on
(i) any and all Indebtedness of the Company (other than the Debentures,
Parity Debt and Subordinated Debt) incurred in connection with the
borrowing of money, all Indebtedness to the extent it is secured by real
estate and/or assets of the Company (including Capitalized Lease
Obligations), all Indebtedness evidenced by bonds, debentures, mortgages,
notes or other securities or other instruments, incurred, assumed or
guaranteed by the Company before, at or after the date of execution of
this Indenture, all Indebtedness evidenced by bankers' acceptances of
similar instruments, or by letters of credit, bank guarantees or
reimbursement obligations therefor, all Indebtedness under swap or
hedging transactions, and Indebtedness represented by previously issued
and outstanding debentures which have been called for redemption and (ii)
all renewals, extensions and refundings thereof; provided that any
Indebtedness shall not be Senior Debt if the instrument creating or
evidencing any such Indebtedness or pursuant to which such Indebtedness
is outstanding, provides that such Indebtedness, or such renewal,
extension or refunding thereof, is junior or is not superior in right of
payment to the Debentures."
The Indenture does not prevent us from incurring additional Senior Debt. As
of April 30, 1999, we had approximately $9.7 million of outstanding Indebtedness
which is expected to be Senior Debt.
The subordination provisions of the Indenture and the Debentures will not
prevent the occurrence of any default or Event of Default or limit the rights of
any holder of Debentures to pursue any other rights or remedies with respect to
the Debentures.
As a result of the subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceedings, holders of the Debentures may receive less than other creditors (on
a ratable basis).
EVENTS OF DEFAULT AND REMEDIES
The following events are included as "Events of Default" in the Indenture:
- our failure to pay interest on the Debentures when due if the failure
continues for 30 days
- our failure to pay the principal of, or premium, if any, on any of the
Debentures when due
- our breach of any financial covenant and continuance of such breach for a
period of 30 days after the date of our report to the Trustee
- our failure to perform any other covenant or warranty in the Indenture if
the failure continues for 30 days after appropriate notice is given to the
Company, the Trustee and the Debenture holders, as applicable
- a default by us on any Indebtedness (other than the Debentures and the
mortgage on our corporate headquarters) that results in the acceleration
of Indebtedness in an amount in excess
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of $500,000 and the Indebtedness or the acceleration has not been
discharged for 60 days after notice is given in accordance with the
Indenture
- certain events involving bankruptcy, insolvency or reorganization of us
- a final judgment by a court against us for the payment of money in an
amount in excess of $500,000 (net of insurance proceeds) which judgment
remains unsatisfied for 30 days after the right to appeal such judgment
has expired or terminated
The Trustee will be generally required, within 60 days after its becoming
aware of a default, to provide the registered holders of the Debentures written
notice of the default. Except in the case of a payment default, the Trustee will
not be required to deliver a notice of default if it determines in good faith
that withholding the notice is in the best interest of the holders of the
Debentures.
If an Event of Default has occurred and is continuing, the Trustee, or the
holders of not less than 25% of the aggregate principal amount of the
Debentures, may declare all amounts outstanding on the Debentures to be
immediately due and payable. If an Event of Default occurs resulting from the
bankruptcy, insolvency or reorganization of us, all unpaid principal of and
accrued interest on the outstanding Debentures would become due and payable
immediately without any declaration or other act on the part of the Trustee or
holders of Debentures.
The Indenture will generally provide that the holders of a majority in
principal amount of the outstanding Debentures may direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee, subject to certain
limitations. Before proceeding to exercise any right or power under the
Indenture at the direction of the holders, the Trustee will be entitled to
receive from the holders reasonable security or indemnity against any costs,
expenses and liabilities that it might incur as a result. Following an Event of
Default for nonpayment, each holder to which the default pertains will have the
absolute right to institute suit to enforce payment of any Debentures held by
it.
Generally, the holders of at least a majority in aggregate principal amount
of the outstanding Debentures may on behalf of the holders of all Debentures
waive any default or Event of Default. The consent of all Debenture holders will
be required to waive any Events of Default relating to a failure to make payment
on any Debenture, convert any Debenture into common stock or to comply with any
of the provisions of the Indenture that would require the consent of affected
holders to modify.
Within 90 days of the end of each fiscal year, we will be required to send
the Trustee a statement of certain of our officers stating:
- that such officer has analyzed our activities during such year and
supervised the performance under this Indenture
- whether, to the best of such officer's knowledge based on such analysis,
we are in compliance with our obligations under this Indenture or if we
have defaulted on such obligations
We are also required, if certain of our officers obtain knowledge that we
are not in compliance with the terms of the Indenture or the Debentures, to
deliver to the Trustee a statement specifying the nature of the default and the
action we have taken, are taking or proposes to take to cure the default.
RESTRICTIVE COVENANTS
CONSOLIDATION, MERGER OR SALE OF ASSETS. The Indenture provides that we may
not consolidate or merge with or into another Person or convey, transfer or
lease all or substantially all of our properties and assets to another Person,
Paper Warehouse or any Subsidiary, unless,
- if we are not the surviving entity, such surviving entity must be a U.S.
business entity and expressly assume all of our obligations under the
Debentures and the Indenture
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- no Event of Default will exist or will occur immediately after giving
effect to the transaction
- certain other conditions are satisfied
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Any Indebtedness between the
Company and any Affiliate will be subordinate and junior in right of payment to
the Debentures, unless such Indebtedness is borrowed from Yale Dolginow and
approved by a majority of our Board's Independent members prior to the date of
such Indebtedness. We cannot, and we cannot permit any Subsidiary, to engage in
any transaction of any kind or nature with any of our Affiliates, other than a
wholly-owned Subsidiary, unless
- a majority of our Board's Independent members determines that the
transaction terms are fair to us or our subsidiary, as the case may be
- the terms of the transaction are more beneficial to us or Subsidiary, as
the case may be, than a similar transaction with an unrelated person under
the same circumstances
- a person experienced in the nature of the transaction certifies the
transaction to the Board as fair to us or our Subsidiary, as the case may
be, and the terms are those that would be found in similar transactions
with unrelated persons under the same circumstances
RESTRICTIONS ON DIVIDENDS AND REDEMPTIONS. We can only make dividends or
distributions that are paid in our capital stock. Neither us nor our Subsidiary
may purchase, redeem or acquire for value any of our capital stock, unless we
meet certain conditions specified in the Indenture.
NET WORTH. We must at all times during the term of the Debentures keep and
maintain Consolidated Tangible Net Worth at an amount not less than $7,000,000
plus 50% of positive Consolidated Net Income earned after January 29, 1999.
MODIFICATIONS OF THE INDENTURE
The Indenture generally allows the Trustee and us, with the consent of the
holders of not less than a majority of the aggregate principal amount of the
outstanding Debentures, to modify the Indenture, any supplemental indenture or
the Debentures. The following modifications require the consent of each affected
Debenture holder:
- an extension of the maturity of any Debenture or any interest or premium
payment
- a reduction in the rate or an extension of the time or payment of interest
on any Debenture
- a reduction in the principal amount of any Debenture
- a reduction in any amount payable upon redemption or repurchase of any
Debenture
- any modification to our obligation to repurchase any Debenture upon the
happening of a Change of Control if adverse to any holder of Debentures
- any modification that impairs or adversely affects the right of any holder
to institute suit for the payment of any Debenture
- any change in currency in which any Debenture is payable
- any modification, to the right of the holders to convert the Debentures
into common stock if adverse to any holder of Debentures
- any modification of the subordination provisions that adversely affects
the holders of the Debentures
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SATISFACTION AND DISCHARGE
We may discharge our obligations under the Indenture while the Debentures
remain outstanding if:
- all Debentures are within one year of their scheduled maturity or the date
on which they are scheduled for redemption; and
- we have deposited with the Trustee an amount sufficient to pay all
outstanding Debentures on their scheduled maturity or the date scheduled
for redemption.
GOVERNING LAW
The Indenture and the Debentures will be governed by the laws of the State
of Minnesota.
CONCERNING THE TRUSTEE
Norwest Bank Minnesota, N.A. will serve as Trustee under the Indenture and
is also the Debenture Registrar.
The Trustee under the Indenture, has been appointed by us as the initial
paying agent, conversion agent, registrar and custodian with regard to the
Debentures. We may maintain deposit accounts and conduct other banking
transactions with the Trustee or its affiliates in the ordinary course of
business.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain U.S. federal income tax considerations
applicable to U.S. holders of Debentures relating to the purchase, ownership and
disposition of the Debentures and of common stock into which Debentures may be
converted, but is not a complete analysis of all potential tax considerations.
The summary assumes that the Debentures will be treated as "debt" and not
"equity" for federal income tax purposes. This summary is based on laws,
regulations, rulings and decisions now in effect, which may change in the
future. It relates only to those of you who will hold Debentures and common
stock into which Debentures may be converted as "capital assets" (within the
meaning of Section 1221 of the Internal Revenue Code) and does not address
particular tax considerations or individual circumstances. You may be subject to
special tax rules if you are:
- subject to the alternative minimum tax;
- a bank or other financial institution;
- a tax-exempt organization;
- an insurance company;
- a foreign person or entity;
- a broker or dealer in securities or currencies;
- holding Debentures as a position in a hedging transaction, "straddle" or
"conversion transaction"; or
- deemed to sell Debentures or common stock under the constructive sale
provisions of the Internal Revenue Code.
This summary discusses the tax considerations applicable to those of you who
are the initial purchasers of the Debentures and who purchase the Debentures at
their "issue price" as defined in Section 1273 of the Internal Revenue Code. It
does not discuss the tax considerations applicable to subsequent purchasers of
the Debentures. The summary does not, therefore, discuss application of (i) the
"market discount" rules of Internal Revenue Code Sections 1276 to 1278 or (ii)
the "bond premium" amortization rules of Internal Revenue Code Section 171.
Moreover, the "original issue discount" rules of Internal Revenue Code Sections
1271 to 1275 are not generally discussed herein since Debentures are not
anticipated to be issued at a discount from their face value.
We have not sought any ruling from the IRS or an opinion of counsel with
respect to the statements we make and the conclusions we reach in the following
summary, and we are not certain that the IRS will agree with our statements and
conclusions. The IRS may successfully adopt a contrary position. Our summary
does not consider the effect of the federal estate or gift tax laws, the
alternative minimum tax or the tax laws of any applicable foreign, state, local
or other jurisdiction.
Those of you considering the purchase of Debentures should consult your own
tax advisors with respect to the application of the U.S. federal income tax laws
to your particular situation as well as any tax consequences arising under the
Federal estate or gift tax rules, under the laws of any state, local or foreign
taxing jurisdiction or under any applicable tax treaty.
TAXATION OF INTEREST
Interest paid on the Debentures will be included in your income as ordinary
income at the time it is treated as received or accrued, in accordance with your
regular method of tax accounting. If there is a Change of Control, as defined in
the "Description of Debentures--Repurchase at Option of Holder," we may be
required to pay additional interest on the Debentures. Those payments will
result in the recognition of additional interest or original issue discount
income with respect to the Debentures. According to Treasury Regulations, the
possibility of an additional payment on a Debenture will not affect the amount
of interest or original issue discount income you recognize (or the timing of
your
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recognition) if the likelihood of the additional payment, as of the date the
Debentures are issued, is remote. We believe that the likelihood of a Change of
Control occurring is remote and do not intend to treat the possibility of one
occurring as affecting the yield to maturity of any Debenture. The IRS may not
agree with us.
SALE, EXCHANGE OR REDEMPTION OF THE DEBENTURES
When you sell or exchange a Debenture or a Debenture is redeemed, other than
in the case of a conversion (discussed below), you will generally recognize
capital gain or loss equal to the difference between:
- the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption (except to the extent the
amount is attributable to accrued interest income not previously included
in your taxable income, which will be taxable as ordinary income, or is
attributable to accrued interest that was previously included in income,
which amount may be received without generating further taxable income);
and
- your adjusted tax basis in the Debenture.
Your adjusted tax basis in a Debenture generally will equal the amount you
paid for the Debenture. Capital gain or loss will be long-term capital gain or
loss if your holding period for the Debenture is more than one year at the time
of sale, exchange or redemption.
CONVERSION OF THE DEBENTURES
You will generally not recognize any income, gain or loss upon conversion of
a Debenture into common stock except to the extent that the common stock is
considered attributable to accrued interest not previously included in your
taxable income (which is taxable as ordinary income) or with respect to cash
received in lieu of a fractional share of common stock. Your tax basis in the
common stock received on conversion of a Debenture will be the same as your
adjusted tax basis in the Debenture at the time of conversion (reduced by any
basis allocable to a fractional share interest), and the holding period of the
common stock received on conversion will generally include the holding period of
the converted Debenture. However, your tax basis in shares of common stock
considered attributable to any accrued interest generally will equal the amount
of the accrued interest included in income, and the holding period for such
common stock will begin on the date of conversion. An adjustment of the
conversion ratio of the Debentures, in some circumstances, could be treated as a
constructive distribution, as discussed under "Dividends" below.
Cash you receive in lieu of a fractional share of common stock upon
conversion will be treated as payment in exchange for the fractional share of
common stock. Accordingly, cash you receive in lieu of a fractional share of
common stock generally will result in capital gain or loss (measured by the
difference between the cash received for the fractional share and your adjusted
tax basis in the fractional share).
DIVIDENDS
Any dividends paid to you on the common stock after a conversion generally
will be included in your taxable income as ordinary income to the extent of our
current or accumulated earnings and profits. You may, in certain circumstances,
be deemed to have received constructive distributions if the conversion ratio of
the Debentures is adjusted. Adjustments to the conversion price made pursuant to
a bona fide reasonable adjustment formula which has the effect of preventing the
dilution of your interest as a holder of the debt instrument will generally not
be considered to result in a constructive distribution. Certain of the possible
adjustments provided in the Debentures (including, without limitation,
adjustments in respect to taxable dividends to our stockholders) will not
qualify as being made pursuant to a bona fide reasonable adjustment formula. If
these adjustments are made, you, as a
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Debenture holder, might be deemed to have received constructive distributions
taxable as dividends even though you have not received any cash or property as a
result of the adjustments. In certain circumstances, the failure of the
Debentures to provide for such an adjustment may result in taxable dividend
income to the holders of common stock.
SALE OF COMMON STOCK
Upon the sale or exchange of common stock, you will generally recognize
capital gain or loss equal to the difference between:
- the amount of cash and the fair market value of any property you receive
upon the sale or exchange; and
- your adjusted tax basis in the common stock.
Capital gain or loss will be long-term capital gain or loss if your holding
period in common stock is more than one year at the time of the sale or
exchange. Your basis and holding period in common stock received upon conversion
of a Debenture are determined as discussed above under "Conversion of the
Debentures."
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
In general, information reporting requirements will apply to payments of
principal, redemption premium, if any, interest on a Debenture, payments of
dividends on common stock, payments of the proceeds of the sale of a Debenture
and payments of the proceeds of the sale of common stock. A 31% backup
withholding tax may apply to some or all of these payments unless you:
- certify that you are a corporation, or come within certain other exempt
categories of recipients when required to demonstrate this fact; or
- provide a taxpayer identification number on IRS Form W-9 promptly when
requested, certify as to no loss of exemption from backup withholding, and
otherwise comply with applicable requirements of the backup withholding
rules.
Any amounts withheld under the backup withholding rules from your payment
will be allowed as a credit against your U.S. federal income tax and may entitle
you to a refund, provided that you furnish required information to the IRS.
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS
FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, YOU SHOULD
CONSULT YOUR OWN TAX ADVISOR AS TO THE PARTICULAR U.S. FEDERAL, STATE, AND LOCAL
TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR DEBENTURES AND
COMMON STOCK. YOU SHOULD ALSO CONSULT A TAX ADVISOR AS TO THE UNITED STATES
ESTATE AND GIFT TAX CONSEQUENCES AND THE FOREIGN TAX CONSEQUENCES OF PURCHASING,
HOLDING AND DISPOSING OF OUR DEBENTURES AND COMMON STOCK, AS WELL AS THE
CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company presently consists of 50,000,000
shares, 40,000,000 of which are common stock, par value $0.01 per share, and,
10,000,000 shares of Preferred Stock, par value $0.01 per share, issuable in
series.
COMMON STOCK
As of April 30, 1999, there were 4,627,936 shares of common stock
outstanding. All outstanding shares of common stock are fully paid and
nonassessable. The holders of common stock are entitled to one vote for each
share held of record on all matters voted upon by the stockholders. Stockholders
may not cumulate votes for the election of directors. Thus, the owners of a
majority of the shares of common stock outstanding have the power to elect all
of the directors. Subject to the rights of any
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future class or series of Serial Preferred Stock that the Board may authorize
and issue in the future, each share of outstanding common stock is entitled to
participate equally in any distribution of net assets made to the stockholders
in liquidation, dissolution or winding up of Paper Warehouse and is entitled to
participate equally in dividends as and when declared by the board of directors.
There are no redemption, sinking fund, conversion or preemptive rights with
respect to the shares of common stock. All shares of common stock have equal
rights and preferences.
SERIAL PREFERRED STOCK
Under governing Minnesota law and our Amended and Restated Articles of
Incorporation, no action by our stockholders is necessary, and only action of
the board of directors is required to authorize the issuance of any shares or
series of Serial Preferred Stock. The board of directors is empowered to
establish, and to designate the name of, each class or series of the shares of
Serial Preferred Stock and to set the terms of these shares (including terms
with respect to redemption, sinking fund, dividend, liquidation, preemptive,
conversion and voting rights and preferences), any or all of which may be
greater than the rights of the holders of common stock. Accordingly, the board
of directors, without stockholder approval, may issue shares of Serial Preferred
Stock with terms (including terms with respect to redemption, sinking fund,
dividend, liquidation, preemptive, conversion and voting rights and preferences)
that could adversely affect the voting power and other rights of holders of the
common stock. At present, the board of directors has not authorized or issued
any shares of Serial Preferred Stock and has no present plan to establish any
such additional class or series.
The Serial Preferred Stock may have the effect of discouraging an attempt,
through acquisition of a substantial number of shares of common stock, to
acquire control of us with a view to effecting a merger, sale or exchange of
assets or a similar transaction. For example, the board of directors could issue
these shares as a dividend to holder of common stock or place these shares
privately with purchasers who may side with the board of directors in opposing a
takeover bid. The anti-takeover effects of the Serial Preferred Stock may deny
stockholders the receipt of a premium on their common stock and may also have a
depressive effect on the market price of the common stock.
STATE LAW PROVISIONS WITH POTENTIAL ANTI-TAKEOVER EFFECT
Certain provisions of Minnesota law described below could have an
anti-takeover effect. These provisions are intended to provide management
flexibility and to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by the
Board and to discourage an unsolicited takeover of the Company, if the Board
determines that such a takeover is not in the best interests of the Company and
our stockholders. However, these provisions could have the effect of
discouraging certain attempts to acquire us which could deprive our stockholders
of opportunities to sell their shares of common stock at prices higher than
prevailing market prices.
Section 302A.671 of the Minnesota Business Corporation Act (the "MBCA")
applies, with certain exceptions, to any acquisition of voting stock of the
Company (from a person other than us, and other than in connection with certain
mergers and exchanges to which we are a party) resulting in the beneficial
ownership of 20% or more of the voting stock then outstanding. Section 302A.671
requires approval of any acquisition of this type by a majority vote of our
stockholders before the consummation of the acquisition. In general, shares
acquired in the absence of this approval are denied voting rights and we may
redeem the shares at their then fair market value within 30 days after the
acquiring person has failed to give a timely information statement to us or the
date the stockholders voted not to grant voting rights to the acquiring person's
shares.
Section 302A.673 of the MBCA generally prohibits any business combination by
us, or any of our subsidiaries, with any stockholder that purchases 10% or more
of our voting shares (an "interested shareholder") within four years following
the interested shareholder's share acquisition date, unless the
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business combination is approved by a committee of all of the disinterested
members of our board of directors before the interested shareholder's share
acquisition date.
Our Amended & Restated Bylaws provide that Section 302A.673 of the MBCA is
not applicable to any business combination (as defined in the MBCA) of Paper
Warehouse with, with respect to, proposed by or on behalf of, or pursuant to,
any written or oral agreement, arrangement, relationship, understanding, or
otherwise with Yale T. Dolginow or Brent D. Schlosser or any of their respective
affiliates or associates (as defined in the MBCA).
CERTAIN LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
Our Amended and Restated Articles of Incorporation limit the liability of
our directors to the fullest extent permitted by law. Specifically, our
directors will not be personally liable for monetary damages for breach of the
fiduciary duty as directors, except for liability for
- any breach of the director's duty of loyalty to us or our stockholders
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law
- corporate distributions which are in contravention of restrictions in the
MBCA, our Articles or Bylaws, or any agreement to which we are a party
- violations of Minnesota securities laws
- any transaction from which the director derives an improper personal
benefit
- any act or omission occurring before the effective date of the provision
in our Articles eliminating or limiting liability
This provision will generally not limit liability under state or federal
securities law.
Section 302A.521 of the MBCA provides that a Minnesota business corporation
must indemnify any director, officer, employee or agent of the corporation made
or threatened to be made a party to a proceeding, by reason of the former or
present official capacity (as defined) of the person, against judgments,
penalties, fines, settlements and reasonable expenses incurred by the person in
connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
this right of indemnification and reference is made thereto for a complete
statement of these indemnification rights.
Article 6 of our Bylaws provides that each of our directors, officers and
employees will be indemnified by us in accordance with, and to the fullest
extent permissible by, applicable law.
Insofar as indemnification for liabilities arising under the Security Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that in the opinion of the SEC
this indemnification is against public policy as expressed in the Securities
Act, and is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
Firstar Trust Company is the transfer agent and registrar of the common
stock.
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UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, Miller & Schroeder Financial, Inc. has agreed to purchase from us and
we have agreed to sell to Miller & Schroeder, Debentures, in the total principal
amount of $4,000,000. Miller & Schroeder will purchase the Debentures from us
for $3,700,000, net of its underwriting discount fee of $300,000. We have agreed
to pay Miller & Schroeder a nonaccountable expense allowance in the amount of
$120,000, 3.0% of the gross proceeds of this offering and a management fee in
the amount of $80,000, 2% of the gross proceeds of this offering.
Miller & Schroeder will be committed to take and pay for all of the
Debentures if any are purchased.
The Underwriting Agreement provides for reciprocal indemnification between
us, Miller & Schroeder and each of Miller & Schroeder's and our officers,
directors and controlling persons against civil liabilities in connection with
this offering, including certain liabilities under the Securities Act. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted pursuant to such indemnification provisions, we have been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Miller & Schroeder proposes to offer the Debentures to the public at $1,000
per Debenture, and to certain selected dealers at such price less a concession
of $ per Debenture. Miller & Schroeder does not intend to confirm sales to
any account over which it has discretionary authority.
In connection with this offering, we have agreed to issue and sell to Miller
& Schroeder, for nominal consideration, a warrant (the "Underwriter's Warrant")
to purchase 50,000 shares of our common stock at $ per share. The
Underwriter's Warrant contains anti-dilution provisions providing for
appropriate adjustments on the occurrence of certain events. The Underwriter's
Warrant also provides certain demand and participatory rights to require
registration under the Securities Act of the shares underlying the Underwriter's
Warrant. The Underwriter's Warrant will be exercisable commencing one year from
the date of this prospectus and for a period of four years thereafter. The
Underwriter's Warrant will be restricted from sale, transfer, assignment or
hypothecation except to officers or successors of Miller & Schroeder. Any
profits realized by Miller & Schroeder upon the sale of the Underwriter's
Warrant or the securities issuable upon exercise thereof may be deemed to
constitute additional underwriting compensation.
In order to facilitate the offering of the Debentures, Miller & Schroeder
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Debentures. In addition, to stabilize the price of the Debentures,
Miller & Schroeder may bid for, and purchase, Debentures in the open market.
Miller & Schroeder may also reclaim selling concessions allowed to a dealer for
distributing Debentures in the offering, if Miller & Schroeder repurchases
previously distributed Debentures in transactions to cover its short positions,
in stabilization transactions or otherwise. Finally, Miller & Schroeder may bid
for, and purchase, Debentures in market making transactions and impose penalty
bids. These activities may stabilize or maintain the market price of the
Debentures above the market level that may otherwise prevail. Miller & Schroeder
is not required to engage in these activities and may end any of these
activities at any time. Any such activities will be undertaken in accordance
with the rules and regulations under the Exchange Act, if at all.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. Neither Miller & Schroeder nor us
make any representation or prediction as to the direction or magnitude of any
effect that the transactions described above might have on the price of the
Debentures. In addition, neither Miller & Schroeder nor us make any
representations that Miller &
60
<PAGE>
Schroeder will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Before the offering, there has been no public market for the Debentures. We
do not intend to list the Debentures on any securities exchange or include them
for quotation on the Nasdaq system. Miller & Schroeder has advised us that it
intends initially to make a market in the Debentures, but it is not obligated to
do so and may discontinue market making at any time without notice.
The foregoing is a summary of the material provisions of the Underwriting
Agreement and the Underwriter's Warrant. Copies of such documents have been
filed as exhibits to the Registration Statement of which this prospectus is a
part.
The following table summarizes the compensation we will pay to Miller &
Schroeder:
<TABLE>
<CAPTION>
FORM OF COMPENSATION AMOUNT
- -------------------------------------------------------------- -------------
<S> <C>
Total underwriting discounts and commissions.................. $ 300,000
Non-accountable expense allowance............................. $ 120,000
Management fee................................................ $ 80,000
Warrant....................................................... 50,000 shares
</TABLE>
The following table itemizes all of the expenses we expect to incur in
connection with this offering (all expenses are estimates other than the SEC
registration and NASD fees which are actual) other than underwriting discounts,
fees and commissions which are set forth in the table above.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 1,668
NASD filing fee................................................... 1,100
Legal fees and expenses........................................... 80,000
Accounting fees and expenses...................................... 25,000
Blue Sky fees and expenses........................................ 5,000
Printing and engraving expenses................................... 50,000
Trustee and registrar fees and expenses........................... 10,000
Miscellaneous..................................................... 107,232
---------
Total........................................................... $ 280,000
---------
---------
</TABLE>
LEGAL MATTERS
The validity of the Debentures being sold in this offering will be passed
upon for us by Oppenheimer Wolff & Donnelly LLP, Minneapolis, Minnesota.
Fredrikson & Byron, P.A., Minneapolis, Minnesota, is acting as counsel for
Miller & Schroeder in connection with certain legal matters relating to the
Debentures offered hereby.
EXPERTS
The consolidated financial statements of Paper Warehouse, Inc. as of January
29, 1999 and January 30, 1998, and for each of the years in the three-year
period ended January 29, 1999 have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
auditors, appearing elsewhere in this prospectus, and upon the authority of said
firm as experts in accounting and auditing.
61
<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act with respect to the Debentures
and common stock offered by this prospectus. This prospectus does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto, certain parts of which are omitted as permitted by the
rules and regulations of the Commission. For further information with respect to
us and the Debentures and common stock offered in this prospectus, reference is
made to the Registration Statement and the exhibits and schedules filed
therewith. Although all material terms and provisions of any material contract
or other document filed are referred to in this prospectus and described herein,
these descriptions are not necessarily complete, and in each instance reference
is made to the copy of the contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
the reference.
We are subject to the periodic reporting and other informational
requirements of the Exchange Act pursuant to Section 15(d) thereof and, in
accordance therewith, file reports, proxy statements and other information with
the Commission. For further information with respect to us, reference is hereby
made to such reports and other information which, together with the Registration
Statement and the exhibits and schedules thereto, can be inspected, without
charge, at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at 500 West Madison Street, Suite 1400, Chicago, IL 60661, and 7 World
Trade Center, Suite 1500, New York, New York 10048. Copies of all or any part of
the Registration Statement can also be obtained from the Public Reference Room
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. You may obtain information on the operation of the SEC's
Public Reference Room by calling the SEC at 1-800-SEC-0330. The Commission also
maintains a website (http.//www.sec.gov) that contains reports, proxy and
information statements, and other information that has been or will be filed by
us.
Our World Wide Web site address is WWW.PAPERWAREHOUSE.COM. The information
included in our website is not made a part of this prospectus.
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of January 29, 1999 and January 30, 1998.................................... F-3
Consolidated Statements of Operations for the Years Ended January 29, 1999, January 30, 1998 and January
31, 1997................................................................................................. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended January 29, 1999, January 30, 1998 and
January 31, 1997......................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended January 29, 1999, January 30, 1998 and January
31, 1997................................................................................................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
Consolidated Balance Sheets as of April 30, 1999 (Unaudited) and January 29, 1999.......................... F-17
Consolidated Statements of Operations for the First Quarters Ended April 30, 1999 and May 1, 1998
(Unaudited).............................................................................................. F-18
Consolidated Statements of Cash Flows for the First Quarters Ended April 30, 1999 and May 1, 1998
(Unaudited).............................................................................................. F-19
Notes to Unaudited Consolidated Financial Statements....................................................... F-20
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Paper Warehouse, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Paper
Warehouse, Inc. and Subsidiary (the Company) as of January 29, 1999 and January
30, 1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
January 29, 1999. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Company's management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Paper
Warehouse, Inc. and Subsidiary as of January 29, 1999 and January 30, 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 29, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
March 19, 1999
Minneapolis, Minnesota
F-2
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JANUARY 29, 1999 AND JANUARY 30, 1998
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 64,507 $ 2,059,737
Inventories, net................................................................. 16,302,070 11,161,549
Accounts receivable.............................................................. 1,105,262 451,937
Prepaid expenses and other current assets........................................ 613,584 153,968
------------- -------------
Total current assets........................................................... 18,085,423 13,827,191
Property and equipment, net...................................................... 9,976,450 6,798,228
Other assets, net................................................................ 1,466,613 391,918
------------- -------------
Total assets................................................................. $ 29,528,486 $ 21,017,337
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--line of credit.................................................... $ 6,850,000 $ --
Current maturities of long-term debt............................................. 151,993 305,585
Current maturities of capital lease obligation................................... 308,566 179,671
Accounts payable................................................................. 4,390,525 2,989,016
Accrued liabilities:
Payroll and related expenses................................................... 563,112 369,486
Accrued expenses............................................................... 337,014 349,718
Accrued interest............................................................... 15,037 10,317
Other.......................................................................... 256,893 240,765
------------- -------------
Total current liabilities...................................................... 12,873,140 4,444,558
Capital lease obligation, less current maturities.................................. 635,204 355,927
Long-term debt, less current maturities............................................ 861,827 911,409
Deferred rent credits and other.................................................... 1,068,331 711,659
------------- -------------
Total liabilities.............................................................. 15,438,502 6,423,553
Stockholders' equity:
Serial preferred stock; 10,000,000 shares authorized; none issued or
outstanding.................................................................... -- --
Common stock, $.01 par value. 40,000,000 shares authorized; 4,627,936 and
4,557,187 shares issued and outstanding, respectively.......................... 46,279 45,572
Additional paid-in capital....................................................... 13,833,442 13,683,807
Retained earnings................................................................ 210,263 864,405
------------- -------------
Total stockholders' equity..................................................... 14,089,984 14,593,784
Total liabilities and stockholders' equity..................................... $ 29,528,486 $ 21,017,337
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 29, 1999, JANUARY 30, 1998 AND JANUARY 31, 1997
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30, JANUARY 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Company-owned stores.............................................. $ 62,218,553 $ 51,787,842 $ 41,892,173
Franchise related fees............................................ 1,271,973 1,161,097 1,109,737
------------- ------------- -------------
Total revenues.................................................. 63,490,526 52,948,939 43,001,910
Costs and expenses:
Costs of products sold and occupancy costs........................ 41,252,342 34,966,018 27,946,561
Store operating expenses.......................................... 15,185,082 11,484,271 8,732,589
General and administrative expenses............................... 7,643,011 5,515,491 4,242,960
------------- ------------- -------------
Total costs and expenses........................................ 64,080,435 51,965,780 40,922,110
Operating (loss) income......................................... (589,909) 983,159 2,079,800
Interest expense, net............................................. 254,405 797,567 771,549
Expenses of canceled acquisition.................................. -- 260,852 --
------------- ------------- -------------
(Loss) income before income taxes and extraordinary charge........ (844,314) (75,260) 1,308,251
Income tax benefit (expense)...................................... 323,654 (5,941) (5,300)
------------- ------------- -------------
(Loss) income before extraordinary charge......................... (520,660) (81,201) 1,302,951
------------- ------------- -------------
Extraordinary charge for extinguishment of debt................... -- (182,611) --
Tax benefit of extraordinary charge............................... -- 72,846 --
------------- ------------- -------------
Extraordinary charge, net......................................... -- (109,765) --
------------- ------------- -------------
Net (loss) income............................................... $ (520,660) $ (190,966) $ 1,302,951
------------- ------------- -------------
------------- ------------- -------------
Basic and diluted earnings per share:
Weighted average shares outstanding............................... 4,572,979
Net loss per share................................................ $ (0.11)
-------------
Pro forma net (loss) income......................................... $ (206,610) $ 807,830
Pro forma basic earnings per share:
Weighted average shares outstanding............................... 2,630,811 2,202,818
(Loss) income before extraordinary charge per share............... $ (0.04) $ 0.37
Extraordinary charge per share.................................... (0.04) --
------------- -------------
Net (loss) income per share....................................... $ (0.08) $ 0.37
------------- -------------
------------- -------------
Pro forma diluted earnings per share:
Weighted average shares outstanding............................... 2,630,811 2,514,250
(Loss) income before extraordinary charge per share............... $ (0.04) $ 0.32
Extraordinary charge per share.................................... (0.04) --
------------- -------------
Net (loss) income per share....................................... $ (0.08) $ 0.32
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 29, 1999, JANUARY 30, 1998 AND JANUARY 31, 1997
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL TOTAL
PREFERRED COMMON COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK SHARES STOCK CAPITAL EARNINGS EQUITY
----------- ---------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 2, 1996.................. -- 2,202,818 $ 22,028 $ 572,472 $ 2,529,075 $ 3,123,575
Net income............................... -- -- -- -- 1,302,951 1,302,951
Distribution of earnings................. -- -- -- -- (2,633,992) (2,633,992)
----- ---------- --------- ------------- ------------ -------------
Balance, January 31, 1997.................. -- 2,202,818 22,028 572,472 1,198,034 1,792,534
Net loss................................. -- -- -- -- (190,966) (190,966)
Distribution of earnings................. -- -- -- -- (142,663) (142,663)
Exercise of event option................. -- 197,219 1,972 (1,972) -- --
Conversion of warrants................... -- 171,350 1,714 (1,714) -- --
Issuance of common stock pursuant to
public offering........................ -- 1,985,800 19,858 13,115,021 -- 13,134,879
----- ---------- --------- ------------- ------------ -------------
Balance, January 30, 1998.................. -- 4,557,187 45,572 13,683,807 864,405 14,593,784
Net loss................................. -- -- -- -- (520,660) (520,660)
Distribution of earnings................. -- -- -- -- (133,482) (133,482)
Issuance of common stock
(See Note 8)........................... -- 70,749 707 149,635 -- 150,342
----- ---------- --------- ------------- ------------ -------------
Balance, January 29, 1999.................. -- 4,627,936 $ 46,279 $ 13,833,442 $ 210,263 $ 14,089,984
----- ---------- --------- ------------- ------------ -------------
----- ---------- --------- ------------- ------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 29, 1999, JANUARY 30, 1998 AND JANUARY 31, 1997
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30, JANUARY 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net (loss) income.................................................... $ (520,660) $ (190,966) $ 1,302,951
Adjustments to reconcile net (loss) income to net cash (used for)
provided by operations:
Write-off of subordinated debt fees................................ -- 182,611 --
Depreciation and amortization...................................... 1,732,220 1,140,966 959,901
Gain on sale of property and equipment............................. (277) (1,892) (4,375)
Deferred taxes..................................................... (323,654) 902 --
Changes in operating assets and liabilities, net of the effect of the
purchase of the assets of a business:
Accounts receivable................................................ (653,325) (190,513) 217,740
Prepaid expenses and other current assets.......................... (459,616) (34,915) 13,259
Merchandise inventories, net....................................... (3,966,362) (1,592,869) (1,851,922)
Accounts payable................................................... 1,401,509 866,731 (488,220)
Accrued liabilities................................................ 558,442 566,365 (63,896)
------------- ------------- -------------
Net cash (used for) provided by operations....................... (2,231,723) 746,420 85,438
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of assets of a business..................................... (2,239,165) -- --
Proceeds from sale of property and equipment......................... 6,349 7,807 136,960
Purchases of property and equipment.................................. (4,334,787) (2,438,110) (1,317,283)
Other assets, net of effect of asset acquisition..................... (117,420) (118,390) (18,544)
------------- ------------- -------------
Net cash used for investing activities........................... (6,685,023) (2,548,693) (1,198,867)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net........................... -- 13,134,879 --
(Payments on) net proceeds from related party loans.................. -- (2,136,193) 2,136,193
Net proceeds from note payable--other -- 55,353 --
Net proceeds from (payments on) notes payable to bank................ 6,850,000 (5,870,000) 1,106,061
Principal payments on long-term debt................................. (203,174) (2,072,131) (23,106)
Net proceeds from capital leases..................................... 408,172 535,598 --
Distribution of earnings............................................. (133,482) (142,663) (2,633,992)
------------- ------------- -------------
Net cash provided by financing activities........................ 6,921,516 3,504,843 585,156
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents............. (1,995,230) 1,702,570 (528,273)
Cash and cash equivalents, beginning of year......................... 2,059,737 357,167 885,440
Cash and cash equivalents, end of year............................... $ 64,507 $ 2,059,737 $ 357,167
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest....................................................... $ 274,004 $ 846,538 $ 877,410
Income taxes................................................... -- 5,039 5,300
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 29, 1999 AND JANUARY 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Paper Warehouse, Inc. (the Company) is a paper and party goods retailer
operating 97 stores in the states of Arizona, Colorado, Iowa, Kansas, Minnesota,
Missouri, Nebraska, Oklahoma, Washington and Wisconsin. The Company also sells
Paper Warehouse franchises through a wholly-owned subsidiary. In exchange for
the initial and continuing franchise fees received, the Company provides
management assistance and gives franchisees the right to use the name "Paper
Warehouse" or "Party Universe."
(B) BASIS OF PRESENTATION
Effective February 1, 1997, the Company acquired Paper Warehouse
Franchising, Inc., a company under common control. The acquisition has been
accounted for on an "as if pooled" basis and, accordingly, the accompanying
financial statements include the financial condition and results of operations
of both companies for all periods presented. Intercompany transactions have been
eliminated in consolidation.
(C) ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(D) FAIR VALUES OF FINANCIAL INSTRUMENTS
Due to their short-term nature, the carrying value of the Company's
financial assets and liabilities approximates their fair value. The fair value
of the Company's borrowings, if recalculated based on current interest rates,
would not significantly differ from the recorded amounts.
(E) S-CORPORATION ELECTION
Prior to its initial public offering in November 1997, the Company had
elected to be taxed as an S-Corporation under the Internal Revenue Code. The
Company had agreed to make distributions of earnings in amounts sufficient to
enable stockholders to pay their federal and state income taxes resulting from
pass-through of taxable income as a result of the S-Corporation election.
(F) FISCAL YEAR
The Company's fiscal year ends on the Friday closest to January 31st. The
fiscal years ended January 29, 1999, January 30, 1998, and January 31, 1997
included 52 weeks. Unless otherwise stated, references to years in this report
relate to fiscal years rather than to calendar years.
(G) MERCHANDISE INVENTORIES
Inventories, are stated at the lower of cost (as determined on a first-in,
first-out basis) or market. The Company reviews slow moving merchandise and
takes appropriate markdowns to move the inventory. Periodically the Company
reviews inventory valuations and takes appropriate write-downs, as it deems
necessary.
F-7
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 29, 1999 AND JANUARY 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) CASH EQUIVALENTS
Cash equivalents of $4,641 at January 29, 1999, consist of short-term
investment in money market accounts with funds available at any time. For
purposes of the Consolidated Statements of Cash Flows, the Company considers all
highly liquid instruments with maturities of three months or less to be cash
equivalents.
(I) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed by the
method indicated over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
ESTIMATED
METHOD USEFUL LIVES
-------------- -------------
<S> <C> <C>
Computers..................................................... Straight-line 3 years
Fixtures and equipment........................................ Straight-line 5 to 7 years
Building...................................................... Straight-line 40 years
Land improvements............................................. Straight-line 40 years
</TABLE>
Maintenance, repairs, and minor renewals are expensed as incurred. Upon
retirement or disposal of assets, the cost and accumulated depreciation are
eliminated from the respective accounts and the related gains or losses are
credited or charged to income.
(J) INTANGIBLE ASSETS
The excess of cost over fair value of net assets resulting from the
acquisition of a store created goodwill that is being amortized over 15 years
using the straight-line method.
The costs of acquiring trademarks have been capitalized and are being
amortized on a straight-line basis over 10 years.
(K) OTHER ASSETS
Other assets consist primarily of security deposits and lease acquisition
fees. Lease acquisition fees are amortized over the related lease term using the
straight-line method.
(L) DEFERRED RENT CREDIT
Certain of the Company's operating leases provide for scheduled increases in
base rentals over their terms. For these leases, the Company recognizes the
total rental amounts due over the lease terms on a straight-line basis and,
accordingly, has established corresponding deferred rent credits for the
differences between the amounts recognized and the amounts paid.
(M) PRE-OPENING COSTS
Costs associated with the opening of new stores are expensed as incurred.
F-8
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 29, 1999 AND JANUARY 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(N) STOCK-BASED COMPENSATION
Compensation expense for stock option grants is recognized in accordance
with Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued
to Employees." Had Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-based Compensation," been applied, the compensation
expense would have been different; see Note 9.
(O) ADVERTISING
The Company expenses the cost of advertising as incurred or the first time
the advertisement takes place.
(P) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of start-up
costs and organization costs and requires that these costs be expensed as
incurred. This SOP is effective for fiscal years beginning after December 15,
1998. The Company has not yet determined the impact that adoption of this SOP
will have on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. This Statement is effective for fiscal years beginning
after June 15, 1999. The Company believes that adoption of this Statement will
have no impact on the Company's financial position or results of operations.
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
1999 1998
------------- ------------
<S> <C> <C>
Fixtures and equipment........................................... $ 13,486,409 $ 8,860,634
Building......................................................... 1,273,088 1,041,702
Land and improvements............................................ 319,733 319,733
Accumulated depreciation and amortization........................ (5,102,780) (3,423,841)
------------- ------------
Total property and equipment, net................................ $ 9,976,450 $ 6,798,228
------------- ------------
------------- ------------
</TABLE>
Depreciation and amortization expense on property and equipment was
$1,678,532, $1,094,714 and $913,918 for the fiscal years ended January 29, 1999,
January 30, 1998 and January 31, 1997, respectively.
(3) NOTES PAYABLE TO BANK
The Company has a revolving line of credit agreement with its bank that
permits borrowings up to $7,500,000. Borrowings under the agreement bear
interest at the bank's prime rate (7.75% at January 29, 1999) plus .5% and are
secured by substantially all assets of the Company. The agreement contains
restrictive covenants which, among other things, require the Company to maintain
a minimum tangible net worth and minimum current ratios. At January 29, 1999,
the Company was in compliance with all of the covenants under its credit
facility.
F-9
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 29, 1999 AND JANUARY 30, 1998
(3) NOTES PAYABLE TO BANK (CONTINUED)
The current agreement is subject to renewal by May 31, 1999. There was
$6,850,000 borrowings outstanding under the agreement as of January 29, 1999.
There were no borrowings outstanding as of January 30, 1998.
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
1999 1998
------------ ------------
<S> <C> <C>
Term note payable in monthly installments of $3,551, including interest at 6.914%
through October 2015. The note is secured by a second mortgage on the Company's
office headquarters, assignment of a life insurance policy, and the personal
guarantee of the Company's majority stockholder..................................... $ 395,281 $ 407,497
Term note payable in monthly installments of $4,796, including interest at 9.08%
through December 2015. The note is secured by a first mortgage on the Company's
office headquarters................................................................. 492,383 504,143
Notes payable in monthly installments of $2,711, including interest at 7.92% through
December 1999....................................................................... 26,156 55,354
$2,300,000 subordinated note payable to private placement holders with interest due
quarterly at 10%. Principal installments of $575,000 due annually commencing
November 30, 2001 100,000 250,000
------------ ------------
Total long-term debt.................................................................. 1,013,820 1,216,994
Less current maturities............................................................... 151,993 305,585
------------ ------------
Long-term debt...................................................................... $ 861,827 $ 911,409
------------ ------------
------------ ------------
</TABLE>
On December 12, 1994, the Company completed a private placement of 46 units,
each unit consisting of a 10% subordinated note due in annual installments
commencing November 30, 2001 through November 30, 2004, and one detachable
common stock purchase warrant. Subject to certain adjustments, each warrant
entitles the holder thereof to purchase 3,994 shares of the Company's common
stock, $.01 par value, at a price of $1.25 per share anytime after November 30,
1995 and before November 30, 2004. The entire proceeds of $2,300,000 were
recorded as long-term debt. The warrants were converted into 171,350 shares of
common stock concurrent with the consummation of the public offering. The
Company repaid $150,000 and $2,050,000 of the debt during fiscal 1998 and in the
fourth quarter of fiscal 1997, respectively, and expects to pay the remaining
$100,000 in fiscal 1999. Total interest expense for the fiscal years ended
January 29, 1999, January 30, 1998 and January 31, 1997 was $278,824, $839,449
and $809,029, respectively.
F-10
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 29, 1999 AND JANUARY 30, 1998
(4) LONG-TERM DEBT (CONTINUED)
Aggregate annual maturities of long-term debt subsequent to the fiscal year
ended January 29, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING IN JANUARY:
- --------------------------------------------------------------------------------
<S> <C>
2000.......................................................................... $ 151,993
2001.......................................................................... 27,865
2002.......................................................................... 30,327
2003.......................................................................... 32,869
2004 and thereafter........................................................... 770,766
------------
Total maturities of long-term debt.............................................. $ 1,013,820
------------
------------
</TABLE>
(5) LEASES
The Company leases all of its retail stores under noncancelable operating
leases that have various expiration dates. In addition to base rents, certain
leases require the Company to pay its share of maintenance and real estate
taxes, and include provisions for contingent rentals based upon sales. Certain
of the leases contain renewal options under which the Company may extend the
terms three to five years.
Future minimum lease commitments due under noncancelable operating leases at
January 29, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING IN JANUARY:
- -------------------------------------------------------------------------------
<S> <C>
2000......................................................................... $ 8,771,636
2001......................................................................... 8,319,612
2002......................................................................... 8,191,964
2003......................................................................... 7,738,108
2004......................................................................... 7,319,693
Thereafter................................................................... 22,075,297
-------------
Total future minimum lease commitments......................................... $ 62,416,310
-------------
-------------
</TABLE>
Rent expense for all operating leases for the years ended January 29, 1999,
January 30, 1998, and January 31, 1997 was $7,135,092, $5,337,555 and $4,309,403
respectively.
During fiscal 1998, the Company entered into a capital lease agreement for
equipment and fixtures. During fiscal 1997, the Company entered into a capital
lease agreement for software. Future maturities under these agreements are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING IN JANUARY:
- ----------------------------------------------------------------------------------
<S> <C>
2000............................................................................ $ 308,566
2001............................................................................ 268,921
2002............................................................................ 119,106
2003............................................................................ 130,407
2004............................................................................ 116,770
----------
Total future maturities of capital leases......................................... $ 943,770
----------
----------
</TABLE>
F-11
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 29, 1999 AND JANUARY 30, 1998
(6) INCOME TAXES
As indicated in Note 1, prior to November 25, 1997, the Company elected to
be taxed as an S-Corporation under the Internal Revenue Code. The Company's
earnings or losses for the S-Corporation period are allocated to its
stockholders for inclusion in their individual tax returns. As a result, no
provision for federal taxes was required at the corporate level for that period.
A provision was made for state taxes during the S-Corporation period as some
states impose a tax upon S-Corporations. The Company has provided federal and
state income taxes for all periods after November 28, 1997.
An income tax benefit of approximately $324,000 was recorded for the fiscal
year ended January 29, 1999. Income tax expense of $5,941 and $5,300 was
recorded for the fiscal years ended January 30, 1998 and January 31, 1997. These
amounts differed from the amounts computed by the U.S. federal income tax rate
of 34% to pretax income from continuing operations as a result of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING:
-------------------------------------
<S> <C> <C> <C>
JANUARY 29, JANUARY 30, JANUARY 31,
1999 1998 1997
----------- ----------- -----------
Computed "expected" tax (benefit) expense for twelve-month period.......... $ (287,067) $ (25,756) $ 416,944
Increase (reduction) in income taxes resulting from:
Adjustment to reflect S-Corporation election............................. -- (15,644) (416,944)
Adjustment to deferred tax assets and liabilities to reflect adoption of
SFAS 109............................................................... -- 43,251 --
State and local income taxes, net of federal income tax benefit............ (48,548) (1,313) 5,300
Other permanent differences................................................ 11,961 5,403 --
----------- ----------- -----------
Total income tax (benefit) expense......................................... $ (323,654) $ 5,941 $ 5,300
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING:
-------------------------------------
<S> <C> <C> <C>
JANUARY 29, JANUARY 30, JANUARY 31,
1999 1998 1997
----------- ----------- -----------
Current:
Federal.................................................................. $ -- $ -- $ --
State.................................................................... -- 5,039 5,300
----------- ----------- -----------
-- 5,039 5,300
Deferred:
Federal.................................................................. (275,106) 767 --
State.................................................................... (48,548) 135 --
----------- ----------- -----------
(323,654) 902 --
Total income tax (benefit) expense......................................... $ (323,654) $ 5,941 $ 5,300
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-12
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 29, 1999 AND JANUARY 30, 1998
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at January 29,
1999 and January 30, 1998 are presented below.
<TABLE>
<CAPTION>
AS OF:
-------------------------
<S> <C> <C>
JANUARY 29, JANUARY 30,
1999 1998
------------ -----------
Deferred tax assets:
Accounts receivable principally due to allowance for doubtful accounts................. $ -- $ 4,800
Inventories, principally due to additional costs inventoried for tax purposes pursuant
to the Tax Reform Act of 1986........................................................ 156,500 103,040
Difference in timing of lease deductions............................................... 454,911 296,874
Net operating loss carryforward........................................................ 529,843 237,988
------------ -----------
Total gross deferred tax asset..................................................... 1,141,254 642,702
------------ -----------
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation and capitalized
interest............................................................................. 623,922 467,702
Software, principally due to the differences in amortization........................... 121,733 103,056
------------ -----------
Total gross deferred liabilities................................................... 745,655 570,758
------------ -----------
Net deferred tax asset............................................................. $ 395,599 $ 71,944
------------ -----------
------------ -----------
</TABLE>
At January 29, 1999, the Company has a net operating loss carryforward for
federal income tax purposes of $1,324,607 which is available to offset future
federal taxable income, if any, through 2019.
(7) RELATED PARTY TRANSACTIONS
A related party of one of the Company's majority stockholders had previously
owned four of the Company's franchise stores. On November 9, 1998, the Company
purchased all the assets of these four franchise stores. The total purchase
price was $1,349,974, which was made up of both cash and stock. Goodwill in the
amount of $267,974 was recognized on this purchase. Continuing franchise fees
collected from this related party were $88,728 and $108,034, in 1998 and 1997,
respectively. The Company had no outstanding receivable as of January 29, 1999
and a $6,940 receivable from this franchisee at January 30, 1998.
A related party of one of the Company's majority stockholders substantially
owns one of the Company's franchise stores. Continuing fees collected from this
related party were $24,810 and $22,777 for the years ended January 29, 1999 and
January 30, 1998, respectively. The Company had a receivable of $708 and $317
from this franchisee as of January 29, 1999 and January 30, 1998, respectively.
(8) EQUITY TRANSACTIONS AND WEIGHTED AVERAGE SHARE DISCLOSURE
In December 1998, the Company issued 70,749 shares of common stock in
partial consideration for the purchase of Prickly Pear Paper, Inc.
F-13
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 29, 1999 AND JANUARY 30, 1998
(8) EQUITY TRANSACTIONS AND WEIGHTED AVERAGE SHARE DISCLOSURE (CONTINUED)
In February 1997, the board of directors of the Company increased the number
of common shares authorized for issuance from 200,000 to 40,000,000 and
authorized 10,000,000 shares of serial preferred stock.
In September 1997, the board of directors of the Company declared a
37.57217275 to 1 common stock split increasing the number of common shares
issued and outstanding from 58,629 to 2,202,818. All references to share and per
share amounts in the accompanying consolidated financial statements reflect this
stock split.
In November and December 1997, the Company registered and sold a total of
1,985,800 shares of common stock at a price of $7.50 each in a public offering
pursuant to the Securities Act of 1933. Total proceeds to the Company were
$13,850,955. This amount, net of other related costs of the offering of
$716,028, has been reflected in common stock and additional paid-in capital in
these consolidated financial statements.
