<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-26742
GT BICYCLES, INC.
(Exact name of the registrant as specified in its charter)
Delaware 04-3210830
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 East Dyer Road, Santa Ana, California 92705
(Address of principal executive offices)
(714) 481-7100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at May 12, 1998
----- ---------------------------
<S> <C>
Common Stock, $0.001 par value 9,828,801
</TABLE>
<PAGE> 2
GT BICYCLES, INC.
INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Operations for the
three-month periods ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GT BICYCLES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS (NOTE 3) 1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
Current assets:
Cash $ -- $ 588
Trade accounts receivable, net 64,102 52,418
Inventories (note 2) 78,475 80,985
Prepaid expenses and other current assets 3,410 3,098
Income taxes receivable 124 --
Deferred income taxes 1,646 1,646
--------- ---------
Total current assets 147,757 138,735
Property, plant and equipment, net 13,047 12,833
Goodwill and other intangibles, net 19,662 19,920
Other assets 1,184 1,161
Restricted cash from issuance of industrial development bonds 2,839 3,607
Deferred income taxes 25 25
--------- ---------
Total Assets $ 184,514 $ 176,281
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 3) $ 5,521 $ 92,883
Current portion of capital lease obligations 438 462
Accounts payable 10,387 11,915
Accrued liabilities 5,048 4,310
Income taxes payable -- 463
--------- ---------
Total current liabilities 21,394 110,033
Long-term debt, net of current portion (note 3) 101,111 4,438
Capital lease obligations, net of current portion 333 407
--------- ---------
Total liabilities 122,838 114,878
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized,
none issued -- --
Common stock, $0.001 par value, 20,000,000 shares authorized,
9,828,801 and 9,820,152 shares issued and outstanding
at March 31, 1998 and December 31, 1997, respectively 10 10
Additional paid-in-capital 47,234 47,182
Retained earnings 14,691 14,608
Accumulated other comprehensive income (259) (397)
--------- ---------
Total stockholders' equity 61,676 61,403
--------- ---------
Total Liabilities and Stockholders' Equity $ 184,514 $ 176,281
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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GT BICYCLES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1998 1997
------- -------
(in thousands, except
per share data)
<S> <C> <C>
Net sales $51,165 $51,170
Cost of sales 36,754 37,395
------- -------
Gross profit 14,411 13,775
Selling, general and administrative expenses 12,355 10,995
------- -------
Operating income 2,056 2,780
Interest expense 1,956 1,386
------- -------
Income before taxes 100 1,394
Provision for income taxes 17 578
------- -------
Net income $ 83 $ 816
======= =======
Earnings per share:
Basic $ 0.01 $ 0.08
======= =======
Diluted $ 0.01 $ 0.08
======= =======
Weighted average common and common equivalent shares:
Basic 9,827 9,788
======= =======
Diluted 9,918 9,954
======= =======
</TABLE>
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GT BICYCLES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 83 $ 816
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 882 394
Provision for doubtful accounts 156 60
Foreign currency translation adjustment 138 (115)
Changes in assets and liabilities:
Trade accounts receivable (11,840) (8,920)
Inventories 2,510 1,467
Prepaid expenses and other current assets (312) 92
Restricted cash and other assets 745 (122)
Accounts payable (1,528) (2,920)
Accrued and other liabilities 738 502
Income taxes receivable/payable (587) 158
-------- --------
Net cash used in operating activities (9,015) (8,588)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (838) (1,854)
-------- --------
Net cash used in investing activities (838) (1,854)
-------- --------
Cash flows from financing activities:
Net borrowings under lines of credit 10,458 11,461
Principal payments on term loan and industrial development bonds (1,147) (1,063)
Principal payments on capital lease obligations (98) (47)
Proceeds from issuance of common stock 52 91
-------- --------
Net cash provided by financing activities 9,265 10,442
-------- --------
Change in cash and cash equivalents (588) --
Cash and cash equivalents at beginning of period 588 --
-------- --------
Cash and cash equivalents at end of period $ -- $ --
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,981 $ 1,362
======== ========
Income taxes $ 604 $ 427
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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GT BICYCLES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements of GT Bicycles, Inc. (the
"Company") include the wholly-owned subsidiaries, GT Bicycles California, Inc.,
GT BMX Products, Inc., Riteway Distributors, Inc., Riteway Distributors Central,
Inc., Riteway Products East, Inc., Riteway Products North Central, Inc., Riteway
Products Japan K.K. ("Riteway Japan"), Riteway Products France S.A.R.L.
("Riteway France") and Caratti Sport Limited ("Caratti"), as well as the
majority-owned subsidiaries, Innovations in Composites, Inc. ("Innovations") and
Riteway Products Canada Limited ("Riteway Canada"). Investments in affiliates,
for which the Company has an ownership interest of at least 20% but not
exceeding 50%, are recorded under the equity method of accounting.
The Company held a 45% ownership interest in Innovations from 1993 through June
1997. In July 1997, the Company increased its ownership level in Innovations to
57% through the purchase of additional common shares. At that date, the Company
changed its method of accounting for Innovations from the equity method to
consolidation. Riteway Canada was formed in September 1997 as an 85%-owned
subsidiary of the Company. The interest of minority shareholders in the equity
of Innovations and Riteway Canada is included in accrued liabilities on the
accompanying balance sheets and their interest in the earnings of these entities
is included in selling, general and administrative expenses on the accompanying
statement of operations; such amounts were not material in the periods
presented.
All significant intercompany balances and transactions are eliminated in
consolidation.
Foreign Currency Translation
The Company uses the local currency of the respective country as the functional
currency for its overseas operations. Accordingly, assets and liabilities
outside the United States were translated into dollars at the rate of exchange
in effect at the balance sheet date. Income and expense items were translated at
the weighted average exchange rates prevailing during the period. The cumulative
translation gain or loss is included as a component of accumulated other
comprehensive income. There were no significant foreign currency transaction
gains or losses in the periods presented.
Earnings per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which
replaces the former primary and fully-diluted earnings per share with basic and
diluted earnings per share. All earnings per share amounts have been restated to
conform with the SFAS No. 128 presentation. In each of the quarters ended March
31, 1998 and 1997, the difference in weighted average shares used in the
calculation of basic and diluted earnings per share is solely attributable to
the incremental shares resulting from the assumed exercise of dilutive stock
options.
Reporting Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
establishes new rules for the reporting and display of comprehensive income and
its components. Annual financial statements will be reclassified as required.
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A summary of the Company's comprehensive income follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
(in thousands)
<S> <C> <C>
Net income $ 83 $ 816
Foreign currency translation adjustment 138 (115)
----- -----
Comprehensive income $ 221 $ 701
===== =====
</TABLE>
Unaudited Condensed Consolidated Financial Statements
The unaudited condensed consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. All such
adjustments are, in the opinion of management, of a normal recurring nature.
Results for the three-month period ended March 31, 1998 are not necessarily
indicative of the operating results to be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1997.
(2) INVENTORIES
A summary of the components of inventories follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Raw materials $ 756 $ 678
Work in process 2,840 3,124
Finished goods and component parts 74,879 77,183
------- -------
$78,475 $80,985
======= =======
</TABLE>
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(3) LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
Domestic revolving credit facility $ 70,674 $ 65,490
Domestic term loan 10,625 11,688
Riteway Japan revolving credit facility 2,728 1,761
Riteway France revolving credit facility 3,486 3,280
Caratti revolving credit facility 10,415 10,149
Riteway Canada revolving credit facility 3,835 --
Industrial development bonds payable 4,804 4,888
Promissory note payable 65 65
--------- ---------
106,632 97,321
Less current portion (5,521) (92,883)
--------- ---------
$ 101,111 $ 4,438
========= =========
</TABLE>
At March 31, 1998, the Company had credit agreements with a bank that provided
for a domestic revolving credit facility, a domestic term loan, and separate
revolving credit facilities for the Riteway Japan, Riteway France and Caratti
subsidiaries. Such credit agreements were scheduled to expire on June 30, 1998
and, accordingly, the related borrowings were classified as current liabilities
at December 31, 1997.
In April 1998, the Company refinanced such borrowings on a long-term basis, as
described below. Accordingly, the revolving credit facilities and the portion of
the term loan which does not mature within one year have been classified as
noncurrent liabilities at March 31, 1998.
The Company entered into a new domestic revolving credit facility with an
affiliate of its existing bank. The facility expires in April 2001 and is
secured by substantially all of the Company's assets. The facility provides for
maximum borrowings and letters of credit equal to the lesser of $75.0 million or
the Company's borrowing base associated with accounts receivable and
inventories, as defined by the agreement. The amount individually available
under commercial and standby letters of credit is $15.0 million. The Company has
the option to pay interest on borrowings at the bank's reference rate plus the
applicable margin (as defined in the agreement) or LIBOR plus the applicable
margin (as defined in the agreement); such interest rates may decrease in the
future if the Company meets certain financial ratio criteria. The weighted
average interest rate on the facility was 8.16% at April 30, 1998. The Company
must pay a monthly commitment fee equal to .25% per annum on the unused amount
of the $75.0 million maximum available credit. The agreement requires that the
Company maintain certain financial ratios and other covenants, which, among
other things, restrict other indebtedness, capital expenditures and certain
investments.
The Company's separate revolving credit facilities for Riteway France and
Riteway Japan, which provide for maximum borrowings of $3.5 million and $3.0
million, respectively, were also extended in connection with the aforementioned
new domestic facility. In addition, the Company received a commitment from its
bank to extend the Caratti facility to April 2001 and to increase the maximum
borrowings thereunder from $10.0 million to $15.0 million.
The domestic term loan outstanding at March 31, 1998 was replaced by a $20.0
million term loan with the Company's existing bank. The new loan requires
quarterly principal payments of $1.3 million through June 1999 with a final
balloon payment of the remaining principal in July 1999. The Company has the
option to pay interest on borrowings at the bank's reference rate plus the
applicable margin (as defined in the agreement) or LIBOR plus the applicable
margin (as defined in the agreement). The interest rate on the term loan was
9.63% at April 30, 1998. In
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addition, in connection with the term loan, the Company issued a warrant which
gives the bank the right to purchase 525,765 shares of the Company's common
stock at $6.58 per share, which represented the average of the closing prices of
the Company's common stock on the Nasdaq market during a specified period in
January 1998. The warrant becomes exercisable based on the following schedule:
one-third in September 1998, one-third in December 1998 and one-third in March
1999, provided that the Company has not yet repaid the term loan in full as of
such dates.
Also in April 1998, the Company entered into an unsecured revolving credit
facility with another financial institution. This facility, which expires in
October 1999, provides for maximum borrowings of $3.0 million. Interest is based
on specified commercial paper rates plus the applicable margin (as defined in
the agreement). The interest rate on the facility was 8.02% at April 30, 1998.
In February 1998, Riteway Canada entered into a revolving credit facility with a
Canadian bank. This facility, which expires in February 2000, provides for
maximum borrowings equal to the lesser of C$9.0 million (approximately US$6.3
million) or Riteway Canada's borrowing base associated with accounts receivable
and inventories, as defined in the agreement. Interest is payable monthly at the
bank's prime rate plus the applicable margin (as defined in the agreement). The
interest rate on the facility was 7.75% at April 30, 1998.
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<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
GT Bicycles, Inc. (the "Company") is a leading designer, manufacturer and
marketer of mid-to-premium-priced mountain and juvenile BMX bicycles sold under
the Company's brand names. The Company's Riteway Products and Caratti
distribution network is a leading distributor of the Company's bicycles, parts
and accessories, and parts and accessories of other manufacturers, to
independent bicycle dealers.
RESULTS OF OPERATIONS
Net Sales. Net sales of $51.2 million in the quarter ended March 31, 1998 were
unchanged from the corresponding prior-year quarter. Domestic sales increased
$0.7 million due to higher sales of parts and accessories; domestic sales of
bicycles were at approximately the same level as in the prior-year quarter.
International sales decreased $0.7 million, as lower export shipments to
independent distributors more than offset higher sales by the Company's
subsidiaries in Canada, France, Japan and the United Kingdom. In particular, the
stronger U.S. dollar adversely affected orders from independent European
distributors, who could not pass on currency-related higher prices to their
customers.
Gross Profit. Gross profit, as a percentage of net sales, was 28.2% and 26.9% in
the quarters ended March 31, 1998 and 1997, respectively. The increase primarily
reflected a change in the mix of products sold, with a greater proportion of
sales coming from higher-margin parts and accessories and juvenile bicycles.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the quarter ended March 31, 1998 increased
by $1.4 million, or 12.3%, over the corresponding prior-year quarter and
increased as a percentage of net sales to 24.1% from 21.5%. Approximately half
of the dollar increase was attributable to expenses incurred at Riteway Canada
and Innovations, which were not consolidated during the first quarter last year,
and higher expenses at the Company's subsidiaries in France, Japan and the
United Kingdom. The remaining increase primarily reflected higher U.S. marketing
and advertising expenses to promote brand equity and higher operating costs
associated with the new Santa Ana facility. Partially offsetting these increases
were approximately $0.3 million of nonrecurring relocation costs incurred during
the first quarter of 1997 in connection with the Company's move to the new Santa
Ana facility.