In December 1997, the Company requested the holders of it's 10% subordinated
notes issued in 1994 to surrender the notes. Each note had one detachable common
stock warrant good for 3,725 shares of common stock. Accordingly, 171,350 shares
of common stock were issued when the notes were prepaid.
A reconciliation of weighted average shares used in the earnings per share
calculation is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
-------------------------------------
<S> <C> <C> <C>
JANUARY 29, JANUARY 30, JANUARY 31,
1999 1998 1997
----------- ----------- -----------
Basic weighted average shares...................... 4,572,979 2,630,811 2,202,818
Potential common shares............................ -- -- 311,432
----------- ----------- -----------
Diluted weighted average shares.................... 4,572,979 2,630,811 2,514,250
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(9) STOCK OPTIONS
In order to attract and retain employees and directors, while preserving
cash resources, the Company has, since going public, utilized stock option
awards. During fiscal 1997, the Company adopted a stock option plan (the Plan)
pursuant to which the Company may grant stock options to employees and the board
of directors. The Plan authorizes grants of options to purchase up to 639,641
shares of authorized but unissued common stock. Stock options are granted with
an exercise price equal to the stock's fair market value at the date of grant.
All stock options have ten-year terms and vest ratably over three years from the
date of grant.
At January 29, 1999, there were options issued and outstanding to purchase
412,200 shares of the Company's common stock issued to employees and directors.
In fiscal 1998, the Company granted stock option awards to certain of its
employees and directors for the purchase of an aggregated amount of 227,750
shares of the Company's common stock. These options are exercisable at prices
from $2.07 to $5.00 per share and expire in 2008. During fiscal 1997, 184,450
options were awarded to certain of its employees and directors. These options
are exercisable at $7.50 per share and expire in 2007.
The per share weighted-average fair value of these options using the Black
Scholes option-pricing model is $2.10 with the following weighted-average
assumptions: volatility 60%, expected dividend yield .0%, risk-free rate of
5.5%, and an expected life of 5 years.
F-14
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 29, 1999 AND JANUARY 30, 1998
(9) STOCK OPTIONS (CONTINUED)
Details of the status of stock options as of January 29, 1999 are reflected
in the table below.
<TABLE>
<CAPTION>
SHARES UNDER PRICE WEIGHTED-AVERAGE
OPTION RANGE EXERCISE PRICE
------------- ------------- -----------------
<S> <C> <C> <C>
Unexercised options outstanding January
31, 1997................................ -- -- --
Options granted......................... 184,450 $ 7.50 $ 7.50
Options exercised....................... -- -- --
Options forfeited....................... -- -- --
------------- ------------- -----
Unexercised options outstanding January
30, 1998................................ 184,450 $ 7.50 $ 7.50
Options granted......................... 227,750 $ 2.07-$5.00 $ 2.90
Options exercised....................... -- -- --
Options forfeited....................... -- -- --
------------- ------------- -----
Unexercised options outstanding January
29, 1999................................ 412,200 $ 2.75-$7.50 $ 4.96
------------- ------------- -----
------------- ------------- -----
</TABLE>
The following table summarizes information concerning options outstanding
and exercisable as of January 29, 1999:
<TABLE>
<CAPTION>
EXERCISABLE
OUTSTANDING OPTIONS OPTIONS
------------------- ------------------
<S> <C> <C>
Number of options............................... 412,200 61,483
Weighted average remaining contractual life, in
years......................................... 9.36 8.83
Weighted average exercise price................. $ 4.96 $ 7.50
</TABLE>
The Company applies ABP Opinion No. 25 in accounting for options granted
under its stock option plans and, accordingly, no compensation cost has been
recognized for its stock options granted to its employees or directors in the
consolidated financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, the Company's net loss would have increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
1998 1997
--------------- ---------------
<S> <C> <C>
Net loss--as reported in fiscal 1998 and as reported pro
forma assuming C-Corporation status in fiscal 1997.... $ (520,660) $ (206,610)
Net loss--pro forma..................................... $ (677,149) $ (500,291)
Net loss per share--as reported in fiscal 1998 and as
reported pro forma assuming C-Corporation status in
fiscal 1997........................................... $ (0.11) $ (0.08)
Net loss per share--pro forma........................... $ (0.15) $ (0.19)
</TABLE>
F-15
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 29, 1999 AND JANUARY 30, 1998
(10) EMPLOYEE BENEFITS
The Company has a retirement savings plan covering substantially all
employees who have completed one year of service and attained 21 years of age,
which includes a noncontributory profit sharing plan and 401(k) feature.
Employees become fully vested in the plan on a graduated scale over a six-year
period. Contributions to the profit sharing plan are made at the discretion of
the plan committee. The 401(k) feature allows for employee's elective salary
deferrals up to 15% of their compensation, but not in excess of certain
limitations. There were no discretionary contributions to the profit sharing
plan in any of the fiscal years.
The Company has a Voluntary Employee Benefit Plan and Employee Benefit Trust
for the sole and exclusive benefit of its employees. The Company matches 25% of
the first 4% of employee contributions to the plan. Company contributions were
$34,358 and $25,422 for the years ended January 29, 1999 and January 30, 1998,
respectively.
On December 7, 1998, the board approved an Employee Stock Purchase Plan to
be approved by the stockholders at the 1999 Annual Meeting. If approved by the
stockholders, the first enrollment period is not expected to begin until August
1, 1999.
(11) EXTRAORDINARY CHARGE
Upon completing the Company's initial public offering in November 1997, the
Company exercised its option to repay subordinated debt. The Company then took a
one-time charge of $182,611, which represented the unamortized portion of the
fees associated with the debt. This amount is shown as an extraordinary charge
in the accompanying Consolidated Statement of Operations for the fiscal year
ended January 30, 1998.
(12) SUBSEQUENT EVENT (UNAUDITED)
On April 8, 1999 the Company refinanced its corporate office building. The
$1.1 million term note is payable in monthly installments of $8,612, including
interest at 7.125%, through May 2009. The note is secured by a first mortgage on
the Company's office headquarters.
F-16
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 29,
1999
APRIL 30, -------------
1999
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 791,133 $ 64,507
Merchandise inventories, net..................................................... 18,997,829 16,302,070
Accounts receivable.............................................................. 938,296 1,105,262
Prepaid expenses and other current assets........................................ 1,336,537 613,584
------------- -------------
Total current assets........................................................... 22,063,795 18,085,423
Property and equipment, net...................................................... 10,012,196 9,976,450
Other assets, net................................................................ 1,303,256 1,466,613
------------- -------------
Total assets................................................................. $ 33,379,247 $ 29,528,486
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--line of credit.................................................... $ 6,558,908 $ 6,850,000
Current maturities of long-term debt............................................. 142,069 151,993
Current maturities of capital lease obligation................................... 526,249 308,566
Accounts payable................................................................. 8,399,767 4,390,525
Accrued liabilities.............................................................. 1,254,550 1,172,056
------------- -------------
Total current liabilities...................................................... 16,881,543 12,873,140
Capital lease obligation, less current maturities.................................. 1,418,852 635,204
Long-term debt, less current maturities............................................ 1,076,420 861,827
Deferred rent credits.............................................................. 1,129,787 1,068,331
------------- -------------
Total liabilities.............................................................. 20,506,602 15,438,502
Stockholders' equity:
Serial preferred stock, $.01 par value; 10,000,000 shares authorized; none issued
or outstanding................................................................. -- --
Common stock, $.01 par value; 40,000,000 shares authorized; 4,627,936 shares
issued and outstanding......................................................... 46,279 46,279
Additional paid-in capital....................................................... 13,833,442 13,833,442
Accumulated (deficit) earnings................................................... (1,007,076) 210,263
------------- -------------
Total stockholders' equity..................................................... 12,872,645 14,089,984
------------- -------------
Total liabilities and stockholders' equity................................... $ 33,379,247 $ 29,528,486
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
----------------------------
APRIL 30, MAY 1,
1999 1998
------------- -------------
<S> <C> <C>
Revenues:
Company-owned stores............................................................. $ 16,419,572 $ 12,192,259
Franchise related fees........................................................... 272,857 303,185
------------- -------------
Total revenues................................................................. 16,692,429 12,495,444
Costs and expenses:
Costs of products sold and occupancy costs....................................... 11,406,845 8,454,727
Store operating expenses......................................................... 4,673,890 3,186,973
General and administrative expenses.............................................. 2,247,013 1,706,830
------------- -------------
Total costs and expenses....................................................... 18,327,748 13,348,530
Operating loss................................................................. (1,635,319) (853,086)
Interest expense, net............................................................ 216,040 27,086
------------- -------------
Loss before income taxes and cumulative effect of accounting change.............. (1,851,359) (880,172)
Income tax benefit............................................................... 742,526 352,069
------------- -------------
Net loss before cumulative effect of accounting change........................... (1,108,833) (528,103)
------------- -------------
Cumulative effect of accounting change, net (Note 2)............................. (108,506) --
------------- -------------
Net loss....................................................................... $ (1,217,339) $ (528,103)
------------- -------------
------------- -------------
Basic and diluted loss per share:
Weighted average shares outstanding............................................ 4,627,936 4,557,187
Basic and diluted loss per share before cumulative effect of accounting
change....................................................................... $ (.24) $ (.12)
Cumulative effect of accounting change......................................... (.02) --
------------- -------------
Basic and diluted loss per share............................................... $ (.26) $ (.12)
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
----------------------
APRIL 30, MAY 1,
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................................... $(1,217,339) $ (528,103)
Adjustments to reconcile net loss to net cash provided by (used
for) operations:
Depreciation and amortization.................................. 535,235 367,753
Gain on sale of property and equipment......................... (1,414) (107)
Deferred taxes................................................. (812,883) (352,069)
Other noncash items affecting earnings......................... 189,123 --
Changes in operating assets and liabilities, net of the effect of
the purchase of assets of a business:
Accounts receivable............................................ 166,966 99,625
Prepaid expenses and other current assets...................... 89,930 (312,988)
Merchandise inventories, net................................... (2,695,759) (857,941)
Accounts payable............................................... 4,009,242 1,284,356
Accrued liabilities............................................ 82,494 114,217
Deferred rent credits.......................................... 61,456 (3,523)
---------- ----------
Net cash provided by (used for) operations................... 407,051 (188,780)
---------- ----------
INVESTING ACTIVITIES:
Purchase of assets of a business................................... -- (148,710)
Proceeds from sale of property and equipment....................... 16,010 3,967
Purchases of property and equipment................................ (574,102) (816,487)
Other assets, net of effect of asset acquisition................... -- (49,170)
---------- ----------
Net cash used for investing activities....................... (558,092) (1,010,400)
---------- ----------
FINANCING ACTIVITIES:
Net payments on notes payable to bank.............................. (291,092) --
Proceeds from refinancing of mortgage.............................. 1,100,000 --
Principal payments on long-term debt............................... (895,331) (65,666)
Payment of debt acquisition fees................................... (37,241)
---
Net proceeds from (payments on) capital leases..................... 1,001,331 (24,490)
---------- ----------
Net cash provided by (used for) financing activities......... 877,667 (90,156)
---------- ----------
Net increase (decrease) in cash and cash equivalents......... 726,626 (1,289,336)
Cash and cash equivalents, beginning of period..................... 64,507 2,059,737
---------- ----------
Cash and cash equivalents, end of period........................... $ 791,133 $ 770,401
---------- ----------
---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period.............................. $ 210,949 $ 30,305
Income taxes paid during the period.......................... -- --
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Paper Warehouse, Inc. (the Company) is a growing chain of retail stores
specializing in party supplies and paper goods, operating under the names "Paper
Warehouse" and "Party Universe." At April 30, 1999, the Company had a total of
142 stores, consisting of 97 company-owned stores and 45 franchise stores,
operating in 24 states. The Company sells Paper Warehouse franchises through its
wholly-owned subsidiary, Paper Warehouse Franchising, Inc.
The unaudited consolidated financial statements included herein have been
prepared by the Company pursuant to the Rules and Regulations of the Securities
and Exchange Commission ("SEC"), and represent the consolidated financial
statements of Paper Warehouse, Inc. and Paper Warehouse Franchising, Inc. as of
April 30, 1999 and May 1, 1998 and for the three month periods then ended. The
information furnished in these financial statements includes normal recurring
adjustments and reflects all adjustments, which are, in the opinion of
management, necessary for a fair presentation of such financial statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
1998 Annual Report to Shareholders and its Form 10-K filed with the SEC.
Due to the seasonality of the Company's business, revenues and operating
results for the three months ended April 30, 1999 are not necessarily indicative
of the results to be expected for the full year.
(2) ACCOUNTING CHANGE
The Company adopted Statement of Position (SOP) No. 98-5, "Reporting on the
Costs of Start-Up Activities" during first quarter 1999. This SOP requires that
costs of start-up activities and organization costs be expensed as incurred.
Prior to the adoption of SOP No. 98-5, the Company's policy was to capitalize
lease acquisition fees and amortize them over the related lease term using the
straight-line method. The net impact of the change of approximately $109,000 or
$.02 per share, is shown as a cumulative effect of accounting change in the
Consolidated Statement of Operations for the three months ended April 30, 1999.
(3) FINANCING ARRANGEMENTS
On April 8, 1999, the Company refinanced its corporate office building. The
$1.1 million term note is payable in monthly installments of $8,612, including
interest at 7.125%, through May 2009. The note is secured by a first mortgage on
the Company's office headquarters.
On June 7, 1999, the Company obtained a $15 million three-year revolving
line of credit facility for general working capital purposes, that replaced its
previous $7.5 million facility. Borrowings outstanding under the new line of
credit bear interest, at a variable rate and are secured by substantially all of
the assets of the Company. The agreement with respect to the credit facility
contains covenants, which require the Company to satisfy certain financial
tests, and restrictions on the Company's ability to pay dividends.
Subsequent to first quarter 1999, the Company filed a Registration Statement
with the SEC for the public sale of a new issue of an aggregate principal amount
of $4 million of Convertible Subordinated Debentures due 2005. Proceeds from the
issuance will be used to develop and implement an Internet website for the sale
of party supplies and paper goods, to repay indebtedness and for other general
corporate purposes.
F-20
<PAGE>
PAPER WAREHOUSE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) COMMON STOCK AND STOCK OPTION TRANSACTIONS
During first quarter the Company granted options to selected management of
the Company to purchase 14,100 shares of the Company's Common Stock at a range
of $1.88 to $2.75 per share. The options vest over three years and expire 10
years from the date of grant.
(5) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
F-21
<PAGE>
The inside back cover of the prospectus contains a map of the United States
indicating the locations of the Company-owned stores and franchise stores. The
map has lines on it that call out the location of 26 stores in the
Minneapolis/St. Paul metropolitan area, 16 stores in the Kansas City
metropolitan area, 13 stores in the Denver metropolitan area, 8 stores in the
Oklahoma City metropolitan area and 7 stores in the Seattle metropolitan area.
Along the left-hand side of the map, we list the following states where we
have Company-owned stores and franchise stores, along with the number of stores
in each state:
<TABLE>
<CAPTION>
COMPANY STORES FRANCHISE STORES
- ------------------- ---------------------
<S> <C>
Arizona(4) Arizona(1)
Colorado(14) Colorado(5)
Iowa(8) Florida(1)
Kansas(9) Georgia(2)
Minnesota(29) Illinois(3)
Missouri(10) Iowa(2)
Nebraska(2) Kansas(2)
Oklahoma(12) Kentucky(1)
Washington(7) Louisiana(4)
Wisconsin(2) Maryland(1)
Minnesota(1)
Mississippi(1)
Missouri(1)
Montana(2)
Nebraska(3)
Nevada(1)
North Dakota(4)
South Dakota(5)
Tennessee(1)
Texas(3)
Wyoming(2)
</TABLE>
Below the map is a photo of gift-wrapped boxes, and below the boxes are
the Paper Warehouse and Party Universe logos.
Below these pictures, running across the bottom of the page, is a banner
carrying the names of various celebratory events and sayings, such as
"Congratulations on Your Graduation," "Confirmation," "Bridal Shower" and
"Happy Birthday."
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR ANY OTHER PERSON TO
PROVIDE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS. YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATION.
THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
THESE DEBENTURES IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 12
Price Range of Common Stock............................................... 12
Dividend Policy........................................................... 13
Capitalization............................................................ 13
Selected Financial and Operating Data..................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 16
Business.................................................................. 24
Management................................................................ 35
Certain Transactions...................................................... 43
Principal Shareholders and Beneficial Ownership of Management............. 45
Description of Debentures................................................. 47
Description of Capital Stock.............................................. 57
Underwriting.............................................................. 60
Legal Matters............................................................. 61
Experts................................................................... 61
Additional Information.................................................... 62
Index to Consolidated Financial Statements................................ F-1
</TABLE>
$4,000,000
[LOGO]
9% CONVERTIBLE SUBORDINATED
DEBENTURES
---------------------
PROSPECTUS
---------------------
MILLER & SCHROEDER
FINANCIAL, INC.
JUNE , 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses we expect to incur in connection
with this offering (subject to future contingencies) (all expenses are estimates
other than the SEC registration and NASD fees which are actual) other than
underwriting discounts, commissions and fees:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 1,668
NASD filing fee................................................... 1,100
Legal fees and expenses........................................... 80,000
Accounting fees and expenses...................................... 25,000
Blue Sky fees and expenses........................................ 5,000
Printing and engraving expenses................................... 50,000
Trustee and registrar fees and expenses........................... 10,000
Miscellaneous..................................................... 107,232
---------
Total........................................................... $ 280,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles limit the liability of our directors to the fullest extent
permitted by law. Specifically, our directors will not be personally liable for
monetary damages for breach of their fiduciary duty as directors, except for
liability for (i) any breach of the director's duty of loyalty to us or our
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) corporate
distributions which are in contravention of restrictions in the MBCA, our
Articles or Bylaws, or any agreement to which we are a party, (iv) violations of
Minnesota securities laws, (v) any transaction from which the director derives
an improper personal benefit, or (vi) any act or omission occurring before the
effective date of the provision in our Articles eliminating or limiting
liability. This provision will generally not limit liability under state or
federal securities law.
Section 302A.521 of the MBCA provides that a Minnesota business corporation
must indemnify any director, officer, employee or agent of the corporation made
or threatened to be made a party to a proceeding, by reason of the former or
present official capacity (as defined) of the person, against judgments,
penalties, fines, settlements and reasonable expenses incurred by the person in
connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 also contains detailed terms
regarding this right of indemnification and reference is made thereto for a
complete statement of these indemnification rights.
Article 6 of our Bylaws provides that each of our directors, officers and
employees will be indemnified by US in accordance with, and to the fullest
extent permissible by, applicable law.
Article 10 of our Bylaws provides that Section 302A.673 of the MBCA, is not
applicable to any Business Combination (as defined in the MBCA) of Paper
Warehouse with, with respect to, proposed by or on behalf of, or pursuant to,
any written or oral agreement, arrangement, relationship, understanding, or
otherwise with Yale T. Dolginow or Brent D. Schlosser or any of their respective
affiliates or associates (as defined in the MBCA).
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission this indemnification is against public policy
as expressed in the Securities Act, and is therefore unenforceable.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On December 17 1998, we completed an acquisition of all of the assets of
four franchise stores owned by Prickly Pear Paper, Inc. To acquire the assets,
we paid Prickly Pear approximately $1.2 million in cash and 70,749 shares of our
common stock for a total purchase price of $1,349,974. We believe that the
issuance of these shares of common stock is exempt from registration under
Section 4(2) of the Securities Act.
In connection with the completion of our initial public offering, we issued
201,064 shares of our common stock to the selling stockholder in the offering
pursuant to the cashless exercise of an option. No commissions were paid in
connection with this transaction. We believe that the issuance of these shares
is exempt from registration pursuant to Section 3(a)(9) under the Securities
Act.
In connection with the completion of our initial public offering, we issued
a total of 171,350 shares of our common stock to holders of warrants upon the
cashless exercise of these warrants. We believe that the issuance of these
shares is exempt from registration pursuant to Section 3(a)(9) under the
Securities Act.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
ITEM NUMBER DESCRIPTION OF ITEM
- --------------- ----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement (including form of Underwriter's Warrant).(1)
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Amended and Restated By-laws.(1)
4.1 Form of 10% Subordinated Note due November 30, 2004, dated December 7, 1994.(1)
4.2 Form of Warrant Agreement.(1)
4.3 Form of Warrant Conversion Agreement, as extended.(1)
4.4 Form of Indenture dated June , 1999 between the Company and Norwest Bank Minnesota N.A. relating
to the 9% Convertible Subordinated Debentures due June 15, 2005.(2)
4.5 Form of 9% Convertible Subordinated Debenture due June 15, 2005.(3)
4.6 Form of Underwriter's Warrant.(1)
5.1 Opinion of Oppenheimer Wolff & Donnelly LLP.(1)
10.1 1997 Stock Option and Compensation Plan.(1)
10.2 Directors' Stock Option Plan.(1)
10.3 Corporation Tax Allocation and Indemnification Agreement entered into on September 26, 1997 between
the Company and Yale T. Dolginow and Brent D. Schlosser.(1)
10.4 Employment Agreement by and between the Company and Yale T. Dolginow dated February 7, 1997.(1)
10.5 Employment Agreement by and between the Company and Brent D. Schlosser dated February 7, 1997.(1)
10.6 Amendment Number 1 to the Employment Agreement by and between the Company and Brent D. Schlosser
dated September 26, 1997.(1)
10.7 Combination Mortgage and Security Agreement and Fixture Financing Statement dated June 9, 1995 by
and between the Company and Richfield Bank & Trust Co.(1)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER DESCRIPTION OF ITEM
- --------------- ----------------------------------------------------------------------------------------------------
<C> <S>
10.8 Secured Promissory Note of the Company in favor of Richfield Bank & Trust Co. in the amount of
$945,000 dated June 9, 1995.(1)
10.9 Authorization and Note Guaranty of the Company dated May 25, 1995.(1)
10.10 Employment Agreement by and between the Company and Cheryl W. Newell dated July 14, 1997.(1)
10.11 Loan Agreement between Paper Warehouse, Inc., Yale T. Dolginow and Richfield Bank & Trust Co., dated
January 29, 1997.(1)
10.12 Revolving Promissory Note to Richfield Bank & Trust Co. dated January 29, 1997.(1)
10.13 Security Agreement between the Company and Richfield Bank & Trust Co. dated January 29, 1997.(1)
10.14 Amendment to Loan Agreement entered into as of October 1, 1997 by and between the Company, Yale T.
Dolginow and Richfield Bank & Trust Co.(1)
10.15 Master Lease by and between Targa Financial, Inc. and the Company dated October 22, 1997.(1)
10.16 Loan Agreement SBA Note No. COCL837046 3001 MN, dated August 15, 1995.(1)
10.17 Consulting Agreement entered into December 1, 1992 by and between Paper Warehouse, Inc. and Stanford
Weiner, Lawrence Weiner and Gary Stone.(1)
10.18 1998 Employee Stock Purchase Plan.(1)
10.19 Asset Purchase Agreement dated December 17, 1998 among the Company, Susan Hazan and Prickly Pear
Paper, Inc.(1)
10.20 Second Amendment to Loan Agreement dated March 31, 1998 between the Company and Richfield Bank &
Trust Co.(1)
10.21 Third Amendment to Loan Agreement dated March 15, 1999 between the Company and Richfield Bank &
Trust Co.(1)
10.22 Mortgage Note dated April 8, 1999 between the Company and Fortis Insurance Company.(1)
10.23 Mortgage and Security Agreement between the Company and Fortis Insurance Company dated April 8,
1999.(1)
10.24 Loan and Security Agreement between BankBoston Retail Finance Inc. and the Company dated June 7,
1999.(2)
12 Computation of Ratio of Earnings to Fixed Charges.(2)
21 Subsidiaries of Company.(1)
23.1 Consent of KPMG Peat Marwick LLP.(2)
23.2 Consent of Oppenheimer Wolff & Donnelly LLP.(4)
24.1 Power of Attorney.(1)
27 Financial Data Schedule.(2)
</TABLE>
- ------------------------
(1) Previously filed.
(2) Filed herewith electronically
(3) Included in Indenture under Exhibit 4.4.
(4) Included in Exhibit 5.1 previously filed.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of our counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(2) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and this offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Pre-Effective Amendment No. 1 to the
Registration Statement to be signed on our behalf by the undersigned, thereunto
duly authorized in the City of Minneapolis, State of Minnesota, on June 10,
1999.
<TABLE>
<S> <C> <C>
PAPER WAREHOUSE, INC.
By: /s/ YALE T. DOLGINOW
-----------------------------------------
Yale T. Dolginow
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed
below on the 10th day of June, 1999 by the following persons in the capacities
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ ---------------------------------------------
<C> <S>
/s/ YALE T. DOLGINOW President, Chief Executive Officer
- ------------------------------ and Chairman of the Board
Yale T. Dolginow (Principal Executive Officer)
/s/ BRENT D. SCHLOSSER
- ------------------------------ Executive Vice President and Director
Brent D. Schlosser
/s/ CHERYL W. NEWELL
- ------------------------------ Vice President and Chief Financial Officer
Cheryl W. Newell (Principal Financial Officer)
/s/ DIANE C. DOLGINOW
- ------------------------------ Secretary and Director
Diane C. Dolginow
/s/ DIANA G. PURCEL
- ------------------------------ Controller
Diana G. Purcel (Principal Accounting Officer)
/s/ ARTHUR H. COBB
- ------------------------------ Director
Arthur H. Cobb
/s/ MARVIN W. GOLDSTEIN
- ------------------------------ Director
Marvin W. Goldstein
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ ---------------------------------------------
<C> <S>
/s/ MARTIN A. MAYER
- ------------------------------ Director
Martin A. Mayer
/s/ JEFFREY S. HALPERN
- ------------------------------ Director
Jeffrey S. Halpern
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ YALE T. DOLGINOW
-------------------------
Yale T. Dolginow
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAPER WAREHOUSE, INC.
As Issuer
AND
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
As Trustee
______________________________
INDENTURE
Dated as of June __, 1999
______________________________
9% Convertible Subordinated Debentures Due June 15, 2005
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDENTURE
THIS INDENTURE, dated as of June __, 1999, between Paper Warehouse,
Inc., a Minnesota corporation (the "Company"), having its principal office at
7630 Excelsior Boulevard, Minneapolis, Minnesota 55426-4504 and Norwest Bank
Minnesota, National Association, a national banking association with trust
powers (the "Trustee"), having its principal office at Norwest Center, Sixth
and Marquette, Minneapolis, Minnesota 55479-0069.
RECITALS
WHEREAS, for its lawful corporate purposes, the Company has duly
authorized an issue of its 9% Convertible Subordinated Debentures due June
___ 2005 (the "Debentures") in the aggregate principal amount of up to Six
Million Dollars ($6,000,000), to be issued as fully registered Debentures
without coupons, to be authenticated by the Certificate of the Trustee, to be
payable and to be redeemable all as hereinafter provided; and
WHEREAS, the Trustee has power to enter into this Indenture and to
accept and execute the trusts herein created; and
WHEREAS, the Company represents that all acts and things necessary to
make the Debentures, when executed and issued by the Company and
authenticated and delivered by the Trustee as provided in this Indenture, the
valid, binding and legal obligations of the Company, and to constitute this
instrument a valid indenture and agreement according to its terms, have been
done and performed, and the execution of this Indenture and the issue
hereunder of the Debentures have in all respects been duly authorized, and
the Company, in the exercise of each and every right and power in it vested,
executes this Indenture and proposes to make, execute, issue and deliver the
Debentures.
NOW, THEREFORE, THIS INDENTURE WITNESSETH, that, in order to provide for
the payment of the principal of, premium, if any, and interest on the
Debentures issued under this Indenture according to their tenor and effect
and the performance and observance of each and all of the covenants and
conditions herein and therein contained, for and in consideration of the
premises and of the purchase and acceptance of the Debentures by the
respective purchasers thereof and for other good and valuable consideration,
the receipt whereof is hereby acknowledged, the Company has executed and
delivered this Indenture in trust for the equal and proportionate benefit,
security and protection of all of the Holders of Debentures issued or to be
issued under and secured by this Indenture, without preference, priority or
distinction as to lien or otherwise of any of the Debentures over any of the
others;
THIS INDENTURE FURTHER WITNESSETH, that the Company has agreed and
covenanted with the respective Debentureholders from time to time as follows:
1
<PAGE>
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101. DEFINITIONS.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned
to them in this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act of 1939, as amended (the "TIA"), either directly or by
reference therein, have the meanings assigned to them therein;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles; and
(4) the words "herein," "hereof" and "hereunder" and other words
of similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision.
Certain terms, used principally in Article Six, are defined in that
Article.
"Act," when used with respect to any Holder, has the meaning specified
in Section 104.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing. Without limiting the generality of the foregoing, at the date of
this Indenture, the "Affiliates" of the Company include any Subsidiary.
"Authenticating Agent" means any Person authorized by the Trustee to act
on behalf of the Trustee to authenticate Debentures.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in the city in which
the principal office of the Trustee is located are authorized or obligated by
law or executive order to close.
2
<PAGE>
"Capitalized Lease Obligation" means any lease or other agreement for
the use of property which, in accordance with GAAP, should be capitalized on
the lessee's or user's balance sheet.
"Cash Equivalents" means, with respect to any Person at any date of
determination, any of the following held by such Person on a consolidated
basis, (i) any evidence of Indebtedness with a maturity of 180 days or less
issued or directly and fully guaranteed or insured by the United States of
America or any agency or instrumentality thereof (provided that the full
faith and credit of the United States of America is pledged in support
thereof); (ii) certificates of deposit or acceptances with a maturity of 180
days or less of, or a savings account in, any financial institution that is a
member of the Federal Reserve System having combined capital and surplus and
undivided profits of not less than $25,000,000; (iii) commercial paper with a
maturity of 180 days or less issued by a corporation (except any Affiliate of
the Company) organized under the laws of any state of the United States of
America or the District of Columbia and rated at least A-1 by Standard &
Poor's Corporation or at least P-1 by Moody's Investors Service, Inc.; (iv)
repurchase agreements and reverse repurchase agreements relating to
marketable obligations issued or unconditionally guaranteed by the United
States of America or issued by any agency thereof and backed by the full
faith and credit of the United States of America, in each case maturing
within one year from the date of acquisition; provided, however, that the
terms of such agreements comply with the guidelines set forth in the Federal
Financial Agreements of Depository Institutions with Securities Dealers and
Others, as adopted by the Comptroller of the Currency; (v) instruments backed
by letters of credit issued by financial institutions satisfying the
conditions of (ii) above; and (vi) mutual funds or similar securities, not
less than 80% of the assets of which are invested in securities of the type
referred to in clauses (i) through (v).
"Certificate of Independent Public Accountants" means a certificate
signed by KPMG Peat Marwick, LLP, or any other independent public accountant
or firm of independent public accountants (who may be the independent public
accountants regularly retained by the Company) reasonably acceptable to the
Trustee. Such accountant or firm shall be entitled to rely upon any Opinion
of Counsel as to the interpretation of any legal matters relating to such
certificate. The acceptance by the Trustee of, or its actions on, such a
certificate shall be sufficient evidence that such accountant is reasonably
acceptable to the Trustee. Any certificate or opinion of any independent
firm of public accountants filed with the Trustee shall contain a statement
that such firm is Independent.
"Change of Control" has the meaning specified in Section 1203.
"Closing Price" for any day means the last reported sale price of the
Common Stock regular way on such day or, in case no such reported sale takes
place on such day, the average of the reported closing bid and asked prices
regular way on such day, in either case on the New York Stock Exchange or, if
the Common Stock is not listed or admitted to trading on such Exchange, on
the principal national securities exchange on which the Common Stock is
listed or
3
<PAGE>
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, on the Nasdaq National Market or, if the Common Stock is
not listed or admitted to trading on any national securities exchange or
quoted on such National Market System, the average of the closing bid and
asked prices in the over-the-counter market as furnished by any New York
Stock Exchange member firm selected from time to time by the Company for that
purpose. If the Common Stock is not listed or admitted to trading on any
national securities exchange, quoted on such National Market System or listed
in any list of bid and asked prices in the over-the-counter market, "Closing
Price" shall mean the fair market value of the Common Stock as determined in
good faith by the Board of Directors.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission, as from time
to time constituted, created under the Securities Exchange Act of 1934, as
amended, or, if at any time after the execution of this instrument such
Commission is not existing and performing the duties now assigned to it under
the Trust Indenture Act, then the body performing such duties at such time.
"Common Stock" means the Company's Common Stock, par value $0.01,
authorized at the date this Indenture is executed, whether voting or
non-voting, and shares of any class or classes resulting from any
reclassification or reclassifications thereof which have no preference in
respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Company and also
shall include stock of the Company of any other class, whether now or
hereafter authorized, which ranks, or is entitled to a participation, as to
assets or dividends, substantially on a parity with such Common Stock or
other class of stock into which such Common Stock may have been changed;
provided however, that warrants or other rights to purchase Common Stock will
not be deemed to be Common Stock.
"Company" means Paper Warehouse, Inc., a Minnesota corporation, until a
successor Person shall have become such pursuant to the provisions of this
Indenture and thereafter "Company" shall mean such successor Person.
"Company Request" and "Company Order" mean, respectively, a written
request or order signed in the name of the Company by its President or any
Vice President, and by its Chief Financial Officer, Assistant Treasurer,
Secretary or Assistant Secretary, and delivered to the Trustee.
"Company Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted
by the Board of Directors of the Company and to be in full force and effect
on the date of such certification and delivered to the Trustee.
4
<PAGE>
"Consolidated" when used in conjunction with any other defined term
means the aggregate amount of the items included within the defined term of
the Company on a consolidated basis in accordance with GAAP, eliminating
inter-company items.
"Consolidated Earnings Before Interest and Taxes plus Depreciation and
Amortization" or "Consolidated EBITDA" means with respect to any Person for
any period, without duplication, the sum of (i) income of such Person on a
Consolidated basis, determined in accordance with GAAP before provision for
United States Federal, state and foreign income taxes of such Person paid or
accrued in accordance with GAAP and increased by depreciation and
amortization, (ii) Consolidated Interest Expense, and (iii) interest portion
of operating lease rental expense (excluding the interest portion of
operating lease rental expense included in the definition of Consolidated
Interest Expense).
"Consolidated Interest Expense" means with respect to any Person for any
period, without duplication, all cash and non-cash interest expenses incurred
for Indebtedness of such Person, including the interest portion of rental
expense of such Person and its Subsidiaries, on a consolidated basis
determined in accordance with GAAP, net of deferred financing fees of such
Person and its Subsidiaries.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the net income of such Person and its Subsidiaries,
for such period, on a Consolidated basis, determined in accordance with GAAP,
provided that extraordinary gains and losses (determined in accordance with
GAAP) shall be excluded.
"Consolidated Tangible Net Worth" means, with respect to any Person at
any date of determination, the Consolidated stockholders' equity represented
by the shares of such Person's capitalized stock (other than Disqualified
Stock) outstanding at such date, as determined on a Consolidated basis in
accordance with GAAP less any portion of such stockholders' equity
attributable to intangible assets as determined in accordance with GAAP and
prepaid expenses.
"Conversion Price" has the meaning specified in Section 1301.
"Corporate Trust Office," when used with respect to the Trustee means
the principal office of the Trustee in Minneapolis, Minnesota, at which at
any particular time its corporate trust business shall be administered, which
office is on the date of this Indenture located at Norwest Center, Sixth and
Marquette, Minneapolis, Minnesota 55479-0069 or said office of any successor
Trustee.
"Debentureholder" means a Person in whose name a Debenture is registered
on the Debenture Register, or the beneficial owner of such Debentures if
record ownership is held by a nominee.
"Debenture Register" and "Debenture Registrar" have the respective
meanings specified in Section 305.
5
<PAGE>
"Debentures" means the 9% Convertible Subordinated Debentures due June ___
2005 issued pursuant to this Indenture.
"Defaulted Interest" has the meaning specified in Section 307.
"Defaulted Principal" has the meaning specified in Section 307.
"Disqualified Stock" means, with respect to any Person, any capital stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is exchangeable for Indebtedness, or is redeemable
at the option of the holder thereof, in whole or in part, in each case on or
prior to the Stated Maturity of the Debentures.
"Dividends" means payments in respect of the Company's Common Stock in
either cash or property, but shall not include payments solely in Common Stock
or distributions in the form of rights to acquire Common Stock.
"Eligible Person" means an employee or agent of the Company.
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financial Statements" means the statement of operations, balance sheet,
and/or statement of cash flows of any Person prepared in accordance with GAAP.
"GAAP" means generally accepted accounting principles, consistently
applied.
"Guaranty" by any Person means any obligations, including letters of
credit, both standby and irrevocable in nature, other than endorsements in the
ordinary course of business of negotiable instruments for deposit or collection,
guaranteeing any Indebtedness, dividend, or other obligation of any other Person
(the "primary obligor") in any manner, whether directly or indirectly,
including, without limitation, all obligations incurred through an agreement,
contingent or otherwise, by such Person (i) to purchase such Indebtedness or
obligation or any property or assets constituting security therefor; (ii) to
advance or supply funds for the purchase or payment of such Indebtedness or
obligation, or to maintain working capital or other balance sheet condition, or
otherwise to advance or make available funds for the purchase or payment of such
Indebtedness or obligation; (iii) to lease property or to purchase securities or
other property or services primarily for the purpose of assuring the owner of
such Indebtedness or obligation of the ability of the primary obligor to make
payment of the Indebtedness or obligation; or (iv) otherwise to assure the owner
of the Indebtedness or obligation of the primary obligor against loss in respect
thereof. For the purposes of all computations made under this definition, a
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Guaranty in respect of any Indebtedness for borrowed money shall be deemed to be
equal to the principal amount of such Indebtedness which has been guaranteed,
and a Guaranty in respect of any other obligation, liability, or dividend shall
be deemed to be equal to the maximum aggregate amount of such obligation,
liability or dividend.
"Holder" when used with respect to any Debenture means a Debentureholder.
"Indebtedness" means, with respect to any Person at any date, without
duplication, all items of indebtedness which, in accordance with GAAP, would be
included in determining total liabilities as shown on the liabilities side of a
balance sheet of such Person at such date, and in addition shall include
(i) Guaranties by such Person, (ii) all Capitalized Lease Obligations of such
Person, and (iii) all indebtedness secured by any mortgage, lien, pledge, charge
or encumbrance upon property owned by such Person, whether or not the
indebtedness so secured has been assumed by such Person. For the purpose of
computing the "Indebtedness" of any Person, there shall be excluded any
particular Indebtedness to the extent that, upon or prior to the maturity
thereof, there shall have been deposited with the proper depository in trust the
necessary funds, securities, or evidences of such Indebtedness, if permitted by
the instrument creating such Indebtedness, for the payment, redemption, or
satisfaction of such Indebtedness, and thereafter such funds and evidences of
Indebtedness so deposited shall not be included in any computation of the assets
of such Person.
"Indenture" means this instrument as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof.
"Independent" when used with respect to any specified Person means such a
Person who (i) is in fact independent, (ii) does not have any direct financial
interest or any material indirect financial interest in the Company or in any
other obligor upon the Debentures or in any Affiliate of the Company or of such
other obligor, and (iii) is not connected with the Company or such other obligor
or any Affiliate of the Company or of such other obligor, as an officer,
employee, promoter, organizer, underwriter, trustee, partner, director or Person
performing similar functions. Whenever it is herein provided that any
Independent Person's opinion or certificate shall be furnished to the Trustee,
such Person shall be appointed by a Company Order, and such opinion or
certificate shall state that the signer has read this definition and that the
signer is Independent within the meaning hereof.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Debentures.
"Inventory" means, with respect to any Person, all assets of such Person
classified as inventory on a Consolidated basis in accordance with GAAP.
"Issue Date" means the date on which the Debentures are originally issued
in accordance with the terms of this Indenture.
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"Lien" means any mortgage, lien (statutory or other), pledge, security
interest, encumbrance, hypothecation, assignment for security or other security
agreement of any kind or nature whatsoever. For purposes of this Indenture, a
Person shall be deemed to own subject to a Lien any property which it has
acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, Capital Lease Obligation or other title retention
agreement relating to Indebtedness of such Person.
"Long-Term Debt" means, with respect to any Person at any date, all
Indebtedness classified as "long-term debt" in accordance with GAAP.
"Maturity" when used with respect to any Debenture, means the date on which
the principal of such Debenture becomes due and payable as therein or herein
provided, whether at the Stated Maturity thereof or by declaration of
acceleration, call for redemption or otherwise.
"Nasdaq" means the automated quotation system of the National Association
of Securities Dealers, Inc. or another comparable quotation system.
"Net Income" means, with respect to any Person for any period, the net
income or loss of such Person determined in accordance with GAAP.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board of Directors, Chief Executive Officer, President, Chief Financial Officer,
Executive Vice President or any Vice President, and by the Chief Financial
Officer, an Assistant Treasurer, Secretary or an Assistant Secretary of the
Company, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be (except
as otherwise expressly provided in this Indenture) counsel for the Company, and
who shall be acceptable to the Trustee.
"Original Interest Accrual Date" means __________, 1999 or the most recent
Interest Payment Date, whichever is later.
"Outstanding" when used with respect to Debentures, means, as of the date
of determination, all Debentures theretofore authenticated and delivered under
this Indenture, except: (i) Debentures theretofore cancelled by the Trustee or
delivered to the Trustee for cancellation; (ii) Debentures for whose payment or
redemption money in the necessary amount has been theretofore deposited with the
Trustee or any Paying Agent (other than the Company) in trust or set aside and
segregated in trust by the Company (if the Company shall act as its own Paying
Agent) for the Holders of such Debentures, provided that if such Debentures are
to be redeemed notice of such redemption has been duly given pursuant to this
Indenture or provision therefor satisfactory to the Trustee has been made and
(iii) Debentures in exchange for or in lieu of which other Debentures have been
authenticated and delivered pursuant to this Indenture; provided, however, that
in determining whether the Debentureholders of the requisite principal amount of
the Outstanding Debentures have given any request, demand, authorization,
direction, notice, consent or waiver hereunder, Debentures owned by the Company
or any other obligor
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upon the Debentures or any Affiliate of the Company or of such other obligor
shall be disregarded and deemed not to be Outstanding, except that, in
determining whether the Trustee shall be protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Debentures which the Trustee knows to be so owned shall be so disregarded.
Debentures so owned which have been pledged in good faith may be regarded as
Outstanding if the pledgee establishes to the satisfaction of the Trustee the
pledgee's right so to act with respect to such Debentures and that the
pledgee is not the Company or any other obligor upon the Debentures or any
Affiliate of the Company or of such other obligor.
"Parity Debt" means any and all Indebtedness of the Company created,
incurred, assumed, or guaranteed by the Company before, at, or after the date of
execution of the Indenture which (a) matures by its terms, or is renewable at
the option of the Company to a date, more than one year after the date of the
original creation, incurrence, assumption, or guaranty of such Indebtedness by
the Company, (b) contains covenants, conditions and restrictions on the Company
which are not inconsistent with nor violate any of the covenants, conditions and
restrictions in this Indenture, and (c) is neither Senior Debt nor Subordinated
Debt but in no event shall Parity Debt include deferred taxes.
"Paying Agent" means any Person authorized by the Company to pay the
principal of (and premium, if any) or interest on any Debenture on behalf of the
Company. Unless otherwise specified in a Company Order, the Paying Agent shall
initially be the Trustee.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Predecessor Debenture" of any particular Debenture means every previous
Debenture evidencing all or a portion of the same debt as that evidenced by such
particular Debenture. For purposes of this definition, any Debenture
authenticated and delivered under Section 306 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Debenture shall be deemed to evidence the
same debt as the mutilated, destroyed, lost or stolen Debenture.
"Principal Payment Date" means the Maturity of the principal on the
Debentures.
"Redemption Date," when used with respect to any Debenture to be redeemed,
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price," when used with respect to any Debenture to be redeemed,
means the price at which it is to be redeemed pursuant to this Indenture.
"Regular Record Date" for the interest payable on any Interest Payment Date
means the fifteenth day (whether or not a Business Day) of the calendar month
immediately preceding such Interest Payment Date, and "Regular Record Date" for
the principal payable on any Principal Payment Date means the fifteenth day
(whether or not a Business Day) of the calendar month immediately preceding such
Principal Payment Date.
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"Repurchase Date" has the meaning specified in Section 1201.
"Responsible Officer," when used with respect to the Trustee, means the
chairman or any vice-chairman of the board of directors, the chairman or any
vice-chairman of the executive committee of the board of directors, the chairman
of the trust committee, the president, any executive vice president, any vice
president, any assistant vice president, the secretary, any assistant secretary,
the treasurer, any assistant treasurer, the cashier, any assistant cashier, any
trust officer or assistant trust officer, or any other employee of the Trustee
customarily per-forming functions similar to those performed by any of the above
designated officers and also means, with respect to a particular corporate trust
matter, any other officer to whom such matter is referred because of such
person's knowledge of and familiarity with the particular subject.
"Senior Debt" means the principal of, premium (if any) and interest on
(i) any and all Indebtedness of the Company (other than the Debentures, Parity
Debt and Subordinated Debt) incurred in connection with the borrowing of money,
all Indebtedness to the extent it is secured by real estate and/or assets of the
Company (including Capitalized Lease Obligations), all Indebtedness evidenced by
bonds, debentures, mortgages, notes or other securities or other instruments,
incurred, assumed or guaranteed by the Company before, at or after the date of
execution of this Indenture, all Indebtedness evidenced by bankers' acceptances
or similar instruments, or by letters of credit, bank guarantees or
reimbursement obligations therefor, all Indebtedness under swap or hedging
transactions, and Indebtedness represented by previously issued and outstanding
debentures which have been called for redemption and (ii) all renewals,
extensions and refundings thereof; provided that any Indebtedness shall not be
Senior Debt if the instrument creating or evidencing any such Indebtedness or
pursuant to which such Indebtedness is outstanding, provides that such
Indebtedness, or such renewal, extension or refunding thereof, is junior or is
not superior in right of payment to the Debentures.
"Special Record Date" for the payment of any Defaulted Interest or
Defaulted Principal means a date fixed by the Trustee pursuant to Section 307.
"Stated Maturity," when used with respect to any Debenture or any
installment of interest thereon, means the date specified in such Debenture as
the fixed date on which such Debenture is due and payable or such installment of
interest on such Debenture is due and payable.
"Subordinated Debt" means any and all Indebtedness of the Company (but not
of any Subsidiary) created, incurred, assumed or guaranteed by the Company
before, at or after the date of execution of this Indenture which, by the terms
of the instrument (or any supplemental instrument) creating or evidencing such
Indebtedness or pursuant to which such Indebtedness is outstanding it is
provided that such Indebtedness, or any renewal, extension, or refunding
thereof, (a) is expressly subordinate and junior in right of payment to the
Debentures (whether or not subordinated to any other Indebtedness of the
Company) or (b) is not, by its terms, Senior Debt or Parity Debt. "Subordinated
Debt" shall include any Indebtedness of the Company to Affiliates of the Company
and any Indebtedness incurred by the Company under any agreement to redeem or
repurchase any securities of the Company.
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"Subsidiary" means any corporation, more than 50% of the outstanding voting
stock of which is owned, directly or indirectly, by the Company or by one or
more other Subsidiaries, or by the Company and one or more other Subsidiaries.
For the purposes of this definition, "voting stock" means stock which ordinarily
has voting power for the election of directors or trustees, whether at all times
or only so long as no senior class of stock has such voting power by reason of
any contingency.
"Total Liabilities" means, with respect to any Person for any period, the
total liabilities of such Person, as presented on such Person's Consolidated
Balance Sheet, for such period on a Consolidated basis, determined in accordance
with GAAP.
"Trading Day" means with respect to the common stock, each Monday, Tuesday,
Wednesday, Thursday and Friday, other than any day on which the securities are
not traded on the exchange or national market for which the common stock is
traded.
"Trust Estate" means all rights, interest and property which has been
collaterally assigned to the Trustee.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in force of
the date as of which this instrument was executed; provided, however, that in
the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means to the extent requested by any such amendment, the Trust
Indenture Act of 1939 as so amended.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
this instrument until a successor Trustee shall have become such pursuant to the
applicable provisions of the Indenture, and thereafter "Trustee" shall mean such
successor Trustee.
"Vice President" when used with respect to the Trustee or the Company,
means any vice president, whether or not designated by a word or words added
before or after the title "vice president."
"Wholly-Owned" when used in connection with any Subsidiary, means a
Subsidiary of which all of the issued and outstanding shares of voting stock,
except shares required as directors' qualifying shares, are owned by the Company
and/or one or more of its Wholly-Owned Subsidiaries. For purposes of this
definition, "voting stock" shall have the same meaning as in the definition of
Subsidiary.
SECTION 102. COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Company to the Trustee to take any
action under any provision of this Indenture, the Company shall furnish to the
Trustee upon request an Officers' Certificate stating that all conditions
precedent, if any, provided for in this Indenture relating to the proposed
action have been complied with and an Opinion of Counsel stating that in the
opinion of such counsel all such conditions precedent, if any, have been
complied with,
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except that in the case of any such application or request as to which the
furnishing of such documents is specifically required by any provision of
this Indenture relating to such particular application or request, no
additional certificate or opinion need be furnished. Every certificate or
opinion with respect to compliance with a condition or covenant provided for
in this Indenture shall include:
(1) a statement that each individual signing such certificate or opinion
has read such covenant or condition and the definitions herein relating thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, such
individual has made such examination or investigation as is necessary to enable
such individual to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
SECTION 103. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows or in the exercise of
reasonable prudence should know that the certificate or opinion or
representations with respect to the matters upon which such Officer's
Certificate or opinion is based are erroneous. Any such certificate or Opinion
of Counsel may be based, insofar as it relates to factual matters, upon a
certificate or opinion of, or representations by, an officer or officers of the
Company stating that the information with respect to such factual matters is in
the possession of the Company, unless such counsel knows or in the exercise of
reasonable prudence should know that the certificate or opinion or
representations with respect to such matters are erroneous.
Any certificate or opinion of an officer of the Company or any Opinion of
Counsel may be based, insofar as it relates to accounting matters, upon a
certificate, statement or opinion of an accountant or firm of accountants,
unless such officer or counsel, as the case may be, knows or in the exercise of
reasonable prudence should know that the certificate, statement or opinion with
respect to the accounting matters upon which such certificate or opinion is
based is erroneous.
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Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may be consolidated and form one
instrument.
SECTION 104. ACTS OF HOLDERS.
(1) Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given or taken by
Debentureholders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Debentureholders in person or by an
agent duly appointed in writing. Except as therein otherwise expressly
provided, such action shall become effective when such instrument or instruments
are delivered to the Trustee and, where it is hereby expressly required, to the
Company. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the
Debentureholders signing such instrument or instruments. Proof of execution of
any such instrument or of a writing appointing any such agent shall be
sufficient for any purpose of this Indenture and (subject to Section 601)
conclusive in favor of the Trustee and the Company, if made in the manner
provided in this Section.
(2) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to such witness, notary public or other
officer the execution thereof. Where such execution is by a signer acting in a
capacity other than such person's individual capacity, such certificate or
affidavit shall also constitute sufficient proof of such person's authority.
The fact and date of the execution of any such instrument or writing, or the
authority of the Person executing the same, may also be proved in any other
manner which the Trustee deems sufficient.
(3) The ownership of Debentures shall be proved by the Debenture Register.
(4) Any request, demand, authorization, direction, notice, consent, waiver
or other Act of the Holder of any Debenture shall bind every future Holder of
the same Debenture and the Holder of every Debenture issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Company in reliance thereon, whether or not notation of such action is made upon
such Debenture.
(5) The Company may set any day as a record date for the purpose of
determining the Holders of Debentures entitled to give, make or take any
request, demand, authorization, direction, notice, consent, waiver or other
action provided or permitted by this Indenture to be given, made or taken by
Holders of Debentures, provided that the Company may not set a record date for,
and the provisions of this paragraph shall not apply with respect to the giving
or making of any notice, declaration, request or direction referred to in the
next paragraph. Such record date shall be the later of 30 days prior to the
first solicitation of Holders of Debentures entitled to
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give, make or take any request, demand, authorization, direction, notice,
consent, waiver, or other action or the date of the most recent list of
holders furnished to the Trustee pursuant to Section 701. If any record date
is set pursuant to this paragraph, the Holders of Debentures on such record
date, and no other Holders shall be entitled to take relevant action, whether
or not such Holders remain Holders after the record date, and no other
Holders shall be entitled to take the relevant action, whether or not such
Holders remain Holders after such record date; provided that no such action
shall be effective hereunder unless taken on or prior to the applicable
expiration date by Holders of the requisition principal amount of outstanding
Debentures on such record date. Nothing in this paragraph shall be construed
to prevent the Company from setting a new record date for any action for
which a record date has previously been set pursuant to this paragraph
(whereupon the record date previously set shall automatically and with no
action by any Person be canceled and of no effect), and nothing in this
paragraph shall be construed to render ineffective any action taken by
Holders of the requisite principal amount of Debentures on the date such
action is taken. Promptly after any record date is set pursuant to this
paragraph, the Company, at its expense, shall cause otice of such record
date, the proposed action by Holders and the applicable Expiration Date to be
given to the Trustee in writing and to each Holder of Debentures in the
manner set forth in Section 106.