Interest Expense. Interest expense for the quarter ended March 31, 1998
increased $0.6 million, or 41.1%, from the corresponding prior-year quarter. The
increase was principally due to a combination of higher borrowings under the
Company's revolving bank credit agreements and a higher effective interest rate
on such borrowings. Based on expected borrowing levels and interest rates under
the Company's new bank facilities, the Company anticipates that interest expense
for the remainder of 1998 will exceed 1997 interest expense.
Income Taxes. The Company's effective tax rate was 17.0% and 41.5% in the
quarters ended March 31, 1998 and 1997, respectively. The relatively low 1998
first quarter tax rate primarily reflected tax benefits at one of the Company's
foreign subsidiaries and the mix of domestic and foreign earnings in the
quarter. The Company expects that the annual 1998 consolidated tax provision
will be comparable to the 39.4% annual rate incurred in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had credit agreements with a bank that provided
for a domestic revolving credit facility, a domestic term loan, and separate
revolving credit facilities for the Riteway
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Japan, Riteway France and Caratti subsidiaries. Such credit agreements were
scheduled to expire on June 30, 1998.
In April 1998, the Company restructured its banking arrangements to provide
longer-term financing, as summarized below.
The Company entered into a new domestic revolving credit facility with an
affiliate of its existing bank. The facility expires in April 2001 and is
secured by substantially all of the Company's assets. The facility provides for
maximum borrowings and letters of credit equal to the lesser of $75.0 million or
the Company's borrowing base associated with accounts receivable and
inventories, as defined by the agreement. The amount individually available
under commercial and standby letters of credit is $15.0 million. The Company has
the option to pay interest on borrowings at the bank's reference rate plus the
applicable margin (as defined in the agreement) or LIBOR plus the applicable
margin (as defined in the agreement); such interest rates may decrease in the
future if the Company meets certain financial ratio criteria. The weighted
average interest rate on the facility was 8.16% at April 30, 1998. The Company
must pay a monthly commitment fee equal to .25% per annum on the unused amount
of the $75.0 million maximum available credit. The agreement requires that the
Company maintain certain financial ratios and other covenants, which, among
other things, restrict other indebtedness, capital expenditures and certain
investments.
The Company's separate revolving credit facilities for Riteway France and
Riteway Japan, which provide for maximum borrowings of $3.5 million and $3.0
million, respectively, were also extended in connection with the aforementioned
new domestic facility. In addition, the Company received a commitment from its
bank to extend the Caratti facility to April 2001 and to increase the maximum
borrowings thereunder from $10.0 million to $15.0 million.
The domestic term loan outstanding at March 31, 1998 was replaced by a $20.0
million term loan with the Company's existing bank. The new loan requires
quarterly principal payments of $1.3 million through June 1999 with a final
balloon payment of the remaining principal in July 1999. The Company has the
option to pay interest on borrowings at the bank's reference rate plus the
applicable margin (as defined in the agreement) or LIBOR plus the applicable
margin (as defined in the agreement). The interest rate on the term loan was
9.63% at April 30, 1998. In addition, in connection with the term loan, the
Company issued a warrant which gives the bank the right to purchase 525,765
shares of the Company's common stock at $6.58 per share, which represented the
average of the closing prices of the Company's common stock on the Nasdaq market
during a specified period in January 1998. The warrant becomes exercisable based
on the following schedule: one-third in September 1998, one-third in December
1998 and one-third in March 1999, provided that the Company has not yet repaid
the term loan in full as of such dates.
Also in April 1998, the Company entered into an unsecured revolving credit
facility with another financial institution. This facility, which expires in
October 1999, provides for maximum borrowings of $3.0 million. Interest is based
on specified commercial paper rates plus the applicable margin (as defined in
the agreement). The interest rate on the facility was 8.02% at April 30, 1998.
In February 1998, Riteway Canada entered into a revolving credit facility with a
Canadian bank. This facility, which expires in February 2000, provides for
maximum borrowings equal to the lesser of C$9.0 million (approximately US$6.3
million) or Riteway Canada's borrowing base associated with accounts receivable
and inventories, as defined in the agreement. Interest is payable monthly at the
bank's prime rate plus the applicable margin (as defined in the agreement). The
interest rate on the facility was 7.75% at April 30, 1998.
The Company's operating activities used cash of $9.0 million and $8.6 million in
the quarters ended March 31, 1998 and 1997, respectively. The higher cash usage
in 1998 primarily reflected a larger increase in accounts receivable, partially
offset by a larger inventory reduction and a smaller accounts payable decrease.
As is normal industry practice, the Company maintains relatively high levels of
receivables during the winter months in connection with its credit policies. The
Company's capital expenditures of $0.8 million in the quarter ended March 31,
1998 were less than the $1.9 million of
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<PAGE> 12
capital expenditures in the corresponding 1997 quarter, which included leasehold
improvements and equipment purchased for the Company's new Santa Ana facility.
The aforementioned 1998 and 1997 operating and investing cash outlays were
financed primarily with additional borrowings under the Company's revolving
lines of credit.
The Company anticipates that it will continue to rely on bank credit, vendor
credit and cash generated from operations in order to finance anticipated higher
inventory and accounts receivable levels. The Company believes that the
restructured financing described above will be sufficient to satisfy the
Company's working capital and capital expenditure requirements through at least
the next 12 months.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which establishes
standards for reporting financial and descriptive information about an
enterprise's operating segments in its annual financial statements and selected
segment information in interim financial reports. SFAS No. 131 becomes effective
for the Company's 1998 annual financial statements and for its 1999 interim
financial statements. Restatement of comparative prior-year financial statements
will be required in the periods in which the Company first applies SFAS No. 131.
YEAR 2000
The Company has performed a preliminary examination of its major software
applications to determine whether each system is prepared to accommodate the
year 2000. This examination included a review of program code which is
maintained by the Company as well as obtaining confirmation from outside
software vendors that their products are year 2000 compliant. The Company
believes that, based on its current examination, the year 2000 will not have a
material adverse impact on the Company's operations and that the costs to
accommodate the year 2000 will not be material. However, there can be no
assurance that software incompatibility with the year 2000 on the part of the
Company or any of its significant suppliers will not cause an interruption of
operations or other limitations of system functionality, or that the Company
will not incur substantial costs to avoid such occurrences. By the end of 1998,
the Company plans to complete an extensive assessment of the readiness of its
software applications with respect to year 2000 issues and any related
accommodation costs.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND FUTURE RESULTS
ECONOMIC CONDITIONS; SUSTAINABILITY OF GROWTH. The Company's business is subject
to economic cycles and changing consumer trends. Purchases of discretionary
sporting goods tend to decline in periods of economic uncertainty. Any
significant decline in general economic conditions or continued uncertainties
regarding future economic prospects that affect consumer spending could have a
material adverse effect on the Company's business, results of operations and
financial condition. While in the past ten years, there has been a renewed
public interest in bicycling and fitness activities, in the past two years,
there has been a decline in the demand for adult bicycles domestically. There
can be no assurance that the public interest in bicycling and fitness activities
will continue, or that the Company will continue to grow or be able to sustain
the level of bicycle sales that it has historically achieved. Any general
decline in the size of the bicycle market or in a segment of the bicycle market
in which the Company competes, whether from general economic conditions, a
decrease in the popularity of bicycling or otherwise, could have a material
adverse effect on the Company's business, results of operations and financial
condition.
TECHNOLOGICAL ADVANCEMENTS AND NEW PRODUCT INTRODUCTIONS. The bicycle industry,
in recent years, has been characterized by significant technological advances
and frequent new product introductions. The Company believes that the frequent
introduction of new, innovative bicycles, parts and accessories
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that respond timely to changing consumer demands and trends will be critical to
its future success. In the past, the Company generally has been successful in
the introduction of its bicycles, parts and accessories. No assurance can be
given, however, that the Company will be able to continue to design and
manufacture products that will achieve commercial success.
INDEBTEDNESS; LIQUIDITY. The credit agreements relating to the Company's
outstanding indebtedness require the Company to maintain certain financial
ratios and profitability levels, as well as other affirmative and negative
covenants. While the Company expects to comply with these requirements, any
failure to comply with covenants or restrictions contained in one or more of the
credit agreements could result in a default thereunder, which in turn could
cause the Company's indebtedness to be declared immediately due and payable. The
Company has in the past renegotiated certain provisions of the credit agreements
to relax certain of the financial covenants to adapt to the Company's then
existing financial condition, although there can be no assurance that the
lenders will renegotiate provisions of the credit agreements in the future.
Although the Company believes that its cash from operations, its revolving
credit arrangements and vendor credit, and its existing working capital will be
sufficient to satisfy the Company's anticipated working capital and capital
expenditure requirements through at least the next twelve months, the Company
may need to seek additional sources of capital as necessary or appropriate to
finance acquisitions or otherwise finance the Company's operations during such
period of time and thereafter.
QUARTERLY FLUCTUATIONS AND SEASONALITY. Operating results fluctuate on a
quarterly basis due to a variety of factors, including the cycles of dealer
orders, shipment of products from foreign suppliers, the number and timing of
new product introductions, the timing of operating and advertising expenditures
and changes in the mix of products ordered by dealers. Typically, the Company's
operating expenses are higher in the third quarter primarily due to annual
introductions of new bicycle models and participation in annual industry trade
shows. In addition, the Company's business has seasonal elements based on
bicycle model years, weather, the year-end shopping season and other factors.
The Company believes that factors such as fluctuations in the quarterly
operating results could cause the price of the common stock to fluctuate
substantially.
COMPETITION. The market for bicycles, parts and accessories, both in the United
States and internationally, is highly competitive. In all of its product
categories, the Company competes with other manufacturers and distributors, some
of which have well-recognized brand names and substantial financial,
technological, distribution, advertising and marketing resources. In addition,
there are several bicycle manufacturers and component suppliers with substantial
resources that do not currently compete directly with the Company, but which
could pose significant competition to the Company in the future. There can be no
assurance that the Company will be able to compete successfully in the future.
DEPENDENCE ON CERTAIN SUPPLIERS. As is common in the industry, a substantial
majority of the Company's multi-speed bicycles contain componentry supplied on a
purchase order basis by one Japanese manufacturer. Although this supplier has
not indicated any intention to limit or reduce sales of parts to the Company, if
it were to do so, the Company's business, results of operations and financial
condition could be adversely affected. In addition, the Company purchases
substantially all of its bicycles that are manufactured overseas from a limited
group of manufacturers, which varies from year to year. The Company has no
long-term contracts with these suppliers and competes with other companies for
their production capacities. Although the Company has established relationships
with its principal suppliers and manufacturing sources, the Company's future
success will depend on its ability to maintain such relationships and to develop
relationships with new suppliers and manufacturing sources for the production
and sale of bicycles, parts and accessories. In the event of a delay or
disruption in the supply or delivery of bicycles, parts and accessories, the
Company believes that suitable alternative suppliers and carriers could be
obtained, although the transition to other suppliers and delays in the delivery
of bicycle components could result in significant production delays. Any
significant delay or disruption in the
13
<PAGE> 14
supply of bicycles, parts and accessories could have a material adverse effect
on the Company's business, results of operations and financial condition.
PRODUCT LIABILITY. Because of the nature of the Company's business, the Company
at any particular time is a defendant in a number of product liability lawsuits
and expects that this will continue to be the case in the future. These lawsuits
generally seek damages, sometimes in substantial amounts, for personal injuries
allegedly sustained as a result of defects in the Company's products. In
addition, from time to time, the Company may make recalls of certain of its
products in cooperation with the Consumer Products Safety Commission. Such
product recalls and any potential product defects related thereto may also
result in claims for personal injury. Although the Company maintains product
liability insurance, due to the uncertainty as to the nature and extent of
manufacturers' and distributors' liability for personal injuries, there is no
assurance that the product liability insurance maintained by the Company is or
will be adequate to cover product liability claims or that the applicable
insurer will be solvent at the time of any covered loss. In addition, due to
deductibles, self-retention levels and aggregate coverage amounts applicable
under the Company's insurance policies, the Company will bear responsibility for
a significant portion, if not all, of the defense costs (which include
attorneys' fees and expenses incurred in the defense of any claim), and the
related payments to satisfy any judgments associated with any claim asserted
against the Company in excess of any applicable coverage. The successful
assertion or settlement of an uninsured claim, the settlement of a significant
number of insured claims, or a claim exceeding the Company's insurance coverage
could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, there can be no assurance that
insurance will remain available, or if available, will not be prohibitively
expensive.
CURRENCY FLUCTUATIONS. A portion of the Company's sales outside of North America
are denominated in local currencies. In addition, certain components purchased
by the Company are purchased in local currencies. Accordingly, the Company is
subject to the risks associated with fluctuations in currency rates. The Company
has not in the past experienced significant losses associated with currency
exchange fluctuations, but there can be no assurance that it will not experience
such losses in the future, particularly in light of the increasing portion of
net revenues resulting from sales outside North America and through its foreign
operating subsidiaries. From time to time, the Company has entered into forward
contracts against certain foreign currencies in an effort to minimize its
exposure on certain significant foreign currency receivables and component
purchases. Such hedging activities only partially address the Company's risks in
currency exchange transactions, and there can be no assurance that this strategy
will continue to be successful. Further there can be no assurance that the
Company's results of operations will not be adversely affected by currency
fluctuations.
14
<PAGE> 15
FORWARD-LOOKING STATEMENTS. THIS QUARTERLY REPORT CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, THAT INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION, THE COMPANY MAY
FROM TIME TO TIME MAKE ORAL FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS ARE
UNCERTAIN AND MAY BE IMPACTED BY THE FOLLOWING FACTORS. IN PARTICULAR, CERTAIN
RISKS AND UNCERTAINTIES THAT MAY IMPACT THE ACCURACY OF THE FORWARD-LOOKING
STATEMENTS WITH RESPECT TO REVENUES, EXPENSES AND OPERATING RESULTS INCLUDE,
WITHOUT LIMITATION, CYCLES OF DEALER ORDERS, GENERAL ECONOMIC AND COMPETITIVE
CONDITIONS AND CHANGING CONSUMER TRENDS, TECHNOLOGICAL ADVANCES AND THE NUMBER
AND TIMING OF NEW PRODUCT INTRODUCTIONS, SHIPMENTS OF PRODUCTS AND COMPONENTRY
FROM FOREIGN SUPPLIERS, THE TIMING OF OPERATING AND ADVERTISING EXPENDITURES AND
CHANGES IN THE MIX OF PRODUCTS ORDERED BY INDEPENDENT BICYCLE DEALERS. AS A
RESULT, THE ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS.
BECAUSE OF THESE AND OTHER FACTORS THAT MAY AFFECT THE COMPANY'S OPERATING
RESULTS, PAST FINANCIAL PERFORMANCE SHOULD NOT BE CONSIDERED AN INDICATOR OF
FUTURE PERFORMANCE, AND INVESTORS SHOULD NOT USE HISTORICAL TRENDS TO ANTICIPATE
RESULTS OR TRENDS IN FUTURE PERIODS.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number
10.59 Business Credit and Security Agreement, Dated as of February 9,
1998, between Riteway Products Canada, Ltd. and Deutsche
Financial Services, a Division of Deutsche Bank Canada.
27.1 Financial data schedule
(b) Reports on Form 8-K
None
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GT BICYCLES, INC.
Date: May 15, 1998 By: /s/ Charles Cimitile
--------------------------------
Charles Cimitile
Vice President Finance
and Chief Financial
Officer
(Principal Financial
and Accounting Officer
and Duly Authorized
Officer)
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.59 Business Credit and Security Agreement, Dated as of February
9, 1998, between Riteway Products Canada, Ltd. and Deutsche
Financial Services, a Division of Deutsche Bank Canada.
27.1 Financial data schedule
<PAGE> 1
================================================================================
BUSINESS CREDIT AND SECURITY AGREEMENT
Dated as of February 9, 1998
BETWEEN
RITEWAY PRODUCTS CANADA LTD.
AND
DEUTSCHE FINANCIAL SERVICES,
A DIVISION OF DEUTSCHE BANK CANADA
================================================================================
<PAGE> 2
BUSINESS CREDIT AND SECURITY AGREEMENT
BETWEEN: DEUTSCHE FINANCIAL SERVICES, a division of Deutsche Bank Canada, a
Canadian chartered bank ("DFS")
AND: RITEWAY PRODUCTS CANADA LTD., a Corporation incorporated under the laws
of the Province of Ontario, ("Borrower").
EFFECTIVE DATE: February 12, 1998
ARTICLE 1 RECITALS
Borrower has requested that DFS provide Borrower with a credit facility for
working capital and inventory acquisition purposes.
ARTICLE 2 DEFINITIONS
2.1 Terms defined in this Agreement shall have initial capital letters.
The definitions of those terms are found below, in this Article 2, and elsewhere
in this Agreement. Such definitions are to be equally applicable to both the
singular and plural forms of the terms defined. All financial and accounting
terms used herein and not otherwise defined, shall be defined in accordance with
GAAP.
"Accessions" shall have the meaning given to the term in the PPSA and,
to the extent not included therein, shall also mean any goods which are
sold by Borrower and which are or are to be attached, installed or
affixed to Inventory.
"Accessories" means any goods which are sold by Borrower and which are
or are to be joined or incident to Inventory and shall include
Accessions.
"Account Debtor" means any Person who is or who may become obligated to
Borrower under, with respect to, or on account of an Account.
"Accounts" shall have the meaning given to that term in the PPSA and, to
the extent not included therein, shall also mean all monetary
obligations, accounts, leases, contract rights, chattel paper, choses in
action and instruments, including any Lien or other security interest
that secures or may secure any of the foregoing, plus all books,
invoices, documents and other records in any form evidencing or relating
to any of the foregoing, now owned or hereafter acquired by Borrower.
"Advance Fee" shall have the meaning set forth in Section 3.10.
"Affiliate" means: (i) any individual who is an officer or director of a
Person (collectively, the "Affiliated Individuals"); and (ii) any Person
who directly or indirectly controls, is controlled by, or is under
common control or ownership with, another Person. For the purposes of
this definition, the term "control" means the ownership of, or the power
or ability to direct or control or cause to be directed or controlled,
10% or more of (i) the voting securities of a corporation, or (ii) the
aggregate equitable interest of a partnership or joint venture.
"Agreement" means this Business Credit and Security Agreement, all
schedules and exhibits annexed hereto and all amendments made to the
foregoing.
"AMIO" shall have the meaning set forth in Section 14.2.
"Average Daily Balance" means the quotient of: (a) the sum of the
outstanding principal debt owed DFS on each day of a billing period,
divided by (b) the actual number of days in such billing period.
"Borrowing Base" means as of any date of determination, an amount equal
to the sum of (i) the Eligible Account
<PAGE> 3
Page 2
Availability plus (ii) the Eligible Inventory Availability.
"Borrowing Base Certificate" shall have the meaning set forth in Section
3.2(a).
"Business" means the business carried on by Borrower and its
Subsidiaries which at all times shall consist of a core and principal
business of the manufacture and/or distribution of bicycles, bicycle
accessories and activities ancillary thereto.
"Business Day" means any day other than Saturdays, Sundays, statutory
holidays and any other day on which DFS' Mississauga office is closed.
"Capital Expenditure" means any amount debited to the fixed asset
account on the consolidated balance sheet of Borrower and its
Subsidiaries, if any, in respect of (a) the acquisition (including,
without limitation, acquisition by entry into a capitalised lease),
construction, improvement, replacement or betterment of land, buildings,
machinery, equipment or of any other fixed assets or leaseholds, and (b)
to the extent related to and not included in clause (a), materials,
contract labour and direct labour (excluding expenditures properly
chargeable to repairs or maintenance in accordance with GAAP).
"Collateral" means, all items described in Section 6.1.
"Current Tangible Assets" shall have the meaning set forth in Section
9.3.1.
"Credit Facility" shall have the meaning set forth in Section 3.1.
"Credit Facility Fee" shall have the meaning set forth in Section 3.11.
"Daily Charge" shall have the meaning set forth in Section 3.4(b).
"Daily Contract Balance" shall have the meaning set forth in Section
3.4(b).
"Daily Rate" shall have the meaning set forth in Section 3.4(b).
"Debt" shall have the meaning set forth in Section 9.3.1.
"Default" shall have the meaning set forth in Section 10.
"Default Interest Rate" shall have the meaning set forth in Section 3.7.
"DFS Companies" shall have the meaning set forth in Section 14.1.
"Disputes" shall have the meaning set forth in Section 14.1.
"Effective Date" means the date set forth in the heading on page 1 of
this Agreement.
"Eligible Accounts" means all Accounts that are not Ineligible Accounts.
"Eligible Account Availability" shall have the meaning set forth in
Section 3.2(a).
"Eligible Inventory" means Borrower's finished goods Inventory whose
acquisition by Borrower was not financed by DFS, that is owned by
Borrower free and clear of all Liens, security interests and
encumbrances of any third parties, except for the Permitted Liens, that
is not obsolete or unmerchantable, that is in good, new and saleable
condition that conforms to the representations and warranties of Section
8.27 of this Agreement, and which DFS deems, in its sole discretion, to
be acceptable for financing. Eligible Inventory which DFS agrees is
acceptable for financing includes only GT bicycles and products or
activities ancillary thereto, but will not include Inventory held by
Borrower which has a turnover rate less than once per year.
<PAGE> 4
Page 3
"Eligible Inventory Availability" shall have the meaning set forth in
Section 3.2(b).
"Environmental Laws" means (i) all applicable federal, provincial,
municipal or local laws, statutes or ordinances, including, without
limitation, the Hazardous Products Act (Canada), as amended from time to
time and the regulations thereunder, the Canadian Environmental
Protection Act (Canada), as amended from time to time and the
regulations thereunder, the Environmental Protection Act (Ontario), as
amended from time to time and the regulations thereunder, and other
applicable laws including, without limitation, the laws of each province
or other country or political division thereof in which the Borrower
holds property or conducts business, relating to the protection of the
environment, (ii) all rules, regulations or the like promulgated under
or pursuant to any of the foregoing; and (iii) applicable orders,
decisions or the like rendered by any ministry, department or
administrative or regulatory agency.
"Environmental Lien" means a Lien in favour of any governmental entity,
ministry or agency for (a) any liability under any Environmental Law, or
(b) damages arising from or costs incurred by such governmental entity,
ministry or agency in response to a spillage, disposal, or release into
the environment of any Hazardous Material or other hazardous, toxic or
dangerous waste, substance or constituent, or other substance.
"Equipment" shall have the meaning as given to that term in the PPSA,
and, to the extent not included therein, shall also mean all equipment,
machinery, trade fixtures, furnishings, furniture, supplies, materials,
tools, machine tools, office equipment, appliances, apparatus, parts and
all attachments, replacements, substitutions, accessions, additions and
improvements to any of the foregoing.
"Excess Advances" shall have the meaning set forth in Section 5.2.
"Financial Covenants" shall have the meaning set forth in Section 9.3.1.
"GAAP" means Canadian generally accepted accounting principles,
consistently applied.
"Guarantor" means a guarantor of any of the Obligations.
"Hazardous Material" shall include, but shall not be limited to, any and
all contaminants, pollutants, dangerous substances, liquid wastes,
industrial wastes, hauled liquid wastes, toxic substances, hazardous
wastes, hazardous materials or hazardous substances, as defined in,
listed under or pursuant to any Environmental Laws.
"Indebtedness" means any sum for borrowed money or other obligation owed
directly or indirectly by Borrower or any Subsidiary to a Person which,
in accordance with GAAP, would be classified as a liability upon a
balance sheet prepared at such time and shall include, without
limitation:
(a) all guarantees and endorsements (other than
endorsements on notes, bills and cheques presented to
banks for collection or deposit in the ordinary course
of business);
(b) any liability for which Borrower has granted or
permitted to exist a Lien on any asset of Borrower even
if non-recourse;
(c) letter of credit reimbursement obligations;
(d) contingent liabilities to supply funds or services
or in any other manner to invest, directly or
indirectly, in any other Person;
(e) obligations to purchase indebtedness of, or
purchase or supply goods, wares or services for any
other Person;
(f) indemnities and other obligations to protect the
holders of any indebtedness, including indebtedness of
others, against loss or damage;
<PAGE> 5
Page 4
(g) indebtedness arising under conditional sales or
other title retention agreements;
(h) capitalised lease obligations; and
(i) obligations or liabilities as lessee under any
lease of real or personal property (other than leases
entered into with arm's length lessors for use and
occupation for normal business purposes and at fair
market rent at the time such leases are entered into).
"Indemnified Liabilities" shall have the meaning set forth in Section
12.2.
"Indemnitees" shall have the meaning set forth in Section 12.2.
"Ineligible Accounts" means: (a) Accounts created from the sale of goods
and services on terms not standard to Borrower; (b) Accounts any part of
which are unpaid more than sixty (60) days from the due date thereof;
(c) all Accounts of any Account Debtor if fifty percent (50%) or more of
the outstanding balance of such Accounts or any part thereof are unpaid
more than sixty (60) days from the due date thereof; (d) Accounts for
which the Account Debtor is an officer, director, shareholder, partner,
member, owner, employee, agent, parent, Subsidiary, or Affiliate of, or
is related to, Borrower or has common shareholders, officers, directors,
owners, partners or members with Borrower; (e) consignment sales; (f)
Accounts for which the payment is or may be conditional; (g) Accounts
for which the obligor is not a commercial or institutional entity or is
not a resident of the United States or Canada unless backed by a letter
of credit or insurance acceptable to DFS; (h) Accounts with respect to
which any warranty or representation provided in Subsection 8.19 is not
true and correct; (i) Accounts which represent goods or services
purchased for a personal, family or household purpose; (j) Accounts
which represent goods used for demonstration purposes or loaned by
Borrower to another party; (k) Accounts which are progress payment,
barter, or contra accounts; and (l) any and all other Accounts which DFS
deems to be ineligible in its reasonable discretion.