The Trustee may set any day as a record date for the purpose of determining
the Holders of Debentures entitled to join in the giving or making of (i) any
Notice of Default (as defined in Section 501), (ii) any declaration of
acceleration referred to in Section 502, (iii) any request to institute
proceedings referred in Section 507(2) or (iv) any direction referred to in
Section 512, in each case with respect to Debentures. If any record date is set
pursuant to this paragraph, the Holders of Debentures on such record date, and
no other Holders, shall be entitled to join in such notice, declaration, request
or direction, whether or not such Holders remain Holders after such record date;
provided that no such action shall be effective hereunder unless taken on or
prior to the applicable expiration date by Holders of the requisite principal
amount of Debentures on such record date. Nothing in this paragraph shall be
construed to prevent the Trustee from setting a new record date for any action
for which a record date has previously been set pursuant to this paragraph
(whereupon the record date previously set shall automatically and with no action
by any Person be canceled and of no effect), and nothing in this paragraph shall
be construed to render ineffective any action taken by Holders of the requisite
principal amount of Debentures on the date such action is taken. Promptly after
any record date is set pursuant to this paragraph, the Trustee, at the Company's
expense, shall cause notice of such record date, the proposed action by the
Holders and the applicable expiration date to be given to the Company in writing
and to each Holder of Debentures in the manner set forth in Section 106.
With respect to any record date set pursuant to this Section, the party
hereto which sets such record date may designate any day as the "Expiration
Date" and from time to time may change the Expiration Date to any earlier or
later day; provided that no Expiration Date shall be later than the 180th day
after the applicable record date; and provided, further, that no such change
shall be effective unless notice of the proposed new Expiration Date is given to
the other party hereto in writing, and to each Holder of Debentures in the
manner set forth in Section 106, on or prior to the existing Expiration Date.
If an Expiration Date is not designated with respect to any record date set
pursuant to this Section, the party hereto which set such record date shall
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be deemed to have initially designated the 180th day after such record date
as the Expiration Date with respect thereto, subject to its right to change
the Expiration Date as provided in this paragraph.
Without limiting the foregoing, a Holder entitled hereunder to take any
action hereunder with regard to any Debenture may do so with regard to all or
any part of the principal amount of such Debenture or by one or more duly
appointed agents each of which may do so pursuant to such appointment with
regard to all or any part of such principal amount.
SECTION 105. NOTICES, ETC., TO TRUSTEE AND COMPANY.
Any request, demand, authorization, direction, notice, consent, waiver or
Act of Debentureholders or other document provided or permitted by this
Indenture to be made upon, given or furnished to or filed with the Trustee by
any Holder or by the Company, or the Company by the Trustee or any Holder, shall
be sufficient for every purpose hereunder (unless otherwise herein expressly
provided) if in writing and delivered personally, transmitted by facsimile
transmission (provided a confirming copy is sent by mail), delivered by
overnight courier or mailed, first-class postage prepaid:
(1) if to the Trustee by any Holder or by the Company at its Corporate
Trust Office, or
(2) if to the Company by the Trustee or by any Holder at the address of
its principal office specified in the first paragraph of this instrument or at
any other address previously furnished in writing to the Trustee by the Company.
Any communication contemplated herein shall be deemed to have been made,
given, furnished and filed if personally delivered, on the date of delivery, if
transmitted by facsimile transmission, telex or other direct written electronic
means, on the date of transmission, and if transmitted by registered mail, on
the date of receipt.
SECTION 106. NOTICE TO DEBENTUREHOLDERS; WAIVER.
Where this Indenture or any Debenture provides for notice to
Debentureholders of any event, such notice shall be sufficiently given (unless
otherwise herein expressly provided) if in writing and mailed, first-class
postage prepaid, to each Holder, or if the terms herein provide for notice to
less than all Debentureholders, then to such Debentureholders as to whom notice
may be required to be sent, at each such Holder's address as it appears on the
Debenture Register, not later than the latest date and not earlier than the
earliest date prescribed for the giving of such notice. In any case where
notice to Debentureholders is given by mail, neither the failure to mail such
notice, nor any defect in any notice so mailed, to any particular Holder shall
affect the sufficiency of such notice with respect to other Debentureholders.
Where this Indenture provides for notice in any manner, such notice may be
waived in writing by the Person entitled to receive such notice, either before
or after the event, and such waiver shall be the equivalent of such notice.
Waivers of notice by Debentureholders shall be filed with the Trustee, but such
filing
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shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.
In case by reason of the suspension of regular mail service or by reason of
any other cause it shall be impracticable to give such notice by mail, then such
notification as shall be made with the approval of the Trustee shall constitute
notification for every purpose hereunder.
Notwithstanding anything else to the contrary in this Indenture, notice to
Debentureholders shall be sufficiently given in all cases if it is given to the
Person in whose name a Debenture is registered on the Debenture Register and in
no event shall notice be required to be given to a Person who is not registered
on the Debenture Register.
SECTION 107. EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
SECTION 108. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Company shall bind
its successors and assigns, whether so expressed or not.
SECTION 109. SEPARABILITY CLAUSE.
In case any provision in this Indenture or in the Debentures shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 110. BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Debentures, expressed or implied, shall
give to any Person, other than the parties hereto and their successors hereunder
and the Holders of Debentures, any benefit or any legal or equitable right,
remedy or claim under this Indenture.
SECTION 111. GOVERNING LAW.
This Indenture and the Debentures shall be governed by and construed in
accordance with the laws of the State of Minnesota, without giving effect to the
conflict of laws principles thereof.
SECTION 112. LEGAL HOLIDAYS.
In any case where any Interest Payment Date, Principal Payment Date,
Redemption Date, Repurchase Date or Stated Maturity of any Debenture shall not
be a Business Day, then (notwithstanding any other provision of this Indenture
or of the Debentures) payment of interest or principal (and premium, if any)
need not be made on such date, but may be made on the next
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succeeding Business Day with the same force and effect as if made on the
Interest Payment Date, Principal Payment Date, Redemption Date, Repurchase
Date or at the Stated Maturity; provided that no interest shall be payable on
such next succeeding Business Day for the period from and after any such
Interest Payment Date, Principal Payment Date, Redemption Date, Repurchase
Date or Stated Maturity.
SECTION 113. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS.
No recourse shall be had for the payment of the principal of, or the
premium, if any, or interest on, any Debenture, or for any claim based thereon
or otherwise in respect thereof or of the indebtedness represented thereby, or
upon any obligation, covenant or agreement of this Indenture, against any
incorporator, stockholder, employee, officer or director, as such, past, present
or future, of the Company, either directly or through the Company, whether by
virtue of any constitutional provision, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise. It is expressly agreed
and understood that this Indenture and the Debentures are solely corporate
obligations, and that no personal liability whatsoever shall attach to, or be
incurred by, any incorporator, stockholder, officer or director, as such, past,
present or future, of the Company, either directly or through the Company,
because of the incurring of the indebtedness hereby authorized or under or by
reason of any of the obligations, covenants, promises or agreements contained in
this Indenture or in any of the Debentures or to be implied herefrom or
therefrom. All liability, if any, of that character against every such
incorporator, stockholder, officer and director, by the acceptance of the
Debentures and as a condition of, and as part of the consideration for the
execution of this Indenture and the issue of the Debentures, is expressly waived
and released.
END OF ARTICLE ONE.
17
<PAGE>
ARTICLE TWO
DEBENTURE FORM
SECTION 201. FORM GENERALLY.
The Debentures and the Trustee's Certificate of Authentication shall be in
substantially the form set forth in Section 204 of this Article, with such
appropriate insertions, omissions, substitutions and other variations as are
required or permitted by this Indenture and may have such letters, numbers or
other marks of identification and such legends or endorsements placed thereon as
may be required to comply with the rules of any securities exchange or as may,
consistently herewith, be determined by the officers executing such Debentures,
as evidenced by their execution of the Debentures. Any portion of the text of
any Debenture may be set forth on the reverse thereof, with an appropriate
reference thereto on the face of the Debenture.
The definitive Debentures shall be printed, lithographed or engraved or
produced by any combination of these methods on steel engraved borders or may be
produced in any other manner permitted by the rules of any securities exchange
or other market on which the Debentures may be listed or included, all as
determined by the officers executing such Debentures, as evidenced by their
execution of such Debentures.
SECTION 202. FORM OF FACE OF DEBENTURES.
PAPER WAREHOUSE, INC.
Incorporated Under the Laws of Minnesota
9% CONVERTIBLE SUBORDINATED DEBENTURES DUE JUNE ___ 2005
Registered No.: Registered Principal
______________ Amount: $ 1,000
Original Interest Accrual CUSIP: _______
Date: __________________
Paper Warehouse, Inc., a corporation created under the laws of the State of
Minnesota (herein called the "Company," which term includes any successor
corporation under the Indenture hereinafter referred to), for value received,
hereby promises to pay to _____________________ or registered assigns, the
principal sum of ____________ Thousand Dollars ($_________) on June 15, 2005
(the "Final Maturity Date") and to pay interest hereon from the Original
Interest Accrual Date set forth above, or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, beginning on
September 15, 1999 ("Initial Interest Payment Date") and on the 15th day of each
December, March, June and September thereafter until fully paid, tendered or if
this Debenture is not presented for principal or conversion, on the Final
Maturity Date (each such date being an "Interest Payment Date"), at the rate of
nine percent (9%) per annum, until the principal hereof is paid or made
available for payment. The principal hereof is subject to optional redemption
by the Company, in whole but
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<PAGE>
not in part, and repurchase by the Company at the option of the Holder, and
optional conversion by the Holder, as provided in the Indenture. If the
principal hereof is not so redeemed, repurchased or converted, the principal
shall be due and payable in full on the Final Maturity Date (any date set for
principal payment is the "Principal Payment Date"). The principal and
interest so payable and punctually paid or duly provided for on any Principal
Payment Date or Interest Payment Date, as provided in the Indenture, will be
paid to the Person in whose name this Debenture (or one or more Predecessor
Debentures) is registered (the "Holder") at the close of business on the
Regular Record Date for such principal or interest, which shall be the
fifteenth day (whether or not a Business Day) of the calendar month next
preceding such Principal Payment Date or Interest Payment Date. Any such
principal or interest not so punctually paid or duly provided for will
forthwith cease to be payable to the Holder on such Regular Record Date and
may either be paid to the Person in whose name this Debenture (or one or more
Predecessor Debentures) is registered at the close of business on a Special
Record Date for the payment of such Defaulted Principal or Defaulted Interest
to be fixed by the Trustee, notice whereof shall be given to Debentureholders
of Debentures not less than 10 days prior to such Special Record Date, or be
paid at any time in any other lawful manner not inconsistent with the
applicable requirements of any securities exchange or market on which the
Debentures may be listed or included, and upon such notice as may be required
by such exchange or market, all as more fully provided in the Indenture.
Payment of the principal of and interest (and premium, if any) on this
Debenture will be made at the office or agency maintained by the Company for
such purpose in Minneapolis, Minnesota, or in such other office or agency as
may be selected by the Company in accordance with the Indenture, in such coin
or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts, provided, however, that
at the option of the Company payment of interest may be made in United States
dollars by check mailed to the address of the Person entitled thereto as such
address shall appear in the Debenture Register. THE HOLDER MUST PRESENT THIS
DEBENTURE TO COLLECT PRINCIPAL; AND WHEN FULLY PAID, THE DEBENTURE SHALL BE
SURRENDERED AND CANCELLED.
Reference is hereby made to the further provisions of this Debenture set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by or on
behalf of the Trustee referred to on the reverse hereof by manual signature,
this Debenture shall not be entitled to any benefit under the Indenture or be
valid or obligatory for any purpose.
No recourse shall be had for the payment of the principal or interest of
this Debenture against any Company stockholder, officer, director, employee or
agent by virtue of any statute or by enforcement of any assessment or otherwise;
and any and all liability of stockholders, directors, officers, employees and
agents of the Company being released hereby.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this 9% Convertible Subordinated
Debenture to be signed in its name by the manual or facsimile signature of its
President and attested to by the manual or facsimile signature of its Secretary.
Dated: PAPER WAREHOUSE, INC.
---------------
By
-------------------------------------
Yale T. Dolginow, President
Attest:
- ----------------------------------
Diane C. Dolginow, Secretary
SECTION 203. FORM OF REVERSE SIDE OF DEBENTURE.
This Debenture is one of a duly authorized Debentures of the Company
designated as its 9% Convertible Subordinated Debentures due June ___ 2005 (the
"Debentures") in the maximum aggregate principal amount of up to $6,000,000,
issued and to be issued under an Indenture, dated as of June __, 1999 (the
"Indenture"), between the Company and ________________________, as Trustee (the
"Trustee", which term includes any successor Trustee under the Indenture).
Reference is hereby made to the Indenture and all indentures supplemental
thereto for a statement of the respective rights, limitation of rights, duties
and immunities thereunder of the Company, the Trustee and the Debentureholders,
and for a statement of the terms upon which the Debentures are, and are to be,
authenticated and delivered. Capitalized and certain other terms used herein
and not otherwise defined have the meanings set forth in the Indenture.
The Debentures are general unsecured obligations of the Company. The
payment of the principal of and interest (and premium, if any) on this Debenture
is expressly subordinated, as provided in the Indenture, to the payment of all
Senior Debt, as defined in the Indenture, and, by the acceptance of this
Debenture, the Holder hereof agrees, expressly for the benefit of the present
and future holders of Senior Debt, to be bound by the provisions of the
Indenture relating to such subordination and authorizes and appoints as such
Holder's attorney-in-fact the Trustee to take such action on such Holder's
behalf as may be necessary or appropriate to effectuate such subordination.
Subject to and upon compliance with the provisions of the Indenture, the
Holder of this Debenture has the right, at the option of the Holder, at any time
on or before the close of business on June 15, 2005, or in case this Debenture
is called for redemption or is to be repurchased, then in respect of this
Debenture or such portion hereof until and including, but (unless the Company
20
<PAGE>
defaults in making the payment due upon redemption or repurchase) not after,
the close of business on the Redemption Date or the Repurchase Date, to
convert this Debenture (or any portion of the principal amount hereof which
is $1,000 or an integral multiple thereof, if the remaining principal amount
of any Debenture issued after such conversion exceeds $1,000), into fully
paid and non-assessable shares (calculated as to each conversion to the
nearest 1/100 of a share) of Common Stock of the Company at a conversion
price equal to $______ aggregate principal amount of Debentures per share of
Common Stock (or at the current adjusted conversion price if an adjustment
has been made as provided in the Indenture) by surrender of this Debenture,
together with written notice, duly executed, that the Holder elects to
convert, or if less than the entire principal amount hereof is to be
converted, the portion hereof to be converted, at the office or agency of the
Company to be maintained for that purpose in St. Paul or Minneapolis, or at
such other office or agency as may be established by the Company for such
purpose pursuant to the Indenture (initially the principal Corporate Trust
Office of the Trustee located in St. Paul or Minneapolis, Minnesota is the
office so established by the Company).
No fractions of shares or scrip representing fractions of shares will be
issued on conversion, but instead of any fractional interest the Company shall
pay a cash adjustment as provided in the Indenture. The conversion price is
subject to adjustment as provided in the Indenture. In addition, the Indenture
provides that in case of certain consolidations or mergers to which the Company
is a party or the transfer of substantially all of the assets of the Company,
the Indenture shall be amended, without the consent of any Holders of
Debentures, so that this Debenture, if then outstanding, will be convertible
thereafter during the period this Debenture shall be convertible as specified
above, only into the kind and amount of Debentures, cash and other property
receivable upon the consolidation, merger or transfer by a holder of the number
of shares of Common Stock into which this Debenture might have been converted
immediately prior to such consolidation, merger or transfer (assuming such
holder of Common Stock failed to exercise any rights of election and received
per share the kind and amount received per share by a plurality of non-electing
shares).
21
<PAGE>
The Company may, at its option, at any time on or after June __, 2002,
redeem the Debentures , in whole but not in part, at the following Redemption
Prices (expressed as percentages of the principal amount) (the "Redemption
Price"); together with interest accrued and unpaid thereon to the Redemption
Date, if redeemed during the 12-month period beginning June __, of the years
indicated,
<TABLE>
<CAPTION>
Year Redemption Price
<S> <C>
2002 108%
2003 104%
</TABLE>
and thereafter at a Redemption Price equal to 100% of the principal amount.
Notice of Redemption will be mailed at least 30 days, but not more than 60
days, before the Redemption Date to each Holder at the registered address
thereof.
Interest installments whose Stated Maturity is on or prior to such
Redemption Date or Repayment Date will be payable to the Holders of such
Debentures, or one or more Predecessor Debentures, of record at the close of
business on the relevant Regular or Special Record Dates referred to on the face
hereof, all as provided in the Indenture.
If, at any time prior to June 15, 2005 there occurs any Change of
Control (as defined in the Indenture) of the Company then each Holder of
Debentures shall have the right, at the Holder's Option, to require the
Company to repurchase all of such Holder's Debentures, or any portion thereof
which is $1,000 or any integral multiple thereof, on the date (the
"Repurchase Date") that is 45 days after the date that the Company gives
notice of the Change of Control, at a purchase price, payable in cash, equal
to 102% of the principal amount of Debentures to be repurchased (a
"Repurchase Price"), together with accrued interest to the Repurchase Date.
22
<PAGE>
Notwithstanding the above, interest installments whose Stated Maturity are
on or prior to a Repurchase Date will be payable to the Holders of repurchased
Debentures, or one or more Predecessor Debentures, of record at the close of
business on the relevant Regular or Special Record Dates referred to on the face
hereof, all as provided in the Indenture.
In the event of conversion of this Debenture in part only, a new Debenture
or Debentures for the unconverted portion hereof will be issued in the name of
the Holder hereof upon the cancellation hereof.
If this Debenture shall be redeemed, or any portions repurchased or
converted and payment be duly provided therefor or shares of Common Stock issued
as specified in the Indenture, interest shall cease to accrue on this Debenture.
If an Event of Default as defined in the Indenture shall occur and be
continuing, the outstanding principal of all the Debentures may be declared due
and payable in the manner and with the effect provided in the Indenture. The
Company shall pay all costs of collection, whether or not judicial proceedings
are instituted, in the manner provided in the Indenture. The Indenture provides
that such declaration and its consequences may, in certain events, be annulled
by the Holders of a majority in principal amount of the Outstanding Debentures.
The Indenture permits the amendment thereof and the modification of the
rights and obligations of the Company and the rights of the Debentureholders
under the Indenture at any time by the Company and the Trustee with the consent
of a majority of the Holders of all Outstanding Debentures, provided however,
certain amendments and modifications require the consent of the Holders of all
Outstanding Debentures. The Indenture also contains provisions permitting the
Debentureholders of not less than a majority in aggregate principal amount of
the Outstanding Debentures, on behalf of the Debentureholders of all of the
Debentures, to waive compliance by the Company with certain provisions of the
Indenture and certain past defaults under the Indenture and their consequences.
Any such consent or waiver by the Holder of this Debenture shall be conclusive
and binding upon such Holder and upon all future Debentureholders of this
Debenture and of any Debenture issued upon the registration of transfer hereof
or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Debenture.
No reference herein to the Indenture and no provision of this Debenture or
of the Indenture or amendment or modification hereof or thereof shall alter or
impair the obligation of the Company to pay the principal of and interest (and
premium, if any) on this Debenture at the times, place and rate and in the coin
or currency herein prescribed or to convert this Debenture as provided in the
Indenture.
In the event of a consolidation or merger of the Company into, or of the
transfer of its assets substantially as an entirety to, a successor corporation
in accordance with the Indenture, such successor corporation shall assume
payment of the Debentures and the performance of
23
<PAGE>
every covenant of the Indenture on the part of the Company, and in the event
of any such transfer, the predecessor corporation shall be discharged from
all obligations and covenants in respect of the Debentures and the Indenture
and may be dissolved and liquidated, all as more fully set forth in the
Indenture.
The Debentures are issuable only in registered form without coupons in
denominations of $1,000 or any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, the Debentures
are exchangeable for a like aggregate principal amount of Debentures of a
different authorized denomination, as requested by the Holder surrendering the
same; and, the transfer of this Debenture is registerable in the Debenture
Register, upon surrender of this Debenture for registration of transfer at the
office or agency of the Company in any place where the principal of and interest
on this Debenture are payable, duly endorsed by or accompanied by a written
instrument of transfer in the form printed on this Debenture or in another form
satisfactory to the Company and the Debenture Registrar duly executed by the
Holder hereof or such Holder's attorney duly authorized in writing, and
thereupon one or more new Debentures, of authorized denominations and for the
same aggregate principal amount, will be issued to the designated transferee or
transferees. No service charge shall be made for any such registration of
transfer or exchange, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Debenture for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Debenture is registered as the owner hereof for
all purposes, whether or not this Debenture be overdue, and neither the Company,
the Trustee nor any such agent shall be affected by notice to the contrary.
This Debenture shall be governed by and construed in accordance with the
laws of the State of Minnesota, without giving effect to the conflict of law
provisions thereof.
All terms used in this Debenture which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
24
<PAGE>
SECTION 204. FORM OF CERTIFICATE OF AUTHENTICATION .
[Form of Certificate of Authentication]
Norwest Bank Minnesota, National Association, as Trustee, certifies that
this Debenture is one of the 9% Convertible Subordinated Debentures issued by
Paper Warehouse, Inc., a Minnesota corporation, referred to in the
within-mentioned Indenture.
Dated:
--------------- ---------------------------------,
as Trustee
By
-------------------------------
Authorized Signature
25
<PAGE>
SECTION 205. FORM OF ASSIGNMENT.
[Form of Assignment]
(To be executed by the registered holder if such holder desires to
transfer this Debenture)
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print name and address of transferee)
this Debenture, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint ___________________, as Attorney, to
transfer the within Debenture on the books kept for registration thereof, with
full power of substitution.
Dated: ______________
Signature: ___________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Note)
Social Security
or Other Identifying
Number of Transferee: _____________
Signature Guaranteed:
SECTION 206. FORM OF CONVERSION NOTICE.
[Form of Conversion Notice]
CONVERSION NOTICE
The undersigned hereby elects to convert all or a portion of the principal
amount the attached 9% Convertible Subordinated Debenture Due June 15, 2005 into
fully paid and non-assessable shares of Paper Warehouse, Inc. Common Stock.
26
<PAGE>
I elect to convert: (check) ______ All the principal amount of the
Debenture.
______ A portion of the principal amount of
the Debenture. $________ Write in the
portion of the principal amount you
wish to convert. (if you elect to
convert a portion, such portion must
be an integral multiple of $1,000)
Please issue a certificate or certificates for such Common Stock in the name of,
and pay any cash for fractional share to:
Name:
______________________________________
(please print name)
Address:_______________________________________
_______________________________________
_______________________________________
Tax Identification No.
or Social Security No._______________________________________
Signature:_______________________________________
Date:_______________________________________
If you elect to convert less than all the principal amount of the Debenture, you
will be issued a new Debenture for the balance of the principal amount.
END OF ARTICLE TWO.
27
<PAGE>
ARTICLE THREE
THE DEBENTURES
SECTION 301. TITLE AND TERMS GENERALLY.
The Debentures shall be known and designated as the 9% Convertible
Subordinated Debentures due June ____, 2005 of the Company. The maximum
aggregate principal amount of Debentures to be authenticated and delivered under
this Indenture is limited to $6,000,000, excluding accrued interest, except for
Debentures authenticated and delivered upon registration of transfer of, or in
exchange for, or in lieu of, other Debentures pursuant to Sections 304, 305,
306, 906, 1202, and 1302(b) hereof. The Maturity of the Debentures shall be
June 15, 2005, and each Debenture shall bear interest at the rate of 9% per
annum on the outstanding balance, until the principal thereof is paid or made
available for payment.
The Debentures shall be dated as provided in Section 303 hereof, shall bear
interest from the Original Interest Accrual Date of such Debenture, or from the
most recent Interest Payment Date to which interest has been paid or duly
provided for, as the case may be, payable on each March 15, June 15, September
15 and December 15, commencing on September 15, 1999, until the principal
thereof is paid or made available for payment.
The principal of (and premium, if any) and interest on the Debentures shall
be payable at the office or agency maintained by the Company in Minneapolis,
Minnesota (initially the principal corporate trust office of the Trustee), or in
any other city or cities as the Company may maintain additional such offices or
agencies pursuant to Section 1002, maintained for such purpose, provided that,
at the option of the Company, payment of interest may be made by check mailed to
the address of the Person entitled thereto as such address shall appear in the
Debenture Register.
The Debentures shall be subject to optional redemption by the Company as
provided in Article Eleven.
The Debentures shall be repurchased by the Company if required by the
Holder thereof, as provided in Article Twelve.
The Debentures shall be convertible as provided in Article Thirteen.
The Debentures are unsecured obligations of the Company and shall be
subordinated in right of payment to Senior Debt of the Company as provided in
Article Fourteen. The Debentures shall be equal in right of payment to certain
Indebtedness of the Company defined as Parity Debt. The Debentures shall be
senior in right of payment to all Subordinated Debt.
The Debentures are an obligation of the Company but not of any Affiliate.
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<PAGE>
SECTION 302. DENOMINATIONS.
The Debentures shall be issuable only in registered form without coupons
and in denominations of $1,000 or any integral multiple thereof.
SECTION 303. EXECUTION, AUTHENTICATION, DELIVERY AND DATING.
The Debentures shall be executed on behalf of the Company by its President
or any Vice President and attested by its Secretary or Assistant Secretary. The
signature of any of these officers on the Debentures may be manual or facsimile.
Debentures bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Debentures or did not
hold such offices at the date of such Debentures.
At any time and from time to time after the execution and delivery of this
Indenture, the Company may deliver Debentures executed by the Company to the
Trustee for authentication, together with a Company Order for the authentication
and delivery of such Debentures. The Trustee in accordance with such Company
Order shall authenticate and deliver such Debentures as in this Indenture
provided and not otherwise.
Upon the initial issuance, each Debenture shall be dated June __, 1999, and
thereafter, Debentures issued hereunder shall be dated the date of their
authentication.
No Debenture shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Debenture a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature, and such certificate upon any
Debenture shall be conclusive evidence, and the only evidence, that such
Debenture has been duly authenticated and delivered hereunder and is entitled to
the benefits of the Indenture.
SECTION 304. TEMPORARY DEBENTURES.
Pending the preparation of definitive Debentures, the Company may execute,
and upon Company Order the Trustee shall authenticate and deliver, temporary
Debentures which are printed, lithographed, typewritten, mimeographed or
otherwise produced, in any authorized denomination, substantially of the tenor
of the definitive Debentures, in lieu of which they are issued and with such
appropriate insertions, omissions, substitutions and other variations as the
officers executing such Debentures may determine, as evidenced by their
execution of such Debentures.
If temporary Debentures are issued, the Company will cause definitive
Debentures to be prepared without unreasonable delay. After the preparation of
definitive Debentures, the temporary Debentures shall be exchangeable for
definitive Debentures upon surrender of the temporary Debentures at any office
or agency of the Company designated pursuant to Section 1002, without charge to
the Holder. Upon surrender for cancellation of any one or more
29
<PAGE>
temporary Debentures, the Company shall execute and the Trustee shall
authenticate and deliver in exchange therefor a like principal amount of
definitive Debentures of authorized denominations. Until so exchanged the
temporary Debentures shall in all respects be entitled to the same benefits
under this Indenture as definitive Debentures.
SECTION 305. REGISTRATION, TRANSFER, AND EXCHANGE.
The Company shall cause to be kept at the Corporate Trust Office of the
Trustee a register (the register maintained in such office or any other office
or agency pursuant to Section 1002 being herein sometimes referred to as the
"Debenture Register") in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of Debentures and of
transfers of Debentures. The Trustee is hereby appointed "Debenture Registrar"
for the purpose of registering Debentures and transfers of Debentures as herein
provided.
Upon surrender for registration of transfer of any Debenture at an office
or agency of the Company designated pursuant to Section 1002 for such purpose,
the Company shall execute, and the Trustee shall authenticate and deliver, in
the name of the designated transferee or transferees, one or more new Debentures
of any authorized denomination, of a like aggregate principal amount.
At the option of the Holder, Debentures may be exchanged for other
Debentures of any authorized denominations, of a like aggregate principal
amount, upon surrender of the Debentures to be exchanged at such office or
agency. Whenever any Debentures are so surrendered for exchange, the Company
shall execute, and the Trustee shall authenticate and deliver, the Debentures
which the Holder making the exchange is entitle to receive.
All Debentures issued upon any registration of transfer or exchange of
Debentures shall be valid obligations of the Company, evidencing the same debt
and entitled to the same benefits under this Indenture as the Debentures
surrendered upon such registration of transfer or exchange.
Every Debenture presented or surrendered for registration of transfer or
for exchange shall be duly endorsed for transfer (if so required by the Company
or the Trustee), or shall be accompanied by a written instrument of transfer in
form satisfactory to the Company and the Debenture Registrar duly executed by
the Holder thereof or such Holder's attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of Debentures, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Debentures, other than
exchanges pursuant to Section 304 or 905 not involving any transfer.
The Company shall not be required to issue or register the transfer or
exchange of any Debenture during a period beginning at the opening of business
15 days before the day of the
30
<PAGE>
mailing of a notice of redemption of Debentures selected for redemption
pursuant to Section 1105 and ending at the close of business on the day of
such mailing.
SECTION 306. MUTILATED, DESTROYED, LOST AND STOLEN DEBENTURES.
If any mutilated Debenture is surrendered to the Trustee, the Company shall
execute and the Trustee shall authenticate and deliver in exchange therefor a
new Debenture of like series, tenor and principal amount and bearing a number
not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence to
their satisfaction of the destruction, loss or theft of any Debenture and
(ii) such security or indemnity as may be required by them to save each of them
harmless, then, in the absence of notice to the Company or the Trustee that such
Debenture has been acquired by a bona fide purchaser, the Company shall execute
and upon its request the Trustee shall authenticate and deliver, in lieu of any
such destroyed, lost or stolen Debenture, a new Debenture of like series, tenor
and principal amount and bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Debenture has become
or is about to become due and payable, the Company in its discretion, may
instead of issuing a new Debenture, may pay such Debenture.
Upon the issuance of any new Debenture under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses (including
the fees and expenses of the Trustee) connected therewith.
Every new Debenture issued pursuant to this Section in lieu of any
destroyed, lost or stolen Debenture shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Debenture shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Debentures.
SECTION 307. PAYMENTS OF PRINCIPAL AND INTEREST; RIGHTS PRESERVED.
Any installment of interest or interest and principal under any Debenture
which is payable, and is punctually paid or duly provided for, on any Interest
Payment Date or Principal Payment Date, as the case may be, shall be paid to the
Person in whose name that Debenture (or one or more Predecessor Debentures) is
registered at the close of business on the Regular Record Date for such
installment.
Any installment of interest or principal and interest on any Debenture
which is payable, but is not punctually paid or duly provided for, on any
Interest Payment Date (herein called "Defaulted Interest") or on any Principal
Payment Date (herein called "Defaulted Principal"), as the case may be, shall
forthwith cease to be payable to the Holder on the relevant Regular Record
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Date by virtue of having been such Holder, and such Defaulted Interest or
Default Principal, as the case may be, shall be paid by the Company, at its
election in each case, as provided in paragraph (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest or
Defaulted Principal to the Persons in whose names the Debentures (or their
respective Predecessor Debentures) are registered at the close of business on a
Special Record Date for the payment of such Defaulted Interest or Defaulted
Principal, which shall be fixed in the following manner. The Company shall
notify the Trustee in writing of the amount of Defaulted Interest or Defaulted
Principal proposed to be paid on each Debenture and the date of the proposed
payment and, at the same time, the Company shall deposit with the Trustee an
amount of money equal to the aggregate amount proposed to be paid in respect of
such Defaulted Interest or Defaulted Principal or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the proposed
payment, such money when deposited to be held in trust for the benefit of the
Persons entitled to such Defaulted Interest or Defaulted Principal as in this
Clause provided. Thereupon the Trustee shall fix a Special Record Date for the
payment of such Defaulted Interest or Defaulted Principal which shall be not
more than 15 days and not less than 10 days prior to the date of the proposed
payment and not less than 10 days after the receipt by the Trustee of the notice
of the proposed payment. The Trustee shall promptly notify the Company of such
Special Record Date and, in the name and at the expense of the Company, shall
cause notice of the proposed payment of such Defaulted Interest or Defaulted
Principal and the Special Record Date therefor to be mailed, first-class postage
prepaid, to each Holder of an affected Debenture at such Holder's address as it
appears in the Debenture Register, not less than 10 days prior to such Special
Record Date. Notice of the proposed payment of such Defaulted Interest or
Defaulted Principal and the Special Record Date therefor having been so mailed,
such Defaulted Interest or Defaulted Principal shall be paid to the Persons in
whose names the Debentures (or their respective Predecessor Debentures) are
registered at the close of business on such Special Record Date and shall no
longer be payable pursuant to the following Paragraph (2).
(2) The Company may make payment of any Defaulted Interest or Defaulted
Principal in any other lawful manner not inconsistent with the requirements of
any securities exchange or market on which the Debentures may be listed or
included and, upon such notice as may be required by such exchange or market if,
after notice given by the Company to the Trustee of the proposed payment
pursuant to this Clause, such manner of payment shall be deemed practicable by
the Trustee and the Trustee shall have sent written notification to the Company
to such effect.
If any installment of interest whose Stated Maturity is on or prior to the
Redemption Date or Repurchase Date for any Debentures called for redemption or
repurchase pursuant to Article Eleven or Article Twelve is not paid or duly
provided for on or prior to the Redemption Date in accordance with the foregoing
provisions of this Section, such interest shall be payable as part of the
Redemption Price or Repurchase Price, as the case may be, of such Debentures.
Subject to the foregoing provisions of this Section, each Debenture
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Debenture shall carry the rights to interest accrued
and unpaid and to accrue which were carried by such other Debenture.
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All payments of interest on the Debentures to the person entitled thereto,
whether made by the Company, the Trustee or any Paying Agent, as authorized
pursuant to this Indenture, shall be made (subject to collection) by check
mailed to the address of the person entitled thereto as such address shall
appear on the Debenture Register, unless the Trustee determines such methods to
be inappropriate in the circumstances.
In the case of any Debenture which is converted after any Regular Record
Date and on or prior to the next succeeding Interest Payment Date, the interest
falling due on such Interest Payment Date shall be payable on such Interest
Payment Date notwithstanding such Conversion, and such interest (whether or not
punctually paid or duly provided for) shall be paid to the Person in whose name
the Debenture (or any Predecessor Debenture or Debentures) is registered at the
close of business on such Regular Record Date.
Holders must present and surrender the Debentures to collect the principal
of such Debentures.
SECTION 308. PERSONS DEEMED OWNERS.
Prior to due presentment of a Debenture for registration of transfer, the
Company, the Trustee, the Debenture Registrar and any agent of the Company or
the Trustee may treat the Person in whose name such Debenture is registered as
the owner of such Debenture for the purpose of receiving payment (subject to
Section 307) of principal of (and premium, if any) and interest on such
Debenture and for all other purposes whatsoever, whether or not such Debenture
be overdue, and neither the Company, the Trustee nor any agent of the Company or
the Trustee shall be affected by notice to the contrary.
SECTION 309. CANCELLATION.
All Debentures surrendered for payment, redemption, repurchase, conversion,
registration of transfer or exchange if surrendered to any Person other than the
Trustee, shall be delivered to the Trustee and shall be promptly cancelled by
it. The Company may at any time deliver to the Trustee for cancellation any
Debentures previously authenticated and delivered hereunder which the Company
may have acquired in any manner whatsoever, and all Debentures so delivered
shall be promptly cancelled by the Trustee. No Debentures shall be
authenticated in lieu of or in exchange for any Debentures cancelled as provided
in this Section, except as expressly permitted by this Indenture. All cancelled
Debentures held by the Trustee shall be disposed of and a destruction
certificate shall be delivered to the Company.
SECTION 310. COMPUTATION OF INTEREST.
Interest on the Debentures shall be computed on the basis of a 360-day year
comprised of twelve 30-day months.
SECTION 311. AUTHENTICATION AND DELIVERY OF ORIGINAL ISSUE.
Forthwith upon the execution and delivery of this Indenture, or from time
to time thereafter, Debentures up to the aggregate principal amount of
$6,000,000 may be executed by
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the Company and delivered to the Trustee for authentication and delivered by
the Trustee upon Company Order, without any further action by the Company.
END OF ARTICLE THREE.
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ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall cease to be of further effect (except as to any
surviving rights of registration of transfer or exchange of Debentures herein
expressly provided for), and the Trustee, on demand of and at the expense of the
Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when
(1) either
(a) all Debentures theretofore authenticated and delivered (other
than (i) Debentures which have been destroyed, lost or stolen and which have
been replaced or paid as provided in Section 306 and (ii) Debentures for whose
payment money has theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter paid to the Company or discharged from such
trust, as provided in Section 1003 have been delivered to the Trustee for
cancellation; or
(b) all such Debentures not theretofore delivered to the Trustee for
cancellation (i) have become due and payable, or (ii) will become due and
payable at their Stated Maturity within one year, or (iii) are to be called for
redemption within one year under arrangements satisfactory to the Trustee for
the giving of notice of redemption by the Trustee in the name, and at the
expense, of the Company; and the Company, in the case of this subsection (b)
(i), (ii) or (iii) above, has deposited or caused to be deposited with the
Trustee as trust funds in trust for the purpose an amount sufficient to pay and
discharge the entire indebtedness on such Debentures not theretofore delivered
to the Trustee for cancellation, for principal (and premium, if any) and
interest to the date of such deposit (in the case of Debentures which have
become due and payable) or to the Stated Maturity or Redemption Date, as the
case may be;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company;
(3) the Company shall have delivered to the Trustee an Officer's
Certificate and an Opinion of Counsel to the effect that such deposit does
not violate (a) the provisions of Article Twelve hereof or (b) any provisions of
any Senior Debt; and
(4) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this Indenture have
been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 607 shall survive, and,
if the money shall have been
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deposited with the Trustee pursuant to subclause (b) of clause (1) of this
Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
SECTION 402. APPLICATION OF TRUST MONEY.
All money deposited with the Trustee pursuant to Section 401 shall be held
in trust and applied by it, in accordance with the provisions of the Debentures
and this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal (and premium, if
any) and interest for whose payment such money has been deposited with the
Trustee.
END OF ARTICLE FOUR.
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ARTICLE FIVE
REMEDIES
SECTION 501. EVENTS OF DEFAULT.
"Event of Default," wherever used herein, means any one of the following
events (whatever the reason for such Event of Default and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) default in the payment of any installment interest upon any Debenture
when it becomes due and payable and continuance of such default for a period of
30 days (whether or not such payment is prohibited under the provisions of
Article Twelve); or
(2) default in the payment of the principal of or premium, if any, on any
Debenture at its Maturity (whether or not such payment is prohibited under the
provisions of Article Twelve); or
(3) breach of a covenant of the Company contained in Sections 1007, 1009
or 1010 hereof and the continuance of such breach for a period of 30 days after
the due date for filing of the report pursuant to section 703(5) which reports
such breach, provided, however, that prior to the expiration of the 30 day
period referred to above, the Company shall have filed with the Trustee a
certification of KPMG Peat Marwick, LLP, or such other certified independent
public auditor, certifying that such breach has been cured, then such breach
shall be deemed cured; or
(4) default in the performance, or breach, of any covenant or warranty of
the Company in this Indenture (other than a covenant or warranty default in
whose performance or whose breach is elsewhere in this Section specifically
dealt with), and continuance of such default or breach for a period of 30 days
after there has been given, by registered or certified mail, to the Company by
the Trustee or to the Company and the Trustee by the Debentureholders of at
least 25% in principal amount of the Outstanding Debentures, a written notice
(and the Trustee shall give such written notice to the Company upon the request
of the Debentureholders of at least 25% in principal amount of the Outstanding
Debentures) specifying such default or breach and requiring it to be remedied
and stating that such notice is a "Notice of Default" hereunder; or
(5) except for a default under the Mortgage Note dated April 8, 1999
between the Company and Fortis Insurance Company (the "Fortis Note"), a default
under any bond, debenture, note or other evidence of Indebtedness of the Company
or any Subsidiary (including Capital Lease Obligations), or, except for a
default under the Mortgage and Security Agreement dated April 8, 1999 between
the Company and Fortis Insurance Company, a default under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness of the Company, (including such Capital
Lease Obligations), whether such Indebtedness now exists or shall hereafter be
created, which default
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shall have resulted in such Indebtedness in excess of $500,000 becoming or
being declared due and payable prior to the date on which it would otherwise
have become due and payable or such obligations in excess of $500,000 being
accelerated, without such acceleration having been rescinded or annulled or
such Indebtedness shall not have been discharged within a period of 60 days
after such default or acceleration; provided, however, that this Section
501(5) shall not apply to (a) a default under any purchase money obligation
of the Company if, and so long as, the Company is in good faith and in the
exercise of its reasonably prudent business judgment, contesting its
obligations thereunder in accordance with a reasonable interpretation of the
documentation of such obligation; or (b) a default in a contractual
obligation not otherwise constituting Indebtedness if and so long as, the
Company is in good faith contesting such obligation and has posted a bond
sufficient to pay such obligation in the event it is determined to be due and
payable; or
(6) the entry of a decree or order by a court having jurisdiction in the
premises adjudging the Company or any Subsidiary a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company or any Subsidiary,
under Federal bankruptcy law, as now or hereafter constituted, or any other
applicable Federal or State bankruptcy, insolvency or other similar law, or
appointing a receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or any Subsidiary or of any substantial part of
its property, or ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a period of
sixty (60) consecutive days; or
(7) the commencement by the Company or any Subsidiary of a voluntary case
under Federal bankruptcy law, as now or hereafter constituted, or any other
applicable Federal or State bankruptcy, insolvency, or other similar law, or the
consent by it to the institution of bankruptcy or insolvency proceedings against
it, or the filing by it of a petition or answer or consent seeking
reorganization or relief under Federal bankruptcy law or any other applicable
Federal or State law, or the consent by it to the filing of such petition or to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator or
similar official of the Company or any Subsidiary or of any substantial part of
its property, or the making by it of an assignment for the benefit of creditors,
or the admission by it in writing of its inability to pay its debts generally as
they become due, or the taking of corporate action by the Company or any
Subsidiary in furtherance of any such action; or
(8) except with respect to the Fortis Note, the rendering of a final
judgment or judgments (not subject to appeal) for the payment of money against
the Company or any Subsidiary not fully insured against in an aggregate amount
in excess of $500,000 (net of insurance proceeds received by the Company with
respect to such judgment) by a court or courts of competent jurisdiction, which
judgment or judgments remain unsatisfied for a period of 30 days after the right
to appeal all such judgments has expired or otherwise terminated.
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SECTION 502. ACCELERATION OF MATURITY, RESCISSION AND ANNULMENT.
If an Event of Default occurs and is continuing, then and in every such
case the Trustee or the Debentureholders of not less than 25% in principal
amount of the Outstanding Debentures may, and the Trustee upon request of the
Debentureholders of not less than 25% in principal amount of the Outstanding
Debentures shall, declare the principal of all the Debentures to be due and
payable immediately, by notice in writing to the Company (and to the Trustee if
given by Debentureholders), and upon any such declaration such entire principal
amount and all interest shall become immediately due and payable. Collection
actions or judicial proceedings may be commenced as set forth in Section 503.
At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Debentureholders of a
majority in principal amount of the Outstanding Debentures, by written notice to
the Company and the Trustee, may rescind and annul such declaration and its
consequences if:
(1) the Company has paid or deposited with the Trustee a sum sufficient to
pay
(a) all overdue installments of interest on all Debentures,
(b) the principal of (and premium, if any, on) any Debentures which
have become due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Debentures,
(c) to the extent that payment of such interest is lawful, interest
upon overdue installments of interest at the rate borne by the Debentures, and
(d) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel and the Holders and their agents and counsel if such
Holders have initiated action in accordance with this Section 502; and
(2) all Events of Default, other than the non-payment of the principal of
Debentures which have become due solely by such declaration of acceleration,
have been cured or waived as provided in Section 513.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE.
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The Company covenants that if:
(1) default is made in the payment of any installment of interest on any
Debenture when such interest becomes due and payable and such default continues
for a period of 30 days, or
(2) default is made in the payment of the principal of (or premium, if
any, on) any Debenture at its Maturity,
the Company will, subject to the provisions of Article Twelve, upon demand of
the Trustee or Debentureholders of not less than 25% in aggregate principal
amount of the Outstanding Debentures, pay to the Trustee, for the benefit of all
the Debentureholders of such Debentures, the whole amount then due and payable
on such Debentures for principal, premium, if any, and interest, with interest
upon the overdue principal (and premium, if any) and, to the extent that payment
of such interest shall be legally enforceable, upon overdue installments of
interest, at the rate borne by the Debentures and, in addition thereto, such
further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel or the Holders as set forth
herein, their agents and counsel, as the case may be, whether or not judicial
proceedings are commenced.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name as trustee of an express trust, or the Holders of not
less than 25% in principal amount of the Outstanding Debentures, on behalf of
all Holders, may institute a judicial proceeding for the collection of the sums
so due and unpaid, may prosecute such proceeding to judgment or final decree and
may enforce the same against the Company or any other obligor upon the
Debentures and collect the moneys adjudged or decreed to be payable in the
manner provided by law out of the property of the Company or any other obligor
upon the Debentures, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Debentureholders by such appropriate judicial proceedings as the Trustee shall
deem most effectual to protect and enforce any such rights, whether for the
specific enforcement of any covenant or agreement in this Indenture or in the
exercise of any power granted herein, or to enforce any other proper remedy.
Holders of not less than 25% in principal amount of Outstanding Debentures, on
behalf of all Holders, may initiate such appropriate judicial proceedings in the
same manner as the Trustee. The Trustee or the Holders initiating action
hereunder, as the case may be, shall be reimbursed for the costs of collection
incurred as provided for above in this Section 503.
SECTION 504. TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Debentures or the property of the Company or of such other obligor, the Trustee
(irrespective of whether the principal of the Debentures shall then be
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due and payable as therein expressed or by declaration or otherwise and
irrespective of whether the Trustee shall have made any demand on the Company
for the payment of overdue principal or interest) shall be entitled and
empowered, by intervention in such proceeding or otherwise to:
(1) file and prove a claim for the whole amount of principal, premium, if
any, and interest owing and unpaid in respect of the Debentures and to file such
other papers or documents as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel) and
of the Debentureholders allowed in such judicial proceeding, and
(2) collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any custodian,
receiver, assignee, trustee, liquidator, sequestrator or other similar official
in any such judicial proceeding is hereby authorized by each Holder to make such
payments to the Trustee and, in the event that the Trustee shall consent to the
making of such payments directly to the Debentureholders, to pay to the Trustee
any amount due it for the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, and any other amounts due the
Trustee under Section 607 hereof.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Debentures
or the rights of any Holder thereof or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
SECTION 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF DEBENTURES.
All rights of action and claims under this Indenture or the Debentures may
be prosecuted and enforced by the Trustee without the possession of any of the
Debentures or the production thereof in any proceeding relating thereto, and any
such proceeding instituted by the Trustee shall be brought in its own name as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, be for the ratable benefit of
the Debentureholders of the Debentures in respect of which such judgment has
been recovered.
SECTION 506. APPLICATION OF MONEY COLLECTED.
Any money collected by the Trustee or the Holders directly pursuant to this
Article shall be applied in the following order, at the date or dates fixed by
the Trustee and, in case of the distribution of such money on account of
principal, premium, if any, or interest, upon presentation of the Debentures and
the notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid.
FIRST: to the payment of all amounts due the Trustee under Section 607
hereof;
SECOND: to the payment of the amounts then due and unpaid for costs of
collection, principal, premium, if any, and interest on the Debentures in
respect of which or for the benefit of
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which such money has been collected, ratably, without preference or priority
of any kind, according to the amounts due and payable on such Debentures for
principal, premium, if any, and interest, respectively; and
THIRD: to the payment of the remainder, if any, to the Company or any
other person lawfully entitled thereto.
SECTION 507. LIMITATION ON SUITS.
(a) Prior to the declaration of acceleration provided for in Section 502
hereof, no Holder of any Debenture shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee of a
continuing Event of Default;
(2) the Debentureholders of not less than 25% in principal amount of the
Outstanding Debentures shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
(3) such Holder or Debentureholders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 45 days after its receipt of such notice, request and
offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been given to
the Trustee during such 45-day period by the Debentureholders of a majority in
principal amount of the Outstanding Debentures;
it being understood and intended that no one or more Debentureholders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other
Debentureholders, or to obtain or to seek to obtain priority or preference over
any other Debentureholders or to enforce any right under this Indenture, except
in the manner herein provided and for the equal and ratable benefit of all the
Debentureholders.
(b) After the declaration of acceleration provided for in Section 502
hereof, Holders of 25% or more in principal amount of Outstanding Debentures may
institute judicial proceedings in respect to such Event of Default which
triggers the declaration of acceleration in their own name in the manner
provided in Section 503 if the Trustee has not instituted such proceedings
within 60 days after such declaration, it being understood that such Holders
shall not have any right in any manner whatever by virtue of, or by availing of,
any provision of the
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Indenture to affect, disturb or prejudice the rights of any other Holders of
Debentures, or to obtain or to seek to obtain priority or preference over any
other Holders or to enforce any rights under this Indenture, except in the
manner herein provided and for the equal and ratable benefit of all the
Holders of Debentures.
SECTION 508. UNCONDITIONAL RIGHT OF DEBENTUREHOLDERS TO RECEIVE PRINCIPAL,
PREMIUM AND INTEREST.
Notwithstanding any other provision in this Indenture, the Holder of any
Debenture shall have the right to receive payment (subject to Section 307) of
the principal of (and premium, if any) and interest on such Debenture on the
Stated Maturity thereof (or, in the case of redemption, on the Redemption Date)
and to institute suit for the enforcement of any such payment, and such rights
shall not be impaired without the consent of such Holder.
SECTION 509. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder has instituted any proceeding to enforce any
right or remedy under this Indenture and such proceeding shall have been
discontinued or abandoned for any reason or shall have been determined adversely
to the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the
Debentureholders shall be restored severally and respectively to their former
positions hereunder and thereafter all rights and remedies of the Trustee and
the Debentureholders shall continue as though no such proceeding had been
instituted.
SECTION 510. RIGHTS AND REMEDIES CUMULATIVE.
Except as otherwise provided with respect to the replacement or payment of
mutilated, destroyed, lost or stolen Debentures in the last paragraph of Section
306, no right or remedy herein conferred upon or reserved to the Trustee or to
the Debentureholders is intended to be exclusive of any other right or remedy,
and every right and remedy shall, to the extent permitted by law, be cumulative
and in addition to every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other appropriate right or remedy.
SECTION 511. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any Debenture to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article or by law to
the Trustee or to the Debentureholders may be exercised from time to time, and
as often as may be deemed expedient, by the Trustee or by the Debentureholders,
as the case may be.
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SECTION 512. CONTROL BY DEBENTUREHOLDERS.
The Holders of a majority in principal amount of the Outstanding Debentures
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee, provided that
(1) such direction shall not be in conflict with any rule of law or with
this Indenture, and
(2) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction.
SECTION 513. WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in aggregate principal amount of
the Outstanding Debentures may on behalf of the Holders of all the Debentures
waive any past default hereunder and its consequences, provided that a default
in the payment of the principal of, premium, if any, or interest on any
Debenture, or in respect of certain other covenants or provisions hereof cannot
be modified or amended except as set forth in Section 902 hereof.
Upon any such waiver, such default shall cease to exist and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture, but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
SECTION 514. UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any Debenture by
such Holder's acceptance thereof shall be deemed to have agreed, that any court
may in its discretion require in any suit for the enforcement of any right or
remedy under this Indenture, or in any suit against the Trustee for any action
taken, suffered or omitted by it as Trustee, the filing by any party litigant in
such suit of an undertaking to pay the costs of such suit, and that such court
may in its discretion assess reasonable costs, including reasonable attorneys'
fees, against any party litigant in such suit, having due regard to the merits
and good faith of the claims or defenses made by such party litigant. The
provisions of this Section shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder, or group of Debentureholders,
holding in the aggregate more than 10% in principal amount of the Outstanding
Debentures, or to any suit instituted by any Holder for the enforcement of the
payment of the principal of, premium, if any, or interest on any Debenture on or
after the Stated Maturity thereof (or, in the case of redemption, on or after
the Redemption Date).
SECTION 515. WAIVER OF STAY OR EXTENSION LAWS.