"Intangibles" shall have the meaning set forth in Section 9.3.
"Inventory" shall have the meaning given to that term in the PPSA and,
to the extent not included therein, shall also mean all of Borrower's
merchandise, materials, finished goods, work-in-process, component
materials, packaging, shipping materials, parts and other tangible
personal property, now owned or hereafter acquired and held for sale or
which contribute to the finished products or the sale, promotion,
storage and shipment thereof, whether located at facilities owned or
leased by Borrower, or in the course of transport to or from facilities
owned or leased by Borrower; but should not include any inventory held
by the Borrower for lease or rent.
"Liabilities" means all amounts in principal, interest fees and
accessories owed by Borrower to DFS pursuant to this Agreement and all
liabilities and Indebtedness of any kind and nature whatsoever now or
hereafter arising, owing, due or payable from Borrower (and/or any of
its Subsidiaries and Affiliates) to DFS, whether primary or secondary,
joint or several, direct, contingent, fixed or otherwise, secured or
unsecured, or whether arising under this Agreement, any other Loan
Document or any other agreement now or hereafter executed by Borrower
(or any of its Subsidiaries or Affiliates) and delivered to DFS.
"Liabilities" will include, without limitation, any third party claims
against Borrower (or any of its Subsidiaries or Affiliates) satisfied or
acquired by DFS.
"Lien" means any security interest, mortgage, pledge, lien,
hypothecation, judgement lien or similar legal process, charge,
encumbrance, title retention agreement or analogous instrument or device
(including, without limitation, the interest of lessors under
capitalised leases and the interest of a vendor under any conditional
sale or other title retention agreement), reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases and other title exceptions and encumbrances
affecting any of Borrower's property.
"Loan" means any advance made to or for the benefit of Borrower pursuant
to this Agreement.
"Loan Documents" means all documents executed by Borrower pursuant to
any financial accommodation between Borrower and DFS and all documents
entered into in connection with the transaction herein contemplated. The
term "Loan Documents" includes, but is not limited to, this Agreement,
all financing statements, all pledges, mortgages, deeds of trust,
leasehold mortgages, security agreements, guarantees,
<PAGE> 6
Page 5
assignments, subordination agreements, and any future or additional
documents or writings executed under the terms of this Agreement or any
amendments or modifications hereto.
"Monthly Reports" shall have the meaning given in Section 3.13(b).
"NSF Cheque" shall have the meaning given in Section 3.5.
"OAA" shall have the meaning set forth in Section 14. 5.
"Obligations" means any and all liabilities and Indebtedness of any kind
and nature whatsoever now or hereafter arising, owing, due or payable
from Borrower (and/or any of its Subsidiaries and Affiliates) to DFS,
whether primary or secondary, joint or several, direct, contingent,
fixed or otherwise, secured or unsecured, or whether arising under this
Agreement, any other Loan Document or any other agreement now or
hereafter executed by Borrower (or any of its Subsidiaries or
Affiliates) and delivered to DFS. Obligations will include, without
limitation, any third party claims against Borrower (or any of its
Subsidiaries or Affiliates) satisfied or acquired by DFS. Obligations
will also include, without limitation, all obligations of Borrower to
pay to DFS: (a) any and all sums reasonably advanced by DFS to preserve
or protect the Collateral or the value of the Collateral or to preserve,
protect, or perfect DFS' security interests in the Collateral; (b) in
the event of any proceeding to enforce the collection of the Obligations
after a Default, the reasonable expenses of retaking, holding, preparing
for sale, selling or otherwise disposing of or realising on the
Collateral, or expenses of any exercise by DFS of its rights, together
with reasonable legal fees, expenses of collection and court costs, as
provided in the Loan Documents; and (c) any other indebtedness or
liability of Borrower to DFS, whether direct or indirect, absolute or
contingent, now or hereafter arising.
"OHSA Law" means (i) all applicable federal, provincial, municipal or
local laws, statutes or ordinances, including, without limitation, the
Occupational Health and Safety Act (Ontario), as amended from time to
time and the regulations thereunder, and other applicable laws
including, without limitation, the laws of each province or other
country or political division thereof in which the Borrower holds
property or conducts business, relating to employee health and/or
safety matters, (ii) all rules, regulations or the like promulgated
under or pursuant to any of the foregoing; and (iii) applicable orders,
decisions or the like rendered by any ministry, department or
administrative or regulatory agency.
"Orderly Liquidation Value: shall have the meaning set forth in Section
3.14(b).
"Other Reports" shall have the meaning set forth in Section 3.13(c).
"Permitted Liens" means: (a) Liens for taxes, assessments or other
governmental charges or levies not yet delinquent or which are being
contested in good faith by appropriate action and as to which adequate
reserves shall have been set aside in conformity with GAAP and which
are, in addition, satisfactory to DFS in its reasonable discretion; (b)
Liens of mechanics, construction contractors, materialmen, suppliers,
landlords, warehousemen, repairmen, carriers and similar Liens arising
in the future in the ordinary course of business for sums not yet
delinquent, or being contested in good faith if a reserve or other
appropriate provision in accordance with GAAP shall have been made
therefor and which are, in addition, satisfactory to DFS in its
reasonable discretion; (c) statutory Liens incurred in the ordinary
course of business in connection with workers' compensation, employment
insurance, Canada Pension Plan, and similar items for sums not yet
delinquent or being contested in good faith, if a reserve or other
appropriate provision in accordance with GAAP shall have been made
therefor and which are, in addition, satisfactory to DFS in its
reasonable discretion; (d) lessor's Liens arising from operating leases
entered into in the ordinary course of business; (e) Liens arising from
legal proceedings, so long as such proceedings are being contested in
good faith by appropriate proceedings, appropriate reserves have been
established therefor in accordance with GAAP and which are, in addition,
satisfactory to DFS in its reasonable discretion, and so long as
execution is stayed and bonded on appeal on all judgements resulting
from any such proceedings; (f) Purchase Money Liens securing Permitted
Purchase Money Indebtedness which is not incurred in violation of
Section 9.2.9; and (g) Liens in favour of DFS granted hereunder.
"Permitted Purchase Money Indebtedness" means Purchase Money
Indebtedness of Borrower incurred after the
<PAGE> 7
Page 6
date hereof in compliance with Section 9.2.9 which is secured by a
Purchase Money Lien and which, when aggregated with the principal amount
of all other such Indebtedness and the capitalised lease Obligations of
Borrower at the time outstanding, does not exceed $100,000.00. For the
purposes of this definition, the principal amount of any Purchase Money
Indebtedness consisting of capitalised leases shall be computed as a
capitalised lease Obligation.
"Person" means an individual, a partnership, a joint venture, a
corporation, a trust, any other legal entity, an unincorporated
organisation or association, or a government or any department, agency
or political subdivision thereof.
"PPSA" means, as applicable, the Personal Property Security Act as then
in effect in the Provinces of Ontario, British Columbia and Manitoba,
depending upon the location or situs of the Collateral, and any
successor legislation, together with any regulations thereunder, in each
case as in effect or amended from time to time. References to sections
of the PPSA shall be construed to also refer to any successor sections.
"Prime Rate" means a fluctuating interest rate per annum equal to the
prime rate of interest established, announced publicly and reported to
the Bank of Canada from time to time (whether or not charged in each
instance) by Royal Bank of Canada (or any successor thereof) as its
prime rate of interest charged to its Canadian customers of varying
degrees of credit worthiness for Canadian Dollar loans made by it in
Canada. The Prime Rate so established, announced and reported on the
last day of each month shall, for the purposes of this Agreement, become
effective, without notice to Borrower, on the last day of that month and
shall be the Prime Rate hereunder applicable for each day during the
following month. If the bank listed above discontinues the practice of
announcing or publishing a prime rate during the term of this Agreement,
then DFS may, in its reasonable judgement, designate a comparable bank
and/or publicly announced rate to be thereinafter used as a basis for
determining Prime Rate. Borrower acknowledges that the bank listed above
may extend credit at rates of interest less than its announced prime
rate, and that such practice shall not affect in any way the provisions
hereof.
"Purchase Money Indebtedness" means and includes:
(i) Indebtedness for the payment of all or any part of the
purchase price of any fixed assets,
(ii) any Indebtedness incurred at the time of or within ten (10)
days prior to or after the acquisition of any fixed assets for
the purpose of financing all or any part of the purchase price
thereof, and
(iii) any renewals, extensions or refinancings thereof, but not
any increases in the principal amounts thereof outstanding at
the time.
"Purchase Money Lien" means a Lien upon fixed assets which secures
Purchase Money Indebtedness, but only if such Lien shall at all times be
confined solely to the fixed assets the purchase price of which was
financed through the incurrence of the Purchase Money Indebtedness
secured by such Lien.
"Rentals" shall have the meaning set forth in Section 9.2.18.
"Standby Fee" shall have the meaning set forth in Section 3.12.
"Subordinated Debt" shall have the meaning set forth in Section 9.3.1.
"Subsidiaries" means any corporation in which Borrower owns or controls
greater than 50% of the voting securities, or any partnership or joint
venture in which Borrower owns or controls greater than 50% of the
aggregate equitable interest. The term "Subsidiary" means any one of the
Subsidiaries.
"Tangible Net Worth" shall have the meaning set forth in Section 9.3.1.
"Total Credit Limit" shall have the meaning set forth in Section 3.1.
"Total Working Capital Credit Limit" shall have the meaning set forth in
Section 3.2.
<PAGE> 8
Page 7
"Value" means the cost to Borrower of Borrower's Eligible Inventory
(exclusive of discounts, rebates, credits (including, without limitation
price protection credits), incentive payments and all other general
intangibles relating to such Eligible Inventory), as determined in
accordance with GAAP.
"Weekly Report" shall have the meaning set forth in Section 3.13(a).
"Working Capital Loan" shall have the meaning set forth in Section 3.2.
2.2 Currency. Unless otherwise specifically stated, all references
to money, currency or dollar amounts in this Agreement shall refer to lawful
money of Canada expressed in Canadian Dollars.
ARTICLE 3 CREDIT FACILITY
3.1 Total Credit Facility. In consideration of Borrower's payment
and performance of its Obligations and subject to the terms and conditions
contained in this Agreement, DFS agrees to provide, and Borrower agrees to
accept, an aggregate revolving credit facility (the "Credit Facility") of up to
NINE MILLION DOLLARS ($9,000,000.00) (the "Total Credit Limit") at any one time
outstanding. The Credit Facility shall be available in the form of Working
Capital Loans. No Loans need be made by DFS to or on behalf of Borrower if
Borrower is in Default or if there exists any other event or occurrence which,
with the passage of time, or notice, or both, would be a Default. This is an
agreement regarding the extension of credit, and not the provision of goods or
services.
3.2 Working Capital Loans. Subject to the terms of this Agreement,
DFS agrees, for so long as no Default exists, to provide to Borrower, and
Borrower agrees to accept, working capital financing (each advance being a
"Working Capital Loan") on Eligible Accounts and Eligible Inventory in the
maximum aggregate unpaid principal amount at any time equal to the lesser of (i)
the Borrowing Base and (ii) the Total Credit Limit (the "Total Working Capital
Credit Limit"). A request for a Working Capital Loan shall be made, or shall be
deemed to be made, as provided in Section 5.1 hereof. Amounts borrowed pursuant
to this Section 3.2 may be repaid and, subject to the terms and conditions of
this Agreement, reborrowed at any time during the term of this Agreement.
(a) Eligible Accounts. On receipt of each Borrowing Base
Certificate in form and substance acceptable to DFS (the "Borrowing Base
Certificate"), DFS will credit Borrower with up to EIGHTY-FIVE percent
(85%) of the net amount of the Eligible Accounts, which are, absent
error or other discrepancy, listed in such Borrowing Base Certificate
("Eligible Account Availability"). For purposes hereof, the net amount
of Eligible Accounts at any time shall be the face amount of such
Eligible Accounts less any and all returns, discounts (which may, at
DFS' option, be calculated on shortest terms), credits, rebates,
allowances, or taxes (including federal, provincial or municipal Goods
and Services Tax, sales tax, value-added tax or excise tax) of any
nature at any time issued, owing claimed by Account Debtors, granted,
outstanding, or payable in connection with such Accounts at such time.
Borrower acknowledges that the percentage contained in this Subsection
(a) is subject to reduction as provided in Section 3.14.
(b) Eligible Inventory. On receipt of each Borrowing
Base Certificate, DFS will credit Borrower with up to EIGHTY percent
(80%) of the Value of Eligible Inventory which is, absent error or other
discrepancy, listed in such Borrowing Base Certificate ("Eligible
Inventory Availability"). Borrower acknowledges that the percentage
contained in this Subsection (b) is subject to reduction as provided in
Section 3.14.
(c) Interest. Borrower hereby agrees to pay interest to
DFS on the Daily Contract Balance owed under Borrower's Working Capital
Loans at the rate per annum that is one plus one quarter percentage
points (1.25%) per annum above the Prime Rate; and
3.3 Mandatory Prepayment. If at any time and for any reason the
aggregate amount of outstanding Working Capital Loans exceeds the Borrowing
Base, Borrower will, immediately upon demand, repay an amount of the Working
Capital Loans made to it by DFS hereunder equal to such excess. In addition,
Borrower shall immediately pay DFS whatever sums may be necessary from time to
time to remain in compliance with the Total Credit Limit, the Total Working
Capital Credit Limit, the Eligible Account Availability and the Eligible
Inventory Availability, including,
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without limitation, as a result of (i) any Collateral no longer qualifying as an
Eligible Account or Eligible Inventory, (ii) any change in the Value of any
Eligible Inventory, or in the amount of any Eligible Account, or (iii) the
establishment of a reserve or reduction in the advance rate set forth in
Sections (a) and (b) as provided in Section 3.14.
3.4 Calculation of Charges.
(a) Working Capital Loans. Borrower will pay DFS
interest on the Daily Contract Balance (as defined below) at the
applicable rate shown in Section 3.2(c). The interest attributable to
such rate will: (i) be computed based on a 360 day year; (ii) be
calculated with respect to each day by multiplying the Daily Rate (as
defined below) by the Daily Contract Balance; and (iii) accrue from the
date of a Working Capital Loan advanced to or for the benefit of
Borrower, until DFS receives full payment of the principal debt Borrower
owes DFS in good funds and DFS applies such payment to Borrower's
principal debt in accordance with the terms of this Agreement. The
interest rate to be charged expressed as an annual rate for the purposes
of the Interest Act is equivalent to the applicable rate determined
under Section 3.2(c) multiplied by the actual number of days in the
calendar year in which the same is to be ascertained and divided by
three hundred and sixty (360).
(b) Definitions; General. The "Daily Charge" is the
product of the Daily Rate multiplied by the Average Daily Balance. The
"Daily Rate" is the quotient of the applicable annual rate provided
herein divided by 360. The "Daily Contract Balance" is the amount of
outstanding principal debt which Borrower owes DFS on the Working
Capital Loans at the end of each day after DFS has credited payments
which it has received on the Working Capital Loans.
3.5 Billing Statement. DFS will send Borrower a monthly billing
statement identifying all charges due on Borrower's account with DFS. The
charges specified on each billing statement will be: (a) due and payable in full
immediately on receipt; and (b) an account stated, unless DFS receives
Borrower's written objection within fifteen (15) days after it is mailed to the
Borrower. If DFS does not receive, by the 25th day of any given month, payment
of all charges accrued to the Borrower's account with DFS during the immediately
preceding month, Borrower will (to the extent allowed by law) pay DFS a late fee
("Late Fee") equal to the greater of Five Dollars ($5.00) or Five percent (5%)
of the amount of such charges (payment of the Late Fee does not waive the
Default caused by late payment). Borrower will also pay DFS $100 for each cheque
drawn on any of Borrower's or Guarantor's bank accounts which is given to DFS by
Borrower or any Guarantor and that is returned unpaid for insufficient funds (an
"NSF Cheque") (such $100 payment repays DFS' estimated administrative costs; it
does not waive the default caused by the NSF Cheque). DFS may adjust the billing
statement at any time to conform to applicable law and this Agreement.
3.6 Loan Proceeds. The parties intend that all indebtedness incurred
hereunder shall be governed exclusively by the terms of this Agreement and the
other Loan Documents, and shall not, unless requested by DFS, be evidenced by
notes or other evidences of indebtedness. Upon any such request, Borrower will
immediately execute and deliver any such note or other evidence reasonably
requested by DFS. Any fees, charges or expenses charged to DFS by any bank for
payments made by DFS at Borrower's request shall be payable by Borrower. All
advances and other obligations of Borrower made hereunder will constitute a
single obligation.
3.7 Default Interest Rate. If a Default occurs, and unless and until
cured, DFS may without prior demand, raise the rate of interest accruing on the
disbursed unpaid principal balance of any Loan by two percentage points (2%)
above the rate of interest otherwise applicable (the "Default Interest Rate"),
whether or not DFS elects to accelerate the unpaid principal balances as a
result of a Default.
3.8 Interest Rate After Certain Events. If a judgement is entered in
favour of DFS or its assigns against Borrower for sums due under any of the
Obligations, as applicable, the amount of the judgement entered (which may
include principal, interest, reasonable legal fees and costs) shall bear
interest at the judgement rate as permitted under applicable law as of the date
of entry of the judgement. In such event and as permitted by applicable law, the
parties hereby state their intention that all Obligations of Borrower described
in clauses (a) and (b) of the definition thereof shall bear interest at the
Default Interest Rate.
3.9 Verification Rights of DFS. DFS may, without notice to Borrower and
at any time or times hereafter verify the validity, amount or any other matter
relating to any Account by mail, telephone or other means, in the name of
Borrower or DFS; provided however, that so long as no Default has occurred and
is continuing, DFS shall
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endeavour to exercise such rights by using (with respect to Account Debtors) a
fictitious or trade name of DFS; provided that any failure on the part of DFS to
use such a fictitious or trade name shall not constitute a breach hereof.
3.10 Intentionally Deleted.
3.11 Credit Facility Fee. Borrower agrees to pay DFS an annual credit
facility fee, payable in advance, on the execution of this Agreement, and on
each anniversary thereof through the term of this Agreement, in an amount equal
to Five Thousand Four Hundred Dollars ($5,400.00). Once received by DFS, no
Credit Facility Fee shall be refundable by DFS for any reason.
3.12 Standby Fee. Borrower agrees to pay DFS a fee equal to one-eighth
of one percent (0.125%) per annum of the aggregate undrawn portion of the first
Six Million Dollars ($6,000,000.00) of the Total Working Capital Credit Limit,
such fee to be calculated monthly in arrears on the daily undrawn portion, if
any, of the first Six Million Dollars ($6,000,000.00) of the Total Working
Capital Credit Limit to accrue from the Effective Date to and including the last
day of each month and to be paid on or before the fifth Business Day of the next
succeeding month (the "Standby Fee"). Once received by DFS, no Standby Fee shall
be refundable by DFS for any reason.
3.13 Reports.
(a) Weekly Reports. In addition to Borrower's other
obligations set forth in this Agreement, Borrower agrees to provide DFS
with a weekly report in such form as is satisfactory to DFS, including
supporting information regarding, but not limited to (i) Borrowing Base
Certificate; (ii) assignment forms; (iii) sales journal; (iv) ageing of
accounts; and (v) cash receipts journal (the "Weekly Report"). The
Weekly Report will be received by DFS each Monday after the date of the
Agreement by noon (in the event that DFS is not open for business on a
Monday, then the Weekly Report will be due by noon of the next Business
Day that DFS is open for business).
(b) Monthly Reports. In addition to Borrower's other
obligations set forth in this Agreement, Borrower agrees to provide to
DFS by the 10th calendar day of each month, in each case as of the last
day of the immediately prior month, each of the following: (i) a
detailed Inventory ageing report; (ii) a detailed ageing of Accounts
report; (iii) a detailed ageing of Borrower's accounts payable report;
(iv) Borrower's interim financing statements; and (v) a covenant
compliance certificate (the "Monthly Reports").
(c) Other Reports. In addition to Borrower's other
obligations set forth in this Agreement, Borrower agrees to provide DFS
within five (5) Business Days after each request by DFS, or sooner if
requested by DFS, any other report or information requested by DFS (the
"Other Reports").
(d) Accuracy of Reports. The Weekly Report, the Monthly
Reports and the Other Reports will be true and correct in all material
respects. Borrower acknowledges DFS' reliance on the truthfulness and
accuracy of each Weekly Report, Monthly Reports and the Other Reports.
3.14 Establishment of Reserves and Appraisals.
(a) Reserves. Notwithstanding the foregoing provisions of Section
3.2, DFS shall have the right to establish reasonable reserves in such
amounts, and with respect to such matters, as DFS shall deem necessary
or appropriate, against the amount of Loans which Borrower may otherwise
request under Section 3.2, including, without limitation, with respect
to (a) price adjustments, damages, unearned discounts, returned products
or other matters for which credit memoranda are issued in the ordinary
course of Borrower's business; (b) shrinkage, spoilage and obsolescence
of Inventory; (c) slow moving Inventory; (d) other sums chargeable
against Borrower as Loans under any section of this Agreement; and (e)
such other matters, events, conditions or contingencies as to which DFS,
in its reasonable credit judgment, determines reserves should be
established from time to time hereunder. Borrower may engage an
independent third party evaluator acceptable to DFS, at Borrower's sole
cost and expense, to determine whether reserves taken under this
paragraph are reasonable or not. If such evaluator determines that such
reserves are not reasonable, then Borrower shall have the option,
exercisable up to thirty (30) days after such determination, of
terminating this Agreement forthwith without necessity for payment to
DFS of the amounts set out in Section 4.1 and this shall be Borrower's
sole right or remedy in relation thereto.
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(b) Appraisals. Borrower acknowledges that DFS will obtain from an
independent third party appraiser selected by DFS, or DFS may conduct
itself, no less frequently than quarterly, an appraisal of the orderly
liquidation value of the Eligible Inventory and Eligible Accounts. For
purposes of this Agreement "Orderly Liquidation Value" will be based
upon a sale or other realisation within a 120 day period. Borrower
further acknowledges and agrees that DFS will have the right to decrease
the advance rates set forth in Sections 3.2(a) and (b) to give effect to
its rights under this Section 3.14 , including, without limitation, to
reflect the Orderly Liquidation Value of the Eligible Inventory and
Eligible Accounts, as determination of any such appraisal. Borrower
further acknowledges and agrees that no increase in the advance rates
set forth in Sections 3.2(a) and (b) will be made as a result of such
appraisal unless agreed to in writing by DFS.
3.15 Capital Adequacy.
(a) In the event that DFS shall have determined that the adoption
of any law, rule or regulation regarding capital adequacy, or any change
therein or in the interpretation or application thereof or compliance by
DFS with any request or directive regarding capital adequacy (whether or
not having the force of law) from any central bank or governmental
authority, does or shall have the effect of reducing the rate of return
on DFS' capital as a consequence of its obligations hereunder to a level
below that which DFS could have achieved but for such adoption, change
or compliance (taking into consideration DFS' policies with respect to
capital adequacy) by an amount deemed by DFS, in its sole discretion, to
be material, then from time to time, after submission by DFS to Borrower
of a written demand therefor, Borrower shall pay to DFS thereafter, but
not retroactively, such additional amount or amounts as will compensate
DFS for such reduction.
(b) A certificate of DFS claiming entitlement to payment as set
forth in Section 3.15(a) above shall be conclusive in the absence of
manifest error. Such certificate shall set forth the nature of the
occurrence giving rise to such payment, the additional amount or amounts
to be paid to DFS, and the method by which such amounts were determined.
In determining such amount, DFS may use any reasonable averaging and
attribution method.
3.16 Collections. Borrower will direct all Account Debtors to make all
remittances to, and Borrower will deposit all collections on Accounts received
directly by Borrower into, an account or accounts designated by DFS. All funds
in such accounts immediately shall become the property of DFS and Borrower shall
obtain the agreement of such banks to waive any offset rights against the funds
so deposited. Borrower agrees to execute and deliver, on or before the Effective
Date, the documents, certificates and agreements substantially in form and
substance as annexed hereto as Exhibit 3.16 in order to establish one or more
"lock box account(s)" and, from time to time, such other documents and
agreements as may reasonably be necessary to give effect to the foregoing. The
Borrower agrees to pay to DFS, on a monthly basis when invoiced therefor, the
costs of maintaining such "lock box account(s)" with a chartered Canadian bank
acceptable to DFS. Until delivery to such "lock box account(s)", Borrower will
keep such remittances separate and apart from Borrower's own funds so that they
are capable of identification as the property of DFS and will be held in trust
for DFS. DFS may upon Default notify any Account Debtor of the assignment of
Accounts and collect the same. All proceeds received or collected by DFS with
respect to Accounts, and reserves and other property of Borrower in possession
of DFS at any time or times hereafter, may be held by DFS without interest to
Borrower until all Obligations are paid in full or applied by DFS on account of
the Obligations. DFS may release to Borrower such portions of such reserves and
proceeds as DFS may, in its sole and unfettered discretion, determine.
3.17 Advancements. If Borrower fails to (a) perform any of the
affirmative covenants contained herein, (b) protect or preserve the Collateral
or (c) protect or preserve the status and priority of the Liens and security
interest of DFS in the Collateral, DFS may make advances on behalf of Borrower
for the purpose of performing those obligations. DFS shall give Borrower notice
prior to making any such advances. All sums so advanced will immediately upon
advancement become secured by the security interests created by this Agreement
and will be subject to the terms and provisions of this Agreement and all of the
Loan Documents. DFS may add all sums so advanced, plus any expenses or costs
incurred by DFS, including reasonable legal fees, as outstanding Loans as DFS
may designate in its sole discretion. The provisions of this Section will not be
construed to prevent the institution of rights and remedies of DFS upon the
occurrence of a Default. Any provisions in this Agreement to the contrary
notwithstanding, the authorisations contained in this Section will impose no
duty or obligation on DFS to perform any action or make any advancement on
behalf of Borrower and are for the sole benefit and protection of DFS.