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may
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affect the covenants or the performance of this Indenture; and the Company
(to the extent that it may lawfully do so) hereby expressly waives all
benefit or advantage of any such law and covenants that it will not hinder,
delay or impede the execution of any power herein granted to the Trustee, but
will suffer and permit the execution of every such power as though no such
law had been enacted.
END OF ARTICLE FIVE.
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ARTICLE SIX
THE TRUSTEE
SECTION 601. CERTAIN DUTIES AND RESPONSIBILITIES.
(1) Except during the continuance of an Event of Default,
(a) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture, and no implied covenants
or obligations shall be read into this Indenture against the Trustee; and
(b) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture, but in the case of
any such certificates or opinions which by any provision hereof are specifically
required to be furnished to the Trustee, the Trustee shall be under a duty to
examine the same to determine whether or not they conform to the requirements of
this Indenture.
(2) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
such person's own affairs.
(3) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that:
(a) this Subsection shall not be construed to limit the effect of
Subsection (1) (a) of this Section;
(b) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it shall be proved that the Trustee
was negligent in ascertaining the pertinent facts;
(c) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith in accordance with the direction of
the Holders of a majority in principal amount of the Outstanding Debentures
relating to the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred upon
the Trustee, under this Indenture; and
(d) no provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for
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believing that repayment of such funds or adequate indemnity against such
risk or liability is not reasonably assured to it.
(4) Whether or not therein expressly so provided, every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Trustee shall be subject to the provisions of this Section.
SECTION 602. NOTICE OF DEFAULTS.
Within 60 days after the occurrence of any default hereunder, the Trustee
shall transmit by mail to all Debentureholders, as their names and addresses
appear in the Debenture Register, notice of such default hereunder known to a
Responsible Officer of Trustee, unless such default shall have been cured or
waived, provided that (i) except in the case of a default in the payment of the
principal of (or premium, if any) or interest on any Debenture, the Trustee
shall be protected in withholding such notice if and so long as the board of
directors, the executive committee or a trust committee of directors or
Responsible Officers of the Trustee in good faith determine that the withholding
of such notice is in the interests of the Debentureholders, and (ii) in the case
of any default of the character specified in Section 501(4), no such notice to
Debentureholders shall be given until at least 30 days after the Company has
been notified of such default by the Trustee or the Debentureholders in
accordance with Section 502. For the purpose of this Section, the term
"default" means any event which is, or after notice or lapse of time or both
would become, an Event of Default.
SECTION 603. CERTAIN RIGHTS OF TRUSTEE.
Except as otherwise provided in Section 601:
(1) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond, debenture, note or
other paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties;
(2) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any resolution
of the board of directors of the Company may be sufficiently evidenced by a
Company Resolution;
(3) whenever in the administration of this Indenture the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its part,
rely upon an Officers' Certificate;
(4) the Trustee may consult with counsel (who may be counsel to the
Company) and the advice of such counsel or any Opinion of Counsel shall be full
and complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance thereon;
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(5) the Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Debentureholders pursuant to this Indenture, unless such Debentureholders
shall have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by it in compliance with
such request or direction;
(6) prior to the occurrence of an Event of Default hereunder and after the
curing of all Events of Default, the Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note or other paper or document unless requested to do
so by the Holders of not less than a majority in aggregate principal amount of
the Outstanding Debentures, but the Trustee, in its discretion, may make such
further inquiry or investigation into such facts or matters as it may see fit,
and, provided that if the payment within a reasonable time to the Trustee of the
costs, expenses and liabilities likely to be incurred in the making of such
investigation is not, in the opinion of the Trustee, reasonably assured to the
Trustee by the terms of this Indenture, the Trustee may require reasonable
indemnity against such expense or liability as a condition to so proceeding; and
(7) the Trustee shall have no duty to inquire as to the performance of the
Company's covenants in Article Ten or Section 1102 hereof. In addition, the
Trustee shall not be deemed to have knowledge of any Default or Event of
Default, except (i) any Default or Event of Default occurring pursuant to
Section 501(l), 501(2) or 1001, or (ii) any Default or Event of Default of which
the Trustee shall have received written notification or obtained actual
knowledge.
SECTION 604. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF DEBENTURES.
The recitals contained herein and in the Debentures, except the Trustee's
certificates of authentication, shall be taken as the statements of the Company
and the Trustee assumes no responsibility for their correctness. The Trustee
makes no representations as to the validity or sufficiency of this Indenture or
of the Debentures. The Trustee shall not be accountable for the use or
application by the Company of Debentures or the proceeds thereof.
SECTION 605. TRUSTEE MAY HOLD DEBENTURES.
The Trustee, any Authenticating Agent, any Paying Agent, any Debenture
Registrar or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Debentures and, subject to Section
612, may otherwise deal with the Company with the same rights it would have it
if were not Trustee, Authenticating Agent, Paying Agent, Debenture Registrar or
such other agent.
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SECTION 606. MONEY HELD IN TRUST.
Money held by the Trustee in trust hereunder need not be segregated from
other funds except to the extent required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder except as otherwise
agreed in writing with the Company.
SECTION 607. COMPENSATION AND REIMBURSEMENT.
The Company agrees:
(1) to pay to the Trustee from time to time reasonable compensation for
all services rendered by it hereunder (which compensation shall not be limited
by any provision of law in regard to the compensation of a trustee of an express
trust);
(2) except as otherwise expressly provided for herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and advances
incurred or made by the Trustee in accordance with any provision of this
Indenture (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its negligence or bad faith; and
(3) to indemnify the Trustee for, and to hold it harmless against, any
loss, liability or expense incurred without negligence or bad faith on its part,
arising out of or in connection with the acceptance or administration of this
trust, including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties hereunder.
As security for the performance of the obligations of the Company under
this Section, the Trustee shall have a lien prior to the Debentures upon all
property and funds held or collected by the Trustee as such, except funds held
in trust for the payment of principal of, premium, if any or interest on
Debentures.
SECTION 608. DISQUALIFICATION; CONFLICTING INTERESTS.
(1) If the Trustee has or shall acquire any conflicting interest, as
defined in this Section 608, then, within 90 days after ascertaining that it has
such conflicting interest, and if the default (as defined in Section 608(3)) to
which such conflicting interest relates has not been cured or duly waived or
otherwise eliminated before the end of such 90-day period, the Trustee shall
either eliminate such conflicting interest or resign in the manner and with the
effect hereinafter specified in this Article.
(2) In the event that the Trustee shall fail to comply with the provisions
of Subsection (1) of this Section, within ten (10) days after the expiration of
such 90-day period, the Trustee shall transmit by mail to all Debentureholders,
as their names and addresses appear in the Debenture Register, notice of such
failure.
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(3) For the purposes of this Section, the Trustee shall be deemed to have
a conflicting interest if:
(a) the Trustee is trustee under another indenture under which any
other securities, or certificates of interest or participation in any other
securities, of the Company are outstanding, unless such other indenture is a
collateral trust indenture under which the only collateral consists of
Debentures issued under this Indenture, provided that there shall be excluded
from the operation of this paragraph any indenture or indentures under which
other securities, or certificates of interest or participation in other
securities, of the Company are outstanding, if
(i) this Indenture and such other indenture or indentures are
wholly unsecured and such other indenture or indentures are hereafter qualified
under the Trust Indenture Act, unless the Commission shall have found and
declared by order pursuant to Section 306(b) or Section 307(1) of the Trust
Indenture Act that differences exist between the provisions of this Indenture
and the provisions of such other indenture or indentures which are so likely to
involve a material conflict of interest as to make it necessary in the public
interest or for the protection of investors to disqualify the Trustee from
acting as such under this Indenture and such other indenture or indentures, or
(ii) the Company shall have sustained the burden of proving, on
application to the Commission and after opportunity for hearing thereon, that
trusteeship under this Indenture and such other indenture or indentures is not
so likely to involve a material conflict of interest as to make it necessary in
the public interest or for the protection of investors to disqualify the Trustee
from acting as such under one of such indentures;
(b) the Trustee or any of its directors or executive officers is an
underwriter for the Company;
(c) the Trustee directly or indirectly controls or is directly or
indirectly controlled by or is under direct or indirect common control with an
underwriter for the Company;
(d) the Trustee or any of its directors or executive officers is a
director, officer, partner, employee, appointee or representative of the
Company, or of an underwriter (other than the Trustee itself) for the Company
who is currently engaged in the business of underwriting, except that the
Trustee may be designated by the Company or by any underwriter for the Company
to act in the capacity of transfer agent, registrar, custodian, paying agent,
fiscal agent, escrow agent or depositary, or in any other similar capacity or,
subject to the provisions of paragraph (a) of this Subsection, to act as
trustee, whether under an indenture or otherwise;
(e) 10% or more of the voting securities of the Trustee is
beneficially owned either by the Company or by any director or executive officer
thereof, or 20% or more of such voting securities is beneficially owned,
collectively, by any two or more of such persons; or 10% or more of the voting
securities of the Trustee is beneficially owned either by an underwriter for
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the Company or by any director, partner or executive officer of any such
underwriter, or is beneficially owned, collectively, by any two or more such
persons;
(f) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default (as hereinafter in this
Subsection defined), (i) 5% or more of the voting securities, or 10% or more of
any other class of security of the Company not including the Debentures issued
under this Indenture and securities issued under any other indenture under which
the Trustee is also trustee, or (ii) 10% or more of any class of security of an
underwriter for the Company;
(g) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default (as hereinafter in this
Subsection defined), 5% or more of the voting securities of any person who, to
the knowledge of the Trustee, owns 10% or more of the voting securities of, or
controls directly or indirectly or is under direct or indirect common control
with, the Company;
(h) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default (as hereinafter in this
Subsection defined), 10% or more of a class of security of any person who, to
the knowledge of the Trustee, owns 50% or more of the voting securities of the
Company;
(i) the Trustee owns, on the date of default upon the Debentures or
on any anniversary of such default while the default upon the Debentures remains
outstanding, in the capacity of executor, administrator, testamentary or inter
vivos trustee, guardian, committee or conservator, or in any other similar
capacity, an aggregate of 25% or more of the voting securities, or of any class
of security, of any person, the beneficial ownership of a specified percentage
of which would have constituted a conflicting interest under paragraph (f), (g)
or (h) of this Subsection. As to any such securities of which the Trustee
acquired ownership through becoming executor, administrator or testamentary
trustee of an estate which included them, the provisions of the preceding
sentence shall not apply, for a period of two years from the date of such
acquisition, to the extent that such securities included in such estate do not
exceed 25% of such voting securities or 25% of any such class of security.
Promptly after the date of any such default and annually each succeeding year
that the Debentures remain in default, the Trustee shall make a check of its
holdings of such securities in any of the above-mentioned capacities as of such
dates. If the Company fails to make payment in full of the principal of (or
premium, if any) or interest on any of the Debentures when and as the same
becomes due and payable, and such failure continues for 30 days thereafter, the
Trustee shall make a prompt check of its holdings of such securities in any of
the above-mentioned capacities as of the date of the expiration of such 30-day
period, and after such date, notwithstanding the foregoing provisions of this
paragraph, all such securities so held by the Trustee, with sole or joint
control over such securities vested in it, shall, but only so long as such
failure shall continue, be considered as though beneficially owned by the
Trustee for the purposes of paragraphs (f), (g) and (h) of this Subsection; or
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(j) except under the circumstances described in paragraphs (1), (3),
(4), (5) or (6) of Section 311(b) of the Trust Indenture Act, the Trustee shall
be or become a creditor of the Company.
The specification of percentages in paragraphs (e) to (i), inclusive, of
this Subsection shall not be construed as indicating that the ownership of such
percentage of the securities of a person is or is not necessary or sufficient to
constitute direct or indirect control for the purposes of paragraph (c) or (g)
of this Subsection.
For the purposes of paragraphs (f), (g), (h) and (i) of this Subsection
only, (i) the terms "security" and "securities" shall include only such
securities as are generally known as corporate securities, but shall not include
any note or other evidence of indebtedness issued to evidence an obligation to
repay moneys lent to a person by one or more banks, trust companies or banking
firms, or any certificate of interest or participation in any such note or
evidence of indebtedness; (ii) an obligation shall be deemed to be "in default"
when a default in payment of principal shall have continued for 30 days or more
and shall not have been cured; and (iii) the Trustee shall not be deemed to be
the owner or holder of (A) any security which it holds as collateral security,
as trustee or otherwise, for an obligation which is not in default as defined in
clause (ii) above, or (B) any security which it holds as collateral security
under this Indenture, irrespective of any default hereunder, or (C) any security
which it holds as agent for collection, or as custodian, escrow agent or
depositary, or in any similar representative capacity.
(4) For the purposes of this Section:
(a) The term "underwriter," when used with reference to the Company
means every person who, within one year prior to the time as of which the
determination is made, has purchased from the Company with a view to, or has
offered or sold for the Company in connection with, the distribution of any
security of the Company outstanding at such time, or has participated or has had
a direct or indirect participation in any such undertaking, or has participated
or has had a participation in the direct or indirect underwriting of any such
undertaking, but such term shall not include a person whose interest was limited
to a commission from an underwriter or dealer not in excess of the usual and
customary distributors' or sellers' commission.
(b) The term "director" means any director of a corporation or any
individual performing similar functions with respect to any organization,
whether incorporated or unincorporated.
(c) The term "person" means an individual, a corporation, a
partnership, an association, a joint-stock company, a trust, an unincorporated
organization or a government or political subdivision thereof. As used in this
paragraph, the term "trust" shall include only a trust where the interest or
interests of the beneficiary or beneficiaries are evidenced by a security.
(d) The term "voting security" means any security presently entitling
the owner or holder thereof to vote in the direction or management of the
affairs of a person, or any
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security issued under or pursuant to any trust, agreement or arrangement
whereby a trustee or trustees or agent or agents for the owner or holder of
such security are presently entitled to vote in the direction or management
of the affairs of a person.
(e) The term "Company" means any obligor upon the Debentures.
(f) The term "executive officer" means the president, every vice
president, every trust officer, the cashier, the secretary and the treasurer of
a corporation, and any individual customarily performing similar functions with
respect to any organization whether incorporated or unincorporated, but shall
not include the chairman of the board of directors.
(g) The term "default" shall mean an Event of Default or an event
which with notice or passage of time, or both, would constitute an Event of
Default.
(5) The percentages of voting securities and other securities specified in
this Section shall be calculated in accordance with the following provisions:
(a) A specified percentage of the voting securities of the Trustee,
the Company or any other person referred to in this Section (each of whom is
referred to as a "person" in this paragraph) means such amount of the
outstanding voting securities of such person as entitles the holder or holders
thereof to cast such specified percentage of the aggregate votes which the
holders of all the outstanding voting securities of such person are entitled to
cast in the direction or management of the affairs of such person.
(b) A specified percentage of a class of securities of a person means
such percentage of the aggregate amount of securities of the class outstanding.
(c) The term "amount," when used in regard to securities, means the
principal amount if relating to evidences of indebtedness, the number of shares
if relating to capital shares and the number of units if relating to any other
kind of security.
(d) The term "outstanding" means issued and not held by or for the
account of the issuer. The following securities shall not be deemed outstanding
within the meaning of this definition:
(i) securities of an issuer held in a sinking fund relating
to securities of the issuer of the same class;
(ii) securities of an issuer held in a sinking fund relating
to another class of securities of the issuer, if the obligation evidenced by
such other class of securities is not in default as to principal or interest or
otherwise;
(iii) securities pledged by the issuer thereof as security for
an obligation of the issuer not in default as to principal or interest or
otherwise; and
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(iv) securities held in escrow if placed in escrow by the
issuer thereof, provided, that any voting securities of an issuer shall be
deemed outstanding if any person other than the issuer is entitled to exercise
the voting rights thereof.
(e) A security shall be deemed to be of the same class as another
security if both securities confer upon the holder or holders thereof
substantially the same rights and privileges, provided, that, in the case of
secured evidences of indebtedness, all of which are issued under a single
indenture, differences in the interest rates or maturity dates of various series
thereof shall not be deemed sufficient to constitute such series different
classes and provided, further, that, in the case of unsecured evidences of
indebtedness, differences in the interest rates or maturity dates thereof shall
not be deemed sufficient to constitute them securities of different classes,
whether or not they are issued under a single indenture.
SECTION 609. TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a Trustee hereunder which shall (a) be a
corporation or trust company organized and doing business under the laws of the
United States of America, any State thereof or the District of Columbia,
authorized under such laws to exercise corporate trust powers, and (b) have a
combined capital and surplus of at least $25,000,000, subject to supervision or
examination by Federal or State authority. If such corporation publishes
reports of condition at least annually, pursuant to law or to the requirements
of such supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such corporation shall be deemed to
be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible
in accordance with the provisions of this Section, it shall resign immediately
in the manner and with the effect hereinafter specified in this Article.
SECTION 610. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(1) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 611.
(2) The Trustee may resign at any time by giving written notice thereof to
the Company. If an instrument of acceptance by a successor Trustee shall not
have been delivered to the Trustee within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee. Such court may
thereupon after such notice, if any, as it may deem proper and prescribe, remove
the Trustee and appoint a successor Trustee.
(3) The Trustee may be removed at any time by Act of the Holders of a
majority in principal amount of the Outstanding Debentures, delivered to the
Trustee and to the Company. If an instrument of acceptance by a successor
Trustee shall not have been delivered to the Trustee within 30 days after the
giving of such notice of removal, the Trustee may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
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(4) If at any time:
(a) the Trustee shall fail to comply with Section 608(l) after
written request therefor by the Company or by any Holder who has been a bona
fide Holder of a Debenture for at least six months, or
(b) the Trustee shall cease to be eligible under Section 609 and
shall fail to resign after written request therefor by the Company or by any
Holder who has been a bona fide Holder of a Debenture for at least six months,
or
(c) the Trustee shall become incapable of acting or shall be adjudged
a bankrupt or insolvent or a receiver of the Trustee or of its property shall be
appointed or any public officer shall take charge or control of the Trustee or
of its property or affairs for the purpose of rehabilitation, conservation or
liquidation, THEN, in any such case, (i) the Company by a Company Resolution may
remove the Trustee, or (ii) subject to Section 514, any Holder who has been a
bona fide Holder of a Debenture for at least six months, on behalf of himself
and all others similarly situated, petition any court of competent jurisdiction
for the removal of the Trustee and the appointment of a successor Trustee.
(5) If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause, the Company,
by a Company Resolution, shall promptly appoint a successor Trustee. If, within
one year after such resignation, removal or incapability, or the occurrence of
such vacancy, a successor Trustee shall be appointed by Act of the
Debentureholders of a majority in principal amount of the Outstanding Debentures
delivered to the Company and the retiring Trustee, the successor Trustee so
appointed, forthwith upon its acceptance of such appointment, shall become the
successor Trustee and supersede the successor Trustee appointed by the Company.
If no successor Trustee shall have been so appointed by the Company or the
Debentureholders and accepted appointment in the manner hereinafter provided,
any Holder who has been a bona fide holder of a Debenture for at least six
months, on behalf of himself and all others similarly situated, may petition any
court of competent jurisdiction for the appointment of a successor Trustee.
(6) The Company shall give notice of each resignation and each removal of
the Trustee and each appointment of a successor Trustee by mailing written
notice of such event by first-class mail, postage prepaid, to all
Debentureholders as their names and addresses appear in the Debenture Register.
Each notice shall include the name of the successor Trustee and the address of
its Corporate Trust Office.
SECTION 611. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
Every successor Trustee appointed hereunder shall execute, acknowledge and
deliver to the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the
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rights, powers, trusts and duties of the retiring Trustee; but, on request of
the Company or the successor Trustee, such retiring Trustee, upon payment of
its charges, shall execute and deliver an instrument transferring to such
successor Trustee all the rights, powers and trusts of the retiring Trustee
and shall duly assign, transfer and deliver to such successor Trustee all
property and money held by such retiring Trustee hereunder, subject
nevertheless to its lien, if any, provided for in Section 607. Upon request
of any such successor Trustee, the Company shall execute any and all
instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such Successor Trustee shall be qualified and eligible under
this Article.
SECTION 612. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS.
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee, shall be the successor of the Trustee hereunder, provided that
such corporation shall be otherwise qualified and eligible under this Article,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Debentures shall have been authenticated
but not delivered by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication and deliver the Debentures so authenticated with the same effect
as if such successor Trustee had itself authenticated such Debentures.
SECTION 613. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
(1) Subject to Subsection (2) of this Section, if the Trustee shall be or
shall become a creditor, directly or indirectly, secured or unsecured, of the
Company within three months prior to a default, as defined in Subsection (3) of
this Section, or subsequent to such a default, then, unless and until such
default shall be cured, the Trustee shall set apart and hold in a special
account for the benefit of the Trustee individually, the Holders of the
Debentures and the holders of other indenture securities, as defined in
Subsection (3) of this Section:
(a) an amount equal to any and all reductions in the amount due and
owing upon any claim as such creditor in respect of principal or interest,
effected after the beginning of such three-month period and valid as against the
Company and its other creditors, except any such reduction resulting from the
receipt or disposition of any property described in paragraph (2) of this
Subsection, or from the exercise of any right of set off which the Trustee could
have exercised if a petition in bankruptcy had been filed by or against the
Company upon the date of such default; and
(b) all property received by the Trustee in respect of any claims as
such creditor, either as security therefor, or in satisfaction or composition
thereof or otherwise, after the beginning of such three-month period, or an
amount equal to the proceeds of any such
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property if disposed of, subject, however, to the rights, if any, of the
Company and its other creditors in such property or such proceeds. Nothing
herein contained, however, shall affect the right of the Trustee:
(i) to retain for its own account (A) payments made on account
of any such claim by any Person (other than the Company) who is liable thereon,
(B) the proceeds of the bona fide sale of any such claim by the Trustee to a
third Person, and (C) distributions made in cash, securities or other property
in respect of claims filed against the Company in bankruptcy or receivership or
in proceedings for reorganization pursuant to the Federal Bankruptcy Act or
applicable State law;
(ii) to realize for its own account upon any property held by
it as security for any such claim, if such property was so held prior to the
beginning of such three-month period;
(iii) to realize for its own account but only to the extent
of the claim hereinafter mentioned, upon any property held by it as security
for any such claim, if such claim was created after the beginning of such
three-month period and such property was received as security therefor
simultaneously with the creation thereof, and if the Trustee shall sustain the
burden of proving that at the time such property was so received the Trustee
had no reasonable cause to believe that a default, as defined in Subsection
(3) of this Section, would occur within three months; or
(iv) to receive payment on any claim referred to in paragraph
(ii) or (iii), against the release of any property held as security for such
claim as provided in paragraph (ii) or (iii), as the case may be, to the extent
of the fair value of such property.
For the purposes of paragraphs (ii), (iii) and (iv), property substituted
after the beginning of such three-month period for property held as security at
the time of such substitution, to the extent of the fair value of the property
released, shall have the same status as the property released and, to the extent
that any claim referred to in any of such paragraphs is created in renewal of or
in substitution for or for the purpose of repaying or refunding any preexisting
claim of the Trustee as such creditor, such claim shall have the same status as
such pre-existing claim.
If the Trustee shall be required to account, the funds and property held in
such special account and the proceeds thereof shall be apportioned among the
Trustee, the Debentureholders and the holders of other indenture securities in
such manner that the Trustee, the Debentureholders and the holders of other
indenture securities realize, as a result of payments from such special account
and payments of dividends on claims filed against the Company in bankruptcy or
receivership or in proceedings for reorganization pursuant to the Federal
Bankruptcy Act or applicable State law, the same percentage of their respective
claims, figured before crediting to the claim of the Trustee anything on account
of the receipt by it from the Company of the funds and property in such special
account and before crediting to the respective claims of the Trustee and the
Debentureholders and the holders of other indenture securities dividends on
claims filed against the Company in bankruptcy or receivership or in proceedings
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for reorganization pursuant to the Federal Bankruptcy Act or applicable State
law, but after crediting thereon receipts on account of the indebtedness
represented by their respective claims from all sources other than from such
dividends and from the funds and property so held in such special account. As
used in this paragraph, with respect to any claim, the term "dividends" shall
include any distribution with respect to such claim, in bankruptcy or
receivership or proceedings for reorganization pursuant to the Federal
Bankruptcy Act or applicable State law, whether such distribution is made in
cash, securities or other property, but shall not include any such distribution
with respect to the secured portion, if any, of such claim. The court in which
such bankruptcy, receivership or proceedings for reorganization is pending shall
have jurisdiction (i) to apportion among the Trustee, the Debentureholders and
the holders of other indenture securities, in accordance with the provisions of
this paragraph, the funds and property held in such special account and proceeds
thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to
the provisions of this paragraph due consideration in determining the fairness
of the distributions to be made to the Trustee and the Debentureholders and the
holders of other indenture securities with respect to their respective claims,
in which event it shall not be necessary to liquidate or to appraise the value
of any securities or other property held in such special account or as security
for any such claim, or to make a specific allocation of such distributions as
between the secured and unsecured portions of such claims, or otherwise to apply
the provisions of this paragraph as a mathematical formula.
Any Trustee which has resigned or been removed after the beginning of such
three-month period shall be subject to the provisions of this Subsection as
though such resignation or removal had not occurred. If any Trustee has
resigned or been removed prior to the beginning of such three-month period, it
shall be subject to the provisions of this Subsection if and only if the
following conditions exist: (i) the receipt of property or reduction of claim,
which would have given rise to the obligation to account, if such Trustee had
continued as Trustee, occurred after the beginning of such three-month period;
and (ii) such receipt of property or reduction of claim occurred within three
months after such resignation or removal.
(2) There shall be excluded from the operation of subsection (a) of this
Section a creditor relationship arising from:
(a) the ownership or acquisition of securities issued under any
indenture, or any security or securities having a maturity of one year or more
at the time of acquisition by the Trustee;
(b) advances authorized by a receivership or bankruptcy court of
competent jurisdiction or by this Indenture for the purpose of preserving any
property which shall at any time be subject to the lien of this Indenture or of
discharging tax liens or other prior liens or encumbrances thereon, if notice of
such advances and of the circumstances surrounding the making thereof is given
to the Debentureholders at the time and in the manner provided in this
Indenture;
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(c) disbursements made in the ordinary course of business in the
capacity of trustee under an indenture, transfer agent, registrar, custodian,
paying agent, fiscal agent or depositary, or other similar capacity;
(d) an indebtedness created as a result of services rendered or
premises rented; or an indebtedness created as a result of goods or securities
sold in a cash transaction, as defined in Subsection (3) of this Section;
(e) the ownership of stock or other securities of a corporation
organized under the provisions of Section 25(a) of the Federal Reserve Act, as
amended, which is directly or indirectly a creditor of the Company; and
(f) the acquisition, ownership, acceptance or negotiation of any
drafts, bills of exchange, acceptances or obligations which fall within the
classification of self-liquidating paper, as defined in Subsection (3) of this
Section.
(3) For the purposes of this Section only:
(a) the term "default" means any failure to make payment in full of
the principal of or interest on any of the Debentures or upon the other
indenture securities when and as such principal or interest become due and
payable;
(b) the term "other indenture securities" means securities upon which
the Company is an obligor outstanding under any other indenture (i) under which
the Trustee is also trustee, (ii) which contains provisions substantially
similar to the provisions of this Section, and (iii) under which a default
exists at the time of the apportionment of the funds and property held in such
special account;
(c) the term "cash transaction" means any transaction in which full
payment for goods or securities sold is made within seven days after delivery of
the goods or securities in currency or in checks or other orders drawn upon
banks or bankers and payable upon demand;
(d) the term "self-liquidating paper" means any draft, bill of
exchange, acceptance or obligation which is made, drawn, negotiated or incurred
by the Company for the purpose of financing the purchase, processing,
manufacturing, shipment, storage or sale of goods, wares or merchandise and
which is secured by documents evidencing title to, possession of, or a lien
upon, the goods, wares or merchandise or the receivables or proceeds arising
from the sale of the goods, wares or merchandise previously constituting the
security, provided the security is received by the Trustee simultaneously with
the creation of the creditor relationship with the Company arising from the
making, drawing, negotiating or incurring of the draft, bill of exchange,
acceptance or obligation;
(e) the term "Company" means any obligor upon the Debentures; and
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(f) the term "Federal Bankruptcy Act" means the Bankruptcy Act or
Title II of the United States Code.
SECTION 614. APPOINTMENT OF AUTHENTICATING AGENT.
At any time when any of the Debentures remain Outstanding, the Trustee may
appoint an Authenticating Agent or Agents which shall be authorized to act on
behalf of the Trustee to authenticate and deliver Debentures issued upon
original issuance, exchange, registration of transfer or partial redemption
thereof or pursuant to Section 307, and Debentures so authenticated shall be
entitled to the benefits of this Indenture and shall be valid and obligatory for
all purposes as if authenticated by the Trustee hereunder. Wherever reference
is made in this Indenture to the authentication and delivery of Debentures by
the Trustee or the Trustee's certificate of authentication, such reference shall
be deemed to include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and shall at all times be a corporation organized and
doing business under the laws of the United States of America, any State thereof
or the District of Columbia, authorized under such laws to act as Authenticating
Agent, having a combined capital and surplus of not less than $10,000,000 and
subject to supervision or examination by Federal or State authority. If such
Authenticating Agent publishes reports of condition at least annually, pursuant
to law or to the requirements of such supervising or examining authority, for
the purposes of this Section, the combined capital and surplus of such
Authenticating Agent shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. If at any time
an Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, such Authenticating Agent shall resign immediately
in the manner and with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section, without the execution or filing of any paper or any further
act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
to such Authenticating Agent and to the Company. Upon receiving such a notice
of resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall mail written notice of
such appointment by first-class mail, postage prepaid, to all Debentureholders
as their names and addresses appear in the Debenture Register. Any successor
Authenticating Agent upon acceptance of its appointment hereunder shall become
vested with all the rights, powers and duties of its predecessor hereunder, with
like
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effect as if originally named as an Authenticating Agent herein. No
successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section.
The Trustee agrees to pay to each Authenticating Agent from time to time
reasonable compensation for its services under this Section, and the Trustee
shall be entitled to be reimbursed for such payments, subject to the provisions
of Section 607.
If an appointment is made pursuant to this Section, the Debentures may have
endorsed thereon, in lieu of the form of certificate of authentication set forth
in Section 204, a certificate of authentication in the following form:
"This is one of the Debentures described in the within mentioned
Indenture."
----------------------------------------
As Trustee
By
-------------------------------------
As Authenticating Agent
By
-------------------------------------
Authorized Signature
END OF ARTICLE SIX.
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ARTICLE SEVEN
DEBENTUREHOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF
DEBENTUREHOLDERS.
The Company will furnish or cause to be furnished to the Trustee:
(1) quarterly, not later than first day of the month in which an Interest
Payment Date occurs, a list, in such form as the Trustee may reasonably require,
of the names and addresses of the Debentureholders as of such Regular Record
Date, and
(2) at such other times as the Trustee may request in writing, within 30
days after the receipt by the Company of any such request, a list of similar
form and content as of a date not more than fifteen (15) days prior to the time
such list is furnished;
provided, however, that such list need not be furnished so long as the Trustee
is the Debenture Registrar.
The Trustee shall furnish, and the Company shall cause the Trustee to
furnish, to Miller & Schroeder Financial, Inc. or its successor ("Miller &
Schroeder") at such times as Miller & Schroeder may reasonably request in
writing, within 30 days of the receipt by the Trustee of such request, a list of
the names and addresses of the Debentureholders as of a date not more than 15
days prior to the time such list is furnished.
SECTION 702. PRESERVATION OF INFORMATION, COMMUNICATIONS TO DEBENTUREHOLDERS.
(1) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Debentureholders contained in the most
recent list furnished to the Trustee as provided in Section 701 and the names
and addresses of Debentureholders received by the Trustee in its capacity as
Debenture Registrar. The Trustee may destroy any list furnished to it as
provided in Section 701 upon receipt of a new list so furnished.
(2) If ten or more Debentureholders (herein referred to as "applicants")
apply in writing to the Trustee, and furnish to the Trustee reasonable proof
that each such applicant has owned a Debenture for a period of at least six
months preceding the date of such application, and such application states that
the applicants desire to communicate with other Debentureholders with respect to
their rights under this Indenture or under the Debentures and is accompanied by
a copy of the form of proxy or other communication which such applicants propose
to transmit, then the Trustee shall, within five business days after the receipt
of such application, at its election, either
(a) afford such applicants access to the information preserved at the
time by the Trustee in accordance with Section 702(1), or
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(b) inform such applicants as to the approximate number of
Debentureholders whose names and addresses appear in the information preserved
at the time by the Trustee in accordance with Section 702(1) and as to the
approximate cost of mailing to such Debentureholders the form of proxy or other
communication, if any, specified in such application.
If the Trustee shall elect not to afford such applicants access to such
information, the Trustee shall, upon the written request of such applicants,
mail to each Holder whose name and address appears in the information preserved
at the time by the Trustee in accordance with Section 702(1) a copy of the form
of proxy or other communication which is specified in such request, with
reasonable promptness after a tender to the Trustee of the material to be mailed
and of payment, or provision for the payment, of the reasonable expenses of
mailing, unless within five days after such tender the Trustee shall mail to
such applicants and file with the Commission, together with a copy of the
material to be mailed, a written statement to the effect that, in the opinion of
the Trustee, such mailing would be contrary to the best interest of the
Debentureholders or would be in violation of applicable law. Such written
statement shall specify the basis of such opinion. If the Commission, after
opportunity for a hearing upon the objections specified in the written statement
so filed and, on notice to the Trustee, shall enter an order refusing to sustain
any of such objections or if, after the entry of an order sustaining one or more
of such objections, the Commission shall find, after notice and opportunity for
hearing, that all the objections so sustained have been met and shall enter an
order so declaring, the Trustee shall mail copies of such material to all such
Debentureholders with reasonable promptness after the entry of such order and
the renewal by such applicants of their applications.
(3) Every Holder of Debentures, by receiving and holding the same, agrees
with the Company and the Trustee that neither the Company nor the Trustee nor
any agent of either of them shall be held accountable by reason of the
disclosure of any such information as to the names and addresses of the
Debentureholders in accordance with Section 702(2), regardless of the source
from which such information was derived, and that the Trustee shall not be held
accountable by reason of mailing any material pursuant to a request made under
Section 702(2).
SECTION 703. REPORTS BY THE COMPANY.
The Company shall:
(1) File with the Trustee, within 15 days after the Company is required to
file the same with the Commission or to mail the same to its shareholders,
copies of the quarterly reports, annual reports and the information, documents
and other reports (or copies of such portions of the foregoing as the Commission
may from time to time by rules and regulations prescribe) which the Company may
be required to file with the Commission pursuant to Section 12 or 13 or Section
15(d) of the Exchange Act or to mail to its shareholders pursuant to Section
14(a) thereof. The Company agrees to make all filings with the Commission
required by Section 15(d) of the Exchange Act without regard to the number of
Holders of record of the Debentures.
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(2) File with the Trustee and the Commission, in accordance with rules and
regulations prescribed from time to time by the Commission, such additional
information, documents and reports with respect to compliance by the Company
with the conditions and covenants of this Indenture as may be required from time
to time by such rules and regulations.
(3) Within 15 days after the date on which the Company is required to file
reports with the Commission under the Exchange Act, or within 15 days after such
date would have occurred had the Company been required to file reports under the
Exchange Act, the Company shall transmit or cause to be transmitted copies of
such reports by mail (or such other means as permitted by the Commission for
delivery of a written proxy statement under the Exchange Act) to all
Debentureholders, as their names and addresses appear on the Debenture Register,
without cost to such Debentureholders.
(4) File with the Trustee within 45 days after the end of each of the
Company's fiscal quarters a certificate of the Chief Executive Officer and the
Controller of the Company stating that the Company is in compliance with Article
Ten, setting forth the calculations supporting such certification, where
applicable, and attaching the unaudited financial statements of the Company, and
file a supplemental certificate to the same effect attaching the audited
financial statements of the Company promptly after such statements become
available.
(5) File with the Trustee, within 90 days after the end of each fiscal
year of the Company ending after the date hereof, a certificate of the Chief
Executive Officer and Controller of the Company as to such person's knowledge of
the Company's compliance with all conditions and covenants under this Indenture,
such compliance to be determined without regard to any period of grace or
requirement of notice provided under this Indenture.
SECTION 704. REPORTS BY TRUSTEE.
(1) Within sixty (60) days of June __ each year commencing with the year
2000, the Trustee shall transmit by mail to all Debentureholders, as hereafter
provided for, a brief report with respect to the following, provided that no
report need be transmitted if no event requiring to be disclosed in the report
has occurred:
(a) any change to its eligibility under Section 609 and its
qualifications under Section 608, or in lieu thereof, if to the best of its
knowledge it has continued to be eligible and qualified under such Section, a
written statement to such effect;
(b) the creation of or any material change to a relationship
specified in paragraphs (e) through (f) of subsection (3) of Section 608;
(c) the character and amount of any advances (and if the Trustee
elects so to state, the circumstances surrounding the making thereof) made by
the Trustee (as such) which remain unpaid on the date of such report, and for
the reimbursement of which it claims or may claim a lien or charge, prior to
that of the Debentures, on the trust estate or any property or funds held or
collected by it as Trustee, except that the Trustee shall not be required (but
may elect) to
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report such advances if the unpaid aggregate of such advances does not exceed
1/2 of 1% of the principal amount of the Debentures Outstanding on the date
of such report;
(d) the amount, interest rate and maturity date of all other
indebtedness owing by the Company (or by any other obligor on the Debentures) to
the Trustee in its corporate capacity, on the date of such report, with a brief
description of any property held as collateral security therefor, except an
indebtedness based upon a creditor relationship arising in any manner described
in Section 613(2) (b), (c), (d) or (f);
(e) any change to the property and funds, if any, physically in the
possession of the Trustee as such on the date of such report;
(f) any additional issue of Debentures which the Trustee has not
previously reported; and
(g) any action taken by the Trustee in the performance of its duties
hereunder which it has not previously reported and which in its opinion
materially affects the Debentures, except action in respect of a default, notice
of which has been or is to be withheld by the Trustee in accordance with Section
602.
(2) The Trustee shall transmit by mail to all Debentureholders, as their
names and addresses appear in the Debenture Register, a brief report with
respect to the character and amount of any advances (and if the Trustee elects
so to state, the circumstances surrounding the making thereof) made by the
Trustee (as such) since the date of the last report transmitted pursuant to
Subsection (1) of this Section (or if no such report has yet been so
transmitted, since the date of execution of this instrument) for the
reimbursement of which it claims or may claim a lien or charge, prior to that of
the Debentures, on property or funds held or collected by it as Trustee and
which it has not previously reported pursuant to this subsection, except that
the Trustee shall not be required (but may elect) to report such advances if
such advances remaining unpaid at any time aggregate 10% or less of the
principal amount of the Debentures Outstanding at such time, such report to be
transmitted within 90 days after such time.
(3) Reports pursuant to this Section 704 shall be transmitted by mail to
all Debentureholders, as the names and addresses of such Debentureholders appear
upon the Debenture Register.
(4) A copy of each such report, at the time of such transmission to
Debentureholders, shall be filed by the Trustee with each stock exchange or
market upon which the Debentures are listed, with the Commission, if required,
and with the Company. The Company will notify the Trustee when the Debentures
are listed on any stock exchange.
END OF ARTICLE SEVEN.
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ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS.
The Company shall not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets substantially as an entirety
to any Person, and the Company shall not permit any Person to consolidate with
or merge into the Company or any Subsidiary or convey, transfer or lease its
properties and assets substantially as an entirety to the Company or any
Subsidiary, unless:
(1) in case the Company shall consolidate with or merge into another
corporation, trust or entity, the Person formed by such consolidation or into
which the Company is merged shall be a trust, corporation or other entity
organized and existing under the laws of the United States of America, any State
thereof or the District of Columbia and shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the Trustee, in form satisfactory
to the Trustee and counsel to the Trustee, the due and punctual payment of the
principal of (and premium, if any) and interest on all the Debentures and the
performance of every covenant of this Indenture on the part of the Company to be
performed or observed;
(2) immediately after giving effect to such transaction, and treating any
Indebtedness which becomes an obligation of the Company or a Subsidiary as a
result of such transaction as having been incurred by the Company or such
Subsidiary at the time of such transaction, no Event of Default, and no event
which, with the passage of time or the giving of notice, would become an Event
of Default, shall have occurred and be continuing;
(3) the Company, or the surviving entity, as the case may be, immediately
before and immediately after giving effect to such transaction or series of
transactions (including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such transaction
or series of transactions) shall have a Consolidated Tangible Net Worth equal to
or greater than the amount required by Section 1010 hereof;
(4) immediately after giving effect to such transaction or series of
transactions, the Company or the surviving entity, as the case may be, could
incur $1.00 of Indebtedness pursuant to paragraph (3) of Section 1007 hereof;
and
(5) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger, conveyance,
transfer or lease and, if a supplemental indenture is required in connection
with such transaction, such supplemental indenture comply with this Article and
that all conditions precedent herein provided for relating to such transaction
have been complied with.
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SECTION 802. SUCCESSOR SUBSTITUTED.
Upon any consolidation or merger of the Company with or into any other
corporation, trust or other entity in accordance with Section 801, the successor
Person formed by such consolidation or into which the Company is merged shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under this Indenture with the same effect as if such successor
Person had been named as the Company herein, and thereafter the predecessor
Person shall be relieved of all obligations and covenants under this Indenture
and the Debentures.
END OF ARTICLE EIGHT.
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ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF DEBENTUREHOLDERS.
Without the consent of any Debentureholders, the Company, when authorized
by a Company Resolution, and the Trustee, at any time and from time to time may
enter into one or more indentures supplemental hereto, in form satisfactory to
the Trustee for any of the following purposes:
(1) to evidence the succession of another trust, corporation or other
entity to the Company and the assumption by any such successor of the covenants
of the Company herein and in the Debentures; or
(2) to add to the covenants of the Company for the benefit of the
Debentureholders, or to surrender any right or power herein conferred upon the
Company; or
(3) to evidence and provide for acceptance of appointment of a successor
Trustee; or
(4) to convey, transfer, assign, mortgage or pledge any property to or
with the Trustee; or
(5) to cure any ambiguity, to correct or supplement any provision herein
which may be inconsistent with any other provision herein, or to make any other
provisions with respect to matters or questions arising under this Indenture
which shall not be inconsistent with the provisions of this Indenture, provided
that such action pursuant to this paragraph (5) shall not adversely affect the
interests of the Debentureholders.
SECTION 902. SUPPLEMENTAL INDENTURES WITH CONSENT OF DEBENTUREHOLDERS.
With the consent of the Holders of not less than majority aggregate
principal amount of the Outstanding Debentures, by Act of such Debentureholders
delivered to the Company and the Trustee, the Company, when authorized by a
Company Resolution, and the Trustee may enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or of
modifying in any manner the rights of the Debentureholders under this Indenture,
provided that without the consent of the Holder of each Outstanding Debenture
affected thereby, no such supplemental indenture shall,
(1) change the Stated Maturity of the principal of, or any installment of
interest on, any Debenture, or any premium payable on the redemption thereof, or
reduce the principal amount thereof or the rate of interest thereon, or change
the place of payment where, or the coin or currency in which, any Debenture or
the interest thereon is payable, or impair the right to
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institute suit for the enforcement of any such payment on or after the Stated
Maturity thereof (or, in the case of redemption, on or after the Redemption
Date), or
(2) reduce the percentage in principal amount of the Outstanding
Debentures, the consent of whose Debentureholders is required for any such
supplemental indenture, or the consent of whose Debentureholders is required for
any waiver (of compliance with certain provisions of this Indenture or certain
defaults hereunder and their consequences) provided for in this Indenture, or
(3) modify any of the provisions of this Section, Section 513, or Section
1011, except to increase any such percentage or to provide that certain other
provisions of this Indenture cannot be modified or waived without the consent of
the Holder of each Outstanding Debenture affected thereby, or
(4) modify any of the provisions of this Indenture relating to the
subordination of the Debentures in a manner adverse to the Debentureholders, or
(5) modify any of the provisions of Article Eleven, Article Twelve or
Article Thirteen.
It shall not be necessary for any Act of Debentureholders under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
SECTION 903. EXECUTION OF SUPPLEMENTAL INDENTURES.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Section 601) shall be fully protected in relying upon, an
Opinion of Counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture. The Trustee may, but shall not
(except to the extent required in the case of a supplemental indenture entered
into under Section 901(4)) be obligated to, enter into any such supplemental
indenture which affects the Trustee's own rights, duties or immunities under
this Indenture or otherwise.
SECTION 904. EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, such supplemental indenture
shall form a part of this Indenture for all purposes and every Holder of
Debentures theretofore or thereafter authenticated and delivered hereunder shall
be bound thereby.
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SECTION 905. CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental Indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act as then in effect if this
Indenture shall then be qualified under the Trust Indenture Act.
SECTION 906. REFERENCE IN DEBENTURES TO SUPPLEMENTAL INDENTURES.
Debentures authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Debentures so modified as to conform, in the opinion of the Trustee and the
Board of Directors of the Company, to any such supplemental indenture may be
prepared and executed by the Company and authenticated and delivered by the
Trustee in exchange for Outstanding Debentures.
SECTION 907. EFFECT ON SENIOR DEBT.
No supplemental indenture shall, directly or indirectly, adversely affect
the rights of any holder of Senior Debt under Article Fourteen without the
consent of such holder.
END OF ARTICLE NINE.
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ARTICLE TEN
COVENANTS
SECTION 1001. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.
The Company will duly and punctually pay the principal of, premium, if any,
and interest on the Debentures in accordance with the terms of the Debentures
and this Indenture.
SECTION 1002. MAINTENANCE OF OFFICE OR AGENCY.
The Company will maintain within the continental United States, an office
or agency where Debentures may be presented or surrendered for payment, where
Debentures may be surrendered for registration of transfer or exchange, and
where notices and demands to or upon the Company in respect of the Debentures
and this Indenture may be served. The Company will give prompt written notice
to the Trustee of the location and any change in the location, of such office or
agency. Until otherwise designated by the Company in a written notice to the
Trustee, and if at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Company hereby appoints the
Trustee its agent to receive such presentations, surrenders, notices and
demands.
The Company may also from time to time designate one or more other offices
or agencies where the Debentures may be presented or surrendered for any or all
such purposes and may from time to time rescind such designations, provided that
no such designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency within the continental United States,
for such purposes. The Company will give prompt written notice to the Trustee
of any such designation or rescission and of any change in the location of any
such other office or agency.
The Company hereby initially designates the Corporate Trust Office of the
Trustee set forth in the first paragraph of this instrument as an agency of the
Company.
SECTION 1003. MONEY FOR DEBENTURE PAYMENTS TO BE HELD IN TRUST.
If the Company shall at any time act as its own Paying Agent, it will, on
or before each due date of the principal of (and premium, if any) or interest on
any of the Debentures, segregate and hold in trust for the benefit of the
Persons entitled thereto a sum sufficient to pay the principal (and premium, if
any) or interest so becoming due until such sums shall be paid to such Persons
or otherwise disposed of as herein provided and will promptly notify the Trustee
of its action.
Whenever the Company shall have one or more Paying Agents, on or prior to
each due date of the principal of (and premium, if any) or interest on any
Debentures, it will deposit with a
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Paying Agent a sum sufficient to pay the principal (and premium, if any) or
interest so becoming due, such sum to be held in trust for the benefit of the
Persons entitled to such principal (and premium, if any) or interest, and
(unless such Paying Agent is the Trustee) the Company will promptly notify
the Trustee of its action or failure so to act.
The Company will cause each Paying Agent other than the Trustee to execute
and deliver to the Trustee an instrument in which such Paying Agent shall agree
with the Trustee, subject to the provisions of this Section, that such Paying
Agent will:
(1) hold all sums held by it for the payment of the principal of (and
premium, if any) or interest on Debentures in trust for the benefit of the
Persons entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or any other
obligor upon the Debentures) in the making of any payment of principal (and
premium, if any) or interest on the Debentures; and
(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so held in
trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, pay, or by Company
Order direct any Paying Agent to pay, to the Trustee all sums held in trust by
the Company or such Paying Agent, such sums to be held by the Trustee upon the
same trusts as those upon which such sums were held by the Company or such
Paying Agent. Upon such payment by any Paying Agent to the Trustee, such Paying
Agent shall be released from all further liability with respect to such money.
Unless otherwise required by applicable law, any money deposited with the
Trustee or any Paying Agent, or then held by the Company, in trust for the
payment of the principal of (and premium, if any) or interest on any Debenture
and remaining unclaimed for two years after such principal (and premium, if any)
or interest has become due and payable shall be paid to the Company on Company
Request, or (if then held by the Company) shall be discharged from such trust.
The Holder of such Debenture shall thereafter, as an unsecured general creditor,
look only to the Company for payment thereof, and all liability of the Trustee
or such Paying Agent with respect to such trust money, and all liability of the
Company as trustee thereof, shall thereupon cease, provided that the Trustee or
such Paying Agent, before being required to make any such repayment, at the
expense of the Company, may cause to be published once, in a newspaper published
in the English language, customarily published on each Business Day and of
general circulation in Minneapolis or Saint Paul, Minnesota, notice that such
money remains unclaimed and that, after a date specified therein, which shall
not be less than thirty (30) days from the date of such publication, any
unclaimed balance of such money then remaining will be repaid to the Company.
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SECTION 1004. MAINTENANCE OF CORPORATE EXISTENCE, LICENSING AND RIGHTS.
Subject to Article Eight hereof, the Company will do or cause to be done
all things necessary to preserve and keep in full force and effect the corporate
existence of the Company and each Subsidiary, and all material rights,
certificates, authorities, licenses, permits and approvals of any of them, and
shall conduct its business in conformity with the requirements of such rights,
certificates, authorities, licenses, permits and approvals, provided that the
Company shall not be required to preserve any such right, certificate,
authority, license or permit if the Board of Directors of the Company shall
reasonably and in good faith determine that the preservation thereof is no
longer desirable in the conduct of the business of the Company or of its
Subsidiaries and that the loss thereof is not disadvantageous in any material
respect to the Debentureholders.
SECTION 1005. PAYMENT OF TAXES AND ASSESSMENTS.
The Company and each of its Subsidiaries will cause to be paid and
discharged all lawful taxes, assessments and governmental charges or levies
imposed upon the Company or any Subsidiary or upon the income or profits of the
Company or any Subsidiary or upon property or any part thereof belonging to the
Company or any Subsidiary before the same shall be in default, as well as all
lawful claims for labor, materials and supplies which, if unpaid, might become a
lien or charge upon such property or any part thereof, provided that the Company
shall not be required to cause to be paid or discharged any such tax,
assessment, charge, levy or claim so long as the validity or amount thereof
shall be contested in good faith by appropriate proceedings and for which
disputed amounts adequate reserves (in the good faith judgment of the Board of
Directors of the Company) have been established.
SECTION 1006. MAINTENANCE OF PROPERTIES; INSURANCE; BOOKS AND RECORDS;
COMPLIANCE WITH LAW.
(1) The Company and each of its Subsidiaries shall maintain insurance in
such amounts and covering such risks as are usually and customarily carried with
respect to similar facilities according to their respective locations.
(2) The Company and each of its Subsidiaries shall cause all its
properties (including leased properties) used or useful in the conduct of its
business to be maintained and kept in good condition, repair and working order
and supplied with all necessary equipment and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvements thereof,
all as in the judgment of the Company may be necessary so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times; provided, however, that nothing in this subsection (2) shall
prevent the Company or any Subsidiary from discontinuing the operation and
maintenance of any of its properties if such discontinuance is, in the good
faith judgment of the Board of Directors of the Company, desirable in the
conduct of its business and not disadvantageous in any material respect to the
Debentureholders.
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(3) The Company and each of its Subsidiaries shall keep proper books of
record and account, in which full and correct entries shall be made of all
financial transactions and the assets and business of the Company and each
Subsidiary, in accordance with GAAP consistently applied to the Company and its
Subsidiary taken as a whole.
(4) The Company and each of its Subsidiaries shall comply with all
statutes, laws, ordinances, or government rules and regulations, including
rules, regulations and orders of governmental agencies, decrees, orders,
injunctions, writs to which it is subject, noncompliance with which would
materially adversely affect the business, prospects, earnings, properties,
assets or condition (financial or otherwise) of the Company and its Subsidiary
taken as a whole.
(5) The Company will take all appropriate steps to preserve, protect and
maintain the trademarks, trade names, copyrights, licenses and permits used in
the conduct of the business of the Company and its Subsidiaries; provided,
however, that nothing in this Subsection shall prevent the Company or a
Subsidiary from selling, abandoning, or otherwise disposing of any such
trademark, trade name, copyright, license or permit if such sale, abandonment or
disposition is, in the judgment of the Company, desirable in the conduct of its
business and not disadvantageous in any material respect to the
Debentureholders.
SECTION 1007. LIMITATION ON ADDITIONAL INDEBTEDNESS.
The Company shall not, and shall not permit any Subsidiary to, create,
incur, assume or issue, directly or indirectly, or guarantee or in any manner
become, directly or indirectly, liable for or with respect to the payment of any
Indebtedness, except for:
(1) Indebtedness under the Debentures and this Indenture;
(2) Indebtedness of the Company and any Subsidiary not otherwise referred
to in this Section 1007 outstanding on the Issue Date;
(3) Indebtedness (plus interest, premium, fees and other obligations
associated therewith) that, immediately after giving PRO FORMA effect to the
incurrence thereof, (i) does not cause the ratio of the sum of the Long Term
debt portion of the Capitalized Lease Obligations plus Long-Term Debt to
Consolidated Tangible Net Worth to exceed 2.75:1 and (ii) does not cause the
ratio of Total Liabilities to Consolidated Tangible Net Worth to exceed 5:1; or
(4) any deferrals, renewals, extensions, replacements, refinancings or
refundings of, or amendments, modifications or supplements to, Indebtedness
incurred under clauses (2) or (3) above, whether involving the same or any other
lender or creditor or group of lenders or creditors, provided that any such
deferrals, renewals, extensions, replacements, refinancings, refundings,
amendments, modifications or supplements (i) shall not provide for any mandatory
redemption, amortization or sinking fund requirement in an amount greater than
or at a time prior to the amounts and times specified in the Indebtedness being
deferred, renewed, extended, replaced, refinanced, refunded, amended, modified
or supplemented, (ii) shall not exceed the principal amount (plus accrued
interest and prepayment premium, if any) of the Indebtedness being renewed,
extended, replaced, refinanced or refunded and (iii) shall be subordinated to
the
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Debentures at least to the extent and in the manner, if at all, that the
Indebtedness being renewed, extended, replaced, refinanced or refunded is
subordinated to the Debenture.
SECTION 1008. TRANSACTIONS WITH AFFILIATES.
(a) The Company will cause any and all Indebtedness of the Company or any
Subsidiary created, incurred, assumed, guaranteed, renewed, extended or refunded
on or after the date of execution of this Indenture, to any Affiliate of the
Company, other than a Subsidiary, to be expressly subordinate and junior in
right of payment to the Debentures, according to the terms of the instrument (or
any supplemental instrument) creating or evidencing such Indebtedness or
pursuant to which such Indebtedness is outstanding, unless such Indebtedness is
borrowed from Yale T. Dolginow and approved by a majority of the Independent
members of the Board of Directors of the Company prior to the date such
Indebtedness is created, incurred, assumed, guaranteed, renewed, extended or
refunded. No payments of any principal or interest on any Indebtedness of the
Company or any Subsidiary to any Affiliate of the Company, other than a
Subsidiary or Yale T. Dolginow, shall be paid during any period which is, or
which would after the passage of time constitute, an Event of Default.
(b) The Company will not itself, and will not permit any Subsidiary to,
engage in any transaction of any kind or nature with any Affiliate of the
Company, other than a Wholly Owned Subsidiary, unless (1) a majority of the
Independent members of the Board of Directors of the Company has determined or
ratified by Resolution (a copy of which need not be delivered to the Trustee
unless and until ratified) that such transaction is or was, or, in the case of a
course of related or similar transactions or continuing transactions, such
course of transactions or continuing transactions are or were, upon terms which
are or were at the time entered into fair to the Company or such subsidiary, as
the case may be, (2) the transaction is or was at the time entered into
reasonably similar to, or more beneficial to the Company or such Subsidiary
than, the terms deemed likely to occur in similar transactions with unrelated
persons under the same circumstances; and (3) the transaction is or was at the
time entered into, certified (a copy of which certification need not be
delivered to the Trustee unless and until the Board Resolution described in
Subsection (b)(1) above is ratified) to the Board of Directors by a person
experienced in transactions of the nature of the subject transaction, other than
an Affiliate of the Company, as fair to the Company or such Subsidiary, as the
case may be, and as reasonably similar to, or more beneficial to the Company or
such Subsidiary than, the terms which would be likely to occur in similar
transactions with unrelated persons under the same circumstances.
SECTION 1009. RESTRICTIONS ON DIVIDENDS, REDEMPTIONS, ETC.
(a) The Company will not (1) declare or pay any dividend or make any other
distribution on any Capital Stock of the Company, except dividends or
distributions payable in Capital Stock of the Company.
(b) The Company and any Subsidiary will not purchase, redeem or otherwise
acquire or retire for value any Capital Stock of the Company, except Capital
Stock acquired upon conversion thereof into other Capital Stock of the Company,
if, upon giving effect to such
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purchase, redemption, or other acquisition, the aggregate amount expended for
all such purposes subsequent to January 29, 1999 would exceed the sum of:
(A) 50% of the increment of Consolidated Net Income accumulated
subsequent to January 29, 1999;
(B) the aggregate of the net proceeds received by the Company or a
Subsidiary from the sale or issue after the date hereof (other than to a
Subsidiary or upon the conversion of Capital Stock or Indebtedness of the
Company or a Subsidiary) of Capital Stock of the Company, said net proceeds
being deemed for the purposes of this Section to equal the aggregate of
(i) the cash, if any, received by the Company or a Wholly Owned Subsidiary
from such sale or issue, plus (ii) the value of any consideration, other
than cash, received by the Company or a Wholly Owned Subsidiary from such
sale or issue, as determined by resolution of the Board of Directors; and
(C) the net proceeds (as above defined) received by the Company or a
Wholly Owned Subsidiary from the issuance or sale (other than to the
Company or a Subsidiary) of any convertible Indebtedness of the Company,
which Indebtedness has been converted into Equity Securities of the Company
after the date hereof.
SECTION 1010. NET WORTH.
The Company will at all times during the term of the Debentures keep and
maintain Consolidated Tangible Net Worth at an amount not less than Seven
Million Dollars ($7,000,000) plus 50% of positive Consolidated Net Income earned
after January 29, 1999.
SECTION 1011. WAIVER OF CERTAIN COVENANTS.
The Company may omit in any particular instance to comply with the
covenants set forth in Section 1004 through 1010 and Section 1012 and 1013,
inclusive, if before the time for such compliance the Debentureholders of at
least a majority in aggregate principal amount of the Outstanding Debentures
shall, by Act of such Debentureholders, either waive such compliance or
condition in such instance or generally waive compliance with such covenants or
condition, but no such waiver shall extend to or affect such covenant except to
the extent so expressly waived, and, until such waiver shall become effective,
the obligations of the Company and the duties of the Trustee in respect of such
covenant shall remain in full force and effect.
SECTION 1012. STATEMENT AS TO COMPLIANCE.
The Company will deliver to the Trustee, within 120 days after the end of
each fiscal year, a written statement signed by the Chairman of the Board,
President or a Vice President and by the Chief Financial Officer, an Assistant
Treasurer, the Controller or an Assistant Controller of the Company, stating, as
to each signer thereof, that:
(a) an analysis of the activities of the Company during such year and of
performance under this Indenture has been made under such person's supervision,
and
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(b) to the best of such person's knowledge, based on such analysis, the
Company has fulfilled all of its obligations under this Indenture throughout
such year, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default known to such person and the nature and
status thereof, and if continuing the actions being taken by the company to cure
the same.
SECTION 1013. LIMITATION ON ISSUANCE OF CERTAIN SECURITIES.
From and after the date of this Indenture as originally executed and for as
long as any of the Debentures are Outstanding, the Company will not publicly
offer for sale or sell any Redeemable Preferred Stock, if such Redeemable
Preferred Stock has a fixed redemption date, as the case may be (exclusive of
payments through the operation of a sinking fund), earlier than the last Stated
Maturity for payment of principal of the Debentures.
END OF ARTICLE TEN.
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ARTICLE ELEVEN
REDEMPTION OF DEBENTURES
SECTION 1101. OPTIONAL REDEMPTION.
The Company may, at its option, at any time on or after June ___ 2002,
redeem the Outstanding Debentures in whole but not in part at the following
redemption prices (expressed as a percentage of the principal amount of each
Debenture thereof) (the "Redemption Price") together with interest accrued and
unpaid thereon to the Redemption Date (which shall be an Interest Payment Date),
if redeemed during the twelve-month period beginning on June ___, of each of the
following years.
<TABLE>
<CAPTION>
REDEMPTION PRICE: 2002 2003 2004
<S> <C> <C> <C>
108% 104% 100%
</TABLE>
The particular Debentures to be redeemed on a Redemption Date pursuant shall be
selected as provided in Section 1104.
SECTION 1102. APPLICABILITY OF ARTICLE.
Redemption of Debentures at the election of the Company or otherwise, as
permitted or required by any provision of this Indenture, or any supplement
hereto shall be made in accordance with such provisions and this Article,
provided that no Redemption shall be made under this Article during any period
in which an Event of Default, or an event which, with notice or lapse of time or
both, would constitute an Event of Default, has occurred and is continuing.
SECTION 1103. ELECTION TO REDEEM; NOTICE TO TRUSTEE.
The election of the Company to redeem any Debentures pursuant to Section
1101 shall be evidenced by a Company Resolution. In case of any Redemption at
the election of the Company of all the Debentures, at least 60 days prior to the
Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee), the Company shall notify the Trustee of such
Redemption Date and of the aggregate principal amount of Debentures to be
redeemed and shall deliver to the Trustee such documentation and records as
shall enable the Trustee to select the Debentures to be redeemed pursuant to
Section 1104.
SECTION 1104. NOTICE OF REDEMPTION.
Notice of redemption shall be given by first-class mail, postage prepaid,
mailed not less than 30 nor more than 60 days prior to the Redemption Date, to
each Holder of Debentures to be redeemed, at the address appearing in the
Debenture Register.
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All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) that on the Redemption Date, the Redemption Price will become due and
payable upon each such Debenture to be redeemed and that interest thereon will
cease to accrue on and after said date, and
(4) the place or places where such Debentures are to be surrendered for
payment of the Redemption Price.
Notice of redemption of Debentures to be redeemed at the election of the
Company shall be given by the Company or, upon Company request, by the Trustee
in the name and at the expense of the Company.
SECTION 1105. DEPOSIT OF REDEMPTION PRICE.
On or prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, the Company will segregate and hold in trust as provided in Section 1003)
in immediately available funds an amount of money sufficient to pay the
Redemption Price of all the Debentures which are to be redeemed on that date.
SECTION 1106. DEBENTURES PAYABLE ON REDEMPTION DATE.
Notice of redemption having been given as aforesaid, the Debentures so to
be redeemed shall become, on the Redemption Date, due and payable at the
Redemption Price therein specified, and on and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Debentures shall cease to bear interest. Upon surrender of any
such Debenture for redemption in accordance with such notice, such Debenture
shall be paid by the Company at the Redemption Price, together with accrued
interest to the Redemption Date, exclusive of installments of interest whose
Stated Maturity is on or prior to the Redemption Date, which shall be payable to
the Debentureholders of such Debentures, or one or more Predecessor Debentures,
registered as such at the close of business on the relevant Record Dates
according to their terms and the provisions of Section 307.
If any Debenture called for redemption shall not be so paid upon surrender
thereof for redemption, the principal (and premium, if any) shall, until paid,
bear interest from the Redemption Date at the rate borne by the Debenture.
SECTION 1107. OPEN MARKET PURCHASES.
Except to the extent limited by Article 14, the Company is not prohibited
from acquiring Debentures on the open market.
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END OF ARTICLE ELEVEN.
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ARTICLE TWELVE
REPURCHASE OF SECURITIES AT THE OPTION
OF THE HOLDER UPON CHANGE IN CONTROL
SECTION 1201. RIGHT TO REQUIRE REPURCHASE.
In the event that, prior to June 15, 2005 there shall occur a Change of
Control (as hereinafter defined) of the Company, then each Holder shall have
the right, at the Holder's option, to require the Company to repurchase, and
upon the exercise of such right the Company shall repurchase, all of such
Holder's Debentures, or any portion of the principal amount thereof that is
an integral multiple of $1,000, on the date (the "Repurchase Date") that is
45 days after the date of the Company Notice (as defined in Section 1202(a))
at a purchase price, payable in cash, equal to 102% of the principal amount
of Debentures to be repurchased (a "Repurchase Price"), together with accrued
interest to the Repurchase Date. Such right to require the repurchase of the
Debentures shall not continue after a discharge of the Company from its
obligations with respect to the securities in accordance with Article 4,
unless a Change of Control shall have occurred prior to such discharge. The
Repurchase Price shall be paid in cash.
SECTION 1202. NOTICES; METHOD OF EXERCISING REPURCHASE RIGHT, ETC.
(a) Unless the Company shall have theretofore called for redemption all
the Outstanding Debentures pursuant to Article 11, on or before the 30th day
after the occurrence of a Change of Control, the Company or, at the request of
the Company, the Trustee, shall mail to all Holders in the manner provided in
Section 1104 a notice (the "Company Notice") of the occurrence of the Change of
Control and of the repurchase right set forth herein arising as a result
thereof. The Company shall also deliver a copy of such notice of a repurchase
right to the Trustee and cause a copy of such notice of a repurchase right to be
published in a newspaper of general circulation in Minneapolis and St. Paul,
Minnesota and San Diego, California.
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Each notice of a repurchase right shall state:
(1) the Repurchase Date,
(2) the date by which the repurchase right must be exercised,
(3) the Repurchase Price, and
(4) a description of the procedure which a Holder must follow to
exercise a repurchase right.
No failure of the Company to give the foregoing notices or defect therein
shall limit any Holder's right to exercise a repurchase right or affect the
validity of the proceedings for the repurchase of Debentures.
(b) To exercise a repurchase right, a Holder shall deliver to the Trustee
on or before the 30th day after the date of the Company Notice (i) written
notice of the Holder's exercise of such right, which notice shall set forth the
name of the Holder, the principal amount of the Debentures to be repurchased, a
statement that an election to exercise the repurchase right is being made
thereby, and (ii) the Debentures with respect to which the repurchase right is
being exercised, duly endorsed for transfer to the Company. Such written notice
shall be irrevocable, except that the right of the holder to convert the
Debentures with respect to which the repurchase right is being exercised shall
continue until the close of business on the Repurchase Date.
(c) In the event a repurchase right shall be exercised in accordance with
the terms hereof, the Company shall pay or cause to be paid the Repurchase Price
in cash, as provided above, to the Holder on the Repurchase Date, together with
accrued and unpaid interest to the Repurchase Date payable with respect to the
Debentures as to which the repurchase right has been exercised; PROVIDED,
HOWEVER, that installments of interest whose Stated Maturity is on or prior to
the Repurchase Date shall be payable in cash to the Holders of such Debentures,
or one or more Predecessor Debentures, registered as such at the close of
business on the relevant Record Dates according to their terms and the
provisions of Section 307.
(d) If any Debenture surrendered for repurchase shall not be so paid on
the Repurchase Date, the principal shall, until paid, bear interest to the
interest to the extent permitted by applicable law from the Repurchase Date at
the rate borne by the Debenture.
(e) Any Debenture which is to be repurchased only in part shall be
surrendered at any office or agency of the Company designated for that purpose
pursuant to Section 1002 (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the holder thereof or his attorney
duly authorized in writing), and the Company shall execute, and the Trustee
shall authenticate and deliver to the holder of such Debenture without service
charge, a new Debenture or Debentures, of any authorized denomination as
requested by such Holder, in aggregate
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principal amount equal to and in exchange for the unrepurchased portion of
the principal of the Debenture so surrendered.
SECTION 1203. CERTAIN DEFINITIONS.
For purposes of this Article:
(a) the term "beneficial owner" shall be determined in accordance with
Rule 13d-3, as in effect on the date of the original execution of this
Indenture, promulgated by the Commission pursuant to the Exchange Act, as
amended, and for the purpose of this Article 12, "Person" shall include any
syndicate or group which would be deemed to be a "person" under Section 13(d)(3)
of such Exchange Act as in effect on the date of the original execution of this
Indenture; and
(b) a "Change of Control" of the Company shall be deemed to have occurred
at such time as any Person is or becomes the beneficial owner, directly or
indirectly, through a purchase, redemption, merger or other acquisition
transaction or series of transactions, of shares of capital stock of the Company
entitling such Person to exercise 50% or more of the total voting power of all
shares of capital stock of the Company entitled to vote in elections of
directors; PROVIDED, HOWEVER, that a Change of Control shall not be deemed to
have occurred if either (i) such Person is Yale T. Dolginow or is an Affiliate
thereof and such person is not entitled to exercise 66% or more of the total
voting power of all shares of capital stock of the Company entitled to vote in
elections of directors or (ii) the Closing Price on any five Trading Days during
the 10 Trading-Day period immediately preceding the date of the Change of
Control shall equal or exceed 125% of the conversion price in effect on such
Trading Day or (iii) all of the consideration (excluding cash payments for
fractional shares) to be paid for the Common Stock in the transaction or
transactions constituting the Change of Control consists of shares of common
stock traded on a national securities exchange or quoted on the Nasdaq National
Market and as a result of such transaction or transactions the Debentures become
convertible solely into such common stock.
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ARTICLE THIRTEEN
CONVERSION OF DEBENTURES
SECTION 1301. RIGHT OF HOLDER TO CONVERT DEBENTURES INTO COMMON STOCK;
CONVERSION RATE.
(a) Subject to and upon compliance with the provisions of this Article
Thirteen, at the option of the Holder thereof, any Debenture or any portion of
the principal amount thereof which is $1,000 or an integral multiple of $1,000
may be converted at the principal amount thereof, or of such portion thereof,
into fully paid and non-assessable shares (calculated as to each conversion to
the nearest 1/100 of a share) of Common Stock, at the Conversion Price,
determined as hereinafter provided, in effect at the time of conversion. Such
conversion right shall expire at the close of business on June 15, 2005. In
case a Debenture is called for redemption or is repurchased, such conversion
right in respect to the Debenture shall expire at the close of business on the
Redemption Date or Repurchase Date, unless the Company defaults in making the
payment due on upon redemption or repurchase.
(b) The initial Conversion Price ("CONVERSION PRICE") at which shares of
Common Stock shall be delivered upon conversion shall be $________ principal
amount of Debentures for each share of Common Stock but such Conversion Price
and any adjusted conversion price shall be subject to adjustment from time to
time as provided in Section 1304.
SECTION 1302. ISSUANCE OF SHARES OF COMMON STOCK ON CONVERSION; NO ADJUSTMENT
FOR INTEREST OR DIVIDENDS.
(a) In order to exercise the conversion privilege, the Holder of any
Debenture to be converted shall surrender such Debenture to the Company at any
office or agency to be maintained by the Company for that purpose pursuant to
Section 1002, and shall give written notice to the Company at said office or
agency that the Holder elects to convert such Debenture or a specified portion
thereof. Such notice shall also state the name or names (with addresses) in
which the certificate or certificates for shares of Common Stock which shall be
issuable on such conversion shall be issued. Debentures surrendered for
conversion shall (if so required by the Company or the Trustee) be accompanied
by proper assignments thereof to the Company or in blank for transfer. As
promptly as practicable after the receipt of such notice and the surrender of
such Debenture as aforesaid, the Company shall issue and shall deliver at said
office or agency to such Holder, or on his or her written order, a certificate
or certificates for the number of full shares of Common Stock issuable upon the
conversion of such Debenture (or a specified portion thereof) in accordance with
the provisions of this Article Thirteen and cash, as provided in Section 1303,
in respect of any fraction of a share of Common Stock issuable upon such
conversion. Such conversion shall be deemed to have been effected at the close
of business on the date on which such notice, duly completed and executed, shall
have been received at said office or agency, and such Debenture shall have been
surrendered as aforesaid, and at such time the rights of the Holder of such
Debenture as such Holder shall cease and the person or persons in whose name or
names any certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become the holder or
holders of record of
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the shares represented thereby; provided, however, that no such surrender on
any date when the stock transfer books of the Company shall be closed shall
be effective to cnstitute the person or persons entitled to receive the
shares of Common Stock upon such conversion as the record holder or holders
of such shares of Common Stock on such date, but such surrender shall be
effective to constitute the person or persons entitled to receive such shares
of Common Stock as the record holder or holders thereof for all purposes at
the opening of business on the next succeeding day on which such stock
transfer books are open and such conversion shall be at the conversion price
in effect at the opening of business on such next succeeding day. Subject to
the provisions of Section 307, no payment or adjustment shall be made upon
any conversion on account of any interest accrued on the Debentures
surrendered for conversion or on account of any dividends on the Common Stock
issued upon such conversion.
(b) In the case of any Debenture which is converted in part only, upon
such conversion the Company shall execute and the Trustee shall authenticate and
deliver to or on the order of the Holder of such Debenture without service
charge, a new Debenture or Debentures, of any authorized denomination or
denominations as requested by such Holder, in aggregate principal amount equal
to the unconverted portion of the principal of the Debenture so surrendered.
(c) In the case of any Debenture which is converted after any Regular
Record Date and on or prior to the next succeeding Interest Payment Date, the
interest falling due on such Interest Payment Date shall be payable on such
Interest Payment Date notwithstanding such Conversion, and such interest
(whether or not punctually paid or duly provided for) shall be paid to the
Person in whose name the Debenture (or any Predecessor Debenture or Debentures)
is registered at the close of business on such Regular Record Date.
SECTION 1303. CASH TO BE PAID IN LIEU OF FRACTIONAL SHARES.
No fractional shares of Common Stock shall be issued upon conversion of
Debentures. If more than one Debenture shall be surrendered for conversion at
one time by the same Holder, the number of full shares which shall be issuable
upon conversion thereof shall be computed on the basis of the aggregate
principal amount of the Debentures (or specified portions thereof to the extent
permitted hereby) so surrendered. Instead of any fractional share of Common
Stock which would otherwise be issuable upon conversion of any Debenture or
Debentures or specified portions thereof, the Company shall pay a cash
adjustment in respect of such fraction in an amount equal to the same fraction
of the conversion price per share of Common Stock.
SECTION 1304. ADJUSTMENT OF CONVERSION PRICE.
The Conversion Price in effect at any time shall be subject to adjustment
as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its Common Stock in shares of its or any of its Subsidiaries'
capital stock, (ii) subdivide its outstanding shares of Common Stock, (iii)
combine its outstanding shares of Common Stock into a smaller number of shares,
or (iv) issue by reclassification of its shares of Common Stock (including any
such reclassification in connection with a consolidation or merger in which the
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Company is the continuing corporation) any shares, the conversion price in
effect at the time of the record date for such dividend or of the effective
date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the Holder of any Debenture surrendered for
conversion after such time shall be entitled to receive the number and kind
of shares which he would have owned or have been entitled to receive had such
Debenture been converted immediately prior to such time. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) In case the Company shall fix a record date for the making of a
distribution to all holders of its Common Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation) of evidences of its indebtedness or assets or
subscription rights or warrants (excluding any cash dividends paid from retained
earnings and dividends payable in stock for which adjustment is made pursuant to
paragraph (a) above and subscription rights or warrants issued in any "rights
offering" for which notice has been given to the Holders of the Debentures
pursuant to Section 1305), the number of shares of Common Stock into which each
$1,000 principal amount of Debentures shall be convertible after such record
date shall be determined by multiplying the number of shares of Common Stock
into which such principal amount of Debentures was convertible immediately prior
to such record date by a fraction, of which the numerator shall be the current
market price per share of Common Stock (as defined in paragraph (c) below) on
such record date, and of which the denominator shall be such current market
price per share of Common Stock, less the fair market value (as determined by
the Board of Directors, whose determination shall be conclusive, and described
in a statement filed with the Trustee and each conversion agent) of the portion
of the assets or evidences of indebtedness so distributed or of such
subscription rights or warrants applicable to one share of Common Stock. Such
adjustment shall be made successively whenever such a Record Date is fixed; and
in the event that such distribution is not made, the Conversion Price shall
again be adjusted to be the Conversion Price which would then be in effect if
such Record Date had not been fixed. For purposes of this subsection (b),
"rights of offering" means the issuance of rights or warrants to all holders of
Common Stock entitling them (for a period expiring within 90 days after the
Record Date therefor) to subscribe for or purchase Common Stock (or securities
convertible into shares of Common Stock) at a price per share (or having a
Conversion Price per share) less than the current market price per share of
Common Stock (as defined in paragraph (c) below) on the record date therefor.
(c) For the purpose of any computation under subsection (b) above, the
current market price per share of Common Stock on any date shall be deemed to be
the average of the daily closing prices, for 30 consecutive Business Days
commencing 45 Business Days before the date in question. The closing price for
each day shall be: (i) if the Common Stock is listed on a national securities
exchange or on the Nasdaq National Market, the last reported sale price of
Common Stock on that day, as reported on a composite basis with other exchanges
upon which the Common stock is listed or over-the-counter transactions, or, if
not so reported on a composite basis, then on the principal securities exchange
on which the Common Stock is listed, as designated by the Board of Directors for
the purposes hereof, or if there was no reported sale on that day, on the basis
of the average of the bid and asked quotations on such composite report or such
exchange on that day, or (ii) if the stock was not then listed on a securities
exchange, on the basis of the highest bid quotation in the over-the-counter
market at the close of business on that
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day, as reported on Nasdaq or its successor quotation system, or, if not so
reported, then as quoted by the principal market maker for the Common Stock,
as designated by the Board of Directors for the purposes hereof.
(d) No adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least $.01 per share in
such price; provided, however, that any adjustments which by reason of this
paragraph (d) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment, and provided further, that
adjustments shall be required and made in accordance with the provisions of this
Article Thirteen (other than this paragraph (d)) not later than such time as may
be required in order to preserve the tax-free nature of a distribution for
United States income tax purposes to the holders of Debentures of Common Stock.
All calculations under this Article Thirteen shall be made to the nearest cent
or to the nearest one-thousandth of a share, as the case may be.
(e) Whenever the Conversion Price is adjusted, as herein provided, the
Company shall promptly file with the Trustee and with the office or agency
maintained by the Company for the conversion of Debentures pursuant to Section
1002, a certificate of a firm of independent public accountants selected by the
Board of Directors (who may be the regular accountants employed by the Company)
setting forth the conversion price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment and a computation
thereof. Such certificate shall be conclusive evidence of the correctness of
such adjustment, and subject to the provisions of Article Six, neither the
Trustee nor any conversion agent shall be under any duty or responsibility with
respect to any such certificate or any facts or computations set forth therein,
except to exhibit said certificate from time to time to any Debentureholder
desiring to inspect the same. The Company shall promptly cause a notice setting
forth the adjusted Conversion Price to be mailed to the holders of Debentures as
their names and addresses appear upon the Debenture Register.
(f) In the event that any time, as a result of an adjustment made pursuant
to paragraph (a) above, the holder of any Debenture thereafter surrendered for
conversion shall become entitled to receive any shares of the Company other than
shares of Common Stock, thereafter the number of such other shares so receivable
upon conversion of any Debenture shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in paragraphs (a) to (e),
inclusive, above and the provisions of this Article Thirteen with respect to the
Common Stock shall apply on like items to any such other shares.
(g) In addition to the foregoing adjustments in subsections (a), (b), (c),
(d), (e) and (f) above, the Company, from time to time and to the extent
permitted by law, may reduce the Conversion Price by any amount for at least 20
Business Days, if the Board of Directors has made a determination, which
determination shall be conclusive, that such reduction would be in the best
interests of the Company. The Company shall give notice to the Trustee and
cause notice of such reduction to be mailed to each Holder of Debentures at such
Holder's address as the same appears on the registry books of the Registrar, at
least 15 days prior to the date on which such reduction commences.
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SECTION 1305. NOTICE OF CERTAIN CORPORATION ACTION.
In case:
(a) the Company shall declare a dividend (or any other distribution) on
its Common Stock payable otherwise than in cash out of its retained earnings or
dividends payable in its Common Stock; or
(b) the Company shall authorize the granting to the holders of its Common
Stock of warrants or rights to subscribe for or purchase any shares of stock of
any class or of any other rights; or
(c) of any reclassification, change, consolidation, merger, sale, transfer
or statutory exchange of securities necessitating the execution of a
supplemental indenture pursuant to Section 1309; or
(d) of the voluntary or involuntary dissolution, liquidation or winding up
of the Company;
then the Company shall cause to be filed with the Trustee and at the
office or agency maintained for the purpose of conversion of Debentures
pursuant to Section 1002, and shall cause to be mailed to the Holders of
Debentures, at their last address as they shall appear upon the Debenture
Register, at least 15 days prior to such record date hereinafter specified, a
notice stating (i) the date on which a record is to be taken for the purpose
of such dividend or distribution of rights, or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend or distribution of rights are to be determined, or
(ii) the date on which such reclassification, change, consolidation, merger,
sale, transfer, statutory exchange, dissolution, liquidation or winding-up is
expected to become effective and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares
of Common Stock for securities or other property deliverable upon such
reclassification, change, consolidation, merger, sale, transfer, statutory
exchange, dissolution, liquidation or winding-up.
SECTION 1306. COMPANY TO RESERVE SHARES OF COMMON STOCK.
(a) The Company shall at all times reserve and keep available, free from
preemptive rights, out of its authorized and unissued Common Stock, for the
purpose of effecting the conversion of Debentures, the full number of shares of
Common Stock then issuable upon the conversion of all Outstanding Debentures.
(b) The Company covenants that if any shares of Common Stock required to
be reserved for purposes of conversion of Debentures hereunder require
registration with or approval of any governmental authority under any Federal or
State law, or listing upon any national securities exchange, before such shares
may be issued upon conversion, the Company will in good faith and as
expeditiously as possible endeavor to cause such shares to be duly registered,
approved or listed, as the case may be.
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SECTION 1307. TAXES ON ISSUANCE OF COMMON STOCK UPON CONVERSION.
The issue and delivery of stock certificates on conversion of Debentures
shall be made without charge to the converting Holders of any documentary
stamp tax or other similar tax in respect of the issue or delivery thereof
(except any such taxes which may be in the nature of exchange or currency
control measures or which, for any other reason, are payable by reason of the
status of any person surrendering Debentures for conversion or receiving
Common Stock, securities or other property upon conversion). The Company
shall not, however, be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of shares of
Common Stock in a name other than that of the Holder of the Debenture or
Debentures to be converted, and no such issuance or delivery shall be made
unless and until the person requesting such issuance has paid to the Company
the amount of any such tax, or has established, to the satisfaction of the
Company, that such tax has been paid.
SECTION 1308. COVENANT AS TO COMMON STOCK.
The Company covenants and agrees that, subject to the effectiveness of any
registration and the obtaining of any approval referred to in Section 1306(b),
all shares of Common Stock which may be issued upon conversion of Debentures
will upon issuance be duly and validly issued and fully paid and non-assessable.
SECTION 1309. PROVISION IN CASE OF RECLASSIFICATION OF COMMON STOCK OR
CONSOLIDATION, MERGER, SALE, OR TRANSFER OF ASSETS OF
THE COMPANY.
In case of any reclassification or change of outstanding shares of
the Common Stock issuable upon conversion of the Debentures (other than a
change in par value, or from par value to no par value, or from no par value
to par value, or as a result of a subdivision or combination), or in case of
any consolidation or merger of the Company with or into any other corporation
(other than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification or change,
other than as aforesaid, of the shares of Common Stock issuable upon
conversion of the Debentures), the Company or the corporation formed by such
consolidation or the corporation into which the Company shall have been
merged or the corporation which shall have acquired such assets or securities
of the Company, as the case may be, shall execute and deliver to the Trustee
a supplemental indenture providing that the Holder of each Debenture then
Outstanding shall have the right thereafter (until the expiration of the
conversion right of such Debenture) to convert such Debenture into the kind
and amount of shares of stock and other securities and property, including
cash, receivable upon such reclassification, change, consolidation, merger,
sale or transfer by a holder of the number of shares of Common stock of the
Company into which such Debenture might have been converted immediately prior
to such reclassification, change, consolidation, merger, sale or transfer.
Such supplemental indenture shall conform to the requirements of the Trust
Indenture Act as then in effect and shall provide for adjustments provided
for in this Article Thirteen. The provisions of this Section 1309 shall
similarly apply to successive reclassifications, changes, consolidations,
mergers, sales or transfers.
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SECTION 1310. DISCLAIMER OF RESPONSIBILITY FOR CERTAIN MATTERS.
Neither the Trustee nor any agent (other than the Company) shall at any
time be under any duty or responsibility to any Holder of Debentures to
determine whether any facts exist which may require any adjustment of the
Conversion Price, or with respect to the nature or extent of any such
adjustment when made, or with respect to the method employed, or herein or in
any supplemental indenture provided to be employed, in making the same.
Neither the Trustee nor any agent (other than the Company) shall be
accountable with respect to the validity or value (or the kind or amount) of
any shares of Common Stock, or of any securities or property, which may at
any time be issued or delivered upon the conversion of any Debenture; and
neither the Trustee nor any agent (other than the Company) makes any
representation with respect thereto. Neither the Trustee nor any conversion
agent (other than the Company) shall be responsible for any failure of the
Company to issue, transfer or deliver any shares of Common Stock or stock
certificates or other securities or property upon the surrender of any
Debenture for the purpose of conversion or, subject to the provisions of
Article Six, to comply with any of the covenants of the Indenture contained
in this Article Thirteen.
END OF ARTICLE THIRTEEN
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ARTICLE FOURTEEN
SUBORDINATION OF DEBENTURES
SECTION 1401. AGREEMENT TO SUBORDINATE.
The Company covenants and agrees, and each Holder of Debentures by such
Holder's acceptance thereof (whether upon original issue or upon transfer or
assignment) likewise covenants and agrees, that the indebtedness represented by
the Debentures and the payment of the principal of (and premium, if any) and
interest on each and all of the Debentures is hereby expressly subordinated, and
junior to the extent and in the manner hereinafter set forth, in right of
payment to the prior payment in full of all Senior Debt.
SECTION 1402. DISTRIBUTION OF ASSETS, ETC.
Upon any distribution of assets of the Company upon any dissolution,
winding-up, liquidation or reorganization of the Company, whether in bankruptcy,
insolvency, reorganization or receivership proceedings or upon an assignment for
the benefit of creditors or any other marshalling of the assets and liabilities
of the Company or upon any acceleration or maturity of the Debentures or
otherwise:
(1) the holders of all Senior Debt shall first be entitled to receive
payment in full of the principal thereof (and premium, if any) and interest
due thereon, or adequate provisions shall be made for such payment, before
the Debentureholders of the Debentures are entitled to receive any payment
on account of the principal of (or premium, if any) or interest on the
Indebtedness evidenced by the Debentures; and
(2) any payment by, or distribution of assets of, the Company of any
kind or character, whether in cash, property or securities, to which the
Debentureholders of the Debentures or the Trustee would be entitled except
for the provisions of this Article Twelve shall be paid or delivered by the
person making such payment or distribution, whether a trustee in
bankruptcy, a receiver or liquidating trustee or otherwise, directly to the
holders of Senior Debt which may have been issued, ratably according to the
aggregate amounts remaining unpaid on account of the Senior Debt held or
represented by each, to the extent necessary to make payment in full of all
Senior Debt remaining unpaid after giving effect to any concurrent payment
or distribution (or provision therefor) to the holders of such Senior Debt.
SECTION 1403. NO PAYMENT TO DEBENTUREHOLDERS IF SENIOR DEBT IS IN DEFAULT.
(a) Upon the maturity of any Senior Debt by lapse of time, acceleration or
otherwise, all principal thereof (and premium, if any) and interest due thereon
shall first be paid in full, or such payment duly provided for in cash or in a
manner satisfactory to the holder or holders of such Senior Debt before any
payment is made on account of the principal of (or premium, if any) or interest
on the Debentures or to acquire any of the Debentures.
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(b) Upon the happening of an event of default with respect to any Senior
Debt, as such event of default is defined therein or in the instrument under
which it is outstanding, permitting the holders to accelerate the maturity
thereof, and, if the default is other than default in payment of the principal
of (or premium, if any) or interest on such Senior Debt, upon written notice
thereof given to the Company and the Trustee by the holder or holders of such
Senior Debt or their representative or representatives, then, unless and until
such event of default shall have been cured or waived or shall have ceased to
exist, no payment shall be made by the Company with respect to the principal (or
premium, if any) or interest on the Debentures or to acquire any of the
Debentures.
SECTION 1404. SUBROGATION.
Subject to the payment in full of all Senior Debt, the Holders of the
Debentures shall be subrogated to the rights of the holders of Senior Debt to
receive payments or distributions of cash, property or securities of the Company
applicable to the Senior Debt until all amounts owing on the Debentures shall be
paid in full, and, as between the Company, its creditors other than holders of
Senior Debt, and the Debentureholders of the Debentures, no such payment or
distribution made to the holders of Senior Debt by virtue of this Article Twelve
which otherwise would have been made to the Holders of the Debentures shall be
deemed to be a payment by the Company on account of the Senior Debt, it being
understood that the provisions of this Article Twelve are and are intended
solely for the purpose of defining the relative rights of the Holders of the
Debentures, on the one hand, and the holders of Senior Debt, on the other hand.
SECTION 1405. OBLIGATION OF COMPANY UNCONDITIONAL.
Nothing contained in this Article Twelve or elsewhere in this Indenture or
in the Debentures is intended to or shall impair, as between the Company, its
creditors other than the holders of Senior Debt, and the Holders of the
Debentures, the obligation of the Company, which is absolute and unconditional,
to pay to the Holders of the Debentures the principal of (and premium, if any)
and interest on the Debentures as and when the same shall become due and payable
in accordance with their terms, or affect the relative rights of the Holders of
the Debentures and creditors of the Company other than the holders of Senior
Debt, nor shall anything herein or exercising all remedies otherwise permitted
by applicable law upon default under this Indenture, subject to the rights, if
any, under this Article Twelve of the holders of Senior Debt in respect of cash,
property or securities of the Company received upon the exercises of any such
remedy.
Upon any payment or distribution of assets of the Company referred to in
this Article Twelve, the Trustee and the Debentureholders of the Debentures
shall be entitled to rely upon any order or decree made by any court of
competent jurisdiction in which any such dissolution, winding-up, liquidation
or reorganization proceeding affecting the affairs of the Company is pending
or upon a certificate of the liquidating trustee or agent or other person
making any payment or distribution to the Trustee or to the Debentureholders
of the Debentures for the purpose of ascertaining the persons entitled to
participate in such payment or distribution, the
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holders of the Senior Debt and other Indebtedness of the Company, the amount
thereof or payable thereon, the amount paid or distributed thereon and all
other facts pertinent thereto or to this Article Twelve.
SECTION 1406. PAYMENTS ON DEBENTURES PERMITTED.
Nothing contained in this Article Fourteen or elsewhere in this Indenture,
or in any of the Debentures, shall (a) affect the obligation of the Company to
make, or prevent the Company from making, at any time except during the pendency
of any dissolution, winding-up, liquidation of reorganization proceeding, and
except during the continuance of any event of default specified in Section 1403
(not cured or waived), payments at the Stated Maturity of principal of (or
premium, if any) or interest on the Debentures, or (b) prevent the application
by the Trustee or any Paying Agent of any moneys held by the Trustee or such
Paying Agent, in trust for the benefit of the Debentureholders of Debentures as
to which notice of redemption shall have been mailed or published at least once
prior to the happening of an Event of Default specified in Section 1403, to the
payment of or on account of the principal of (and premium, if any) and interest
on such Debentures, or (c) prevent the application by the Trustee or any Paying
Agent of any moneys deposited prior to the happening of any Event of Default
specified in Section 1403 with the Trustee or such Paying Agent in trust for the
purpose of paying a specified installment or installments of interest on the
Debentures, to the payment of such installments of interest on the Debentures.
SECTION 1407. EFFECTUATION OF SUBORDINATION BY TRUSTEE.
Each Holder of Debentures, by such Holder's acceptance thereof, authorizes
and directs the Trustee in such Holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination provided in this
Article Fourteen and appoints the Trustee such Holder's attorney-in-fact for any
and all such purposes.
SECTION 1408. KNOWLEDGE OF TRUSTEE.
Notwithstanding the provisions of this Article Twelve or any other
provisions of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts which would prohibit the making of any payment of
moneys to or by the Trustee, or the taking of any other action by the Trustee,
unless and until the Trustee shall have received written notice thereof, at
least one business day prior to the relevant payment date, from the Company, any
Holder, any Paying Agent or the holder or representative or any class of Senior
Debt.
SECTION 1409. RIGHTS OF HOLDERS OF SENIOR DEBT NOT IMPAIRED.
No right of any present or future holder of any Senior Debt to enforce the
subordination herein shall at any time or in any way be prejudiced or impaired
by any act or failure to act on the part of the Company with the terms,
provisions and covenants of this Indenture, regardless of any knowledge thereof
any such holder may have or be otherwise charged with.
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SECTION 1410. TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR DEBT.
The Trustee shall not be deemed to owe any fiduciary duty to the holders of
Senior Debt and shall not be liable to any such holders if it shall in good
faith pay over or distribute to the Debentureholders of the Debentures, to the
Company or to any other Person cash, property or securities to which any holders
of Senior Debt shall be entitled by virtue of this Article or otherwise.
SECTION 1411. RIGHTS OF TRUSTEE AS HOLDER OF SENIOR DEBT.
The Trustee in its individual capacity shall be entitled to all the rights
set forth in this Article with respect to any Senior Debt which may at any time
be held by it, to the same extent as any other holder of Senior Debt, and
nothing in this Indenture shall deprive the Trustee of any of its rights as such
holder.
SECTION 1412. ARTICLE APPLICABLE TO PAYING AGENTS.
In case at any time any Paying Agent other than the Trustee shall have been
appointed by the Company and be then acting hereunder, the term "Trustee" as
used in this Article shall in such case (unless the context shall otherwise
require) be construed as extending to and including such Paying Agent within its
meaning as fully for all intents and purposes as if such Paying Agent were named
in this Article in addition to or in place of the Trustee.
SECTION 1413. RIGHTS AND OBLIGATIONS SUBJECT TO POWER OF COURT.
The rights of the holders of Senior Debt and the obligations of the Trustee
and the Debentureholders set forth in this Article Twelve are subject to the
power of a court of competent jurisdiction to make other equitable provision
reflecting the rights conferred in this Indenture upon the Senior Debt and the
holders thereof with respect to the Debentures and the Debentureholders thereof
by a plan or reorganization under applicable bankruptcy law.
END OF ARTICLE FOURTEEN.
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This Indenture may be executed in any number of counterparts, each of which
so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective seals to be hereunto affixed and attested,
all as of the day and year first above written.
PAPER WAREHOUSE, INC.
By
-------------------------------------------
-----------------------,
Chief Executive Officer
-------------------------------------------,
as Trustee
By
--------------------------------------------
Its
--------------------------------------
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--------------------------------------------------------------------
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-------------------------------------------------
LOAN AND SECURITY AGREEMENT
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BANKBOSTON RETAIL FINANCE INC.
THE LENDER
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PAPER WAREHOUSE, INC.
AND
PAPER WAREHOUSE FRANCHISING, INC.
THE BORROWER
-------------------------------------------------
June 7, 1999
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<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<C> <S>
ARTICLE I - DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE II - THE REVOLVING CREDIT. . . . . . . . . . . . . . . . . . . . . . . . . 24
2.1 ESTABLISHMENT OF REVOLVING CREDIT. . . . . . . . . . . . . . . . . . . . .24
2.2 ADVANCES IN EXCESS OF BORROWING BASE. . . . . . . . . . . . . . . . . . . 25
2.3 RISKS OF VALUE OF COLLATERAL. . . . . . . . . . . . . . . . . . . . . . . 25
2.4 LOAN REQUESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.5 MAKING OF LOANS UNDER REVOLVING CREDIT. . . . . . . . . . . . . . . . . . 28
2.6 THE LOAN ACCOUNT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.7 THE REVOLVING CREDIT NOTE . . . . . . . . . . . . . . . . . . . . . . . . 30
2.8 PAYMENT OF THE LOAN ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . 30
2.9 INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.10 COMMITMENT FEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.11. FACILITY FEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.12. LINE (UNUSED) FEE . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.13. EARLY TERMINATION FEE . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.14. CONCERNING FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
2.15. LENDER'S DISCRETION . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2.16. PROCEDURES FOR ISSUANCE OF L/C'S. . . . . . . . . . . . . . . . . . . . 36
2.17. FEES FOR L/C'S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.18. CONCERNING L/C'S. . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
2.19. INCREASED COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE 3. CONDITIONS PRECEDENT:. . . . . . . . . . . . . . . . . . . . . . . . . 41
3.1. CORPORATE DUE DILIGENCE. . . . . . . . . . . . . . . . . . . . . . . . . 41
3.2. OPINION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.3. LANDLORD WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.4. ADDITIONAL DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.5. OFFICERS' CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.6. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . 43
3.7. MINIMUM EXCESS AVAILABILITY. . . . . . . . . . . . . . . . . . . . . . . 43
3.8. ALL FEES AND EXPENSES PAID . . . . . . . . . . . . . . . . . . . . . . . 43
3.9. NO SUSPENSION EVENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.10 NO ADVERSE CHANGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ARTICLE 4 - GENERAL REPRESENTATIONS, COVENANTS AND WARRANTIES:. . . . . . . . . . 44
4.1. PAYMENT AND PERFORMANCE OF LIABILITIES . . . . . . . . . . . . . . . . . 44
4.2. DUE ORGANIZATION - CORPORATE AUTHORIZATION - NO CONFLICTS. . . . . . . . 44
4.3. TRADE NAMES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
4.4. INFRASTRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
4.5. YEAR 2000 COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 46
4.6. LOCATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
4.7. TITLE TO ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
4.8. INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.9. INSURANCE POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
June 7, 1999
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4.10. LICENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.11. LEASES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.12. REQUIREMENTS OF LAW . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.13. MAINTAIN PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.14. PAY TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
4.15. NO MARGIN STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
4.16. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
4.17. HAZARDOUS MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . 55
4.18. LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
4.19. DIVIDENDS OR INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . 56
4.20. LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
4.21. PROTECTION OF ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . 57
4.22. LINE OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
4.23. AFFILIATE TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 58
4.24. ADDITIONAL ASSURANCES . . . . . . . . . . . . . . . . . . . . . . . . . 58
4.25. ADEQUACY OF DISCLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . 59
4.26. OTHER COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
ARTICLE 5 - FINANCIAL REPORTING AND PERFORMANCE COVENANTS: . . . . . . . . . . . . 60
5.1. MAINTAIN RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
5.2. ACCESS TO RECORDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
5.3. IMMEDIATE NOTICE TO LENDER . . . . . . . . . . . . . . . . . . . . . . . 62
5.4. BORROWING BASE CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . 64
5.5. WEEKLY REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
5.6. MONTHLY REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
5.7. QUARTERLY REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
5.8. ANNUAL REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
5.9. OFFICERS' CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . 67
5.10. INVENTORIES, APPRAISALS, AND AUDITS . . . . . . . . . . . . . . . . . . 67
5.11. ADDITIONAL FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . 69
5.12. FINANCIAL PERFORMANCE COVENANTS . . . . . . . . . . . . . . . . . . . . 70
ARTICLE 6 - USE AND COLLECTION OF COLLATERAL: . . . . . . . . . . . . . . . . . . 71
6.1. USE OF INVENTORY COLLATERAL. . . . . . . . . . . . . . . . . . . . . . . 71
6.2. INVENTORY QUALITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
6.3. ADJUSTMENTS AND ALLOWANCES . . . . . . . . . . . . . . . . . . . . . . . 71
6.4. VALIDITY OF ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . 71
6.5. NOTIFICATION TO ACCOUNT DEBTORS. . . . . . . . . . . . . . . . . . . . . 72
ARTICLE 7 - CASH MANAGEMENT. PAYMENT OF LIABILITIES:. . . . . . . . . . . . . . . 72
7.2. CREDIT CARD RECEIPTS . . . . . . . . . . . . . . . . . . . . . . . . . . 73
7.3. THE CONCENTRATION, BLOCKED, AND OPERATING ACCOUNTS . . . . . . . . . . . 73
7.4. PROCEEDS AND COLLECTION OF ACCOUNTS. . . . . . . . . . . . . . . . . . . 74
7.5. PAYMENT OF LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 75
7.6. THE OPERATING ACCOUNT. . . . . . . . . . . . . . . . . . . . . . . . . . 76
ARTICLE 8 - GRANT OF SECURITY INTEREST: . . . . . . . . . . . . . . . . . . . . . 76
8.1. GRANT OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . 77
8.2. EXTENT AND DURATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . 78
June 7, 1999
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ARTICLE 9 - LENDER AS BORROWER'S ATTORNEY-IN-FACT: . . . . . . . . . . . . . . . . 78
9.1. APPOINTMENT AS ATTORNEY-IN-FACT. . . . . . . . . . . . . . . . . . . . . 78
9.2. NO OBLIGATION TO ACT. . . . . . . . . . . . . . . . . . . . . . . . . . 79
ARTICLE 10 - EVENTS OF DEFAULT:. . . . . . . . . . . . . . . . . . . . . . . . . . 80
10.1. FAILURE TO PAY REVOLVING CREDIT . . . . . . . . . . . . . . . . . . . . 80
10.2. FAILURE TO MAKE OTHER PAYMENTS. . . . . . . . . . . . . . . . . . . . . 80
10.3. FAILURE TO PERFORM COVENANT OR LIABILITY (NO GRACE PERIOD). . . . . . . 80
10.4. FAILURE TO PERFORM COVENANT OR LIABILITY (GRACE PERIOD) . . . . . . . . 81
10.5. MISREPRESENTATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
10.6. ACCELERATION OF OTHER DEBT. BREACH OF LEASE . . . . . . . . . . . . . . 81
10.7. DEFAULT UNDER OTHER AGREEMENTS. . . . . . . . . . . . . . . . . . . . . 81
10.8. UNINSURED CASUALTY LOSS . . . . . . . . . . . . . . . . . . . . . . . . 82
10.9. JUDGMENT. RESTRAINT OF BUSINESS. . . . . . . . . . . . . . . . . . . . 82
10.10. BUSINESS FAILURE . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
10.11. BANKRUPTCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
10.12. DEFAULT BY GUARANTOR OR RELATED ENTITY . . . . . . . . . . . . . . . . 83
10.13. INDICTMENT - FORFEITURE. . . . . . . . . . . . . . . . . . . . . . . . 83
10.14. TERMINATION OF GUARANTY. . . . . . . . . . . . . . . . . . . . . . . . 84
10.15. CHALLENGE TO LOAN DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . 84
10.16. EXECUTIVE MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 84
10.17. CHANGE IN CONTROL. . . . . . . . . . . . . . . . . . . . . . . . . . . 84
ARTICLE 11.- RIGHTS AND REMEDIES UPON DEFAULT: . . . . . . . . . . . . . . . . . . 84
11.1. RIGHTS OF ENFORCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 85
11.2. SALE OF COLLATERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . 85
11.3. OCCUPATION OF BUSINESS LOCATION . . . . . . . . . . . . . . . . . . . . 86
11.4. GRANT OF NONEXCLUSIVE LICENSE . . . . . . . . . . . . . . . . . . . . . 87
11.5. ASSEMBLY OF COLLATERAL. . . . . . . . . . . . . . . . . . . . . . . . . 87
11.6. RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . 87
ARTICLE 12 - NOTICES:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
12.1. NOTICE ADDRESSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
12.2. NOTICE GIVEN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
ARTICLE 13 - TERM: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
13.1. TERMINATION OF REVOLVING CREDIT . . . . . . . . . . . . . . . . . . . . 90
13.2. EFFECT OF TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . 90
ARTICLE 14 - GENERAL:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
14.1. PROTECTION OF COLLATERAL. . . . . . . . . . . . . . . . . . . . . . . . 90
14.2. SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . . . . . . 91
14.3. SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
14.4. AMENDMENTS. COURSE OF DEALING. . . . . . . . . . . . . . . . . . . . . 91
14.5. POWER OF ATTORNEY . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
14.6. APPLICATION OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . 92
14.7. LENDER'S COSTS AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . 93
14.8. COPIES AND FACSIMILES . . . . . . . . . . . . . . . . . . . . . . . . . 93
14.9. MASSACHUSETTS LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
14.10. CONSENT TO JURISDICTION. . . . . . . . . . . . . . . . . . . . . . . . 94
June 7, 1999
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14.11. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
14.12. RULES OF CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . . . . . 95
14.13. INTENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
14.14. RIGHT OF SET-OFF . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
14.15. MAXIMUM INTEREST RATE. . . . . . . . . . . . . . . . . . . . . . . . . 98
14.16. WAIVERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
June 7, 1999
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<PAGE>
EXHIBITS
2-7 : Revolving Credit Note
4-2 : Related Entities
4-3 : Trade Names
4-5 : Year 2000 Compliance
4-6 : Locations, Leases, and Landlords
4-7 : Encumbrances
4-8 : Indebtedness
4-9 : Insurance Policies
4-11 : Capital Leases
4-14 : Taxes
4-18 : Litigation
5-4 : Borrowing Base Certificate
5-12(a) : Financial Performance Covenants
5-12(b) : Business Plan
7-1 : DDA's.