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3.18 Continuing Requirements - Accounts. Borrower will: (a) if from time
to time required by DFS, immediately upon their creation, deliver to DFS copies
of all invoices, delivery evidences and other such documents relating to each
Account; (b) not permit or agree to any extension, compromise or settlement or
make any change to any Account; (c) affix appropriate endorsements or
assignments upon all such items of payment and proceeds so that the same may be
properly deposited by DFS to DFS' account; (d) immediately notify DFS in writing
which Accounts may be deemed Ineligible Accounts; and (e) mark all chattel paper
and instruments now owned or hereafter acquired by it to show that the same are
subject to DFS' security interest and immediately thereafter deliver such
chattel paper and instruments to DFS with appropriate endorsements and
assignments to DFS.
ARTICLE 4 TERM OF AGREEMENT
4.1 Termination. This Agreement will continue in full force and effect
and be non-cancellable for two (2) years from the Effective Date (except that it
may be terminated by DFS in the exercise of its rights and remedies upon Default
by Borrower) and shall be subject to automatic successive one year renewal
periods thereafter unless at least 180 days prior to the expiration of such
initial period or any renewal period either, either party shall have notified in
writing the other party of its intention not to renew this Agreement; provided
however, that Borrower may terminate this Agreement upon (a) at least 90 days
written notice to DFS; (b) payment to DFS of all Obligations; and (c) subject to
Section 3.14(a), payment of an amount as follows:
<TABLE>
<CAPTION>
Date of
Termination Termination Payment
----------- -------------------
<S> <C>
Prior to the first $90,000.00
anniversary of the
Effective Date
After the first anniversary $45,000.00
of the Effective Date
</TABLE>
This sum will also be paid by Borrower if this Agreement is terminated on
account of Borrower's Default. Termination on any date other than the
anniversary date will not entitle Borrower to a refund of any Credit Facility
Fee. DFS shall be entitled to payment of all Credit Facility Fees upon default
by Borrower which would have been payable but for such early termination. This
sum represents liquidated damages for the loss of the bargain and is not a
penalty and the same is hereby acknowledged by the Borrower. Any such written
notice of termination delivered by Borrower to DFS shall be irrevocable. It is
understood that Borrower may elect to terminate this Agreement in its entirety
only, no section or lending facility may be terminated singly.
4.2 Effect of Termination. Borrower will not be relieved from any
Obligations to DFS arising out of DFS' advances or commitments made before the
effective termination date of this Agreement. DFS will retain all of its rights,
interests and remedies hereunder until Borrower has paid all of Borrower's
Obligations to DFS. All waivers set forth within this Agreement will survive any
termination of this Agreement.
ARTICLE 5 BORROWING AND REPAYMENT PROCEDURES
5.1 Borrowing Procedures.
(a) Generally. A request for a Loan shall be made, or shall be
deemed to be made, in the following manner: (i) Borrower may give DFS
written notice of its intention to borrow, in which notice Borrower
shall specify the amount of the proposed borrowing and the proposed
borrowing date; (ii) the becoming due of any amount required to be paid
under this Agreement as interest shall be deemed irrevocably to be a
request for a Loan on the due date in the amount required to pay such
interest; and (iii) the becoming due of any other Obligations shall be
deemed irrevocably to be a request for a Loan on the due date in the
amount then so due.
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For purposes of subpart (i) above, Borrower agrees that DFS may rely and
act upon any request for a Loan from any individual who DFS, absent
gross negligence or wilful misconduct, believes in good faith to be an
authorized representative of Borrower identified on Exhibit 7.1 (l).
Unless otherwise agreed by DFS and Borrower, the proceeds of all Loans
requested by Borrower and made by DFS hereunder shall be made to a
deposit account designated by Borrower in writing to DFS and maintained
by Borrower for that purpose.
(b) Conditions Precedent to Each Loan. Without limiting the
applicability of the conditions precedent set forth in Section 7 below
to DFS' obligation to make any Loan, the obligation of DFS to make any
Loan shall be subject to the further conditions precedent that, on the
date of each such Loan:
(i) The following statements shall be true: (A) the representations
and warranties contained in Section 8 hereof are correct on and as
of the date of such Loan as though made on and as of such date, and
(B) there exists no Default or any other event or occurrence which,
with the passage of time, or notice, or both, would be a Default,
nor would any Default or any such other event result from the
making of the Loan requested by Borrower;
(ii) Borrower shall have signed and sent to DFS, if DFS so
requests, a request for advance, setting forth in writing the
amount of the Loan requested; provided however, that the foregoing
condition precedent shall not prevent DFS, if it so elects in its
sole discretion, from making a Loan pursuant to Borrower's
non-written request therefor;
(iii) DFS shall have received a completed Borrowing Base
Certificate, signed by the Borrower, and dated not more than one
(1) Business Day prior to the date of Borrower's request for such
Loan; and
(iv) DFS hall have received such other opinions or documents as it
may reasonably request.
Borrower agrees that the making of a request by Borrower for a loan,
shall constitute a certification by Borrower and the person(s)
executing or giving the same that all representations and warranties of
Borrower herein are true as of the date thereof (except to the extent
the same expressly relates solely to any earlier date) and that all
required conditions to the making of the loan have been met.
5.2 Excess Advances. DFS, in its sole and absolute discretion, may elect
to permit the total unpaid balance of Loans to exceed the Total Credit Limit
("Excess Advances"), and no such event or occurrence shall cause or constitute a
waiver by DFS of its right to demand payment of all or any part of the Loans at
any time within the terms of this Agreement or to refuse, in its sole and
absolute discretion, to make such further Loans. Any such Excess Advances shall
be payable immediately upon demand therefor, unless otherwise specifically
agreed to by DFS, and shall bear interest at the Default Interest Rate.
5.3 All Loans One Obligation. All Obligations of Borrower to DFS under
this Agreement and all other agreements between Borrower and DFS shall
constitute one obligation to DFS secured by the security interest granted in
this Agreement, and by all other Liens heretofore, now, or at any time or times
hereafter granted by Borrower in favour of DFS. All of the rights of DFS set
forth in this Agreement shall apply to any modification of or supplement to this
Agreement, or the schedules and exhibits hereto, unless otherwise agreed in
writing.
5.4 Payments of Principal and Interest. All payments hereunder by
Borrower shall be made without set-off or counterclaim and shall be made to DFS
by 2:00 p.m. Eastern standard time on the date due at its office(s) responsible
for Borrower's loan account, or at such other place which DFS may designate to
Borrower in writing. Any payments received after such time shall be deemed
received on the next Business Day. Whenever any payment to be made hereunder
shall be stated to be due on a date other than a Business Day, such payment may
be made on the next succeeding Business Day, and such extension of time shall be
included in the computation of payment of interest or any fees.
5.5 Collection Days. All payments and all amounts received hereunder
will be credited by DFS to Borrower's account one day after good funds have been
deposited into DFS' general operating account.
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ARTICLE 6 SECURITY FOR THE OBLIGATIONS
6.1 Grant of Security Interest. To secure payment of all of Borrower's
current and future Obligations and to secure Borrower's performance of all of
the provisions under this Agreement and any other agreements entered into
between DFS and Borrower, Borrower grants to and in favour of DFS a security
interest in all of Borrower's personal property, of every type and description
and wherever situate, including but not limited to the Borrower's businesses,
undertakings, Inventory, Equipment, fixtures, goods, Accounts, money, contract
rights, chattel paper, documents of title, security agreements, instruments,
securities, deposit accounts, reserves, documents and intangibles; and all
judgements, claims, insurance policies, and payments owed or made to Borrower
thereon; all whether now owned or hereafter acquired, all attachments,
Accessories, Accessions, returns, repossessions, exchanges, substitutions and
replacements thereto, and all proceeds thereof. All such assets are collectively
referred to herein as the "Collateral." All such terms for which meanings are
provided in the PPSA are used herein with such meanings. All Collateral and all
proceeds thereof, will be held in trust by Borrower for DFS, with such proceeds
being payable in accordance with Sections 3.3 and 3.5 hereof. Borrower covenants
with DFS that DFS may realise upon all or part of any Collateral in any order it
desires and any realisation by any means upon any Collateral will not bar
realisation upon any other collateral. Borrower's liability under this Agreement
is direct and unconditional and will not be affected by the release or
nonperfection of any security interest granted hereunder.
6.2 Future Advances. DFS' security interests shall secure all current
and all future advances to Borrower made by DFS under the Loan Documents.
6.3 Financing Statements. Borrower shall execute and deliver to DFS for
the benefit of DFS such financing statements, certificates of title and original
documents as may be required by DFS with respect to DFS' security interests. DFS
may register or file such financing statements, financing change statements and
other documents or notices required to perfect and keep perfected or otherwise
give effect to DFS' security interests.
6.4 Guarantees. Borrower shall also cause GT Bicycles, Inc. to execute
and deliver an unconditional, unlimited corporate guarantee of the Obligations
substantially in form and substance as attached as Exhibit 6.4.
6.5 Further Assurances. Borrower will and will cause any Guarantors to
execute and deliver to DFS, at such time or times as DFS may request, all
financing statements, security agreements, assignments, certificates,
affidavits, reports, schedules, and other documents and instruments that DFS may
deem necessary to perfect and maintain perfected, in first priority position,
DFS' security interests, including without limitation its security interests in
the Collateral, and to fully consummate the transactions contemplated under all
Loan Documents.
6.6 Intellectual Property. Borrower will execute and deliver a
collateral assignment of patents, copyrights and trademarks in form and
substance reasonably acceptable to DFS granting DFS a first priority security
interest in and to the items listed in Exhibit 8.21 in form acceptable for
recordation.
ARTICLE 7 CONDITIONS PRECEDENT
All duties and obligations of DFS under the Loan Documents on the Effective
Date, and at all times during the term of this Agreement, are specifically
subject to the full and continued satisfaction by Borrower of the conditions
precedent set forth below.
7.1 Conditions Precedent. The following conditions must be satisfied as
of the Effective Date:
(a) DFS' Counsel. DFS' counsel must approve of all matters
pertaining to (i) title to the Collateral; (ii) the form, substance and
due execution of all Loan Documents; (iii) Borrower's organisational
documents; and (iv) all other legal matters.
(b) Material Change. There must not have been any material adverse
change, between September 1, 1997 and the Effective Date, in the
condition of Borrower, the condition of the Business, the value and
condition of the Collateral, the structure of Borrower other than as
contemplated herein, or in the financial information, reviews, audits,
appraisals and the like obtained by DFS.
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(c) Perfected Liens. DFS shall have a perfected first priority Lien
and security interest in the Collateral, subject only to the Permitted
Liens.
(d) Insurance. Borrower shall provide DFS with certificates of
insurance evidencing that Borrower has obtained the insurance as
required in Section 9.1.2.
(e) Laws. Borrower and its Subsidiaries shall be in compliance with
all applicable laws and governmental regulations, including, but not
limited to, all Environmental Laws and any OHSA Law, the failure to
comply with which would have a material adverse effect on Borrower, its
Subsidiaries or the Business.
(f) Certificate of Good Standing. A certificate of good standing
for Borrower (or other similar certificate) must be delivered to DFS,
from the appropriate governmental authority of Borrower's jurisdiction
of incorporation and other jurisdictions in which Borrower does
business, dated not earlier than 30 days prior to the Effective Date.
(g) Opinion of Borrower's Counsel. DFS must receive a written
opinion from counsel for Borrower, the Subsidiaries and each corporate
Guarantor, dated the Effective Date, and addressed to and for the
benefit of DFS, in form and substance satisfactory to DFS.
(h) PPSA Searches. DFS must receive, not more than 5 days before
the Effective Date, a certificate from a provider of financing statement
searches acceptable to DFS which identifies all financing statements of
public record that pertain to the Collateral, including, without
limitation, DFS financing statement reflecting the security interest
granted hereunder.
(i) Other Documents. Such other documents, submissions, insurance
policies and other matters as reasonably requested by DFS relating to
the results of DFS' due diligence or Borrower's representations made
hereunder or otherwise to the transactions herein contemplated.
(j) President's Certificate. In the form attached hereto as Exhibit
7.1(j).
(k) Articles of Incorporation. A certified copy of the Articles of
Incorporation, Continuance or Amalgamation, whichever is applicable,
By-Laws and the resolutions of the directors of Borrower authorising the
transactions contemplated by this Agreement.
(l) Secretary's Certificate of Resolution and Incumbency. In the
form attached hereto as Exhibit 7.1(l).
(m) Pre-closing Expenses. Borrower shall pay to DFS all fees and
expenses required under this Loan Agreement that are due on or before
the Effective Date, not to exceed the sum of eighteen thousand five
hundred dollars ($18,500.00).
(n) Pre-closing Reviews and Appraisals. DFS must complete reviews
and appraisals with satisfactory results of Borrower's Inventory and
Accounts. All costs and expenses for such pre-closing reviews and
appraisals will be included within the pre-closing expenses.
ARTICLE 8 REPRESENTATIONS AND WARRANTIES
To induce DFS to enter into this Agreement, Borrower makes the representations
and warranties set forth below, all of which will remain true in all material
respects during the term of this Agreement. Borrower acknowledges DFS'
justifiable right to rely upon the representations and warranties set forth
below.