7-2 : Credit Card Arrangements
vi
June 7, 1999
</TABLE>
<PAGE>
================================================================================
LOAN AND SECURITY AGREEMENT BANKBOSTON RETAIL FINANCE INC.
================================================================================
June 7, 1999
THIS AGREEMENT is made between
BANKBOSTON RETAIL FINANCE INC., a Delaware corporation with
offices at 40 Broad Street, Boston, Massachusetts 02109,
and
PAPER WAREHOUSE, INC. and PAPER WAREHOUSE FRANCHISING, INC.
(hereinafter collectively, the "BORROWER"), each a Minnesota corporation with
its principal executive offices at 7630 Excelsior Boulevard, Minneapolis,
Minnesota 55426.
in consideration of the mutual covenants contained herein and benefits to be
derived herefrom,
WITNESSETH:
ARTICLE I - DEFINITIONS:
As herein used, the following terms have the following meanings or are
defined in the section of this Agreement so indicated:
"AGREEMENT": This Loan and Security Agreement dated as of June 7 1999,
between Borrower and Lender, as it may be amended, modified, restated and/ or
supplemented from time to time.
"ACCEPTABLE INVENTORY": Such of the Borrower's Inventory, at such
locations, and of such types, character, qualities and quantities,
as the Lender in its reasonable discretion from time to time
determines to be acceptable for borrowing, as to which Inventory,
the Lender has a perfected security interest which is prior and
1
<PAGE>
superior to all security interests, claims, and all Encumbrances
other than Permitted Encumbrances.
"ACCOUNTS" and "ACCOUNTS RECEIVABLE" include, without limitation,
"accounts" as defined in the UCC, and also all: accounts,
accounts receivable, credit card receivables, notes, drafts,
acceptances, and other forms of obligations and receivables and
rights to payment for credit extended and for goods sold or
leased, or services rendered, whether or not yet earned by
performance; all "contract rights" as formerly defined in the UCC;
all Inventory which gave rise thereto, and all rights associated
with such Inventory, including the right of stoppage in transit;
all reclaimed, returned, rejected or repossessed Inventory (if
any) the sale of which gave rise to any Account.
"ACH": Automated clearing house.
"ACCOUNT DEBTOR": Has the meaning given that term in the UCC.
"AFFILIATE": With respect to any two Persons, a relationship in which
(a) one holds, directly or indirectly, not less than Twenty Five
Percent (25%) of the capital stock, beneficial interests,
partnership interests, or other equity interests of the other; or
(b) one has, directly or indirectly, the right, under ordinary
circumstances, to vote for the election of a majority of the
directors (or other body or Person who has those powers
customarily vested in a board of directors of a corporation); or
(c) not less than Twenty Five Percent (25%) of their respective
ownership is directly or indirectly held by the same third Person.
"AVAILABILITY": Is defined in Section 2-1(b)(i).
2
<PAGE>
"AVAILABILITY RESERVES": Such reserves as the Lender from time to time
determines in the Lender's reasonable discretion as being
appropriate to reflect the impediments to the Lender's ability to
realize upon the Collateral. Without limiting the generality of
the foregoing, Availability Reserves may include (but are not
limited to) reserves based on the following:
(i) Rent (based upon past due rent and/or whether or not
Landlord's Waiver, acceptable to the Lender, has
been received by the Lender).
(ii) In store customer credits.
(iii) Gift Certificates.
(iv) Frequent Shopper Programs.
(v) Layaways and Customer Deposits
(vi) Taxes and other governmental charges, including, ad
valorem, personal property, and other taxes which
might have priority over the security interests of
the Lender in the Collateral.
(viii) L/C Landing Costs.
"BANKRUPTCY CODE": Title 11, U.S.C., as amended from time to time.
"BASE": The Base Rate announced from time to time by BankBoston,
N.A. (or any successor in interest to BankBoston, N.A.). In the
event that said bank (or any such successor) ceases to announce
such a rate, "Base" shall refer to that rate or index announced or
published from time to time as the Lender, in good faith,
designates as the functional equivalent to said Base Rate. Any
change in "Base" shall be effective, for purposes of the
calculation of interest due hereunder, when such change is made
effective generally by the bank on whose rate or index "Base" is
being set. In all events, interest which is determined by
reference to Base (or any successor to Base) shall be calculated
on a 360 day year and actual days elapsed.
3
<PAGE>
"BASE MARGIN LOAN": Each Revolving Credit Loan while bearing interest at
the Base Margin Rate.
"BASE MARGIN RATE": The aggregate of Base plus Zero percent (0%) per
annum. If the Capital Infusion Event does not occur on or before
September 7, 1999, the Base Margin Rate shall be increased to the
aggregate of Base plus One Half of One percent (.5%) per annum
until such time as the Capital Infusion Event does occur, at which
time the Base Margin Rate shall be reinstated to the aggregate of
Base plus Zero percent (0%) per annum.
"BLOCKED ACCOUNT": Is defined in Section 7-3.
"BORROWER": Is defined in the Preamble.
"BORROWING BASE": Is defined in Section 2-1(b)(ii).
"BUSINESS DAY": Any day (with any references herein to time of day
requirements meaning such times based on Eastern time) other than
(a) a Saturday or Sunday; (b) any day on which banks in Boston,
Massachusetts generally are not open to the general public for the
purpose of conducting commercial banking business; or (c) a day on
which the Lender is not open to the general public to conduct
business.
"BUSINESS PLAN": The Borrower's business plan annexed hereto as
EXHIBIT 5-12(b) and any revision, amendment, or update of such
business plan to which the Lender has provided its written
sign-off.
"CAPITAL EXPENDITURES": The expenditure of funds or the incurrence of
liabilities which may be capitalized in accordance with GAAP.
4
<PAGE>
"CAPITAL INFUSION EVENT": A transaction or event which results in at
least $2,000,000 of net cash proceeds available as additional
capital to the Borrowers resulting either from the contribution to
Borrower's capital by its shareholders, the sale of equity
securities of the Borrowers or from indebtedness which has been
subordinated to the Liabilities on terms satisfactory to the
Lender.
"CAPITAL LEASE": Any lease which may be capitalized in accordance
with GAAP.
"CASH FLOW": EBITDA MINUS unfunded Capital Expenditures MINUS
cash taxes.
"CHANGE IN CONTROL": The occurrence of any of the following:
(a) The acquisition, by any group of persons (within the
meaning of the Securities Exchange Act of 1934, as amended) or by
any Person (in either case other than such a group or Person that
includes the current chief executive officer of the Borrower) of
beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission) of 20% or more of the issued
and outstanding capital stock of the Borrower having the right,
under ordinary circumstances, to vote for the election of
directors of the Borrower, unless the current chief executive
officer of the Borrower owns or controls directly or through
voting trusts or agreements (in the case of such capital stock
owned by his family members or by trusts or by other entities
established for their benefit) at least 7% more of the issued and
outstanding capital stock of the Borrower than the issued and
outstanding capital stock of the Borrower acquired by such group
or Person.
(b) More than half of the persons (including the current
chief executive officer) who were directors of the Borrower on the
first day of any period consisting of Twelve (12) consecutive
calendar months (the first of which Twelve (12) month periods
commencing with the first day of the month during which this
5
<PAGE>
Agreement was executed), cease, for any reason other than death or
disability, to be directors of the Borrower.
"CHATTEL PAPER": Has the meaning given that term in the UCC.
"COLLATERAL": Is defined in Section 8-1.
"COMMITMENT FEE": Is defined in Section 2-10.
"CONCENTRATION ACCOUNT": Is defined in Section 7-3.
"CONTRACTUAL OBLIGATIONS": For any period, the sum (without duplication)
of current maturities of long term debt PLUS interest PLUS current
maturities of capital lease obligations (excluding real property
lease payments) PLUS dividends paid or payable by the Borrower.
"COST": The lower of
(a) the calculated cost of purchases, as determined from
invoices received by the Borrower, the Borrower's purchase journal
or stock ledger, based upon the Borrower's accounting practices,
known to the Lender, which practices are in effect on the date on
which this Agreement was executed; OR
(b) the cost equivalent of the lowest ticketed or
promoted price at which the subject inventory is offered to the
public, after all mark-downs (whether or not such price is then
reflected on the Borrower's accounting system), which cost
equivalent is determined in accordance with the cost method of
accounting, reflecting the Borrower's historic business practices.
"Cost" does not include inventory capitalization costs or other
non-purchase price charges (such as freight) used in the Borrower's
calculation of cost of goods sold.
6
<PAGE>
"COSTS OF COLLECTION": Includes, without limitation, all attorneys'
reasonable fees and reasonable out-of-pocket expenses incurred by
the Lender's attorneys, and all reasonable costs incurred by the
Lender in the administration of the Liabilities and/or the Loan
Documents, including, without limitation, reasonable costs and
expenses associated with travel on behalf of the Lender, which
costs and expenses are directly or indirectly related to or in
respect of the Lender's: administration and management of the
Liabilities; negotiation, documentation, and amendment of any Loan
Document; or efforts to preserve, protect, collect, or enforce the
Collateral, the Liabilities, and/or the Lender's Rights and
Remedies and/or any of the Lender's rights and remedies against or
in respect of any guarantor or other person liable in respect of
the Liabilities (whether or not suit is instituted in connection
with such efforts). The Costs of Collection are Liabilities, and
at the Lender's option may bear interest at the highest
post-default rate which the Lender may charge the Borrower
hereunder as if such had been lent, advanced, and credited by the
Lender to, or for the benefit of, the Borrower.
"DDA": Any checking or other demand daily depository account maintained
by the Borrower.
"DEPOSIT ACCOUNT": Has the meaning given that term in the UCC.
"DOCUMENTS": Has the meaning given that term in the UCC.
"DOCUMENTS OF TITLE": Has the meaning given that term in the UCC.
"EARLY TERMINATION FEE": Is defined in Section 2-13.
"EBITDA": The Borrower's income from continuing operations before
interest, taxes, depreciation, and amortization, each as
determined in accordance with GAAP.
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"EMPLOYEE BENEFIT PLAN": As defined in ERISA.
"ENCUMBRANCE": Each of the following:
(a) Any security interest, mortgage, pledge,
hypothecation, lien, attachment, or charge of any kind (including
any agreement to give any of the foregoing); the interest of a
lessor under a Capital Lease; conditional sale or other title
retention agreement; sale of accounts receivable or chattel paper;
or other arrangement pursuant to which any Person is entitled to
any preference or priority with respect to the property or assets
of another Person or the income or profits of such other Person or
which constitutes an interest in property to secure an obligation;
each of the foregoing whether consensual or non-consensual and
whether arising by way of agreement, operation of law, legal
process or otherwise.
(b) The filing of any financing statement under the UCC
or comparable law of any jurisdiction.
"END DATE": The date upon which both (a) all Liabilities have been paid
in full and (b) all obligations of the Lender to make loans and
advances and to provide other financial accommodations to the
Borrower hereunder shall have been irrevocably terminated.
"ENVIRONMENTAL LAWS": All of the following:
(a) Any and all federal, state, local or municipal laws,
rules, orders, regulations, statutes, ordinances, codes, decrees
or requirements which regulate or relate to, or impose any
standard of conduct or liability on account of or in respect to
environmental protection matters, including, without limitation,
Hazardous Materials, as are now or hereafter in effect.
(b) The common law relating to damage to Persons or
property from Hazardous Materials.
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"EQUIPMENT": Includes, without limitation, "equipment" as defined in
the UCC, and also all motor vehicles, rolling stock, machinery,
office equipment, plant equipment, tools, dies, molds, store
fixtures, furniture, and other goods, property, and assets
which are used and/or were purchased for use in the operation
or furtherance of the Borrower's business, and any and all
accessions or additions thereto, and substitutions therefor.
"ERISA": The Employee Retirement Security Act of 1974, as amended.
"ERISA AFFILIATE": Any Person which is under common control with the
Borrower within the meaning of Section 4001 of ERISA or is part of
a group which includes the Borrower and which would be treated as
a single employer under Section 414 of the Internal Revenue Code
of 1986, as amended.
"EVENTS OF DEFAULT": Is defined in Article 10.
"FACILITY FEE": Is defined in Section 2-11.
"FIXTURES": Has the meaning given that term in the UCC.
"GAAP": Principles which are consistent with those promulgated or
adopted by the Financial Accounting Standards Board and its
predecessors (or successors) in effect and applicable to that
accounting period in respect of which reference to GAAP is being
made, PROVIDED, HOWEVER, in the event of a Material Accounting
Change, then unless otherwise specifically agreed to by the
Lender, (a) the Borrower's compliance with the financial
performance covenants imposed pursuant to Section 5-12 shall be
determined as if such Material Accounting Change had not taken
place and (b) the Borrower shall include, with its monthly and
annual
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financial statements a schedule, certified by the Borrower's
chief financial officer, on which the effect of such Material
Accounting Change to the statements shall be described.
"GENERAL INTANGIBLES": Includes, without limitation, "general
intangibles" as defined in the UCC; and also all: rights to
payment for credit extended; deposits; amounts due to the
Borrower; credit memoranda in favor of the Borrower; warranty
claims; tax refunds and abatements; insurance refunds and premium
rebates; all means and vehicles of investment or hedging,
including, without limitation, options, warrants, and futures
contracts; records; customer lists; telephone numbers; goodwill;
causes of action; judgments; payments under any settlement or
other agreement; literary rights; rights to performance;
royalties; license and/or franchise fees; rights of admission;
licenses; franchises; license agreements, including all rights of
the Borrower to enforce same; permits, certificates of convenience
and necessity, and similar rights granted by any governmental
authority; patents, patent applications, patents pending, and
other intellectual property; internet addresses and domain names;
developmental ideas and concepts; proprietary processes;
blueprints, drawings, designs, diagrams, plans, reports, and
charts; catalogs; manuals; technical data; computer software
programs (including the source and object codes therefor),
computer records, computer software, rights of access to computer
record service bureaus, service bureau computer contracts, and
computer data; tapes, disks, semi-conductors chips and printouts;
trade secrets rights, copyrights, mask work rights and interests,
and derivative works and interests; user, technical reference, and
other manuals and materials; trade names, trademarks, service
marks, and all goodwill relating thereto; applications for
registration of the foregoing; and all other general intangible
property of the Borrower in the nature of intellectual property;
proposals; cost estimates, and reproductions on paper, or
otherwise, of any and all concepts or ideas, and any matter
related to, or connected with, the design, development,
manufacture, sale, marketing, leasing, or use of any
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or all property produced, sold or leased, by the Borrower or
credit extended or services performed, by the Borrower, whether
intended for an individual customer or the general business of
the Borrower, or used or useful in connection with research by
the Borrower.
"GOODS": Has the meaning given that term in the UCC.
"GROSS MARGIN": With respect to the subject accounting period for
which being calculated, the decimal equivalent of the following
(determined in accordance with the cost method of accounting):
SALES (MINUS) COST OF GOODS SOLD
--------------------------------
Sales
"HAZARDOUS MATERIALS": Any (a) hazardous materials, hazardous waste,
hazardous or toxic substances, petroleum products, which (as to
any of the foregoing) are defined or regulated as a hazardous
material in or under any Environmental Law and (b) oil in any
physical state.
"INDEBTEDNESS": All indebtedness and obligations of or assumed by
any Person on account of or in respect to any of the following:
(a) In respect of money borrowed (including any
indebtedness which is non-recourse to the credit of such Person
but which is secured by an Encumbrance on any asset of such
Person) whether or not evidenced by a promissory note, bond,
debenture or other written obligation to pay money.
(b) In connection with any letter of credit or
acceptance transaction (including, without limitation, the face
amount of all letters of credit and acceptances issued for the
account of such Person or reimbursement on account of which such
Person would be obligated).
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<PAGE>
(c) In connection with the sale or discount of accounts
receivable or chattel paper of such Person.
(d) On account of deposits or advances.
(e) As lessee under Capital Leases.
"Indebtedness" also includes:
(x) Indebtedness of others secured by an
Encumbrance on any asset of such Person, whether or not
such Indebtedness is assumed by such Person.
(y) Any guaranty, endorsement, suretyship or
other undertaking pursuant to which that Person may be
liable on account of any obligation of any third party.
(z) The Indebtedness of a partnership or joint
venture in which such Person is a general partner or joint
venturer.
"INDEMNIFIED PERSON": Is defined in Section 14-11.
"INSTRUMENTS": Has the meaning given that term in the UCC.
"INTEREST PAYMENT DATE": With Reference to:
Each Base Margin Loans: the first day of each month, the
Termination Date, and the End Date,
Each Libor Loan: the last day of the Interest Period relating
thereto; the Termination Date and the End Date.
"INTEREST PERIOD": (a) With respect to each Libor Loan: Subject to
Subsection (c), below, the period commencing on the date of the
making or continuation of, or conversion to, the subject Libor
Loan and ending 30 days thereafter.
(b) With respect to each Base Margin Loan:
Subject to Subsection (c), below, the period commencing on the
date of the making or
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continuation of or conversion to such Base Margin Loan and
ending on that date (i) as of which the subject Base Margin
Loan is converted to a Libor Loan, as the Borrower may elect by
notice (pursuant to Section 2-4(a)) to the Lender, or (ii) on
which the subject Base Margin Loan is paid by the Borrower.
(c) The setting of Interest Periods is in all
instances subject to the following:
(i) Any Interest Period for a Base Margin
Loan which would otherwise end on a day which is not
a Business Day shall be extended to the next
succeeding Business Day.
(ii) Any Interest Period for a Libor Loan
which would otherwise end on a day that is not a
Libor Business Day shall be extended to the next
succeeding Libor Business Day, unless that
succeeding Libor Business Day is in the next
calendar month, in which event such Interest Period
shall end on the last Libor Business Day of the
month during which the Interest Period ends.
(iii) Subject to Subsection (iv), below, any
Interest Period applicable to a Libor Loan, which
Interest Period begins on a day for which there is
no numerically corresponding day in the calendar
month during which such Interest Period ends, shall
end on the last Libor Business Day of the month
during which that Interest Period ends.
(iv) Any Interest Period which would
otherwise end after the Termination Date shall end
on the Termination Date.
(v) The number of Interest Periods in
effect at any one time is subject to Section 2-9(d)
hereof.
"INVENTORY": Includes, without limitation, "inventory" as defined in the
UCC and also all: packaging, advertising, and shipping materials
related to any of the foregoing, and all names or marks affixed or
to be affixed thereto for identifying or selling the
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<PAGE>
same; Goods held for sale or lease or furnished or to be
furnished under a contract or contracts of sale or service by
the Borrower, or used or consumed or to be used or consumed in
the Borrower's business; Goods of said description in transit:
returned, repossessed and rejected Goods of said description;
and all documents (whether or not negotiable) which represent
any of the foregoing.
"INVENTORY ADVANCE RATE": The following percentage of the Cost of
Acceptable Inventory (including the Cost of Inventory covered by
open import trade L/C's which have an expiry date within 60 days,
provided such L/C Inventory is scheduled for delivery within 60
days) during the period indicated:
DECEMBER 16TH THROUGH SEPTEMBER 30TH : 45%
OCTOBER 1ST THROUGH DECEMBER 15TH : 55%
"INVENTORY RESERVES": Such Reserves as may be established from time
to time by the Lender in the Lender's reasonable discretion with
respect to the determination of the saleability, at retail, of the
Acceptable Inventory or which reflect such other factors as affect
the market value of the Acceptable Inventory. Without limiting
the generality of the foregoing, Inventory Reserves may include
(but are not limited to) reserves based on the following:
(i) Obsolescence (determined based upon Inventory
on hand beyond a given number of days).
(ii) Seasonality.
(iii) Shrinkage.
(iv) Imbalance.
(v) Change in Inventory character.
(vi) Change in Inventory composition
(vii) Change in Inventory mix.
(viii) Markdowns (both permanent and point of sale)
(ix) Seasonal Pack Aways
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"INVESTMENT PROPERTY": Has the meaning given that term in the UCC.
"ISSUER": The issuer of any L/C.
"L/C": Any letter of credit, the issuance of which is procured by the
Lender for the account of the Borrower and any acceptance made on
account of such letter of credit.
"L/C LANDING COSTS": To the extent not included in the Stated Amount of
an L/C, customs, duty, freight, and other out-of-pocket costs and
expenses which will be expended to "land" the Inventory, the
purchase of which is supported by such L/C.
"LEASE": Any lease or other agreement, no matter how styled or
structured, pursuant to which the Borrower is entitled to the use
or occupancy of any space.
"LEASEHOLD INTEREST": Any interest of the Borrower as lessee under
any Lease.
"LENDER": Is defined in the Preamble to the within Agreement.
"LENDER'S RIGHTS AND REMEDIES": Is defined in Section 11-6.
"LIABILITIES" (in the singular, "LIABILITY"): Includes, without
limitation, all and each of the following, whether now existing or
hereafter arising:
(a) Any and all direct and indirect liabilities, debts,
and obligations of the Borrower to the Lender, each of every kind,
nature, and description.
(b) Each obligation to repay any loan, advance,
indebtedness, note, obligation, overdraft, or amount now or
hereafter owing by the Borrower to the Lender (including all
future advances whether or not made pursuant to a
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commitment by the Lender), whether or not any of such are
liquidated, unliquidated, primary, secondary, secured,
unsecured, direct, indirect, absolute, contingent, or of any
other type, nature, or description, or by reason of any cause
of action which the Lender may hold against the Borrower.
(c) All notes and other obligations of the Borrower now
or hereafter assigned to or held by the Lender, each of every
kind, nature, and description.
(d) All interest, fees, and charges and other amounts
which may be properly charged by the Lender to the Borrower and/or
which may be due from the Borrower to the Lender from time to
time.
(e) All costs and expenses incurred or paid by the
Lender in respect of any agreement between the Borrower and the
Lender or instrument furnished by the Borrower to the Lender
(including, without limitation, Costs of Collection, attorneys'
reasonable fees, and all court and litigation costs and expenses).
(f) Any and all covenants of the Borrower to or with the
Lender and any and all obligations of the Borrower to act or to
refrain from acting in accordance with any agreement between the
Borrower and the Lender or instrument furnished by the Borrower to
the Lender.
(g) Each of the foregoing as if each reference to the "
Lender " therein were to each Affiliate of the Lender.
"LIBOR BUSINESS DAY": Any day which is both a Business Day and a
day on which the principal interbank market for Libor deposits in
London in which BankBoston, N.A. participates is open for dealings
in United States Dollar deposits.
"LIBOR LOAN": Any Revolving Credit Loan which bears interest at a Libor
Rate.
"LIBOR OFFER RATE": That rate of interest (rounded upwards, if
necessary, to the next 1/100 of 1%) determined by the Lender to be
the highest prevailing rate per annum at which deposits on U.S.
Dollars are offered to BankBoston, N.A., by first-class
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<PAGE>
banks in the London interbank market in which BankBoston, N.A.
participates at or about 10:00AM (Boston Time) Two (2) Libor
Business Days before the first day of the Interest Period for
the subject Libor Loan, for a deposit approximately in the
amount of the subject loan for a period of time approximately
equal to such Interest Period.
"LIBOR MARGIN": 250 basis points. If the Capital Infusion Event
does not occur on or before September 7, 1999, the Libor Margin
shall be increased to 325 basis points until such time as the
Capital Infusion Event does occur, at which time the Libor Margin
shall be reinstated to 250 basis points.
"LIBOR RATE": That per annum rate (calculated on a 360 day year and
actual days elapsed) which is the aggregate of the Libor Offer
Rate PLUS the Libor Margin EXCEPT THAT, in the event that it is
determined by the Lender that the Lender may be subject to the
Reserve Percentage, the "Libor Rate" shall mean, with respect to
any Libor Loans then outstanding (from the date on which that
Reserve Percentage first became applicable to such loans), and
with respect to all Libor Loans thereafter made, an interest rate
per annum equal to the sum of (a) plus (b), where:
(a) is the decimal equivalent of the following
fraction:
LIBOR OFFER RATE
1 minus Reserve Percentage
(b) is the applicable Libor Margin.
"LINE (UNUSED) FEE": Is defined in Section 2-12.
"LOAN ACCOUNT": Is defined in Section 2-6.
"LOAN CEILING": Fifteen Million Dollars ($15,000,000), or such
lesser amount as the Lender may establish following the occurrence
of an Event of Default hereunder.
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<PAGE>
"LOAN DOCUMENTS": This Agreement, each instrument and document
executed and/or delivered as contemplated by Article 3, below, and
each other instrument or document from time to time executed
and/or delivered in connection with the arrangements contemplated
hereby or in connection with any transaction with the Lender or
any Affiliate of the Lender, including, without limitation, any
transaction which arises out of any cash management, depository,
investment, letter of credit, interest rate protection, or
equipment leasing services provided by the Lender or any Affiliate
of the Lender, as each may be amended from time to time.
"LOCAL DDA": A depository account maintained by the Borrower, the only
contents of which may be transfers FROM the Operating Account and
actually used solely (i) for petty cash purposes; (ii) for
payroll; or (iii) for medical insurance self funding.
"MATERIAL ACCOUNTING CHANGE": Any change in GAAP applicable to
accounting periods subsequent to the Borrower's fiscal year most
recently completed prior to the execution of this Agreement, which
change has a material effect on the Borrower's financial condition
or operating results, as reflected on financial statements and
reports prepared by or for the Borrower, when compared with such
condition or results as if such change had not taken place or
where preparation of the Borrower's statements and reports in
compliance with such change results in the breach of a financial
performance covenant imposed pursuant to Section 5-12 where such a
breach would not have occurred if such change had not taken place
or VISA VERSA.
"MATURITY DATE": June __, 2002.
"OPERATING ACCOUNT": Is defined in Section 7-3.
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"PARTICIPANT": Is defined in Section 14-14, hereof.
"PERMITTED ENCUMBRANCES": Those Encumbrances permitted as provided in
Section 4-7(a) hereof.
"PERMITTED ACQUISITION": means a transaction where the Borrower is a
party to a merger, consolidation or exchange of stock, or purchase
or otherwise acquires all or substantially all of the assets or
stock of, or any partnership or joint venture interest in, any
other Person, and where such transaction meets the following
criteria:.
(a) no Suspension Event has occurred and is continuing and the
proposed transaction will not otherwise create an Event of Default
hereunder;
(b) the business to be acquired is consistent with Borrower's
current line of business and with the Business Plan;
(c) the business to be acquired operates in the United States
of America;
(d) in the case of an asset acquisition, all of the assets to
be acquired shall be owned by the Borrower or a newly created
Subsidiary of the Borrower, 100% of the stock of which has been or
will be pledged to the Lender or which is or will become a
Borrower or a guarantor, in the case of a stock acquisition or an
acquisition by merger, the acquired company shall become a wholly
owned subsidiary of the Borrower or shall be merged with the
Borrower or any wholly-owned Subsidiary of the Borrower;
(e) the aggregate cash consideration to be paid by the
Borrower in connection with any such transaction or
transactions(including the aggregate amount of all Indebtedness
assumed) shall be primarily for inventory purchases and
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shall not exceed $250,000 in the aggregate in any fiscal year
without the consent of the Lender, which consent shall not be
unreasonably withheld;
(f) the transaction shall be preceded by the standard due
diligence practices of the Borrower;
(g) the board of directors and (if required by applicable
law) the stockholders, or the equivalent thereof, of the business
to be acquired has approved such acquisition; and
(h) in the case of transactions where the cash consideration
(including assumed Indebtedness) exceeds $250,000 but is not more
than $1,000,000, a Capital Infusion Event pursuant to which the
Borrower has received at least $4,000,000 shall have first
occurred, and the Lender shall have been provided with (i) a
Compliance Certificate demonstrating that the Borrowers are in
current compliance with and, giving effect to the proposed
Acquisition (including any borrowings made or to be made in
connection therewith), will continue to be in compliance with, all
of the financial covenants set forth in Section 5-12 hereof, (ii)
a copy of the purchase agreement, together with audited (if
available, or otherwise unaudited) financial statements for any
business to be acquired for the preceding two (2) fiscal years,
and (iii) a summary of the results of the Borrower's due diligence
investigations.
"PERSON": Any natural person, and any corporation, limited liability
company, trust, partnership, joint venture, or other enterprise or
entity.
"PROCEEDS": Includes, without limitation, "Proceeds" as defined in the
UCC (defined below), and each type of property described in
Section 8-1 hereof.
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"RECEIPTS": All cash, cash equivalents, checks, and credit card slips
and receipts as arise out of the sale of the Collateral.
"RECEIVABLES COLLATERAL": That portion of the Collateral which consists
of the Borrower's Accounts, Accounts Receivable, General
Intangibles, Chattel Paper, Instruments, Documents of Title,
Documents, Investment Property, letters of credit for the benefit
of the Borrower, and bankers' acceptances held by the Borrower,
and any rights to payment.
"RELATED ENTITY": (a) Any corporation, limited liability company,
trust, partnership, joint venture, or other enterprise which: is a
parent, brother-sister, subsidiary, or affiliate, of the Borrower;
could have such enterprise's tax returns or financial statements
consolidated with the Borrower's; could be a member of the same
controlled group of corporations (within the meaning of Section
1563(a)(1), (2) and (3) of the Internal Revenue Code of 1986, as
amended from time to time) of which the Borrower is a member;
controls or is controlled by the Borrower or by any Affiliate of
the Borrower.
(b) Any Affiliate.
"REQUIREMENT OF LAW": As to any Person:
(a)(i) All statutes, rules, regulations,
orders, or other requirements having the force of law and (ii) all
court orders and injunctions, arbitrator's decisions, and/or
similar rulings, in each instance ((i) and (ii)) of or by any
federal, state, municipal, and other governmental authority, or
court, tribunal, panel, or other body which has or claims
jurisdiction over such Person, or any property of such Person, or
of any other Person for whose conduct such Person would be
responsible.
(b) That Person's charter, certificate of
incorporation, articles of organization, and/or other
organizational documents, as applicable; and (c) that
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Person's by-laws and/or other instruments which deal with
corporate or similar governance, as applicable.
"RESERVE PERCENTAGE": The decimal equivalent of that rate
applicable to the Lender under regulations issued from time to time by the Board
of Governors of the Federal Reserve System for determining the maximum reserve
requirement of that Lender with respect to "Eurocurrency liabilities" as defined
in such regulations. The Reserve Percentage applicable to a particular Libor
Loan shall be based upon that in effect during the subject Interest Period, with
changes in the Reserve Percentage which take effect during such Interest Period
to take effect (and to consequently change any interest rate determined with
reference to the Reserve Percentage) if and when such change is applicable to
such loans.
"RESERVES": All (if any) Availability Reserves and Inventory Reserves.
"REVOLVING CREDIT": Is defined in Section 2-1.
"REVOLVING CREDIT LOAN": A term of convenience which refers to so much
of the unpaid principal balance of the Loan Account as bears the
same rate of interest for the same Interest Period (see Section
2-9(c)).
"REVOLVING CREDIT NOTE": Is defined in Section 2-7.
"STATED AMOUNT": The maximum amount for which an L/C may be honored.
"SUBORDINATED INDEBTEDNESS": Indebtedness which is expressly subordinated
to the Borrower's obligations to the Lender pursuant to a written
subordination agreement acceptable to Lender in its reasonable
discretion.
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"SUSPENSION EVENT": Any occurrence, circumstance, or state of facts
which (a) is an Event of Default; or (b) would become an Event of
Default if any requisite notice were given and/or any requisite
period of time were to run and such occurrence, circumstance, or
state of facts were not absolutely cured within any applicable
grace period.
"TANGIBLE CAPITAL BASE": At any date, the Borrower's Tangible Net Worth
PLUS its Subordinated Indebtedness.
"TANGIBLE NET WORTH": At any date, the total of stockholders' equity of
the Borrower (determined in accordance with GAAP, consistently
applied, except the balance of the Loan Account shall in all
events be treated as current), SUBTRACTING THEREFROM (i)
intangibles (determined in accordance with GAAP so applied); (ii)
prepaid expenses and deferred charges, (iii) Indebtedness owed to
Borrower from any employee, stockholder, or parent or other
Affiliate of the Borrower; and (iv) write-ups in the value of
Borrower's assets occurring after January 31, 1999, but excluding
adjustments for write-ups to reflect physical inventory results.
"TERMINATION DATE": The earliest of (a) the Maturity Date; or (b) the
occurence of any event described in Section 10-11 hereof; or (c)
date set by notice by the Lender to the Borrower, which notice
sets the Termination Date on account of the occurrence of any
Event of Default other than as described in Section 10-11 hereof.
"UCC": The Uniform Commercial Code as presently in effect in
Massachusetts (Mass. Gen. Laws, Ch. 106).
"WORK FEE": As defined in Section 2.11.
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"YEAR 2000 COMPLIANT": Computer applications, imbedded microchips,
and other systems and subsystems which properly recognize and
perform their intended function without any adverse effect on
account of their respective inability to recognize certain dates
prior to, on, and after December 31, 1999 or on account of their
treating any date prior to, on, or after December 31, 1999 other
than as the specific date in question.
ARTICLE II - THE REVOLVING CREDIT:
2.1 ESTABLISHMENT OF REVOLVING CREDIT.
(a) The Lender hereby establishes a revolving line of credit
(the "REVOLVING CREDIT") in the Borrower's favor pursuant to which the Lender,
subject to, and in accordance with, this Agreement, shall make loans and
advances and otherwise provide financial accommodations to and for the account
of the Borrower as provided herein. The amount available for borrowing under
the Revolving Credit shall be determined by the Lender by reference to
Availability, as determined by the Lender from time to time.
(b) As used herein, the following terms have the following
meanings:
(i) "AVAILABILITY" refers at any time to the result of
the following:
(A) Borrowing Base.
MINUS
(B) The then unpaid principal balance of the Loan
Account.
MINUS
(C) The then Stated Amount of all L/C's.
(ii) "BORROWING BASE" refers at any time to the lesser of
2-1(b)(ii)(A) or 2-1(b)(ii)(B), where:
(A) is the Loan Ceiling.
(B) is the result of the following:
(I) The Inventory Advance Rate of the Cost
of Acceptable Inventory (net of
Inventory Reserves).
MINUS
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(II) The then aggregate of the Availability
Reserves.
(c) Availability shall be based upon Borrowing Base
Certificates furnished as provided in Section 5-4 hereof.
(d) The proceeds of borrowings under the Revolving Credit shall
be used to refinance Borrower's existing line of credit with Richfield Bank and
Trust, for working capital purposes of the Borrower, for the Borrower's Capital
Expenditures solely in accordance with the Business Plan (including the
acquisition of franchisee stores, if consistent with the Business Plan and
provided that such acquisitions do not exceed in the aggregate the maximum
amount for Permitted Acquisitions), and for start-up costs associated with the
Borrower's internet strategy, provided that matching funds are available from
other sources, all solely to the extent permitted by this Agreement.
2.2 ADVANCES IN EXCESS OF BORROWING BASE. The Lender does not have
any obligation to make any loan or advance, or otherwise to provide any credit
for the benefit of the Borrower such that the balance of the Loan Account
exceeds the Borrowing Base. The making of loans, advances, and credits and the
providing of financial accommodations in excess of the Borrowing Base is for the
benefit of the Borrower and does not affect the obligations of the Borrower
hereunder; such loans, advances, credits, and financial accommodations
constitute Liabilities. The making of any such loans, advances, and credits and
the providing of financial accommodations, on any one occasion such that the
Borrowing Base is exceeded shall not obligate the Lender to make any such loans,
credits, or advances or to provide any financial accommodation on any other
occasion nor to permit such loans, credits, or advances to remain outstanding.
2.3 RISKS OF VALUE OF COLLATERAL. The Lender's reference to a
given asset in connection with the making of loans, credits, and advances and
the providing of financial accommodations under the Revolving Credit and/or the
monitoring of compliance with the provisions hereof shall not be deemed a
determination by the Lender relative to the actual value of the asset in
question. All risks concerning the saleability of the Borrower's Inventory are
and remain upon the Borrower. All Collateral secures the prompt, punctual, and
faithful performance
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of the Liabilities whether or not relied upon by the Lender in connection
with the making of loans, credits, and advances and the providing of
financial accommodations under the Revolving Credit.
2.4 LOAN REQUESTS.
(a) Subject to the provisions of this Agreement, a loan or
advance under the Revolving Credit duly and timely requested by the Borrower
shall be made pursuant hereto, PROVIDED THAT:
(i) Borrowing Base will not be exceeded; and
(ii) The Revolving Credit has not been suspended as
provided in Section 2-4(i).
(b) Requests for loans and advances under the Revolving Credit
may be requested by the Borrower in such manner as may from time to time be
reasonably acceptable to the Lender.
(c) Subject to provisions of this Agreement, a request
for a loan or advance (in each instance in an amount which is not less
than $10,000.00) shall be made by 11:30AM on a Business Day will be made
by the end of business on that Business Day; otherwise, by the end of the
then next Business Day. (i) If such Revolving Credit Loan is or is to be
converted to a Base Margin Loan: By 11:30 A.M. on the Business Day on
which the subject Revolving Credit Loan is to be made or is to be so
converted. Base Margin Loans requested by the Borrower, other than those
resulting from the conversion of a Libor Loan, shall not be less than
$10,000.00.
(ii) If such Revolving Credit Loan is, or is to be
continued as, or converted to, a Libor Loan: By 1:00 P.M. Two (2) Libor
Business Days before the end of the then applicable Interest Period.
Libor Loans and conversions to Libor Loans shall each be not less than
$1,000,000 and in increments of $50,000 in excess of such minimum.
(iii) Any Libor Loan which matures while a Suspension
Event is extant shall be converted, at the option of the Lender to a Base
Margin Loan notwithstanding any notice from the Borrower that such Loan
is to be continued as a Libor Loan.
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(d) Any request for a Revolving Credit Loan or for the
conversion of a Revolving Credit Loan which is made after the applicable
deadline therefor, as set forth above, shall be deemed to have been made at the
opening of business on the then next Business Day or Libor Business Day, as
applicable. Each request for a Revolving Credit Loan or for the conversion of a
Revolving Credit Loan shall be made in such manner as may from time to time be
reasonably acceptable to the Lender.
(e) Intentionally deleted.
(f) The Borrower may request that the Lender cause the issuance
of L/C's for the account of the Borrower as provided in Section 2-16.
(g) The Lender may rely on any request for a loan or advance,
or other financial accommodation under the Revolving Credit which the Lender, in
good faith, believes to have been made by a Person duly authorized to act on
behalf of the Borrower and may decline to make any such requested loan or
advance, or issuance, or to provide any such financial accommodation pending the
Lender's being furnished with such documentation concerning that Person's
authority to act as may be reasonably satisfactory to the Lender.
(h) A request by the Borrower for loan or advance, or other
financial accommodation under the Revolving Credit shall be irrevocable and
shall constitute certification by the Borrower that as of the date of such
request, each of the following is true and correct:
(i) There has been no material adverse change in the
Borrower's financial condition from the most recent financial information
furnished Lender pursuant to this Agreement.
(ii) The Borrower is in compliance with, and there is no
pending breach of any of, its covenants contained in this Agreement.
(iii) All or a portion of any loan or advance so requested
will be set aside by the Borrower to the extent necessary to cover all of
the Borrower's obligations for sales tax on account of sales since the
then most recent borrowing pursuant to the Revolving Credit.
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(iv) Each representation which is made herein or in any
of the Loan Documents (defined below) is then true and complete as of and
as if made on the date of such request.
(v) No Suspension Event is then extant.
(i) Upon the occurrence and during the continuance of, from
time to time, of any Suspension Event:
(i) The Lender may suspend the Revolving Credit
immediately.
(ii) The Lender shall not be obligated, during such
suspension, to make any loans or advance, or to provide any financial
accommodation hereunder or to seek the issuance of any L/C.
(iii) The Lender may suspend the right of the Borrower to
request any Libor Loan or to convert any Base Margin Loan to a Libor
Loan.
2.5 MAKING OF LOANS UNDER REVOLVING CREDIT.
(a) A loan or advance under the Revolving Credit shall be made
by the transfer of the proceeds of such loan or advance to the Operating Account
or as otherwise instructed by the Borrower.
(b) A loan or advance shall be deemed to have been made under
the Revolving Credit (and the Borrower shall be indebted to the Lender for the
amount thereof immediately) at the following:
(i) The Lender's initiation of the transfer of the
proceeds of such loan or advance in accordance with the Borrower's
instructions (if such loan or advance is of funds requested by the
Borrower).
(ii) The charging of the amount of such loan to the Loan
Account (in all other circumstances).
(c) There shall not be any recourse to or liability of the
Lender (except to the extent caused by the gross negligence or willful
misconduct of the Lender as determined by a court of competent jurisdiction), on
account of:
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(i) Any delay in the making of any loan or advance
requested under the Revolving Credit.
(ii) Any delay in the proceeds of any such loan or
advance constituting collected funds.
(iii) Any delay in the receipt, and/or any loss, of funds
which constitute a loan or advance under the Revolving Credit, the wire
transfer of which was properly initiated by the Lender in accordance with
wire instructions provided to the Lender by the Borrower.
2.6 THE LOAN ACCOUNT.
(a) An account ("LOAN ACCOUNT") shall be opened on the books of
the Lender. A record may be kept in the Loan Account of all loans made under or
pursuant to this Agreement and of all payments thereon.
(b) The Lender may also keep a record (either in the Loan
Account or elsewhere, as the Lender may from time to time elect) of all
interest, fees, service charges, costs, expenses, and other debits owed the
Lender on account of the Liabilities and of all credits against such amounts so
owed.
(c) All credits against the Liabilities shall be conditional
upon final payment to the Lender of the items giving rise to such credits. The
amount of any item credited against the Liabilities which is charged back
against the Lender for any reason or is not so paid shall be a Liability and
shall be added to the Loan Account, whether or not the item so charged back or
not so paid is returned.
(d) Except as otherwise provided herein, all fees, service
charges, costs, and expenses for which the Borrower is obligated hereunder are
payable on demand. In the determination of Availability, the Lender may deem
fees, service charges, accrued interest, and other payments which will be due
and payable between the date of such determination and the first day of the then
next succeeding month as having been advanced under the Revolving Credit whether
or not such amounts are then due and payable.
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(e) The Lender, without the request of the Borrower, may
advance under the Revolving Credit any interest, fee, service charge, or other
payment to which the Lender is entitled from the Borrower pursuant hereto and
may charge the same to the Loan Account notwithstanding that such amount so
advanced may result in Borrowing Base's being exceeded. Such action on the part
of the Lender shall not constitute a waiver of the Lender's rights and
Borrower's obligations under Section 2-8(b). Any amount which is added to the
principal balance of the Loan Account as provided in this Section 2-6(e) shall
bear interest.
(f) Any statement rendered by the Lender to the Borrower
concerning the Liabilities shall be considered correct and accepted by the
Borrower and shall be conclusively binding upon the Borrower unless the Borrower
provides the Lender with written objection thereto within twenty (20) days from
the mailing of such statement, which written objection shall indicate, with
particularity, the reason for such objection. The Loan Account and the Lender's
books and records concerning the loan arrangement contemplated herein and the
Liabilities shall be prima facie evidence and proof of the items described
therein.
2.7 THE REVOLVING CREDIT NOTE. The obligation to repay loans and
advances under the Revolving Credit, with interest as provided herein, shall be
evidenced by a note (the "REVOLVING CREDIT NOTE") in the form of EXHIBIT 2-7,
annexed hereto, executed by the Borrower. Neither the original nor a copy of
the Revolving Credit Note shall be required, however, to establish or prove any
Liability. In the event that the Revolving Credit Note is ever lost, mutilated,
or destroyed, the Borrower shall execute a replacement thereof and deliver such
replacement to the Lender, subject to Lender's agreement to indemnify Borrower
from any claims asserted by any party holding the original Revolving Credit Note
who is not the Lender or the Lender's assignee.
2.8 PAYMENT OF THE LOAN ACCOUNT.
(a) The Borrower may repay all or any portion of the principal
balance of the Loan Account from time to time until the Termination Date. Such
payments shall be applied first to Base Margin Loans and only then to Libor
Loans
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(b) The Borrower, without notice or demand from the Lender
shall pay the Lender that amount, from time to time, which is necessary so that
the unpaid balance of the Loan Account does not exceed the Borrowing Base. Such
payments shall be applied first to Base Margin Loans and only then to Libor
Loans
(c) The Lender shall endeavor to cause those application of
payments (if any), pursuant to Sections 2-8(a) and 2-8(b) against Libor Loans
then outstanding in such manner as results in the least cost to the Borrower,
but shall not have any affirmative obligation to do so nor liability on account
of the Lender's failure to have done so. In no event shall action or inaction
taken by the Lender excuse the Borrower from any indemnification obligation
under Section 2-8(e).
(d) The Borrower shall repay the then entire unpaid balance of
the Loan Account and all other Liabilities on the Termination Date.
(e) The Borrower shall indemnify Lender and hold Lender
harmless from and against any loss, cost or expense (including loss of
anticipated profits) which Lender may sustain or incur (including, without
limitation, by virtue of acceleration after the occurrence of any Event of
Default) as a consequence of the following:
(i) Default by the Borrower in payment of the principal
amount of or any interest on any Libor Loan as and when due and payable,
including any such loss or expense arising from interest or fees payable
by such Lender to lenders of funds obtained by it in order to maintain
its Libor Loans
(ii) Default by the Borrower in making a borrowing or
conversion after the Borrower has given (or is deemed to have given) a
request for a Revolving Credit Loan or a request to convert a Revolving
Credit Loan from one applicable interest rate to another.
(iii) The making of any payment on a Libor Loan or the
making of any conversion of any such Loan to a Base Margin Loan on a day
that is not the last day of the applicable Interest Period with respect
thereto, including interest or fees payable by Lender to lenders of funds
obtained by it in order to maintain any such Loans as "breakage fees"
(so-called).
2.9 INTEREST.
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(a) Each Revolving Credit Loan shall bear interest at the Base
Margin Rate unless timely notice is given (as provided in Section 2-4(a)) that
the subject Revolving Credit Loan (or a portion thereof) is, or is to be
converted to, a Libor Loan.
(b) Each Revolving Credit Loan which consists of a Libor Loan
shall bear interest at the applicable Libor Rate.
(c) Subject to the provisions hereof, the Borrower, by notice
to the Lender, may cause all or a part of the unpaid principal balance of the
Loan Account to bear interest at the Base Margin Rate or the Libor Rate as
specified from time to time by the Borrower. For ease of reference and
administration, each part of the Loan Account which bears interest at the same
interest and for the same Interest Period is referred to herein as if it were a
separate "Revolving Credit Loan".
(d) The Borrower shall not select, renew, or convert any
interest rate for a Revolving Credit Loan such that, in addition to interest at
the Base Margin Rate, there are more than Five (5) Libor Rates applicable to the
Revolving Credit Loans at any one time.
(e) The Borrower shall pay accrued and unpaid interest on each
Revolving Credit Loan in arrears as follows:
(i) On the Interest Payment Date for that Revolving
Credit Loan.
(ii) On the Termination Date and on the End Date.
(iii) Following the occurrence and during the continuance
of any Event of Default, with such frequency as may be determined by the
Lender.
(f) Following the occurrence and during the continuance of any
Event of Default (and whether or not the Lender exercises the Lender's rights on
account thereof), all Revolving Credit Loans shall bear interest, at the option
of the Lender at rate which is the aggregate of the Base Margin Rate PLUS Three
Percent (3%) per annum.
2.10 COMMITMENT FEE.
(a) As compensation for the Lender's commitment to make loans
and advances to the Borrower and as compensation for the Lender's maintenance of
sufficient funds available for such purpose, the Lender has earned a COMMITMENT
FEE (so referred to herein) of $130,000.
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(b) The Commitment Fee shall be paid as follows: The Lender
acknowledges receipt of $65,000 paid by the Borrower upon the execution of the
commitment letter. The Borrower shall pay the $65,000 balance of the Commitment
Fee at closing.
2.11. FACILITY FEE.
(a) In addition to any other fee or expense paid by the
Borrower on account of the Revolving Credit, the Borrower shall pay the Lender a
FACILITY FEE (so referred to herein) of $54,000, which has been fully earned by
the Lender's execution of this Agreement. Subject to this Section 2-11, the
Facility Fee shall be paid to the Lender in monthly installments of $1,500 each.
(i) A proration of such monthly installment shall be
paid out of the first advance under the Revolving Credit for the period
beginning with the date on which this Agreement is executed and ending on
the last day of the month of such execution.
(ii) A monthly installment shall be paid on the first day
of the month next following that during which this Agreement is executed
and on the first day of each month thereafter, until the entire Facility
Fee has been paid.
(b) Upon the termination of the Revolving Credit and, at the
Lender's option, upon the occurrence of any Event of Default described in
Section 10-11, any remaining installments of the Facility Fee shall be
immediately due and payable.
2.12. LINE (UNUSED) FEE. In addition to any other fee by the
Borrower on account of the Revolving Credit, the Borrower shall pay the Lender a
LINE (UNUSED) FEE (so referred to herein) in arrears, on the first day of each
quarter (and on the Termination Date). The Line (Unused) Fee shall be equal to
fifteen tenths of one percent (0.15%) per annum of the average daily difference,
during the quarter just ended (or relevant period with respect to the payment
being made on the Termination Date) between the Loan Ceiling and the unpaid
principal balance of the Loan Account.
2.13. EARLY TERMINATION FEE.
(a) In the event that the Termination Date occurs, for any
reason (other than by reason of a refinancing or restructuring of the Revolving
Credit by Lender or an affiliate of
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Lender or in a syndicated transaction where Lender or an affiliate of Lender
is the Agent or Co-Agent) prior to the Maturity Date, the Borrower shall pay
the Lender the EARLY TERMINATION FEE (so referred to herein) determined and
payable as follows:
(i) If the Termination Date occurs on or before
June 7, 2000, the Borrower shall pay an Early Termination Fee of one percent
(1%) of the Loan Ceiling. June 7, 2001, the Borrower shall pay an Early
Termination Fee of one half of one percent (0.5%) of the Loan Ceiling.
2.14. CONCERNING FEES.
(a) In addition to any other right to which the Lender is then
entitled on account thereof, the Lender may assess an additional fee payable by
the Borrower on account of the accommodation, from time to time, by the Lender
to the Borrower's request that the Lender depart or dispense with one or more of
the administrative provisions of this Agreement and/or the Borrower's failure to
comply with any of such provisions.
(i) By way of non-exclusive example, the Lender may
assess a fee on account of any of the following:
(A) The Borrower's failure to pay that amount
which is necessary so that the principal balance of the Loan
Account does not exceed Borrowing Base (as required under Section
2-8(b) hereof).
(B) The providing of a loan or advance under the
Revolving Credit or charging of the Loan Account such that the
Borrowing Base would be exceeded.
(C) The foreshortening of any of the time frames
with respect to the making of Revolving Credit Loans as set forth
in Section 2-4(a).
(D) The Borrower's failure to provide a financial
statement or report within the applicable timeframe provided for
such report under Article 5 hereof.
(ii) The inclusion of the foregoing right on the part of
the Lender to assess a fee does not constitute an obligation, on the part
of the Lender, to waive any
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provision of this Agreement under any circumstances. The assessment of
any such fee in any particular circumstance shall not constitute the
Lender's waiver of any breach of this Agreement on account of which such
fee was assessed nor a course of action on which the Borrower may rely.
(b) The Borrower shall not be entitled to any credit, rebate or
repayment of the Commitment Fee, Facility Fee, Line (Unused) Fee, Early
Termination Fee, or other fee previously earned by the Lender pursuant to this
Agreement notwithstanding any termination of this Agreement or suspension or
termination of the Lender's obligation to make loans and advances hereunder.
2.15. LENDER'S DISCRETION.
(a) Each reference in the Loan Documents to the exercise of
discretion or the like by the Lender shall be to that Person's exercise of its
judgment, in good faith (which shall be presumed), based upon that Person's
consideration of any such factor as the Lender, taking into account information
of which that Person then has actual knowledge, believes:
(i) Will or reasonably could be expected to affect the
value of the Collateral, the enforceability of the Lender's security and
collateral interests therein, or the amount which the Lender would likely
realize therefrom (taking into account delays which may possibly be
encountered in the Lender's realizing upon the Collateral and likely
Costs of Collection).
(ii) Indicates that any report or financial information
delivered to the Lender by or on behalf of the Borrower is incomplete,
inaccurate, or misleading in any material manner or was not prepared in
accordance with the requirements of this Agreement.
(iii) Suggests an increase in the likelihood that the
Borrower will become the subject of a bankruptcy or insolvency
proceeding.
(iv) Constitutes a Suspension Event.
(b) In the exercise of such judgment, the Lender also may take
into account any of the following factors, to the extent not previously taken
into account:
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(i) Those included in, or tested by, the definitions of
"Acceptable Inventory," and "Cost".
(ii) The current financial and business climate of the
industry in which the Borrower competes (having regard for the Borrower's
position in that industry).
(iii) General macroeconomic conditions which have a
material effect on the Borrower's cost structure.
(iv) Material changes in or to the mix of the Borrower's
Inventory.
(v) Seasonality with respect to the Borrower's Inventory
and patterns of retail sales.