8.1 Financial Statements. Borrower's internally prepared opening balance
sheet dated September 1, 1997, a copy of which has been previously submitted to
DFS, has been prepared in conformity with GAAP and presents fairly the financial
condition of Borrower and its consolidated Subsidiaries as at such dates and the
results of their operations for the periods then ended. Borrower warrants and
represents to DFS that all financial statements and information relating to
Borrower or any Guarantor which have been or may hereafter be delivered by
Borrower or any
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Guarantor are true and correct and have been and will be prepared in accordance
with GAAP and, with respect to such previously delivered statements or
information, there has been no material adverse change in the financial or
business condition of Borrower or any Guarantor since the submission to DFS,
either as of the date of delivery, or, if different, the date specified therein,
and Borrower acknowledges DFS' reliance thereon.
8.2 Non-Existence of Defaults. Neither Borrower nor any of its
Subsidiaries is in default with respect to any material amount of its existing
Indebtedness. The making and performance of this Agreement and all other Loan
Documents, will not immediately, or with the passage of time, the giving of
notice, or both: (a) violate the provisions of the bylaws or any other corporate
document of Borrower; (b) violate any laws to the best of Borrower's knowledge
after diligent inquiry; (c) result in a material default under any contract,
agreement, or instrument to which Borrower is a party or by which Borrower or
its properties are bound; or (d) result in the creation or imposition of any
security interest in, or Lien or encumbrance upon, any of the Collateral except
the Permitted Liens.
8.3 Litigation. Set forth on Exhibit 8.3 is a list of all actions,
suits, investigations or proceedings pending or, in the knowledge of Borrower,
threatened against Borrower or any of its Subsidiaries, as of the date hereof in
which there is a reasonable probability of an adverse decision which would
materially and adversely affect Borrower, the Business, or the Collateral.
8.4 Material Adverse Changes. Borrower does not know of or expect any
material adverse change in the Business, or in Borrower's or any of the
Subsidiaries' assets, liabilities, properties, or condition, financial or
otherwise, including changes in Borrower's financial condition from the date of
DFS' last audit or due diligence or Borrower's latest unaudited,
accountant-prepared financial statements, whichever is later, through the
Effective Date.
8.5 Title to Collateral. Except as set forth on Exhibit 8.5, Borrower
has good and marketable title to all of the Collateral, free and clear of any
and all Liens, claims and encumbrances, other than the Permitted Liens.
8.6 Corporate Status. Borrower and each of the Subsidiaries is a
corporation duly organised and validly existing, in good standing, with
perpetual corporate existence, under the laws of their respective jurisdictions
of incorporation, amalgamation or continuance, as applicable. Borrower and its
Subsidiaries have the corporate power and authority to own their properties and
to transact the Business in which they are engaged and presently propose to
engage. Borrower and each Subsidiary is duly qualified as a foreign or
extra-provincial corporation and in good standing in all jurisdictions where the
nature of their Business or the ownership or use of their property requires such
qualification, and where failure to so qualify would have a material adverse
effect on its Business, operations or financial condition.
8.7 Subsidiaries. Exhibit 8.7 hereto lists the Subsidiaries as of the
Effective Date.
8.8 Power and Authority. Borrower has the corporate capacity and power
to borrow and to execute, deliver and carry out the terms and provisions of the
Loan Documents. Borrower has taken or caused to be taken all necessary corporate
action to authorise the execution, delivery and performance of this Agreement
and all other Loan Documents and the borrowing thereunder.
8.9 Place of Business. Borrower's chief executive office and the
principal place of business is located at 430 Tapscott Road, Scarborough,
Ontario. Borrower's records concerning the Collateral are kept at such chief
executive office, or will be kept at such other place that Borrower informs DFS
of not less than 30 days in advance of relocation.
8.10 Enforceability of the Loan Documents. The Loan Documents executed
by Borrower are the valid and binding obligations of Borrower and are
enforceable against Borrower in accordance with their terms, except as limited
by bankruptcy, insolvency, or other laws of general application relating to the
enforcement of creditors' rights.
8.11 Taxes. Borrower has (a) filed all federal, provincial, municipal
and local tax returns and other reports that it is required by law to file, (b)
paid or caused to be paid all taxes, assessments and other governmental charges
that are due and payable, the failure of which to pay would have a material
adverse effect on the Business, except those contested in good faith and in
accordance with accepted procedures, and for which adequate reserves have been
established in accordance with GAAP, and (c) made adequate provision for the
payment of such taxes,
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assessments or other charges accruing but not yet payable. Borrower has no
knowledge of any deficiency or additional assessment in a material amount in
connection with any taxes, assessments or charges.
8.12 Compliance with Laws. Borrower, to the best of its knowledge after
diligent inquiry, has complied, and shall cause each Subsidiary to comply, in
all material respects with all applicable laws, including any Environmental Laws
or OHSA Law and any zoning laws, the failure to comply with which would have a
material adverse effect on Borrower individually, or Borrower and its
Subsidiaries on a consolidated basis.
8.13 Consents. Borrower and the Subsidiaries have obtained all material
consents, permits, licenses, approvals or authorisation of, or effected the
filing, registration or qualification with, any governmental entity or agency
which is required to be obtained or effected by Borrower and the Subsidiaries in
connection with the Business or the execution and delivery of this Agreement and
the other Loan Documents the failure of which to obtain or effect would have a
material adverse effect on Borrower individually, or on Borrower and its
Subsidiaries on a consolidated basis.
8.14 Purpose. Borrower will use the advances which DFS makes under the
Credit Facility solely for lawful purposes and as described in Section 3 hereof.
8.15 Condition of the Business. All material assets used in the conduct
of the Business are in good operating condition and repair and are fully usable
in the ordinary course thereof, reasonable wear and tear excepted.
8.16 Capital. All issued shares and all outstanding shares in the
Subsidiaries as reflected in Borrower's financial statements are validly issued
pursuant to proper authorisation of the board of directors of such Subsidiary,
and are fully paid, and non-assessable. There are no outstanding subscriptions,
warrants, options, calls or commitments, obligations or securities convertible
or exchangeable for shares of any stock of Borrower or the Subsidiaries.
Borrower and the Subsidiaries shall give DFS thirty days (30) prior written
notice before entering any agreement to redeem any of its capital stock or to
register its equity or debt securities under any applicable securities law. All
Borrower's issued shares and outstanding capital stock are fully paid and
non-assessable, and its capital structure is as set forth on Exhibit 8.16.
8.17 Location of Collateral. Exhibit 8.17 describes the locations where
any of the Collateral is located or stored as of the date hereof.
8.18 Real Property. Neither Borrower nor any Subsidiary own or lease any
real property, except as set forth on Exhibit 8.18 attached hereto.
8.19 Warranties and Representations-Accounts. For each Account listed by
Borrower on any Borrowing Base Certificate, Borrower warrants and represents to
DFS that at all times: (a) such Account is genuine; (b) such Account is not
evidenced by a judgement or promissory note or similar instrument or agreement;
(c) it represents an undisputed bona fide transaction completed in accordance
with the terms of the invoices and purchase orders relating thereto; (d) the
goods sold or services rendered which resulted in the creation of such Account
have been delivered or rendered to and accepted by the Account Debtor; (e) the
amounts shown on the Borrowing Base Certificate, Borrower's books and records
and all invoices and statements delivered to DFS with respect thereto are owing
to Borrower and are not contingent; (f) no payments have been or will be made
thereon except payments turned over to DFS; (g) there are no offsets,
counterclaims or disputes existing or asserted with respect thereto and Borrower
has not made any agreement with the Account Debtor for any deduction or discount
of the sum payable thereunder except regular discounts allowed by Borrower in
the ordinary course of its business for prompt payment; (h) to the best of
Borrower's knowledge,there are no facts or events which in any way impair the
validity or enforceability thereof or reduce the amount payable thereunder from
the amount shown on the Borrowing Base Certificate, Borrower's books and records
and the invoices and statements delivered to DFS with respect thereto; (i) all
persons acting on behalf of the Account Debtor thereon have the authority to
bind the Account Debtor; (j) the goods sold or transferred giving rise thereto
are not subject to any Lien, claim, encumbrance or security interest which is
superior to that of DFS; (k) such Account is subject to DFS' perfected, first
priority security interest and no other Lien other than a Permitted Lien; and
(l) there are no proceedings or actions known to Borrower which are threatened
or pending against the Account Debtor thereon which might result in any material
adverse change in such Account Debtor's financial condition.
8.20 Environmental, Health and Safety Matters. Except as disclosed on
Exhibit 8.20: (a) the operations
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of Borrower and each of the Subsidiaries complies in all respects with (i) all
applicable Environmental Laws, and (ii) any applicable OHSA Law; (b) none of the
operations of Borrower or any Subsidiary are subject to any judicial or
administrative proceeding alleging the violation of any Environmental Law or
OHSA Law; (c) none of the operations of Borrower or any Subsidiary is the
subject of federal or provincial investigation evaluating whether any remedial
action is needed to respond to (i) a spillage, disposal or release into the
environment of any Hazardous Material or other hazardous, toxic or dangerous
waste, substance or constituent, or other substance, or (ii) any unsafe or
unhealthful condition at any premises of Borrower or any Subsidiary; (d) neither
Borrower nor any Subsidiary has filed any notice under any Environmental Law or
OHSA Law indicating or reporting (i) any past or present spillage, disposal or
release into the environment of, or treatment, storage or disposal of, any
Hazardous Material or other hazardous, toxic or dangerous waste, substance or
constituent, or other substance or (ii) any unsafe or unhealthful condition at
any premises of Borrower or any Subsidiary; and (e) neither Borrower nor any
Subsidiary has any known contingent liability in connection with (i) any
spillage, disposal or release into the environment of, or otherwise with respect
to, any Hazardous Material or other hazardous, toxic or dangerous waste,
substance or constituent, or other substance or (ii) any unsafe or unhealthful
condition at any premises of Borrower or any Subsidiary.
8.21 Patents, Copyrights, Trademarks, Etc. The Borrower and each of the
Subsidiaries possesses or has the right to use all of the patents, trademarks,
trade names, service marks and copyrights, and applications therefor, and all
technology, know-how, processes, methods and designs used in or necessary for
the conduct of its business, without known conflict with the rights of others.
All such licenses, patents, trademarks, trade names, service marks and
copyrights, and applications therefor existing on the date hereof are listed on
Exhibit 8.21.
8.22 Solvency. The Borrower and each of the Subsidiaries now has capital
sufficient to carry on its respective business and transactions and all business
and transactions in which it is about to engage and is now solvent and able to
pay its respective debts as they mature, and Borrower and each of the
Subsidiaries now owns property having a value greater than the amount required
to pay Borrower's or such Subsidiary's debts.
8.23 Leases. Exhibit 8.23(a) attached hereto is a complete listing of
all capitalised leases of Borrower and Exhibit 8.23(b) attached hereto is a
complete listing of all operating leases of Borrower.
8.24 Labour Relations. Except as described on Exhibit 8.24 attached
hereto and made a part hereof, neither Borrower nor any of its Subsidiaries is a
party to any collective bargaining agreement, and there are no material
grievances, disputes or controversies with any union or any other organisation
of Borrower's employees, or threats of strikes, work stoppages or any asserted
pending demands for collective bargaining by any union or organisation.
8.25 Business Locations; Agent for Process. Since incorporation,
Borrower has had no office, place of business or agent for service of process
located in any province or municipality other than as shown on Exhibit 8.17.
8.26 Provisions Relating to Equipment.
(a) Borrower's Equipment is in good operating condition and repair
(normal wear and tear excepted), and all necessary replacements of and
repairs thereto shall be made so that the value and operating efficiency
of the Equipment shall be maintained and preserved, reasonable wear and
tear excepted; and
(b) Borrower will not permit any of Borrower's Equipment to become
affixed to any real property leased to Borrower so that an interest
arises therein under the real estate laws of the applicable jurisdiction
unless the landlord of such real property has executed a landlord waiver
or leasehold mortgage in favour of DFS, and Borrower will not permit any
of the Equipment to become an accession to any personal property other
than Equipment subject to first priority Liens in favour of DFS or
subject to Permitted Liens.
8.27 Warranties and Representations - Inventory. For each item of
Inventory listed by Borrower on any Borrowing Base Certificate, Borrower
covenants, warrants and represents to DFS that at all times: (a) such Inventory
has been acquired by Borrower for itself alone and not as agent for any other
Person whatsoever, including Affiliates and Subsidiaries of Borrower; (b)
Inventory will be kept only at the locations indicated on Exhibit 8.17; (c) no
Inventory is or will be produced in violation of any applicable labour standards
legislation; (d) Borrower now keeps and will keep correct and accurate records
itemising and describing the kind, type, quality and quantity of Inventory,
Borrower's cost therefor and the selling price thereof, the daily withdrawals
therefrom and the additions thereto; (e)
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Inventory is not and will not be stored with a bailee, repairman, warehouseman
or similar party without DFS' prior written consent, and Borrower will,
concurrently with delivery to such party, cause any such party to issue and
deliver to DFS, in form acceptable to DFS, warehouse receipts, in DFS' name
evidencing the storage of such Inventory, and waivers of warehouseman's liens in
favour of DFS; (f) where required, Borrower will pay all taxes, rents, business
taxes, and the like on the premises where the Inventory is located; and (g)
Borrower will not rent, lease, lend, demonstrate, pledge, consign, transfer or
secrete any of the Inventory or use any of the Inventory for any purpose other
than exhibition and sale to buyers in the ordinary course of business, without
DFS' prior written consent.