(vi) Such other factors as the Lender determines as
having a material bearing on credit risks associated with the providing
of loans and financial accommodations to the Borrower.
(c) The burden of establishing the failure of the Lender to
have acted in a reasonable manner in such Person's exercise of discretion shall
be the Borrower's.
2.16. PROCEDURES FOR ISSUANCE OF L/C'S.
(a) The Borrower may request that the Lender cause the issuance
of L/C's for the account of the Borrower by BankBoston or by another financial
institution reasonably acceptable to the Borrower. Each such request shall be
in such manner as may from time to time be acceptable to the Lender.
(b) The Lender will endeavor to cause the issuance of any L/C
so requested by the Borrower, PROVIDED THAT, at the time that the request is
made, the Revolving Credit has not been suspended as provided in Section 2-4(i)
and if so issued:
(i) The aggregate Stated Amount of all L/C's then
outstanding, does not exceed Two Million Five Hundred Thousand Dollars
($2,500,000).
(ii) The expiry of the L/C is not later than the earlier
of Thirty (30) days prior to the Maturity Date or the following:
(A) Standby's: One (1) year from initial
issuance.
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(B) Documentary's: one hundred and eighty
(180) days from issuance.
(iii) Borrowing Base would not be exceeded.
(c) The Borrower shall execute such documentation to apply for
and support the issuance of an L/C as may be required by the Issuer.
(d) There shall not be any recourse to, nor liability of, the
Lender (except to the extent caused by the gross negligence or willful
misconduct of the Lender as determined by a court of competent jurisdiction) on
account of
(i) Any delay or refusal by an Issuer to issue an L/C;
(ii) Any action or inaction of an Issuer on account of or
in respect to, any L/C.
(e) The Borrower shall reimburse the Issuer for the amount of
any honoring of a drawing under an L/C on the same day on which such honoring
takes place. The Lender, without the request of the Borrower, may advance under
the Revolving Credit (and charge to the Loan Account) the amount of any honoring
of any L/C and other amount for which the Borrower, the Issuer, or the Lender
becomes obligated on account of, or in respect to, any L/C. Such advance shall
be made whether or not a Suspension Event is then extant or such advance would
result in Borrowing Base's being exceeded. Such action shall not constitute a
waiver of the Lender's rights under Section 2-8(b) hereof.
2.17. FEES FOR L/C'S.
(a) The Borrower shall pay to the Lender a fee, on account of
L/C's, the issuance of which had been procured by the Lender, monthly in
arrears, and on the Termination Date and on the End Date, equal to one and one
quarter of one percent (1.25%) per annum of the weighted average Stated Amount
of all L/C's outstanding during the period in respect of which such fee is being
paid.
(b) In addition to the fee to be paid as provided in Subsection
2-17(a), above, the Borrower shall pay to the Lender (or to the Issuer, if so
requested by Lender), on demand, all
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issuance, processing, negotiation, amendment, and administrative fees and
other amounts charged by the Issuer on account of, or in respect to, any L/C.
2.18. CONCERNING L/C'S.
(a) None of the Issuer, the Issuer's correspondents, or any
advising, negotiating, or paying bank with respect to any L/C shall be
responsible in any way for:
(i) The performance by any beneficiary under any L/C of
that beneficiary's obligations to the Borrower.
(ii) The form, sufficiency, correctness, genuineness,
authority of any person signing; falsification; or the legal effect of;
any documents called for under any L/C if (with respect to the foregoing)
such documents on their face appear to be in order.
(b) The Issuer may honor, as complying with the terms of any
L/C and of any drawing thereunder, any drafts or other documents otherwise in
order, but signed or issued by an administrator, executor, conservator, trustee
in bankruptcy, debtor in possession, assignee for the benefit of creditors,
liquidator, receiver, or other legal representative of the party authorized
under such L/C to draw or issue such drafts or other documents.
(c) Unless otherwise agreed to, in the particular instance, the
Borrower hereby authorizes any Issuer to:
(i) Select an advising bank, if any.
(ii) Select a paying bank, if any.
(iii) Select a negotiating bank.
(d) All directions, correspondence, and funds transfers
relating to any L/C are at the risk of the Borrower. The Issuer shall have
discharged the Issuer's obligations under any L/C which, or the drawing under
which, includes payment instructions, by the initiation of the method of payment
called for in, and in accordance with, such instructions (or by any other
commercially reasonable and comparable method). Neither the Lender nor the
Issuer shall have any responsibility for any inaccuracy, interruption, error, or
delay in transmission or delivery by post, telegraph or cable, or for any
inaccuracy of translation.
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(e) The Lender's and the Issuer's rights, powers, privileges
and immunities specified in or arising under this Agreement are in addition to
any heretofore or at any time hereafter otherwise created or arising, whether by
statute or rule of law or contract.
(f) Except to the extent otherwise expressly provided hereunder
or agreed to in writing by the Issuer and the Borrower, the L/C will be governed
by the Uniform Customs and Practice for Documentary Credits, International
Chamber of Commerce, Publication No. 500, and any subsequent revisions thereof.
(g) If any change in any law, executive order or regulation, or
any directive of any administrative or governmental authority (whether or not
having the force of law), or in the interpretation thereof by any court or
administrative or governmental authority charged with the administration
thereof, shall either:
(i) impose, modify or deem applicable any reserve,
special deposit or similar requirements against letters of credit
heretofore or hereafter issued by any Issuer or with respect to which the
Lender or any Issuer has an obligation to lend to fund drawings under any
L/C; or
(ii) impose on any Issuer any other condition or
requirements relating to any such letters of credit;
and the result of any event referred to in Section 2-18(g)(i) or 2-18(g)(ii),
above, shall be to increase the cost to any Issuer of issuing or maintaining any
L/C (which increase in cost shall be the result of such Issuer's reasonable
allocation among that Issuer's letter of credit customers of the aggregate of
such cost increases resulting from such events), then, upon demand by the Lender
and delivery by the Lender to the Borrower of a certificate of an officer of the
subject Issuer describing such change in law, executive order, regulation,
directive, or interpretation thereof, its effect on such Issuer, and the basis
for determining such increased costs and their allocation, the Borrower shall
immediately pay to the Lender, from time to time as specified by the Lender,
such amounts as shall be sufficient to compensate such Issuer for such increased
cost. Any Issuer's determination of costs incurred under Section 2-18(g)(i) or
2-18(g)(ii), above, and the allocation, if any, of such costs among the Borrower
and other letter of credit customers of
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such Issuer, if done in good faith and made on an equitable basis and in
accordance with such officer's certificate, shall be conclusive and binding
on the Borrower.
(h) The obligations of the Borrower under this Agreement with
respect to L/C's are absolute, unconditional, and irrevocable and shall be
performed strictly in accordance with the terms hereof under all circumstances,
whatsoever including, without limitation, the following:
(i) Any lack of validity or enforceability or
restriction, restraint, or stay in the enforcement of this Agreement, any
L/C, or any other agreement or instrument relating thereto.
(ii) Any amendment or waiver of, or consent to the
departure from, any L/C.
(iii) The existence of any claim, set-off, defense, or
other right which the Borrower may have at any time against the
beneficiary of any L/C.
(iv) Any good faith honoring of a drawing under any L/C,
which drawing possibly could have been dishonored based upon a strict
construction of the terms of the L/C.
2.19. INCREASED COSTS. If, as a result of any change in any
requirement of law, or of the interpretation or application thereof by any court
or by any governmental or other authority or entity charged with the
administration thereof, whether or not having the force of law, which:
(a) subjects the Lender to any taxes or changes the basis of
taxation, or increases any existing taxes, on payments of principal, interest or
other amounts payable by the Borrower to the Lender under this Agreement (except
for taxes on the Lender's overall net income or capital imposed by the
jurisdiction in which the Lender's principal or lending offices are located);
(b) imposes, modifies or deems applicable any reserve, cash
margin, special deposit or similar requirements against assets held by, or
deposits in or for the account of or loans by or any other acquisition of funds
by the relevant funding office of the Lender;
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(c) imposes on the Lender any other condition with respect to
any Loan Document; or
(d) imposes on the Lender a requirement to maintain or allocate
capital in relation to the Liabilities;
and the result of any of the foregoing, in the Lender's
reasonable opinion, is to increase the cost to the Lender of making or
maintaining any loan, advance or financial accommodation or to reduce the income
receivable by the Lender in respect of any loan, advance or financial
accommodation by an amount which the Lender deems to be material, then upon the
Lender's giving written notice thereof, from time to time, to the Borrower (such
notice to set out in reasonable detail the facts giving rise to and a summary
calculation of such increased cost or reduced income), the Borrower shall
forthwith pay to the Lender, upon receipt of such notice, that amount which
shall compensate the Lender for such additional cost or reduction in income.
ARTICLE 3. CONDITIONS PRECEDENT:
As a condition to the effectiveness of this Agreement, the establishment
of the Revolving Credit, and the making of the first loan under the Revolving
Credit, each of the documents respectively described in Sections 3-1 through and
including 3-5, (each in form and substance satisfactory to the Lender) shall
have been delivered to the Lender, and the conditions respectively described in
Sections 3-6 through and including 3-10, shall have been satisfied:
3.1. CORPORATE DUE DILIGENCE FOR EACH BORROWER.
(a) A Certificate of corporate good standing issued by the
Secretary of State of Minnesota.
(b) Certificates of due qualification, in good standing, issued
by the Secretary(ies) of State of each State in which the nature of the
Borrower's business conducted or assets owned could require such qualification.
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(c) A Certificate of the Borrower's Secretary of the due
adoption, continued effectiveness, and setting forth the texts of, each
corporate resolution adopted in connection with the establishment of the loan
arrangement contemplated by the Loan Documents and attesting to the true
signatures of each Person authorized as a signatory to any of the Loan
Documents.
3.2. OPINION. An opinion of counsel to the Borrower in form and
substance satisfactory to the Lender.
3.3. LANDLORD WAIVERS. The delivery to the Lender of waivers or
subordinations (each in form satisfactory to the Lender) executed by each of
the Borrower's landlords with respect to those leased premises located in
Arizona and Washington, and any other additional state in which Borrower
opens a new store location that provides the landlord with a statutory lien
on Borrower's assets. To the extent the foregoing requirement is not met,
Borrower shall use its reasonable best efforts to obtain such waivers or
subordinations, and this condition shall not apply, provided that the Lender
will establish rent reserves as part of the Availability Reserves.
3.4. ADDITIONAL DOCUMENTS. Such additional instruments and
documents as the Lender or its counsel reasonably may require or request.
3.5. OFFICERS' CERTIFICATES. Certificates executed by the Chief
Executive Officer or the Chief Financial Officer of the Borrower and stating
that the representations and warranties made by the Borrower to the Lender in
the Loan Documents are true and complete as of the date of such Certificate, and
that no event has occurred which is or which, solely with the giving of notice
or passage of time (or both) would be an Event of Default.
3.6. REPRESENTATIONS AND WARRANTIES. Each of the representations
made by or on behalf of the Borrower in this Agreement or in any of the other
Loan Documents or in any other report, statement, document, or paper provided by
or on behalf of the Borrower shall be true and complete as of the date as of
which such representation or warranty was made.
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3.7. MINIMUM EXCESS AVAILABILITY. The Borrowing Base, after giving
effect to the first funding under the Revolving Credit; all then held checks
(if any); accounts payable which are beyond credit terms then accorded the
Borrower; overdrafts; any charges to the Loan Account made in connection with
the establishment of the credit facility contemplated hereby; and L/C's to be
issued at, or immediately subsequent to, such establishment, is not less than
One Million Dollars ($1,000,000).
3.8. ALL FEES AND EXPENSES PAID. All fees due at or immediately
after the first funding under the Revolving Credit and all costs and expenses
incurred by the Lender in connection with the establishment of the credit
facility contemplated hereby (including the fees and expenses of counsel to
the Lender) shall have been paid.
3.9. NO SUSPENSION EVENT. No Suspension Event shall then exist.
3.10 NO ADVERSE CHANGE. No event shall have occurred or failed to
occur, which occurrence or failure is or could have a materially adverse effect
upon the Borrower's financial condition when compared with such financial
condition at April 30, 1999.
No document shall be deemed delivered to the Lender until received and accepted
by the Lender at its head offices in Boston, Massachusetts. Under no
circumstances will this Agreement take effect until executed and accepted by the
Lender at said head office.
ARTICLE 4 - GENERAL REPRESENTATIONS, COVENANTS AND WARRANTIES:
To induce the Lender to establish the loan arrangement contemplated
herein and to make loans and advances and to provide financial accommodations
under the Revolving Credit (each of which loans shall be deemed to have been
made in reliance thereupon) the Borrower, in addition
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to all other representations, warranties, and covenants made by the Borrower
in any other Loan Document, makes those representations, warranties, and
covenants included in this Agreement, with the understanding that any such
representations and warranties that are stated as of a specific date or
referencing an exhibit or schedule that is subsequently updated, supplemented
or amended to provide the Lender with current information, shall be deemed to
incorporate, and to be made as of the date of, such additional information.
4.1. PAYMENT AND PERFORMANCE OF LIABILITIES. The Borrower shall pay
each Liability when due (or when demanded if payable on demand) and shall
promptly, punctually, and faithfully perform each other Liability.
4.2. DUE ORGANIZATION - CORPORATE AUTHORIZATION - NO CONFLICTS.
(a) The Borrower presently is and shall hereafter remain in
good standing as a Minnesota corporation and is and shall hereafter remain duly
qualified and in good standing in every other State in which, by reason of the
nature or location of the Borrower's assets or operation of the Borrower's
business, the failure to obtain such qualification would have a material and
adverse effect on the Borrower's operations or the Lender's ability to realize
any Collateral located in such jurisdiction.
(b) Each Related Entity is listed on EXHIBIT 4-2, annexed
hereto. Each Related Entity (excluding individuals) is and shall hereafter
remain in good standing in the State in which incorporated and is and shall
hereafter remain duly qualified in which other State in which, by reason of that
entity's assets or the operation of such entity's business, such qualification
may be necessary. The Borrower shall provide the Lender with prior written
notice of any entity's becoming or ceasing to be a Related Entity.
(c) The Borrower shall not change its State of incorporation
nor its taxpayer identification number.
(d) The Borrower has all requisite corporate power and
authority to execute and deliver all Loan Documents to which the Borrower is a
party and has and will hereafter retain all requisite corporate power to perform
all Liabilities.
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(e) The execution and delivery by the Borrower of each Loan
Document to which it is a party; the Borrower's consummation of the transactions
contemplated by such Loan Documents (including, without limitation, the creation
of security interests by the Borrower as contemplated hereby); the Borrower's
performance under those of the Loan Documents to which it is a party; the
borrowings hereunder; and the use of the proceeds thereof:
(i) Have been duly authorized by all necessary corporate
action.
(ii) Do not, and will not, contravene in any material
respect any provision of any Requirement of Law or obligation of the
Borrower.
(iii) Will not result in the creation or imposition of, or
the obligation to create or impose, any Encumbrance upon any assets of
the Borrower pursuant to any Requirement of Law or obligation, except
pursuant to the Loan Documents.
(f) The Loan Documents have been duly executed and delivered by
Borrower and are the legal, valid and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective terms,
subject to the effect of bankruptcy and equitable principles.
4.3. TRADE NAMES.
(a) EXHIBIT 4-3, annexed hereto, is a listing of:
(i) All names under which the Borrower ever conducted
its business.
(ii) All entities and/or persons with whom the Borrower
ever consolidated or merged, or from whom the Borrower ever acquired in a
single transaction or in a series of related transactions substantially
all of such entity's or person's assets.
(b) The Borrower will not change its name or conduct its
business under any name not listed on EXHIBIT 4-3 except (i) upon not less than
twenty-one (21) days prior written notice (with reasonable particularity) to the
Lender and (ii) in compliance with all other provisions of this Agreement.
4.4. INFRASTRUCTURE.
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(a) The Borrower has and will maintain a sufficient
infrastructure to conduct its business as presently conducted and as
contemplated to be conducted as described in the Business Plan.
(b) To the best of Borrower's knowledge, the Borrower owns and
possesses, or has the right to use (and will hereafter own, possess, or have
such right to use) all patents, industrial designs, trademarks, trade names,
trade styles, brand names, service marks, logos, copyrights, trade secrets,
know-how, confidential information, and other intellectual or proprietary
property of any third Person necessary for the Borrower's conduct of the
Borrower's business.
(c) To the best of Borrower's knowledge, the conduct by the
Borrower of the Borrower's business does not presently infringe (nor will the
Borrower conduct its business in the future so as to infringe) the patents,
industrial designs, trademarks, trade names, trade styles, brand names, service
marks, logos, copyrights, trade secrets, know-how, confidential information, or
other intellectual or proprietary property of any third Person.
4.5. YEAR 2000 COMPLIANCE.
(a) Based upon a diligent inquiry undertaken by the Borrower,
it appears that, except as set forth on EXHIBIT 4-5, annexed hereto, the
Borrower's operations are Year 2000 Compliant.
(b) The Borrower shall have, on or before June 15, 1999
developed a preliminary plan and timetable, and a detailed final plan by July
30, 1999 (which shall be subject to the reasonable approval of the Lender) with
respect to the Borrower's operations becoming fully Year 2000 Compliant and
shall provide a copy or summary of such plan to be appended hereto as EXHIBIT
4-5 and shall have committed adequate resources to execute that plan and to meet
such timetable.
(c) Following the Borrower's operations becoming Year 2000
Compliant, the Borrower will not suffer or permit its operations thereafter to
cease to be Year 2000 Compliant in any manner which might have more than a DE
MINIMUS effect on its operations.
4.6. LOCATIONS.
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(a) The Collateral, and the books, records, and papers of
Borrower pertaining thereto, are kept and maintained solely at the Borrower's
chief executive offices at
(i) 7630 Excelsior Boulevard, Minneapolis Minnesota
55426; and
(ii) those locations which are listed on EXHIBIT 4-6,
annexed hereto, which EXHIBIT includes, with respect to each such
location, the name and address of the landlord on the Lease which covers
such location (or an indication that the Borrower owns the subject
location) and of all service bureaus with which any such records are
maintained and the names and addresses of each of the Borrower's
landlords.
(b) The Borrower shall not remove any of the Collateral from
said chief executive office or those locations listed on EXHIBIT 4-6 except to:
(i) accomplish sales of Inventory in the ordinary course
of business; or
(ii) move Inventory from one such location to another
such location; or
(iii) utilize such of the Collateral as is removed from
such locations in the ordinary course of business (such as motor
vehicles).
(c) The Borrower will not in any manner inconsistent with the
Business Plan:
(i) Execute, alter, modify, or amend any Lease.
(ii) Commit to, or open or close any location at which
the Borrower maintains, offers for sales, or stores any of the
Collateral.
(d) Except as otherwise disclosed pursuant to, or permitted by,
this Section 4-6, no tangible personal property of the Borrower is in the care
or custody of any third party or stored or entrusted with a bailee or other
third party and none shall hereafter be placed under such care, custody,
storage, or entrustment.
4.7. TITLE TO ASSETS.
(a) The Borrower is, and shall hereafter remain, the owner of
the Collateral free and clear of all Encumbrances with the exceptions of the
following (the "PERMITTED ENCUMBRANCES"):
(i) Encumbrances in favor of the Lender.
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(ii) Encumbrances for taxes, fees, assessments, or other
governmental charges or statutory obligations which are not delinquent or
remain payable without penalty, or to the extent that non-payment thereof
is permitted by Section 4-14(d), provided that no notice of encumbrance
has been filed, levied or recorded;
(iii) Encumbrances arising in the ordinary course of
business in connection with Indebtedness (other than Indebtedness for
borrowed money) that are not overdue or which are being contested in good
faith and by appropriate proceedings, including, but not limited to
Encumbrances under bid, performance and other surety bonds, supersedeas
and appeal bonds, Encumbrances on advance or progress payments received
from customers under contracts for the sale, lease or license of goods,
software or services and upon the products being sold or licensed, in
each case securing performance of the underlying contract or the
repayment of such advances in the event final acceptance of performance
under such contracts does not occur; and Encumbrances upon funds
collected temporarily from other pending payment or remittance on their
behalf;
(iv) Encumbrances (other than any Encumbrances imposed by
ERISA) required in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other social security
legislation;
(v) easements, rights-of-way, restrictions and other
similar Encumbrances incurred in the ordinary course of business which,
in the aggregate, are not substantial in amount, and which do not in any
case materially detract from the value of the property subject thereto or
interfere with the ordinary conduct of the businesses of the Borrower;
(vi) purchase money security interests or capitalized
equipment leases on any property acquired or held by the Borrower in the
ordinary course of business securing Indebtedness incurred or assumed for
the purpose of financing all or any part of the cost of acquiring such
property; provided, however, that (i) any such Encumbrances attaches to
such property concurrently with or within 20 days after the acquisition
thereof, (ii) such Encumbrances attaches solely to the property so
acquired in such transaction, and
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(iii) the principal amount of the debt secured thereby does not exceed
100% of the cost of such property;
(vii) Encumbrances arising solely by virtue of any
statutory or common law provision relating to banker's liens, rights of
set-off or similar rights and remedies as to funds maintained with a
creditor depository institution; provided, however, that (i) such deposit
account is not the Blocked Account, or any DDA Account and is not subject
to restrictions against access by the Borrower in excess of those set
forth by regulations promulgated by the Federal Reserve Board, and (ii)
such deposit account is not intended by the Borrower to provide
collateral to the depository institution;
(viii) rights of holders of notes or debentures issued by
the Borrower in deposits in trust to legally or "in substance" defease
such notes or debentures; and
(ix) Those Encumbrances (if any) listed on EXHIBIT 4-7,
annexed hereto.
(b) The Borrower does not and shall not have possession of any
property on consignment to the Borrower.
(c) The Borrower shall not acquire or obtain the right to use
any Equipment, the acquisition or right to use of which Equipment is otherwise
permitted by this Agreement, in which Equipment any third party has an interest,
except for:
(i) Equipment which is merely incidental to the conduct
of the Borrower's business.
(ii) Equipment, the acquisition or right to use of which
has been consented to by the Lender, which consent may be conditioned
upon the Lender's receipt of such agreement with the third party which
has an interest in such Equipment as is satisfactory to the Lender.
4.8. INDEBTEDNESS. The Borrower does not and shall not hereafter have
any Indebtedness with the exceptions of:
(a) Any Indebtedness to the Lender.
(b) Subordinated Indebtedness.
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(c) Indebtedness secured by a Permitted Lien.
(d) Indebtedness under capitalized equipment leases.
(e) The Indebtedness (if any) listed on EXHIBIT 4-8, annexed
hereto.
4.9. INSURANCE POLICIES.
(a) EXHIBIT 4-9, annexed hereto, is a schedule of all insurance
policies owned by the Borrower or under which the Borrower is the named insured.
Each of such policies is in full force and effect. Neither the issuer of any
such policy nor the Borrower is in default or violation of any such policy.
(b) The Borrower shall have and maintain at all times insurance
covering such risks, in such amounts, containing such terms, in such form, for
such periods, and written by such companies as may be satisfactory to the
Lender. The coverage reflected on EXHIBIT 4-9 presently satisfies the foregoing
requirements, it being recognized by the Borrower, HOWEVER, that such
requirements may change hereafter to reflect changing circumstances. All
insurance carried by the Borrower shall provide for a minimum of Thirty (30)
days' written notice of cancellation to the Lender and all such insurance which
covers the Collateral shall include an endorsement in favor of the Lender, which
endorsement shall provide that the insurance, to the extent of the Lender's
interest therein, shall not be impaired or invalidated, in whole or in part, by
reason of any act or neglect of the Borrower or by the failure of the Borrower
to comply with any warranty or condition of the policy. In the event of the
failure by the Borrower to maintain insurance as required herein, the Lender ,
at its option, may obtain such insurance, PROVIDED, HOWEVER, the Lender's
obtaining of such insurance shall not constitute a cure or waiver of any Event
of Default occasioned by the Borrower's failure to have maintained such
insurance. The Borrower shall furnish to the Lender certificates or other
evidence satisfactory to the Lender regarding compliance by the Borrower with
the foregoing insurance provisions.
(c) The Borrower shall advise the Lender of each claim in
excess of $100,000.00 made by the Borrower under any policy of insurance which
covers the Collateral and shall obtain the Lender's approval, which approval
shall not be unreasonably withheld, of any adjustment of such claims, provided
that all insurance proceeds shall be remitted to the Lender for
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application to the Revolving Credit. The Borrower hereby appoints the
Lender as the Borrower's attorney in fact, during the pendency of a
Suspension Event, to obtain, adjust, settle, and cancel any insurance
described in this section and to endorse in favor of the Lender any and all
drafts and other instruments with respect to such insurance. The within
appointment, being coupled with an interest, is irrevocable until this
Agreement is terminated by a written instrument executed by a duly authorized
officer of the Lender. The Lender shall not be liable on account of any
exercise pursuant to said power except for any exercise in actual willful
misconduct and bad faith. The Lender may apply any proceeds of such
insurance against the Liabilities, whether or not such have matured, in such
order of application as the Lender may determine.
4.10. LICENSES. Each license, distributorship, franchise, and
similar agreement issued to, or to which the Borrower is a party is in full
force and effect to the extent that the stated term thereof has not expired.
No party to any such license or agreement is, to the best of Borrower's
knowledge, in default or violation thereof. The Borrower has not received any
notice or threat of cancellation of any such license or agreement.
4.11. LEASES. EXHIBIT 4-11, annexed hereto, is a schedule of all
presently effective Capital Leases. Exhibit 4-6 includes a list of all other
presently effective Leases. Each of such Leases and Capital Leases is in full
force and effect. To the best of Borrower's knowledge, no party to any such
Lease or Capital Lease is in default or violation of any such Lease or Capital
Lease and the Borrower has not received any notice or threat of cancellation of
any such Lease or Capital Lease. The Borrower hereby authorizes the Lender at
any time and from time to time to contact any of the Borrower's landlords in
order to confirm the Borrower's continued compliance with the terms and
conditions of the Lease(s) between the Borrower and that landlord and to discuss
such issues, concerning the Borrower's occupancy under such Lease(s), as the
Lender may determine, with the understanding however, that except during the
pendency of a Suspension Event, Lender will make arrangements for such
communications through or with the participation of Borrower.
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4.12. REQUIREMENTS OF LAW. The Borrower is in compliance with, and shall
hereafter comply with and use its assets in compliance with, all Requirements of
Law. The Borrower has not received any notice of any violation of any
Requirement of Law (whether or not such violation is material), which violation
has not been cured or otherwise remedied.
4.13. MAINTAIN PROPERTIES. The Borrower shall:
(a) Keep the Collateral in good order and repair (ordinary
reasonable wear and tear and insured casualty excepted).
(b) Not suffer or cause the waste or destruction of any
material part of the Collateral.
(c) Not use any of the Collateral in violation of any policy of
insurance thereon.
(d) Not sell, lease, or otherwise dispose of any of the
Collateral, other than the following:
(i) The sale of Inventory in compliance with this
Agreement.
(ii) The disposal of Equipment which is obsolete, worn
out, or damaged beyond repair, which Equipment is replaced to the extent
necessary to preserve or improve the operating efficiency of the
Borrower.
(iii) The turning over to the Lender of all Receipts as
provided herein.
(iv) Collecting proceeds of Receivables Collateral.
4.14. PAY TAXES.
(a) The Borrower has received written notice from the Internal
Revenue Service that the Internal Revenue Service has completed its examination
of the Borrower's federal income tax returns for all tax years through and
including the Borrower's taxable year referenced on EXHIBIT 4-14, annexed
hereto, and that all deficiencies, assessments, and other amounts asserted as a
result of such examinations have been fully paid or settled. No agreement is
extant which waives or extends any statute of limitations applicable to the
right of the Internal Revenue Service to assert a deficiency or make any other
claim for or in respect to federal income taxes.
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No issue has been raised in any such examination which, by application of
similar principles, reasonably could be expected to result in the assertion
of a deficiency for any fiscal year open for examination, assessment, or
claim by the Internal Revenue Service.
(b) The Borrower has received written notice from the
respective state and local taxing authorities to which the Borrower is subject
that such authorities have completed their respective examination of the
Borrower's returns for all state and local income, excise, sales, and other
taxes for which the Borrower is liable for the respective tax years referenced
on EXHIBIT 4-14, annexed hereto, and that all deficiencies, assessments, and
other amounts asserted as a result of such examinations have been fully paid or
settled. No agreement is extant which waives or extends any statute of
limitations applicable to the right of any state taxing authority to assert a
deficiency or make any other claim for or in respect to any such state taxes.
No issue has been raised in any such examination which, by application of
similar principles, reasonably could be expected to result in the assertion of a
deficiency for any fiscal year open for examination, assessment, or claim by any
state or local taxing authority.
(c) Except as disclosed on said EXHIBIT 4-14, there are no
examinations of or with respect to the Borrower presently being conducted by the
Internal Revenue Service or any other taxing authority.
(d) The Borrower has, and hereafter shall: pay, as they become
due and payable, all taxes and unemployment contributions and other charges of
any kind or nature levied, assessed or claimed against the Borrower or the
Collateral by any person or entity whose claim could result in an Encumbrance
upon any asset of the Borrower or by any governmental authority; properly
exercise any trust responsibilities imposed upon the Borrower by reason of
withholding from employees' pay or by reason of the Borrower's receipt of sales
tax or other funds for the account of any third party; timely make all
contributions and other payments as may be required pursuant to any Employee
Benefit Plan now or hereafter established by the Borrower; and timely file all
tax and other returns and other reports with each governmental authority to whom
the Borrower is obligated to so file, unless (in the case of such payment
obligations) Borrower is contesting the same in good faith and has established
adequate cash reserves therefore, and the non-payment thereof does not result in
the recording, filing or levying of an Encumbrance.
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(e) At its option, the Lender may, but shall not be obligated
to, pay any taxes, unemployment contributions, and any and all other charges
levied or assessed upon the Borrower or the Collateral by any person or entity
or governmental authority, and make any contributions or other payments on
account of the Borrower's Employee Benefit Plan that are otherwise required
hereby to be paid as the Lender, in the Lender's discretion, may deem necessary
or desirable, to protect, maintain, preserve, collect, or realize upon any or
all of the Collateral or the value thereof or any right or remedy pertaining
thereto, PROVIDED, HOWEVER, the Lender's making of any such payment shall not
constitute a cure or waiver of any Event of Default occasioned by the Borrower's
failure to have made such payment.
4.15. NO MARGIN STOCK. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying any margin stock
(within the meaning of Regulations U, T, and X of the Board of Governors of the
Federal Reserve System of the United States). No part of the proceeds of any
borrowing hereunder will be used at any time to purchase or carry any such
margin stock or to extend credit to others for the purpose of purchasing or
carrying any such margin stock.
4.16. ERISA. Neither the Borrower nor any ERISA Affiliate ever has or
hereafter shall:
(a) Violate or fail to be in full compliance with the
Borrower's Employee Benefit Plan.
(b) Fail timely to file all reports and filings required by
ERISA to be filed by the Borrower.
(c) Engage in any "prohibited transactions" or "reportable
events" (respectively as described in ERISA).
(d) Engage in, or commit, any act such that a tax or penalty
could be imposed upon the Borrower on account thereof pursuant to ERISA.
(e) Accumulate any material funding deficiency within the
meaning of ERISA.
(f) Terminate any Employee Benefit Plan such that a lien could
be asserted against any assets of the Borrower on account thereof pursuant to
ERISA.
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(g) Be a member of, contribute to, or have any obligation under
any Employee Benefit Plan which is a multiemployer plan within the meaning of
Section 4001(a) of ERISA.
4.17. HAZARDOUS MATERIALS.
(a) The Borrower has never:
(i) Been legally responsible for any release or threat
of release of any Hazardous Material in violation of any Environmental
Law.
(ii) Received notification of any release or threat of
release of any Hazardous Material in violation of any Environmental Law
from any site or vessel occupied or operated by the Borrower and/or of
the incurrence of any expense or loss in connection with the assessment,
containment, or removal of any release or threat of release of any
Hazardous Material in violation of any Environmental Law from any such
site or vessel.
(b) The Borrower shall:
(i) Dispose of any Hazardous Material only in compliance
with all Environmental Laws.
(ii) Not store on any site or vessel occupied or operated
by the Borrower and not transport or arrange for the transport of any
Hazardous Material, except if such storage or transport is in the
ordinary course of the Borrower's business and is in compliance with all
Environmental Laws.
(c) The Borrower shall provide the Lender with written notice
upon the Borrower's obtaining knowledge of any incurrence of any expense or loss
by any governmental authority or other Person in connection with the assessment,
containment, or removal of any Hazardous Material, for which expense or loss the
Borrower may be liable.
4.18. LITIGATION. Except as described in EXHIBIT 4-18, annexed hereto,
there is not presently pending or threatened by or against the Borrower any
suit, action, proceeding, or investigation which, if determined adversely to the
Borrower, would reasonably be expected to have a material adverse effect upon
the Borrower's financial condition or ability to conduct its
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business as such business is presently conducted or is contemplated to be
conducted in the foreseeable future.
4.19. DIVIDENDS OR INVESTMENTS. The Borrower shall not:
(a) Pay any cash dividend or make any other distribution in
respect of any class of the Borrower's capital stock.
(b) Own, redeem, retire, purchase, or acquire any of the
Borrower's capital stock.
(c) Invest in or purchase any stock or securities or rights to
purchase any such stock or securities, of any corporation or other entity except
to the extent such purchases are Permitted Acquisitions.
(d) Merge or consolidate or be merged or consolidated with or
into any other corporation or other entity, except to the extent such
transaction is a Permitted Acquisition.
(e) Consolidate any of the Borrower's operations with those of
any other corporation or other entity except to the extent such transaction is a
Permitted Acquisition.
(f) Organize or create any Related Entity, except in connection
with a Permitted Acquisition.
(g) Subordinate any debts or obligations owed to the Borrower
by any third party to any other debts owed by such third party to any other
Person.
(h) Acquire any assets other than in the ordinary course or
fail to conduct the Borrower's business substantially as conducted at the
execution of this Agreement
4.20. LOANS. The Borrower shall not make any loans or advances to, nor
acquire the Indebtedness of, any Person, PROVIDED, HOWEVER, the foregoing does
not prohibit any of the following:
(a) Advance payments made to the Borrower's suppliers in the
ordinary course.
(b) Advances to the Borrower's officers, employees, and
salespersons with respect to reasonable expenses to be incurred by such
officers, employees, and salespersons for
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the benefit of the Borrower, which expenses are properly substantiated by the
person seeking such advance and properly reimbursable by the Borrower.
(c) Advances made pursuant to the terms of any cash management
agreement between Borrower and Lender or any affiliate of Lender.
4.21. PROTECTION OF ASSETS. The Lender, in the Lender's discretion, and
from time to time, may discharge any tax or Encumbrance on any of the
Collateral, or take any other action that the Lender may deem necessary or
desirable to repair, insure, maintain, preserve, collect, or realize upon any of
the Collateral upon Borrower's failure to do. The Lender shall not have any
obligation to undertake any of the foregoing and shall have no liability on
account of any action so undertaken except where there is a specific finding in
a judicial proceeding (in which the Lender has had an opportunity to be heard),
from which finding no further appeal is available, that the Lender had acted in
actual bad faith or in a grossly negligent manner. The Borrower shall pay to
the Lender, on demand, or the Lender, in its discretion, may add to the Loan
Account, all amounts paid or incurred by the Lender pursuant to this section.
The obligation of the Borrower to pay such amounts is a Liability.
4.22. LINE OF BUSINESS. The Borrower shall not engage in any business
other than the business in which it is currently engaged or a business
reasonably related thereto, including the business contemplated in the
Borrower's internet strategy (the conduct of which reasonably related business
is reflected in the Business Plan).
4.23. AFFILIATE TRANSACTIONS. The Borrower shall not make any payment,
nor give any value to any Related Entity except for goods and services actually
purchased by the Borrower from, or sold by the Borrower to, such Related Entity
for a price and on terms which shall
(a) be competitive and fully deductible as an "ordinary and
necessary business expense" and/or fully depreciable under the Internal Revenue
Code of 1986 and the Treasury Regulations, each as amended; and
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(b) no be less favorable from those which would have been
charged in an arms length transaction.
4.24. ADDITIONAL ASSURANCES.
(a) The Borrower is not the owner of, nor has it any interest
in, any property or asset consisting of Collateral which, immediately upon the
satisfaction of the conditions precedent to the effectiveness of the credit
facility contemplated hereby (Article 3) will be not be subject to a perfected
security or other collateral interest in favor of the Lender (subject only to
Permitted Encumbrances) to secure the Liabilities.
(b) The Borrower will not hereafter acquire any asset or any
interest in property consisting of Collateral which is not, immediately upon
such acquisition, subject to such a perfected security or other collateral
interest in favor of the Lender to secure the Liabilities (subject only to
Permitted Encumbrances).
(c) The Borrower shall execute and deliver to the Lender such
instruments, documents, and papers, and shall do all such things from time to
time hereafter as the Lender may request to carry into effect the provisions and
intent of this Agreement; to protect and perfect the Lender's security interests
in the Collateral; and to comply with all applicable statutes and laws, and
facilitate the collection of the Receivables Collateral. The Borrower shall
execute all such instruments as may be required by the Lender with respect to
the recordation and/or perfection of the security interests created herein.
(d) The Borrower hereby designates the Lender as and for the
Borrower's true and lawful attorney, with full power of substitution, to sign
and file any financing statements in order to perfect or protect the Lender's
security and other collateral interests in the Collateral.
(e) A carbon, photographic, or other reproduction of this
Agreement or of any financing statement or other instrument executed pursuant to
this Section 4-24 shall be sufficient for filing to perfect the security
interests granted herein.
4.25. ADEQUACY OF DISCLOSURE.
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(a) All financial statements furnished to the Lender by the
Borrower have been prepared in accordance with GAAP consistently applied and
present fairly the condition of the Borrower at the date(s) thereof and the
results of operations and cash flows for the period(s) covered. There has been
no change in the financial condition, results of operations, or cash flows of
the Borrower since the date(s) of the most recently provided financial
statements, other than changes in the ordinary course of business, which changes
have not been materially adverse, either singularly or in the aggregate.
(b) The Borrower does not have any contingent obligations or
obligation under any Lease or Capital Lease which are not noted in the
Borrower's financial statements furnished to the Lender prior to the execution
of this Agreement or disclosed on the Schedules annexed hereto.
(c) No document, instrument, agreement, or paper now or
hereafter given the Lender by or on behalf of the Borrower or any guarantor of
the Liabilities in connection with the execution of this Agreement by the Lender
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
therein not misleading. There is no fact known to the Borrower which has, or
which, in the foreseeable future could have, a material adverse effect on the
financial condition of the Borrower or any such guarantor which has not been
disclosed in writing to the Lender.
4.26. OTHER COVENANTS. The Borrower shall not indirectly do or cause
to be done any act which, if done directly by the Borrower, would breach any
covenant contained in this Agreement.
ARTICLE 5 - FINANCIAL REPORTING AND PERFORMANCE COVENANTS:
5.1. MAINTAIN RECORDS. The Borrower shall:
(a) At all times, keep proper books of account, in which full,
true, and accurate entries shall be made of all of the Borrower's transactions,
all in accordance with GAAP (to the
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extent applicable) applied consistently with prior periods to fairly reflect
the financial condition of the Borrower at the close of, and its results of
operations for, the periods in question.
(b) Timely provide the Lender with those financial reports,
statements, and schedules required by this Article 5 or otherwise, each of which
reports, statements and schedules shall be prepared, to the extent applicable,
in accordance with GAAP applied consistently with prior periods to fairly
reflect the financial condition of the Borrower at the close of, and its results
of operations for, the period(s) covered therein.
(c) At all times, keep accurate current records of the
Collateral including, without limitation, accurate current stock, cost, and
sales records of its Inventory, accurately and sufficiently itemizing and
describing the kinds, types, and quantities of Inventory and the cost and
selling prices thereof.
(d) At all times, retain independent certified public
accountants who are reasonably satisfactory to the Lender and instruct such
accountants to fully cooperate with, and be available to, the Lender to discuss
the Borrower's financial performance, financial condition, operating results,
controls, and such other matters, within the scope of the retention of such
accountants, as may be raised by the Lender.
(e) Not change the Borrower's fiscal year.
5.2. ACCESS TO RECORDS.
(a) The Borrower shall accord the Lender and the Lender's
representatives with access from time to time as the Lender and such
representatives may require to all properties owned by or over which the
Borrower has control. The Lender and the Lender's representatives shall have
the right, and the Borrower will permit the Lender and such representatives from
time to time as the Lender and such representatives may request, to examine,
inspect, copy, and make extracts from any and all of the Borrower's books,
records, electronically stored data, papers, and files. The Borrower shall make
all of the Borrower's copying facilities available to the Lender.
(b) The Borrower hereby authorizes the Lender and the Lender's
representatives to:
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(i) Inspect, copy, duplicate, review, cause to be
reduced to hard copy, run off, draw off, and otherwise use any and all
computer or electronically stored information or data which relates to
the Borrower, or any service bureau, contractor, accountant, or other
person, and directs any such service bureau, contractor, accountant, or
other person fully to cooperate with the Lender and the Lender's
representatives with respect thereto.
(ii) Verify at any time the Collateral or any portion
thereof, including verification with Account Debtors, and/or with the
Borrower's computer billing companies, collection agencies, and
accountants and to sign the name of the Borrower on any notice to the
Borrower's Account Debtors or verification of the Collateral.
(c) Lender agrees that it will exercise prudent cautionary
measures in accordance with procedures adopted by Lender in good faith to
protect confidential information delivered to Lender to prevent disclosure to
any third parties of any information delivered or obtained by Lender by or on
behalf of Borrower that is proprietary in nature or was clearly marked or
labeled as confidential information (which term shall include Borrower's
financial information, projections and reports as well as the Business Plan),
other than such information that: (i) was publicly known or otherwise known to
Lender prior to the time of such disclosure; (ii) subsequently becomes publicly
known through no act or omission of Lender; (iii) otherwise becomes known to
Lender other than through disclosure by or on behalf of Borrower; or (iv)
constitutes financial statements or other information delivered to Lender that
are otherwise publicly available. The foregoing shall not preclude Lender from
delivering or disclosing such confidential information to: (i) its directors,
officers, employees, agents, attorneys and affiliates, (ii) its financial
advisors and other professional advisors who agree to maintain the
confidentiality of such information; (ii) to any assignee or participant (or any
prospective assignee or participant) in the Revolving Credit who agrees to
maintain the confidentiality of such information; (iv) to any governmental
authority having jurisdiction over the Lender; (v) in compliance with applicable
law, rule or regulation, including in response to subpoena or legal process, or
in connection with any litigation to which Lender is a party; or (vi) if any
Suspension Event has occurred and is continuing, to the extent Lender may
reasonably determine, such delivery and disclosure to be
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necessary or appropriate in the enforcement or for the protection of the
Lender's rights and remedies under this Agreement or under the Loan Documents.
5.3. IMMEDIATE NOTICE TO LENDER.
(a) The Borrower shall provide the Lender with written notice
immediately upon the occurrence of any of the following events, which written
notice shall be with reasonable particularity as to the facts and circumstances
in respect of which such notice is being given:
(i) Any change in the Borrower's officers.
(ii) The completion of any physical count of the
Borrower's Inventory (together with a copy of the results thereof
certified by Borrower).
(iii) Any ceasing of the Borrower's making of payment, in
the ordinary course, to any of its creditors (including the ceasing of
the making of such payments on account of a dispute with the subject
creditor).
(iv) Any failure by the Borrower to pay rent at any of
the Borrower's locations, which failure continues for more than Five (5)
days following the day on which such rent is considered due.
(v) Any material change in the business, operations, or
financial affairs of the Borrower.
(vi) The occurrence of any Suspension Event.
(vii) Any intention on the part of the Borrower to
discharge the Borrower's present independent accountants or any
withdrawal or resignation by such independent accountants from their
acting in such capacity (as to which, see Subsection 5-1(d)).
(viii) Any litigation which, if determined adversely to the
Borrower, would reasonably be expected to have a material adverse effect
on the financial condition of the Borrower.
(ix) Any delay in the Borrower's meeting the timetable
for its operations becoming Year 2000 Compliant as described on EXHIBIT
4-5 or maintaining such operations as Year 2000 Compliant, except where
such delay or failure to so maintain will
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would not reasonably be expected to have a material adverse effect on
the Borrower's operations.
(b) The Borrower shall:
(i) Provide the Lender, when so distributed, with copies
of any materials distributed to the stockholders of the Borrower (QUA
such stockholders).
(ii) Add the Lender as an addressee on all mailing lists
maintained by or for the Borrower, other than such mailings as are
expressly excluded or rejected by Lender.
(iii) At the request of the Lender, from time to time,
provide the Lender with copies of all advertising (including copies of
all print advertising and duplicate tapes of all video and radio
advertising).
(iv) Provide the Lender, when received by the Borrower,
with a copy of any management letter or similar communications from any
accountant of the Borrower.
5.4. BORROWING BASE CERTIFICATE. The Borrower shall provide the Lender
by 11:30AM, daily, with a Borrowing Base Certificate (in the form of EXHIBIT 5-4
annexed hereto, as such form may be reasonably revised from time to time by the
Lender). Such Certificate shall reflect inventory level adjustments rolling
forward not less frequently than weekly. Such Certificate may be sent to the
Lender by facsimile transmission, PROVIDED THAT the original thereof is
forwarded to the Lender on the date of such transmission.
5.5. WEEKLY REPORTS. Weekly, on Tuesday of each week (as of the
then immediately preceding week) the Borrower shall provide the Lender with an
Inventory report (in such form as may be specified from time to time by the
Lender ). Such report may be sent to the Lender by facsimile transmission,
provided that the original thereof is forwarded to the Lender on the date of
such transmission.
5.6. MONTHLY REPORTS.
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(a) Monthly, the Borrower shall provide the Lender with
original counterparts of the following (each in such form as the Lender from
time to time may specify):
(i) Within Fifteen (15) days of the end of the previous
month:
(A) An "Inventory Certificate" (signed by the
Borrower's Chairman, Chief Financial Officer, or Vice President of
Marketing concerning the Borrower's Inventory.
(B) JDA Inventory Print Out by Department. @ Cost
& Retail.
(C) Monthly Sales & Gross Margin % by Department.
(D) JDA Purchase Query by Department.
(ii) Within Thirty (30) days of the end of the previous
month:
(A) Reconciliation of the above described
Inventory Certificate (Section 5-6(a)(i)(A)) to Availability and
to the general ledger as of the end of the subject month.
(B) A Gross Margin Reconciliation.
(C) A schedule of purchases from the Borrower's
ten largest vendors (in terms of year to date purchases), which
schedule shall be in such form as may be satisfactory to the
Lender and shall include year to date cumulative purchases and an
aging of payables to each such vendor.
(D) An aging of the Borrower's accounts payable
or cash requirements.
(E) A Store Activity Report.
(F) An internally prepared financial statement of
the Borrower's financial condition the results of its operations
for, the period ending with the end of the subject month, which
financial statement shall include, at a minimum, a balance sheet,
income statement (on a store specific and on a "consolidated"
basis), cash flow and comparison of same store sales for the
corresponding month of the then immediately previous year, as well
as to the Business Plan.
(b) For purposes of Section 5-6(a)(i), above, the first
"previous month" in respect of which the items required by that Section shall be
provided shall be May and for
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purposes of Section 5-6(a)(ii), above, the first "previous month" in respect
of which the items required by that Section shall be provided shall be May.
5.7. QUARTERLY REPORTS. Quarterly, within Forty Five (45) days
following the end of each of the Borrower's fiscal quarters, the Borrower shall
provide the Lender with an original counterpart of the Borrower's Form 10Q
Report filed with the Security Exchange Commission.
5.8. ANNUAL REPORTS.
(a) Annually, within ninety (90) days following the end of the
Borrower's fiscal year, the Borrower shall furnish the Lender with an original
signed counterpart of the Borrower's annual financial statement, which statement
shall have been prepared by, and bear the unqualified opinion of, the Borrower's
independent certified public accountants (i.e. said statement shall be
"certified" by such accountants). Such annual statement shall include, at a
minimum (with comparative information for the then prior fiscal year) a balance
sheet, income statement, statement of changes in shareholders' equity, cash
flows, and the Borrower's Form 10K Report filed with the Security and Exchange
Commision.
(b) No later than the earlier of Fifteen (15) days prior to the
end of each of the Borrower's fiscal years or the date on which such accountants
commence their work on the preparation of the Borrower's annual financial
statement, the Borrower shall give written notice to such accountants (with a
copy of such notice, when sent, to the Lender) that:
(i) Such annual financial statement will be delivered by
the Borrower to the Lender.
(ii) It is the primary intention of the Borrower, in its
engagement of such accountants, to satisfy the financial reporting
requirements set forth in this Article 5.
(iii) The Borrower has been advised that the Lender will
rely thereon with respect to the administration of, and transactions
under, the credit facility contemplated by this Agreement.
(c) Each annual statement shall be accompanied by such
accountant's Certificate indicating that, in the preparation of such annual
statement, such accountants did not
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conclude that any Suspension Event had occurred during the subject fiscal
year (or if one or more had occurred, the facts and circumstances thereof).
5.9. OFFICERS' CERTIFICATES. The Borrower shall cause the
Borrower's Chief Executive Officer or Chief Financial Officer respectively to
provide such Person's Certificate with those monthly, and annual statements to
be furnished pursuant to this Agreement, which Certificate shall:
(a) Indicate that the subject statement was prepared in
accordance with GAAP consistently applied and presents fairly the financial
condition of the Borrower at the close of, and the results of the Borrower's
operations and cash flows for, the period(s) covered, SUBJECT, HOWEVER to the
following:
(i) usual year end adjustments and the absence of
footnotes (this exception shall not be included in the Certificate which
accompanies such annual statement).
(ii) Material Accounting Changes (in which event, such
Certificate shall include a schedule (in reasonable detail) of the effect
of each such Material Accounting Change) not previously specifically
taken into account in the determination of the financial performance
covenant imposed pursuant to Section 5-12.
(b) Indicate either that (i) no Suspension Event has occurred
or (ii) if such an event has occurred, its nature (in reasonable detail) and the
steps (if any) being taken or contemplated by the Borrower to be taken on
account thereof.
(c) Include calculations concerning the Borrower's compliance
(or failure to comply) at the date of the subject statement with each of the
financial performance covenants included in Section 5-12 hereof.
5.10. INVENTORIES, APPRAISALS, AND AUDITS.
(a) The Lender, at the expense of the Borrower, may participate
in and/or observe each physical count and/or inventory of so much of the
Collateral as consists of Inventory which is undertaken on behalf of the
Borrower.
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(b) The Borrower, at its own expense, shall cause not less than
one (i) physical inventory plus three seasonal pack-away inventories (Halloween,
Christmas and Easter) to be undertaken in each twelve (12) month period during
which this Agreement is in effect (the spacing of the scheduling of which
inventories shall be subject to the Lender's discretion) conducted by such
inventory takers as are satisfactory to the Lender and following such
methodology as may be satisfactory to the Lender.
(i) The Borrower shall provide the Lender with a copy of
the preliminary results of each such inventory (as well as of any other
physical inventory undertaken by the Borrower) within twenty (20) days
following the completion of such inventory.
(ii) The Borrower shall provide the Lender with a
reconciliation of the results of each such inventory (as well as of any
other physical inventory undertaken by the Borrower) to the Borrower's
books and records within thirty (30) days following the completion of
such inventory.
(iii) The Lender, in its discretion, following the
occurrence of a Suspension Event, may cause such additional inventories
to be taken as the Lender determines (each, at the expense of the
Borrower).
(c) Upon the Lender's request from time to time, the Borrower
shall permit the Lender to obtain appraisals (in all events, at the Borrower's
expense) conducted by such appraisers as are satisfactory to the Lender.
(d) The Lender contemplates conducting Four (4) commercial
finance audits (in each event, at the Borrower's expense) of the Borrower's
books and records during any Twelve (12) month period during which this
Agreement is in effect, but in its discretion, may undertake additional such
audits during such period.
(e) The Lender from time to time (in all events, at the
Borrower's expense) may undertake "mystery shopping" (so-called) visits to all
or any of the Borrower's business premises. The Lender shall provide the
Borrower with a copy of any non-company confidential results of such mystery
shopping.
5.11. ADDITIONAL FINANCIAL INFORMATION.
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(a) In addition to all other information required to be
provided pursuant to this Article 5, the Borrower promptly shall provide the
Lender (and any guarantor of the Liabilities), with such other and additional
information concerning the Borrower, the Collateral, the operation of the
Borrower's business, and the Borrower's financial condition, including original
counterparts of financial reports and statements, as the Lender may from time to
time request from the Borrower.
(b) The Borrower may provide the Lender, from time to time
hereafter, with updated projections of the Borrower's anticipated performance
and operating results.
(c) In all events, the Borrower, no sooner than Ninety (90) nor
later than Sixty (60) days prior to the end of each of the Borrower's fiscal
years, shall furnish the Lender with an updated and extended projection which
shall go out at least through the end of the then next fiscal year.
(d) Such updated and extended projections shall be prepared
pursuant to a methodology and shall include such assumptions as are satisfactory
to the Lender.
(e) The Lender, following the receipt of any of such
projections, may, but shall not be under any obligation to, provide its written
sign-off on such projections (in which event, such Projections shall become the
Business Plan) and if it provides such written sign-off, may by written notice
to the Borrower, extend or revise the financial performance covenants included
on EXHIBIT 5-12, annexed hereto.
(f) In the event that the Lender does not provide its sign-off
with respect to the updated and extended projections to be provided at year-end
pursuant to Section 5-11(c), above, then the Lender, by written notice to the
Borrower, may revise, roll-over, or extend, for the then coming fiscal year, the
financial performance covenants applicable to the Borrower pursuant to Section
5-12 hereof by extrapolation from the Business Plan.
(g) The Borrower recognizes that all appraisals, inventories,
analysis, financial information, and other materials which the Lender may
obtain, develop, or receive with respect to the Borrower is confidential to the
Lender and that, except as otherwise provided herein, the Borrower is not
entitled to receipt of any of such appraisals, inventories, analysis, financial
information, and other materials, nor copies or extracts thereof or therefrom.
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5.12. FINANCIAL PERFORMANCE COVENANTS. The Borrower shall at all times
observe and comply with those financial performance covenants set forth in the
following subsections 5.12.1 and 5.12.2. Such financial performance covenants
are subject to change, revision, roll over, and extension as provided in Section
5-11(e) and (f) hereof, and shall in any event be reset following the occurrence
of the Capital Infusion Event. Compliance with such financial performance
covenants shall be made as if no Material Accounting Changes had been made
(other than any Material Accounting Changes specifically taken into account in
the setting of such covenants). The Lender may determine the Borrower's
compliance with such covenants based upon financial reports and statements
provided by the Borrower to the Lender (whether or not such financial reports
and statements are required to be furnished pursuant to this Agreement) as well
as by reference to interim financial information provided to, or developed by,
the Lender.
5.12.1 TANGIBLE CAPITAL BASE. The Borrower shall not permit or
suffer to exist a Tangible Capital Base, at any date, to be less than 85% of its
projected Tangible Capital Base, as calculable from the Borrower's projections,
and at such times as is set forth on the Business Plan set forth on EXHIBIT
5-12(a), annexed hereto and incorporated herein by reference.
5.12.2 FIXED CHARGE COVERAGE RATIO The Borrower shall not permit
or suffer to exist the ratio of its Cash Flow to its Contractual Obligations,
calculated on a cumulative basis for the period January 30, 1999 through January
29, 2000, and on a trailing twelve month basis, tested quarterly, commencing
with Borrower's fiscal quarter ending in July 1999, to be less than the amounts
set forth in the attached EXHIBIT 5-12(b), annexed hereto and incorporated
herein by reference, which amounts are based on the Business Plan.
ARTICLE 6 - USE AND COLLECTION OF COLLATERAL:
6.1. USE OF INVENTORY COLLATERAL.
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(a) The Borrower shall not engage in any sale of the Inventory
other than for fair consideration in the conduct of the Borrower's business in
the ordinary course and shall not engage in sales or other dispositions to
creditors; sales or other dispositions in bulk; and any use of any of the
Inventory in breach of any provision of their Agreement.
(b) No sale of Inventory shall be on consignment, approval, or
under any other circumstances such that, with the exception of the Borrower's
customary return policy applicable to the return of inventory purchased by the
Borrower's retail customers in the ordinary course, such Inventory may be
returned to the Borrower without the consent of the Lender.
6.2. INVENTORY QUALITY. All Inventory now owned or hereafter acquired
by the Borrower is and will be of good and merchantable quality and free from
defects (other than defects within customary trade tolerances).
6.3. ADJUSTMENTS AND ALLOWANCES. The Borrower may grant such
allowances or other adjustments to the Borrower's Account Debtors (exclusive
of extending the time for payment of any Account or Account Receivable, which
shall not be done without first obtaining the Lender's prior written consent
in each instance) as the Borrower may reasonably deem to accord with sound
business practice, PROVIDED, HOWEVER, the authority granted the Borrower
pursuant to this Section 6-3 may be limited or terminated by the Lender at
any time in the Lender's discretion.
6.4. VALIDITY OF ACCOUNTS.
(a) The amount of each Account shown on the books, records, and
invoices of the Borrower represented as owing by each Account Debtor is and will
be the correct amount actually owing by such Account Debtor and shall have been
fully earned by performance by the Borrower.
(b) The Borrower has no knowledge of any impairment of the
validity or collectibility of any of the Accounts and shall notify the Lender of
any such fact immediately after Borrower becomes aware of any such impairment.
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(c) The Borrower shall not post any bond to secure the
Borrower's performance under any agreement to which the Borrower is a party nor
cause any surety, guarantor, or other third party obligee to become liable to
perform any obligation of the Borrower (other than to the Lender) in the event
of the Borrower's failure so to perform.
6.5. NOTIFICATION TO ACCOUNT DEBTORS. The Lender shall have the right
at any time following the occurrence and continuation of a Suspension Event to
notify any of the Borrower's Account Debtors to make payment directly to the
Lender and to collect all amounts due on account of the Collateral.
ARTICLE 7 - CASH MANAGEMENT. PAYMENT OF LIABILITIES:
7.1 DEPOSITORY ACCOUNTS.
(a) Annexed hereto as EXHIBIT 7-1 is a Schedule of all present
DDA's, which Schedule includes, with respect to each depository (i) the name and
address of that depository; (ii) the account number(s) of the account(s)
maintained with such depository; and (iii) a contact person at such depository.
(b) The Borrower shall deliver to the Lender, as a condition to
the effectiveness of this Agreement:
(i) Notification, executed on behalf of the Borrower, to
each depository institution with which any DDA is maintained (other than
the Operating Account or any Local DDA), in form satisfactory to the
Lender, of the Lender's interest in such DDA.
(ii) An agreement (generally referred to as a "Blocked
Account Agreement"), in form satisfactory to the Lender with any
depository institution at which both any DDA and the Operating Account is
maintained.
(iii) An agreement (generally referred to as a "Blocked
Account Agreement"), in form satisfactory to the Lender, with any
depository institution at which a Blocked Account is maintained
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(c) The Borrower will not establish any DDA hereafter (other
than a Local DDA) unless, contemporaneous with such establishment, the Borrower
delivers to the Lender an agreement (in form satisfactory to the Lender)
executed on behalf of the depository with which such DDA is being established.
7.2. CREDIT CARD RECEIPTS.
(a) Annexed hereto as EXHIBIT 7-2, is a Schedule which
describes all arrangements to which the Borrower is a party with respect to the
payment to the Borrower of the proceeds of all credit card charges for sales by
the Borrower.
(b) The Borrower shall deliver to the Lender, as a condition to
the effectiveness of this Agreement, notification, executed on behalf of the
Borrower, to each of the Borrower's credit card clearinghouses and processors of
notice (in form satisfactory to the Lender), which notice provides that payment
of all credit card charges submitted by the Borrower to that clearinghouse or
other processor and any other amount payable to the Borrower by such
clearinghouse or other processor shall be directed to the Concentration Account
or as otherwise designated from time to time by the Lender. The Borrower shall
not change such direction or designation except upon and with the prior written
consent of the Lender.
7.3. THE CONCENTRATION, BLOCKED, AND OPERATING ACCOUNTS.
(a) The following checking accounts have been or will be
established (and are so referred to herein):
(i) The CONCENTRATION ACCOUNT: Established by the Lender
with Richfield Bank & Trust Co.(interim) and BankBoston, N.A.
(ii) The BLOCKED ACCOUNT: Established by the Borrower
with Richfield Bank & Trust Co,.
(iii) The OPERATING ACCOUNT: Established by the Borrower
with Richfield Bank & Trust Co. (interim) and BankBoston, N.A.
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(b) The contents of each DDA (other than the Operating Account)
and of the Blocked Account constitutes Collateral and Proceeds of Collateral.
The contents of the Concentration Account constitutes the Lender's property.
(c) The Borrower:
(i) Contemporaneous with the execution of this
Agreement, shall provide the Lender with such agreement (generally
referred to as a "Blocked Account Agreement") of the depository with
which the Blocked Account is maintained as may be satisfactory to the
Lender; and
(ii) Shall not establish any Blocked Account hereafter
except upon not less than Thirty (30) days prior written notice to the
Lender and the delivery to the Lender of a similar such agreement.
(d) The Borrower shall pay all fees and charges of, and
maintain such impressed balances as may be required by the Lender or by any bank
in which any account is opened as required hereby (even if such account is
opened by and/or is the property of the Lender).
7.4. PROCEEDS AND COLLECTION OF ACCOUNTS.
(a) All Receipts constitute Collateral and proceeds of
Collateral and shall be held in trust by the Borrower for the Lender; shall not
be commingled with any of the Borrower's other funds; and shall be deposited
and/or transferred only to the Blocked Account.
(b) The Borrower shall cause the ACH or wire transfer to the
Blocked Account, no less frequently than daily (and whether or not there is then
an outstanding balance in the Loan Account) of
(i) the then contents of each DDA (other than (A) any
Local DDA and (B) the Operating Account), each such transfer to be net of
any minimum balance, not to exceed $1000.00, as may be required to be
maintained in the subject DDA by the bank at which such DDA is
maintained); and
(ii) the proceeds of all credit card charges not
otherwise provided for pursuant hereto.
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Telephone advice (confirmed by written notice) shall be provided to the Lender
on each Business Day on which any such transfer is made.
(c) Whether or not any Liabilities are then outstanding, the
Borrower shall cause the ACH or wire transfer to the Concentration Account, no
less frequently than daily, of then entire ledger balance of the Blocked
Account, net of such minimum balance, not to exceed $1000.00, as may be required
to be maintained in the Blocked Account by the bank at which the Blocked Account
is maintained.
(d) In the event that, notwithstanding the provisions of this
Section 7-4, the Borrower receives or otherwise has dominion and control of any
Receipts, or any proceeds or collections of any Collateral, such Receipts,
proceeds, and collections shall be held in trust by the Borrower for the Lender
and shall not be commingled with any of the Borrower's other funds or deposited
in any account of the Borrower other than as instructed by the Lender.
7.5. PAYMENT OF LIABILITIES.
(a) On each Business Day, the Lender shall apply, towards the
Liabilities, the then collected balance of the Concentration Account (net of
fees charged, and of such impressed balances as may be required by the bank at
which the Concentration Account is maintained.
(b) The following rules shall apply to deposits and payments
under and pursuant to this Agreement:
(i) Funds shall be deemed to have been deposited to the
Concentration Account on the Business Day on which deposited, PROVIDED
THAT notice of such deposit is available to the Lender by 2:00PM on that
Business Day.
(ii) Funds paid to the Lender, other than by deposit to
the Concentration Account, shall be deemed to have been received on the
Business Day when they are good and collected funds, PROVIDED THAT notice
of such payment is available to the Lender by 2:00PM on that Business
Day.
(iii) If notice of a deposit to the Concentration Account
(Section 7-5(b)(i)) or payment (Section 7-5(b)(ii)) is not available to
the Lender until after 2:00PM
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on a Business Day, such deposit or payment shall be deemed to have been
made at 9:00AM on the then next Business Day.
(iv) All deposits to the Concentration Account and other
payments to the Lender are subject to clearance and collection.
(c) The Lender shall transfer to the Operating Account any
surplus in the Concentration Account remaining after the application towards the
Liabilities referred to in Section 7-5(a), above (less those amount which are to
be netted out, as provided therein) PROVIDED, HOWEVER, in the event that both
(i) a Suspension Event has occurred and (ii) one or more L/C's are then
outstanding, the Lender may establish a funded reserve of up to 105% of the
aggregate Stated Amounts of such L/C's.
7.6. THE OPERATING ACCOUNT. Except as otherwise specifically provided
in, or permitted by, this Agreement, all checks shall be drawn by the Borrower
upon, and other disbursements shall be made by the Borrower solely from, the
Operating Account.
ARTICLE 8 - GRANT OF SECURITY INTEREST:
8.1. GRANT OF SECURITY INTEREST. To secure the Borrower's prompt,
punctual, and faithful performance of all and each of the Liabilities, the
Borrower hereby grants to the Lender a continuing security interest in and to,
and assigns to the Lender, the following, and each item thereof, whether now
owned or now due, or in which the Borrower has an interest, or hereafter
acquired, arising, or to become due, or in which the Borrower obtains an
interest, and all products, Proceeds, substitutions, and accessions of or to any
of the following (all of which, together with any other property in which the
Lender may in the future be granted a security interest, is referred to herein
as the "COLLATERAL"):
(a) All Accounts and accounts receivable.
(b) All Inventory.
(c) All General Intangibles.
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(d) All Equipment*.
(e) All Goods*.
(f) *EXCLUDING FIXTURES AND FURNITURE ASSOCIATED WITH LEASEHOLD
IMPROVEMENTS AND REAL PROPERTY OWNED OR LEASED BY THE
BORROWER, AND EXCLUDING EQUIPMENT THAT SUBSEQUENTLY BECOMES
LEASED TO BORROWER IN ONE OR MORE CAPITAL LEASE
TRANSACTIONS, PROVIDED THAT THE PROCEEDS OF ANY SALES OF
SUCH EQUIPMENT ARE REMITTED TO LENDER FOR APPLICATION TO
THE REVOLVING CREDIT.
(g) All Chattel Paper.
(h) All books, records, and information relating to the
Collateral and/or to the operation of the Borrower's
business, and all rights of access to such books, records,
and information, and all property in which such books,
records, and information are stored, recorded, and
maintained.
(i) All Investment Property, Instruments, Documents, Deposit
Accounts, policies and certificates of insurance, deposits,
impressed accounts, compensating balances, money, cash, or
other property.
(j) All insurance proceeds, refunds, and premium rebates,
including, without limitation, proceeds of fire and credit
insurance, whether any of such proceeds, refunds, and
premium rebates arise out of any of the foregoing.(8-1(a)
through 8-1(i)) or otherwise, subject to the prior rights,
if any, of holders of Permitted Ecumbrances, with respect
to Collateral or holders of Permitted Indebtedness on
assets which do not comprise Collateral.
(k) All liens, guaranties, rights, remedies, and privileges
pertaining to any of the foregoing (8-1(a) through 8-1(i)),
including the right of stoppage in transit.
(l) All Leasehold Interests.
8.2. EXTENT AND DURATION OF SECURITY INTEREST. The security interest
created and granted herein is in addition to, and supplemental of, any security
interest previously granted by the
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Borrower to the Lender and shall continue in full force and effect applicable
to all Liabilities until all Liabilities have been paid and/or satisfied in
full and the security interest granted herein is specifically terminated in
writing by a duly authorized officer of the Lender.
ARTICLE 9 - LENDER AS BORROWER'S ATTORNEY-IN-FACT:
9.1. APPOINTMENT AS ATTORNEY-IN-FACT. The Borrower hereby irrevocably
constitutes and appoints the Lender as the Borrower's true and lawful attorney,
with full power of substitution, to convert the Collateral into cash at the sole
risk, cost, and expense of the Borrower, but for the sole benefit of the Lender,
such power to be exercised by Lender only upon the occurrence and during the
continuation of a Suspension Event or Event of Default. The rights and powers
granted the Lender by the within appointment include but are not limited to the
right and power to:
(a) Prosecute, defend, compromise, or release any action
relating to the Collateral.
(b) Sign change of address forms to change the address to which
the Borrower's mail is to be sent to such address as the Lender shall designate;
receive and open the Borrower's mail; remove any Receivables Collateral and
Proceeds of Collateral therefrom and turn over the balance of such mail either
to the Borrower or to any trustee in bankruptcy, receiver, assignee for the
benefit of creditors of the Borrower, or other legal representative of the
Borrower whom the Lender determines to be the appropriate person to whom to so
turn over such mail.
(c) Endorse the name of the Borrower in favor of the Lender
upon any and all checks, drafts, notes, acceptances, or other items or
instruments; sign and endorse the name of the Borrower on, and receive as
secured party, any of the Collateral, any invoices, schedules of Collateral,
freight or express receipts, or bills of lading, storage receipts, warehouse
receipts, or other documents of title respectively relating to the Collateral.
(d) Sign the name of the Borrower on any notice to the
Borrower's Account Debtors or verification of the Receivables Collateral; sign
the Borrower's name on any Proof of
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Claim in Bankruptcy against Account Debtors, and on notices of lien, claims
of mechanic's liens, or assignments or releases of mechanic's liens securing
the Accounts.
(e) Take all such action as may be necessary to obtain the
payment of any letter of credit and/or banker's acceptance of which the Borrower
is a beneficiary.
(f) Repair, manufacture, assemble, complete, package, deliver,
alter or supply goods, if any, necessary to fulfill in whole or in part the
purchase order of any customer of the Borrower.
(g) Use, license or transfer any or all General Intangibles of
the Borrower.
9.2-. NO OBLIGATION TO ACT. The Lender shall not be obligated to
do any of the acts or to exercise any of the powers authorized by Section 9-1
herein, but if the Lender elects to do any such act or to exercise any of such
powers, it shall not be accountable for more than it actually receives as a
result of such exercise of power, and shall not be responsible to the Borrower
for any act or omission to act except for any act or omission to act as to which
there is a final determination made in a judicial proceeding (in which
proceeding the Lender has had an opportunity to be heard) which determination
includes a specific finding that the subject act or omission to act had been
grossly negligent or in actual bad faith.
ARTICLE 10 - EVENTS OF DEFAULT:
The occurrence of any event described in this Article 10 respectively
shall constitute an "EVENT OF DEFAULT" herein. Upon the occurrence of any Event
of Default described in Section 10-11, any and all Liabilities shall become due
and payable without any further act on the part of the Lender. Upon the
occurrence of any other Event of Default, any and all Liabilities shall become
immediately due and payable, at the option of the Lender and without notice or
demand. The occurrence of any Event of Default shall also constitute, without
notice or demand, a default under all other agreements between the Lender and
the Borrower and instruments and papers
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given the Lender by the Borrower, whether such agreements, instruments, or
papers now exist or hereafter arise.
10.1. FAILURE TO PAY REVOLVING CREDIT. The failure by the Borrower to
pay any amount when due under the Revolving Credit.
10.2. FAILURE TO MAKE OTHER PAYMENTS. The failure by the Borrower to
pay when due (or upon demand, if payable on demand) any payment Liability other
than under the Revolving Credit.
10.3. FAILURE TO PERFORM COVENANT OR LIABILITY (NO GRACE PERIOD). The
failure by the Borrower to promptly, punctually, faithfully and timely perform,
discharge, or comply with any covenant or Liability not otherwise described in
Section 10-1 or Section 10-2 hereof, and included in any of the following
provisions hereof:
<TABLE>
<CAPTION>
Section Relates to :
------- -----------------------
<S> <C>
4-6 Location of Collateral
4-7 Title to Assets
4-8 Indebtedness
4-9 Insurance Policies
4-14 Pay taxes
4-23 Affiliate Transactions
4-24 Additional Assurances
6-1 Use of Collateral
Article 5 Reporting Requirements and Financial Covenants
Article 7 Cash Management
</TABLE>
10.4. FAILURE TO PERFORM COVENANT OR LIABILITY (GRACE PERIOD). The
failure by the Borrower, upon Ten (10) days written notice by the Lender , to
cure the Borrower's failure to promptly, punctually and faithfully perform,
discharge, or comply with any covenant or Liability not described in any of
Sections 10-1, 10-2, or 10-3 hereof.
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10.5. MISREPRESENTATION. The determination by the Lender that any
representation or warranty at any time made by the Borrower to the Lender, was
not true or complete in all material respects when given.
10.6. ACCELERATION OF OTHER DEBT. BREACH OF LEASE. The occurrence of
any event such that any Indebtedness of the Borrower in excess of $200,000 to
any creditor other than the Lender could be accelerated or, without the consent
of the Borrower, any Lease could be terminated (whether or not the subject
creditor or lessor takes any action on account of such occurrence).
10.7. DEFAULT UNDER OTHER AGREEMENTS. The occurrence of any breach or
default under any agreement between the Lender and the Borrower or instrument or
paper given the Lender by the Borrower, whether such agreement, instrument, or
paper now exists or hereafter arises and the failure of the Borrower to obtain a
waiver or to cure such default within the applicable cure period
(notwithstanding that the Lender may not have exercised its rights upon default
under any such other agreement, instrument or paper).
10.8. UNINSURED CASUALTY LOSS. The occurrence of any uninsured loss,
theft, damage, or destruction of or to any material portion of the Collateral.
10.9. JUDGMENT. RESTRAINT OF BUSINESS.
(a) The service of process upon the Lender or any Participant
seeking to attach, by trustee, mesne, or other process, any of the Borrower's
funds on deposit with, or assets of the Borrower in the possession of, the
Lender or such Participant.
(b) The entry of any judgment against the Borrower, which
judgment is not satisfied (if a money judgment) or appealed from or otherwise
stayed (with execution or similar process stayed) within the applicable appeals
period.
(c) The entry of any order or the imposition of any other
process having the force of law, the effect of which is to restrain in any
material way the conduct by the Borrower of its business in the ordinary course.
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10.10. BUSINESS FAILURE. Any act by, against, or relating to the
Borrower, or its property or assets, which act constitutes the application for,
consent to, or sufferance of the appointment of a receiver, trustee, or other
person, pursuant to court action or otherwise, over all, or any part of the
Borrower's property; the granting of any trust mortgage or execution of an
assignment for the benefit of the creditors of the Borrower, or the occurrence
of any other voluntary or involuntary liquidation or extension of debt agreement
for the Borrower; the offering by or entering into by the Borrower of any
composition, extension, or any other arrangement seeking relief from or
extension of the debts of the Borrower; or the initiation of any judicial or
non-judicial proceeding or agreement by, against, or including the Borrower
which seeks or intends to accomplish a reorganization or arrangement with
creditors; and/or the initiation by or on behalf of the Borrower of the
liquidation or winding up of all or any part of the Borrower's business or
operations.
10.11. BANKRUPTCY. The failure by the Borrower to generally pay the
debts of the Borrower as they mature; adjudication of bankruptcy or insolvency
relative to the Borrower; the entry of an order for relief or similar order with
respect to the Borrower in any proceeding pursuant to the Bankruptcy Code or any
other federal bankruptcy law; the filing of any complaint, application, or
petition by the Borrower initiating any matter in which the Borrower is or may
be granted any relief from the debts of the Borrower pursuant to the Bankruptcy
Code or any other insolvency statute or procedure; the filing of any complaint,
application, or petition against the Borrower initiating any matter in which the
Borrower is or may be granted any relief from the debts of the Borrower pursuant
to the Bankruptcy Code or any other insolvency statute or procedure, which
complaint, application, or petition is not timely contested in good faith by the
Borrower by appropriate proceedings or, if so contested, is not dismissed within
thirty (30) days of when filed.
10.12. DEFAULT BY GUARANTOR OR CERTAIN RELATED ENTITIES. The
occurrence of any of the foregoing Events of Default with respect to any
guarantor of the Liabilities, or the occurrence of any of the foregoing Events
of Default with respect to any parent (meaning an entity holding
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eighty percent (80%) or more of the common stock of the Borrower), or
subsidiary, as if such guarantor, subsidiary or parent were the "Borrower"
described therein.
10.13. INDICTMENT - FORFEITURE. The indictment of, or institution of
any legal process or proceeding against, the Borrower, under any federal, state,
municipal, and other civil or criminal statute, rule, regulation, order, or
other requirement having the force of law where the relief, penalties, or
remedies sought or available include the forfeiture of any property of the
Borrower and/or the imposition of any stay or other order, the effect of which
could be to restrain in any material way the conduct by the Borrower of its
business in the ordinary course.
10.14. TERMINATION OF GUARANTY. The termination or attempted
termination of any guaranty by any guarantor of the Liabilities.
10.15. CHALLENGE TO LOAN DOCUMENTS.
(a) Any challenge by or on behalf of the Borrower or any
guarantor of the Liabilities to the validity of any Loan Document or the
applicability or enforceability of any Loan Document strictly in accordance with
the subject Loan Document's terms or which seeks to void, avoid, limit, or
otherwise adversely affect any security interest created by or in any Loan
Document or any payment made pursuant thereto.
(b) Any determination by any court or any other judicial or
government authority that any Loan Document is not enforceable strictly in
accordance with the subject Loan Document's terms or which voids, avoids,
limits, or otherwise adversely affects any security interest created by any Loan
Document or any payment made pursuant thereto.
10.16. EXECUTIVE MANAGEMENT. The death, disability, or failure of
any of Yale T. Dolginow, Chairman and Chief Executive Officer at any time to
exercise that authority and discharge those management responsibilities with
respect to the Borrower as are exercised and discharged by such Person at the
execution of this Agreement, and if, within sixty (60) days from the date of
the death, disability or failure of such Person, a management team that is
satisfactory to Lender in its sole discretion has assumed those management
responsibilities.
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10.17. CHANGE IN CONTROL. Any Change in Control.
ARTICLE 11.- RIGHTS AND REMEDIES UPON DEFAULT:
In addition to all of the rights, remedies, powers, privileges, and
discretions which the Lender is provided prior to the occurrence of an Event of
Default, the Lender shall have the following rights and remedies upon the
occurrence of any Event of Default and at any time thereafter during the
continuance thereof. No stay which otherwise might be imposed pursuant to
Section 362 of the Bankruptcy Code or otherwise shall stay, limit, prevent,
hinder, delay, restrict, or otherwise prevent the Lender's exercise of any of
such rights and remedies.
11.1. RIGHTS OF ENFORCEMENT. The Lender shall have all of the
rights and remedies of a secured party upon default under the UCC, in addition
to which the Lender shall have all and each of the following rights and
remedies:
(a) To collect the Receivables Collateral with or without the
taking of possession of any of the Collateral.
(b) To take possession of all or any portion of the Collateral.
(c) To sell, lease, or otherwise dispose of any or all of the
Collateral, in its then condition or following such preparation or processing as
the Lender deems advisable and with or without the taking of possession of any
of the Collateral.
(d) To conduct one or more going out of business sales which
include the sale or other disposition of the Collateral.
(e) To apply the Receivables Collateral or the Proceeds of the
Collateral towards (but not necessarily in complete satisfaction of) the
Liabilities.
(f) To exercise all or any of the rights, remedies, powers,
privileges, and discretions under all or any of the Loan Documents.
11.2. SALE OF COLLATERAL.
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(a) Any sale or other disposition of the Collateral may be at
public or private sale upon such terms and in such manner as the Lender deems
advisable, having due regard to compliance with any statute or regulation which
might affect, limit, or apply to the Lender's disposition of the Collateral.
(b) The Lender, in the exercise of the Lender's rights and
remedies upon default, may conduct one or more going out of business sales, in
the Lender's own right or by one or more agents and contractors. Such sale(s)
may be conducted upon any premises owned, leased, or occupied by the Borrower.
The Lender and any such agent or contractor, in conjunction with any such sale,
may augment the Inventory with other goods (all of which other goods shall
remain the sole property of the Lender or such agent or contractor). Any
amounts realized from the sale of such goods which constitute augmentations to
the Inventory (net of an allocable share of the costs and expenses incurred in
their disposition) shall be the sole property of the Lender or such agent or
contractor and neither the Borrower nor any Person claiming under or in right of
the Borrower shall have any interest therein.
(c) Unless the Collateral is perishable or threatens to decline
speedily in value, or is of a type customarily sold on a recognized market (in
which event the Lender shall provide the Borrower with such notice as may be
practicable under the circumstances), the Lender shall give the Borrower at
least seven (7) days prior written notice of the date, time, and place of any
proposed public sale, and of the date after which any private sale or other
disposition of the Collateral may be made. The Borrower agrees that such
written notice shall satisfy all requirements for notice to the Borrower which
are imposed under the UCC or other applicable law with respect to the exercise
of the Lender's rights and remedies upon default.
(d) The Lender may purchase the Collateral, or any portion of
it at any sale held under this Article.
(e) If any of the Collateral is sold, leased, or otherwise
disposed of by the Lender on credit, the Liabilities shall not be deemed to have
been reduced as a result thereof unless and until payment is finally received
thereon by the Lender.
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(f) The Lender shall apply the proceeds of any exercise of the
Lender's Rights and Remedies under this Article 11 towards the Liabilities in
such manner, and with such frequency, as the Lender determines.
11.3. OCCUPATION OF BUSINESS LOCATION. In connection with the Lender's
exercise of the Lender's rights under this Article 11, the Lender may enter
upon, occupy, and use any premises owned or occupied by the Borrower, and may
exclude the Borrower from such premises or portion thereof as may have been so
entered upon, occupied, or used by the Lender. The Lender shall not be required
to remove any of the Collateral from any such premises upon the Lender's taking
possession thereof, and may render any Collateral unusable to the Borrower. In
no event shall the Lender be liable to the Borrower for use or occupancy by the
Lender of any premises pursuant to this Article 11, nor for any charge (such as
wages for the Borrower's employees and utilities) incurred in connection with
the Lender's exercise of the Lender's Rights and Remedies.
11.4. GRANT OF NONEXCLUSIVE LICENSE. The Borrower hereby grants to
the Lender a royalty free nonexclusive irrevocable license to use, apply, and
affix any trademark, trade name, logo, or the like in which the Borrower now or
hereafter has rights, such license being with respect to the Lender's exercise
of the rights hereunder including, without limitation, in connection with any
completion of the manufacture of Inventory or sale or other disposition of
Inventory.
11.5. ASSEMBLY OF COLLATERAL. The Lender may require the Borrower to
assemble the Collateral and make it available to the Lender at the Borrower's
sole risk and expense at a place or places which are reasonably convenient to
both the Lender and Borrower.
11.6. RIGHTS AND REMEDIES. The rights, remedies, powers,
privileges, and discretions of the Lender hereunder (herein, the "LENDER'S
RIGHTS AND REMEDIES") shall be cumulative and not exclusive of any rights or
remedies which it would otherwise have. No delay or omission by the Lender
in exercising or enforcing any of the Lender's Rights and Remedies shall
operate as, or
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constitute, a waiver thereof. No waiver by the Lender of any Event of Default
or of any default under any other agreement shall operate as a waiver of any
other default hereunder or under any other agreement. No single or partial
exercise of any of the Lender's Rights or Remedies, and no express or implied
agreement or transaction of whatever nature entered into between the Lender and
any person, at any time, shall preclude the other or further exercise of the
Lender's Rights and Remedies. No waiver by the Lender of any of the Lender's
Rights and Remedies on any one occasion shall be deemed a waiver on any
subsequent occasion, nor shall it be deemed a continuing waiver. All of the
Lender's Rights and Remedies and all of the Lender's rights, remedies, powers,
privileges, and discretions under any other agreement or transaction are
cumulative, and not alternative or exclusive, and may be exercised by the Lender
at such time or times and in such order of preference as the Lender in its sole
discretion may determine. The Lender's Rights and Remedies may be exercised
without resort or regard to any other source of satisfaction of the Liabilities.
ARTICLE 12 - NOTICES:
12.1. NOTICE ADDRESSES. All notices, demands, and other
communications made in respect of this Agreement (other than a request for a
loan or advance or other financial accommodation under the Revolving Credit)
shall be made to the following addresses, each of which may be changed upon
seven (7) days written notice to all others given by certified mail, return
receipt requested:
If to the Lender:
BankBoston Retail Finance Inc.
40 Broad Street
Boston, Massachusetts 02109
Attention : Michael Murray, Director
Fax : 617 434-4339
WITH A COPY TO:
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Stroock & Stroock & Lavan LLP
100 Federal Street
Boston, Ma 02110
Attention : Peter J. Antoszyk, Esquire
Fax : (617)-330-5111
If to the Borrower:
Paper Warehouse, Inc.
7630 Excelsior Boulevard
Minneapolis, MN 55426
Attention : Cheryl W. Newell, Chief Financial
Officer
Fax (612)-936-7889
WITH A COPY TO:
Oppenheimer, Wolff & Donnelly, LLP
45 South Seventh Street
Suite 3400
Minneapolis, Mn. 55402 -1609
Attention : Christopher M. Scotti, Esquire
Fax: : .(612) 607-7798.............
12.2. NOTICE GIVEN.
(a) Except as otherwise specifically provided herein, notices
shall be deemed made and correspondence received, as follows (all times being
local to the place of delivery or receipt):
(i) By mail: the sooner of when actually received or
Three (3) days following deposit in the United States mail, postage
prepaid.
(ii) By recognized overnight express delivery: the
Business Day following the day when sent.
(iii) By Hand: If delivered on a Business Day after 9:00
AM and no later than Three (3) hours prior to the close of customary
business hours of the recipient, when delivered. Otherwise, at the
opening of the then next Business Day.
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<PAGE>
(iv) By Facsimile transmission (which must include a
header on which the party sending such transmission is indicated): If
sent on a Business Day after 9:00 AM and no later than Three (3) hours
prior to the close of customary business hours of the recipient, one (1)
hour after being sent. Otherwise, at the opening of the then next
Business Day.
(b) Rejection or refusal to accept delivery and inability to
deliver because of a changed address or Facsimile Number for which no due notice
was given shall each be deemed receipt of the notice sent.
ARTICLE 13 - TERM:
13.1. TERMINATION OF REVOLVING CREDIT. The Revolving Credit shall
remain in effect (subject to suspension as provided in Section 2-4(i) hereof)
until the Termination Date.
13.2. EFFECT OF TERMINATION. On the Termination Date, the Borrower
shall pay the Lender (whether or not then due), in immediately available funds,
all then Liabilities including, without limitation: the entire balance of the
Loan Account; any then remaining installments of the Commitment Fee; any then
remaining balance of the Facility Fee; any accrued and unpaid Line Fee; and all
unreimbursed costs and expenses of the Lender for which the Borrower is
responsible; and shall make such arrangements concerning any L/C's then
outstanding are reasonably satisfactory to the Lender . Until such payment, all
provisions of this Agreement, other than those contained in Article 2 which
place an obligation on the Lender to make any loans or advances or to provide
financial accommodations under the Revolving Credit or otherwise, shall remain
in full force and effect until all Liabilities shall have been paid in full.
The release by the Lender of the security and other collateral interests granted
the Lender by the Borrower hereunder may be upon such conditions and
indemnifications as the Lender may require.
ARTICLE 14 - GENERAL:
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<PAGE>
14.1. PROTECTION OF COLLATERAL. The Lender has no duty as to the
collection or protection of the Collateral beyond the safe custody of such of
the Collateral as may come into the possession of the Lender and shall have no
duty as to the preservation of rights against prior parties or any other rights
pertaining thereto. The Lender may include reference to the Borrower (and may
utilize any logo or other distinctive symbol associated with the Borrower) in
connection with any advertising, promotion, or marketing undertaken by the
Lender.
14.2. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
the Borrower and the Borrower's representatives, successors, and assigns and
shall enure to the benefit of the Lender and the Lender's successors and assigns
PROVIDED, HOWEVER, no trustee or other fiduciary appointed with respect to the
Borrower shall have any rights hereunder. In the event that the Lender assigns
or transfers its rights under this Agreement, the assignee shall thereupon
succeed to and become vested with all rights, powers, privileges, and duties of
the Lender hereunder and the Lender shall thereupon be discharged and relieved
from its duties and obligations hereunder.
14.3. SEVERABILITY. Any determination that any provision of this
Agreement or any application thereof is invalid, illegal, or unenforceable in
any respect in any instance shall not affect the validity, legality, or
enforceability of such provision in any other instance, or the validity,
legality, or enforceability of any other provision of this Agreement.
14.4. AMENDMENTS. COURSE OF DEALING.
(a) This Agreement and the other Loan Documents incorporate all
discussions and negotiations between the Borrower and the Lender, either express
or implied, concerning the matters included herein and in such other
instruments, any custom, usage, or course of dealings to the contrary
notwithstanding. No such discussions, negotiations, custom, usage, or course of
dealings shall limit, modify, or otherwise affect the provisions thereof. No
failure by the Lender to give notice to the Borrower of the Borrower's having
failed to observe and comply with any warranty or covenant included in any Loan
Document shall constitute a waiver of such warranty or covenant or the amendment
of the subject Loan Document. No change made by the Lender in
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<PAGE>
the manner by which Availability is determined shall obligate the Lender to
continue to determine Availability in that manner.
(b) The Borrower may undertake any action otherwise prohibited
hereby, and may omit to take any action otherwise required hereby, upon and with
the express prior written consent of the Lender. No consent, modification,
amendment, or waiver of any provision of any Loan Document shall be effective
unless executed in writing by or on behalf of the party to be charged with such
modification, amendment, or waiver (and if such party is the Lender, then by a
duly authorized officer thereof). Any modification, amendment, or waiver
provided by the Lender shall be in reliance upon all representations and
warranties theretofore made to the Lender by or on behalf of the Borrower (and
any guarantor, endorser, or surety of the Liabilities) and consequently may be
rescinded in the event that any of such representations or warranties was not
true and complete in all material respects when given.
14.5. POWER OF ATTORNEY. In connection with all powers of attorney
included in this Agreement, the Borrower hereby grants unto the Lender full
power to do any and all things necessary or appropriate in connection with the
exercise of such powers as fully and effectually as the Borrower might or could
do, hereby ratifying all that said attorney shall do or cause to be done by
virtue of this Agreement. No power of attorney set forth in this Agreement
shall be affected by any disability or incapacity suffered by the Borrower and
each shall survive the same. All powers conferred upon the Lender by this
Agreement, being coupled with an interest, shall be irrevocable until this
Agreement is terminated by a written instrument executed by a duly authorized
officer of the Lender.
14.6. APPLICATION OF PROCEEDS. The proceeds of any collection, sale,
or disposition of the Collateral, or of any other payments received hereunder,
shall be applied towards the Liabilities in such order and manner as the Lender
determines in its sole discretion. The Borrower shall remain liable for any
deficiency remaining following such application.
14.7. LENDER'S COSTS AND EXPENSES.
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<PAGE>
(a) The Borrower shall pay on demand all Costs of Collection
and all reasonable expenses of the Lender in connection with the preparation,
execution, and delivery of this Agreement and of any other Loan Documents,
whether now existing or hereafter arising, and all other reasonable expenses
which may be incurred by the Lender in preparing or amending this Agreement and
all other agreements, instruments, and documents related thereto, or otherwise
incurred with respect to the Liabilities, and all costs and expenses of the
Lender which relate to the credit facility contemplated hereby.
(b) The Borrower authorizes the Lender to pay all such fees and
expenses and in the Lender's discretion, to add such fees and expenses to the
Loan Account.
(c) The undertaking on the part of the Borrower in this Section
14-7 shall survive payment of the Liabilities and/or any termination, release,
or discharge executed by the Lender in favor of the Borrower, other than a
termination, release, or discharge which makes specific reference to this
Section 14-7.
14.8. COPIES AND FACSIMILES. This Agreement and all documents which
relate thereto, which have been or may be hereinafter furnished the Lender may
be reproduced by the Lender by any photographic, microfilm, xerographic, digital
imaging, or other process, and the Lender may destroy any document so
reproduced. Any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding (whether or not the
original is in existence and whether or not such reproduction was made in the
regular course of business). Any facsimile which bears proof of transmission
shall be binding on the party which or on whose behalf such transmission was
initiated and likewise shall be so admissible in evidence as if the original of
such facsimile had been delivered to the party which or on whose behalf such
transmission was received.
14.9. MASSACHUSETTS LAW. This Agreement and all rights and obligations
hereunder, including matters of construction, validity, and performance, shall
be governed by the laws of The Commonwealth of Massachusetts.
14.10. CONSENT TO JURISDICTION.
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<PAGE>
(a) The Borrower agrees that any legal action, proceeding,
case, or controversy against the Borrower with respect to any Loan Document may
be brought in the Superior Court of Suffolk County Massachusetts or in the
United States District Court, District of Massachusetts, sitting in Boston,
Massachusetts, as the Lender may elect in the Lender's sole discretion. By
execution and delivery of this Agreement, the Borrower, for itself and in
respect of its property, accepts, submits, and consents generally and
unconditionally, to the jurisdiction of the aforesaid courts.
(b) The Borrower WAIVES personal service of any and all process
upon it, and irrevocably consents to the service of process out of any of the
aforementioned courts in any such action or proceeding by the mailing of copies
thereof by certified mail, postage prepaid, to the Borrower at the Borrower's
address for notices as specified herein, such service to become effective five
(5) Business Days after such mailing.
(c) The Borrower WAIVES any objection based on FORUM NON
CONVENIENS and any objection to venue of any action or proceeding instituted
under any of the Loan Documents and consents to the granting of such legal or
equitable remedy as is deemed appropriate by the Court.
(d) Nothing herein shall affect the right of the Lender to
bring legal actions or proceedings in any other competent jurisdiction.
(e) The Borrower agrees that any action commenced by the
Borrower asserting any claim or counterclaim arising under or in connection with
this Agreement or any other Loan Document shall be brought solely in the
Superior Court of Suffolk County Massachusetts or in the United States District
Court, District of Massachusetts, sitting in Boston, Massachusetts, and that
such Courts shall have exclusive jurisdiction with respect to any such action.
14.11. INDEMNIFICATION. The Borrower shall indemnify, defend, and
hold the Lender and any employee, officer, or agent of the Lender (each, an
"INDEMNIFIED PERSON") harmless of and from any claim brought or threatened
against any Indemnified Person by the Borrower, any guarantor or endorser of the
Liabilities, or any other Person (as well as from attorneys' reasonable fees and
expenses in connection therewith) on account of the relationship of the Borrower
or of
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<PAGE>
any other guarantor or endorser of the Liabilities Lender (each of claims
which may be defended, compromised, settled, or pursued by the Indemnified
Person with counsel of the Lender's selection, but at the expense of the
Borrower) other than any claim as to which a final determination is made in a
judicial proceeding (in which the Lender and any other Indemnified Person has
had an opportunity to be heard), which determination includes a specific
finding that the Indemnified Person seeking indemnification had acted in a
grossly negligent manner or in actual bad faith. This indemnification shall
survive payment of the Liabilities and/or any termination, release, or
discharge executed by the Lender in favor of the Borrower, other than a
termination, release, or discharge which makes specific reference to this
Section 14-11.
14.12. RULES OF CONSTRUCTION. The following rules of construction
shall be applied in the interpretation, construction, and enforcement of this
Agreement and of the other Loan Documents:
(a) Words in the singular include the plural and words in the
plural include the singular.
(b) Titles, headings (indicated by being UNDERLINED or shown in
SMALL CAPITALS) and any Table of Contents are solely for convenience of
reference; do not constitute a part of the instrument in which included; and do
not affect such instrument's meaning, construction, or effect.
(c) The words "includes" and "including" are not limiting.
(d) Text which follows the words "including, without
limitation" (or similar words) is illustrative and not limitational.
(e) Except where the context otherwise requires or where the
relevant subsections are joined by "or", compliance with any Section or
provision of any Loan Document which constitutes a warranty or covenant requires
compliance with all subsections (if any) of that Section or provision. Except
where the context otherwise requires, compliance with any warranty or covenant
of any Loan Document which includes subsections which are joined by "or" may be
accomplished by compliance with any of such subsections.
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<PAGE>
(f) Text which is shown in ITALICS, shown in BOLD, shown IN ALL
CAPITAL LETTERS, or in any combination of the foregoing, shall be deemed to be
conspicuous.
(g) The words "may not" are prohibitive and not permissive.
(h) The word "or" is not exclusive.
(i) Any reference to a Person's "knowledge" (or words of
similar import) are to such Person's knowledge assuming that such Person has
undertaken reasonable and diligent investigation with respect to the subject of
such "knowledge" (whether or not such investigation has actually been
undertaken).
(j) Terms which are defined in one section of any Loan Document
are used with such definition throughout the instrument in which so defined.
(k) The symbol "$" refers to United States Dollars.
(l) Unless limited by reference to a particular Section or
provision, any reference to "herein", "hereof", or "within" is to the entire
Loan Document in which such reference is made.
(m) References to "this Agreement" or to any other Loan
Document is to the subject instrument as amended to the date on which
application of such reference is being made.
(n) Except as otherwise specifically provided, all references
to time are to Boston time.
(o) In the determination of any notice, grace, or other period
of time prescribed or allowed hereunder:
(i) Unless otherwise provided (I) the day of the act,
event, or default from which the designated period of time begins to run
shall not be included and the last day of the period so computed shall be
included unless such last day is not a Business Day, in which event the
last day of the relevant period shall be the then next Business Day and
(II) the period so computed shall end at 5:00 PM on the relevant Business
Day.
(ii) The word "from" means "from and including".
(iii) The words "to" and "until" each mean "to, but
excluding".
(iv) The work "through" means "to and including".
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<PAGE>
(p) The Loan Documents shall be construed and interpreted in a
harmonious manner and in keeping with the intentions set forth in Section 14-13
hereof, PROVIDED, HOWEVER, in the event of any inconsistency between the
provisions of this Agreement and any other Loan Document, the provisions of this
Agreement shall govern and control.
14.13. INTENT. It is intended that:
(a) This Agreement take effect as a sealed instrument.
(b) The scope of the security interests created by this
Agreement be broadly construed in favor of the Lender.
(c) The security interests created by this Agreement secure all
Liabilities, whether now existing or hereafter arising.
(d) All reasonable costs and expenses incurred by the Lender in
connection with the Lender's relationship(s) with the Borrower shall be borne by
the Borrower.
(e) Unless otherwise explicitly provided herein, the Lender's
consent to any action of the Borrower which is prohibited unless such consent is
given may be given or refused by the Lender in its sole discretion and without
reference to Section 2-15 hereof.
14.14. RIGHT OF SET-OFF. Any and all deposits or other sums at any
time credited by or due to the Borrower from the Lender or any participant (a
"PARTICIPANT") in the credit facility contemplated hereby or any from any
Affiliate of the Lender or any Participant and any cash, securities, instruments
or other property of the Borrower in the possession of the Lender any
Participant or any such Affiliate, whether for safekeeping or otherwise
(regardless of the reason such Person had received the same) shall at all times
constitute security for all Liabilities and for any and all obligations of the
Borrower to the Lender or any Participant or any such Affiliate and may be
applied or set off against the Liabilities and against such obligations at any
time, whether or not such are then due and whether or not other collateral is
then available to the Lender or any Participant or any such Affiliate.
14.15. MAXIMUM INTEREST RATE. Regardless of any provision of any
Loan Document, the Lender shall never be entitled to contract for, charge,
receive, collect, or apply as interest on
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<PAGE>
any Liability, any amount in excess of the maximum rate imposed by applicable
law. Any payment which is made which, if treated as interest on a Liability
would result in such interest's exceeding such maximum rate shall be held, to
the extent of such excess, as additional collateral for the Liabilities as if
such excess were "Collateral."
14.16. WAIVERS.
(a) The Borrower (and all guarantors, endorsers, and sureties
of the Liabilities) make each of the waivers included in Section 14-16(b),
below, knowingly, voluntarily, and intentionally, and understands that the
Lender, in entering into the financial arrangements contemplated hereby and in
providing loans and other financial accommodations to or for the account of the
Borrower as provided herein, whether not or in the future, is relying on such
waivers.
(b) THE BORROWER, AND EACH SUCH GUARANTOR, ENDORSER, AND SURETY
RESPECTIVELY WAIVES THE FOLLOWING:
(i) Except as otherwise specifically required hereby,
notice of non-payment, demand, presentment, protest and all forms of
demand and notice, both with respect to the Liabilities and the
Collateral.
(ii) Except as otherwise specifically required hereby,
the right to notice and/or hearing prior to the Lender's exercising of
the Lender's rights upon default.
(iii) THE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR
CONTROVERSY IN WHICH THE LENDER IS OR BECOMES A PARTY (WHETHER SUCH CASE
OR CONTROVERSY IS INITIATED BY OR AGAINST THE LENDER OR IN WHICH THE
LENDER IS JOINED AS A PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES
OUT OF OR IS IN RESPECT OF, ANY RELATIONSHIP AMONGST OR BETWEEN THE
BORROWER OR ANY OTHER PERSON AND THE LENDER (AND THE LENDER LIKEWISE
WAIVES THE RIGHT TO A JURY IN ANY TRIAL OF ANY SUCH CASE OR CONTROVERSY).
(iv) The benefits or availability of any stay,
limitation, hindrance, delay, or restriction (including, without
limitation, any automatic stay which otherwise might be
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<PAGE>
imposed pursuant to Section 362 of the Bankruptcy Code) with respect to
any action which the Lender may or may become entitled to take hereunder.
(v) Any defense, counterclaim, set-off, recoupment, or
other basis on which the amount of any Liability, as stated on the books
and records of the Lender, could be reduced or claimed to be paid
otherwise than in accordance with the tenor of and written terms of such
Liability.
(vi) Any claim to consequential, special, or punitive
damages.
PAPER WAREHOUSE, INC.
("BORROWER")
By /s/ YALE T. DOLGINOW
------------------------------
Yale T. Dolginow, Chairman and
Chief Executive Officer
PAPER FRANCHISING WAREHOUSE, INC.
("BORROWER")
By /s/ Yale T. Dolginow
------------------------------
Yale T. Dolginow, Chairman and
Chief Executive Officer
BANKBOSTON RETAIL FINANCE INC.
("LENDER")
By /s/ Michael Murray
------------------------------
Michael Murray, Director
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<PAGE>
EXHIBIT 12
PAPER WAREHOUSE, INC., AND SUBSIDIARY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND MAY 1, 1998
AND FOR THE FIVE YEARS ENDED JANUARY 29, 1999
<TABLE>
<CAPTION>
FIRST
($'S IN THOUSANDS) FISCAL YEARS ENDED QUARTER ENDED
--------------------------------------------------------------------------------------
JANUARY 27, FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29, May 1, April 30,
1995 1996 1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES:
Earnings:
Consolidated net earnings ............ $ 794 $ 797 $ 808 $ (207) $ (521) $ (528) $ (1,217)
Extraordinary charge, net ............ --- --- --- (110) --- --- ---
Cumulative effect of accounting
change, net......................... --- --- --- --- --- --- (109)
Income taxes (1) ..................... (492) (494) (500) (22) 323 352 743
-------- --------- --------- ---------- --------- -------- --------
Total earnings before
extraordinary charge and
cumulative effect of
accounting change................ 1,286 1,291 1,308 (75) (844) (880) (1,851)
Fixed Charges:
Interest expense ..................... 227 547 834 860 279 40 220
Interest portion of rental expense.... 673 1,046 1,436 1,779 2,378 487 773
-------- --------- --------- ---------- --------- -------- --------
Total fixed charges ............... 900 1,593 2,270 2,639 2,657 527 993
Earnings available for fixed charges.... $ 2,186 $ 2,884 $ 3,578 $ 2,564 $ 1,813 $ (353) $ (858)
Ratio of earnings before extraordinary
charge and cumulative effect of
accounting change to fixed charges... 2.43 1.81 1.58 --- (2) --- (2) --- (2) --- (2)
-------- --------- --------- ---------- --------- -------- --------
-------- --------- --------- ---------- --------- -------- --------
</TABLE>
(1) Prior to November 1997, the Company was taxed as an S-Corporation.
This amount reflects the pro forma provision for taxes as if the Company
were taxed as a C-Corporation.
(2) Earnings were not adequate to cover fixed charges by approximately $1.9
million for the first quarter ended April 30, 1999, by $880,000 for the
first quarter ended May 1, 1998, $844,000 in fiscal 1998 and by $75,000
in fiscal 1997. Assuming this issuance had occurred at the beginning of
the last fiscal year, earnings would not have been adequate to cover
fixed charges by approximately $1.3 million.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Paper Warehouse, Inc. and Subsidiary:
We consent to the use of our report included herein and to the reference to our
firm under the headings "Experts" and "Selected Financial and Operating Data"
in the prospectus.
/s/ KPMG Peat Marwick LLP
June 14, 1999
Minneapolis, Minnesota
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-28-2000
<PERIOD-START> JAN-30-1999
<PERIOD-END> APR-30-1999
<CASH> $ 791
<SECURITIES> 0
<RECEIVABLES> 938
<ALLOWANCES> 0
<INVENTORY> 18,998
<CURRENT-ASSETS> 22,064
<PP&E> 15,630
<DEPRECIATION> 5,618
<TOTAL-ASSETS> 33,379
<CURRENT-LIABILITIES> 16,882
<BONDS> 2,495
0
0
<COMMON> 46
<OTHER-SE> 12,826
<TOTAL-LIABILITY-AND-EQUITY> 33,379
<SALES> 16,692
<TOTAL-REVENUES> 16,692
<CGS> 16,080
<TOTAL-COSTS> 16,080
<OTHER-EXPENSES> 2,247
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 216
<INCOME-PRETAX> (1,851)
<INCOME-TAX> 743
<INCOME-CONTINUING> (1,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (109)
<NET-INCOME> $(1,217)
<EPS-BASIC> $(.26)
<EPS-DILUTED> $(.26)
</TABLE>