8.28 Reaffirmation. Each request for a Loan made by Borrower pursuant to
this Agreement or any of the other Loan Documents shall constitute (a) an
automatic representation and warranty by Borrower to DFS that there does not
then exist any Default, and (b) a reaffirmation as of the date of said request
of all of the representations and warranties of Borrower contained in this
Agreement and the other Loan Documents.
8.29 Survival of Representations and Warranties. Borrower covenants,
warrants and represents to DFS that all representations and warranties of
Borrower contained in this Agreement or any of the other Loan Documents shall be
true at the time of Borrower's execution of this Agreement and the other Loan
Documents, and shall survive the execution, delivery and acceptance thereof by
DFS and the parties thereto and the closing of the transactions described
therein or related thereto.
ARTICLE 9. BORROWER'S COVENANTS
9.1 Affirmative Covenants. During the term of this Agreement and
thereafter for so long as any Obligations are outstanding and unpaid, Borrower
Covenants that unless otherwise consented to by DFS in writing, it shall perform
all the acts and promises required by this Agreement and all the acts and
promises set forth below.
9.1.1 Payment and Performance. Borrower will pay and perform all
Obligations in full when and as due hereunder.
9.1.2 Insurance.
(a) Type of Insurance. Borrower will at all times cause
the Business and the Collateral to be insured by insurers of
reasonable financial soundness and having an A. M. Best rating
of A or better, with such policies, against such risks and in
such amounts as are appropriate for reasonably prudent
businesses in Borrower's industry and of Borrower's size and
financial strength.
(b) Requirements as to Insurance Policies. The policies
of insurance which Borrower is required to carry shall comply
with the requirements listed below:
(i) Each such policy shall provide that it may
not be cancelled or allowed to lapse at the end of a
policy period without at least 30 days' prior written
notice to DFS;
(ii) Each liability and hazard insurance policy
shall name DFS as first loss payee and as an additional
insured; and
(iii) Each property insurance policy required
hereunder shall contain a standard lender's loss payable
clause in favour of DFS. Such insurance policies shall
also contain lender's loss payable endorsements
satisfactory to DFS providing, among other things, that
any loss shall be payable in accordance with the terms
of such policy notwithstanding any act of Borrower which
might otherwise result in forfeiture of such insurance;
(c) Collection of Claims. Borrower will promptly advise
DFS of any insured casualty and Borrower agrees that DFS may
direct all insurance proceeds therefrom to be paid directly to
DFS to the extent that such loss is not adequately insured under
an insurance policy which names DFS as a loss payee, and hereby
appoints DFS its attorney-in-fact for such purpose.
(d) Blanket Policies. Any insurance required hereunder
may be supplied by means of a blanket or umbrella insurance
policy.
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(e) Delivery of Policies or Certificates of Insurance.
Borrower shall deliver to DFS certificates of insurance issued
by insurers to evidence that the insurance maintained by
Borrower complies with the requirements hereunder.
9.1.3 Collection of Receivables; Sale of Inventory. Borrower will
collect its Accounts and sell its Inventory only in the ordinary course
of business, unless written permission to the contrary is obtained from
DFS.
9.1.4 Notice of Litigation and Proceedings. Borrower will give
prompt notice to DFS of: (a) any material litigation or proceeding
(including fines and penalties of any public authority) in which it, or
any of the Subsidiaries, is a party and in which there is a reasonable
probability of an adverse decision which would require it or any of the
Subsidiaries to pay money or deliver assets, whether or not the claim is
considered to be covered by insurance; (b) any class action litigation
against it, regardless of size; and (c) the institution of any other
suit or proceeding that might materially and adversely affect its or any
of its Subsidiary's operations, financial condition, property or
Business. For the purposes of this Section 9.1.4, any proceeding shall
be considered material if it, alone or in conjunction with any one or
more other proceedings arising in the then current calendar year, amount
to or may potentially amount to adverse decisions in a sum greater than
or equal to fifty thousand dollars ($50,000.00).
9.1.5 Payment of Indebtedness to Third Persons. Borrower will, and
will cause each Subsidiary to, pay, when due, all Indebtedness and any
other liability due third persons, except when the amount thereof is
being contested in good faith by appropriate proceedings and with
adequate reserves therefor satisfactory to DFS in accordance with GAAP
being set aside by Borrower or such Subsidiary. DFS shall give Borrower
notice before DFS requires Borrower to set aside additional reserves.
9.1.6 Notice of Change of Business Location. Borrower will notify
DFS 30 days in advance of: (a) any change in or discontinuation of the
location of the Collateral, Borrower's principal place of business, or
any of the Subsidiaries' existing offices or places of business, (b) the
establishment of any new places of business relating to the Business,
and (c) any change in or addition to the locations where Borrower's
Inventory or records are kept.
9.1.7 Payment of Taxes. Borrower will, and will cause each
Subsidiary to pay or cause to be paid, when and as due, all taxes,
assessments and charges or levies imposed upon it or on any of its
property or that it is required to withhold and pay over to the taxing
authority or that it must pay on its income, the failure of which to pay
would have a material adverse effect on Borrower individually, or on
Borrower and the Subsidiaries on a consolidated basis, except where
contested in good faith by appropriate proceedings with adequate
reserves therefor satisfactory to DFS, in accordance with GAAP, having
been set aside by Borrower or such Subsidiary. DFS will use reasonable
efforts to attempt to give Borrower notice before DFS requires
additional reserves. Borrower will, however, and will cause each
Borrower Subsidiary to, pay or cause to be paid all such taxes,
assessments, charges or levies immediately whenever foreclosure of any
Lien that attaches on the Collateral appears imminent.
9.1.8 Further Assurances. Borrower agrees to, and will cause each
Subsidiary to, execute such other and further documents, including,
without limitation, deeds of trust, promissory notes, security
agreements, financing statements, continuation statements, certificates
of title, and the like as may from time to time in the reasonable
opinion of DFS be necessary to perfect, confirm, establish,
re-establish, continue, or complete the security interests, collateral
assignments and Liens in the Collateral, and the purposes and intentions
of this Agreement.
9.1.9 Maintenance of Status. Borrower will take all necessary steps
to (a) preserve its, and each Subsidiary's existence as a corporation,
(b) preserve Borrower's and the Subsidiaries' franchises and permits,
and (c) comply with all present and future material agreements to which
Borrower, or any of the Subsidiaries, is subject, and (d) maintain, and
cause each Subsidiary to maintain, its qualification and good standing
in all jurisdictions in which such qualification is necessary or in
which the failure to be so qualified might have a
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material adverse effect on the financial condition or properties of
Borrower or the Business. Borrower will not change the nature of the
Business during the term of this Agreement.
9.1.10 Financial Statements; Reporting Requirements; Certification
as to Defaults. During the term of this Agreement, Borrower will furnish
two copies of the following to DFS:
(a) within 120 days after the end of each
fiscal year, annual, unaudited accountant-prepared financial
statements for Borrower and its consolidated and consolidating
Subsidiaries (if any) as of the end of such fiscal year,
consisting of a consolidated and consolidating balance sheet,
consolidated and consolidating statement of operations,
consolidated and consolidating statements of cash flows and
consolidated and consolidating statement of shareholder's
equity, in comparative form, together with a narrative
description of the financial condition and results of
operations and the liquidity and capital resources of Borrower
and setting forth in comparative form the corresponding
figures for the corresponding period of the prior fiscal year
and the corresponding figures from the most recent financial
projections of Borrower, discussing the reasons for any
significant variations. The statements and balance sheet will
be reviewed by an independent firm of chartered accountants
selected by Borrower and acceptable to DFS, and certified by
that firm of chartered accountants to have been prepared in
accordance with GAAP. The chartered accountants will render an
unqualified opinion as to such statements and balance sheets.
DFS will have the absolute and irrevocable right, from time to
time, to discuss the affairs of Borrower directly with the
independent chartered accountant after prior notice to
Borrower and the reasonable opportunity of Borrower to be
present at any such discussions;
(b) by the 45th calendar day of each fiscal
quarter, financial statements for Borrower and its
consolidated and consolidating Subsidiaries as of the end of
the immediately preceding fiscal quarter, consisting of
consolidated and consolidating balance sheet and statement of
operations prepared by Borrower;
(c) by the 45th calendar day of each fiscal
quarter, a certificate of the President, or Chief Financial
Officer, in the form of Exhibit 9.1.10(c) attached hereto, of
Borrower stating that such person has reviewed the provisions
of the Loan Documents and that a review of the activities of
Borrower during such quarter has been made by or under such
person's supervision with a view to determining whether
Borrower has observed and performed all of Borrower's
obligations under the Loan Documents, and that, to the best
of such person's knowledge, information and belief, Borrower
has observed and performed each and every undertaking
contained in the Loan Documents and is not at the time in
default in the observance or performance of any of the terms
and conditions thereof or, if Borrower will be so in default,
specifying all of such defaults and events of which such
person may have knowledge;
(d) by the end of each fiscal year, an annual
budget and income statement with cash flow projections for the
following fiscal year;
(e) promptly upon receipt thereof, copies of
all final reports and final management letters submitted to
Borrower or any of the Borrower's Subsidiaries by independent
chartered accountants in connection with any annual or interim
review of the books of Borrower or such Subsidiaries made by
such accountants;
(f) copies of any and all reports, filings and
other documentation delivered to any applicable Securities
Commission (or other applicable body) by or on behalf of
Borrower promptly after the delivery thereof, if applicable;
and
(g) any other statements, reports and other
information as DFS may reasonably request concerning the
financial condition or operations of Borrower and its
properties.
9.1.11 Notice of Existence of Default. Borrower will, and will
cause its Subsidiaries to, promptly notify DFS of: (a) the existence of
any known condition or event, which is or which will be with notice or
the passage of time or both, a Default and (b) the actual or threatened
termination, suspension, lapse or
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relinquishment of any material license, authorisation, permit or other
right granted Borrower or for Borrower's benefit and used in the
Business, or granted to any of its Subsidiaries or for any such
Subsidiaries' benefit, by any governmental agency material to the
Business.
9.1.12 Compliance with Laws. Borrower will, and will cause its
Subsidiaries to, comply in all material respects with all applicable
laws, rules, regulations and orders.
9.1.13 Maintenance of Collateral. Borrower will maintain all
material Collateral and every part thereof in good condition and repair.
Borrower will not permit the value of the Collateral to be materially
impaired. Borrower will defend the Collateral against all claims and
legal proceedings by persons other than DFS. Borrower will not transfer
the Collateral from the premises where now located (other than Inventory
sold in the ordinary course of business and other Collateral transferred
in the ordinary course of business), or permit the Collateral to become
a fixture or accession (unless so affixed on the Effective Date) to any
goods which are not items of Collateral, without the prior written
approval of DFS. Borrower will not permit the Collateral to be used in
violation of any applicable law, regulations, or any policy of
insurance. As to Collateral consisting of instruments and chattel paper,
Borrower will preserve rights in it against prior parties.
9.1.14 Collateral Records and Statements. Borrower will keep such
accurate and complete books and records pertaining to the Collateral in
such detail and form as DFS reasonably require, including, but not
limited to: schedules of inventory; original orders; invoices; shipping
documents; billing settlements and receivables; sold receivables;
Inventory listing containing model, serial number (if available) and
location. Biweekly, or at such other times as DFS may reasonably
require, Borrower will furnish to DFS a statement, certified by Borrower
showing the ageing of Accounts, and the current Inventory status,
showing the lower of cost (determined on a "first-in, first-out" basis)
or market value thereof. Other reporting will be available upon request
by DFS, including, but not be limited to, accounts payable ageings in
such form as DFS reasonably requires. The statements will be in the form
and will contain the information as is reasonably prescribed by DFS.
9.1.15 Inspection of Collateral. Upon at least 24 hours prior
written or verbal notice to senior management of Borrower, DFS may
examine the Collateral at any time, and from time to time during normal
business hours. DFS will have full access to, and the right to: (a)
review, inspect and make abstracts and copies from Borrower's books and
records pertaining to the Collateral, and (b) inspect and examine
Inventory and check and test the same as to quality, quantity, Value and
condition, wherever located, at any time during normal business hours,
and from time to time. Borrower will assist DFS in so doing. Borrower
will pay a fee to DFS in the amount of SEVEN HUNDRED AND FIFTY Dollars
($750.00) per quarter for such Collateral reviews and any other reviews
performed under the Loan Documents as frequently as DFS shall reasonably
determine, but at least quarterly, and Borrower agrees that such fee is
not interest but rather reimburses DFS for its out-of-pocket and
allocated overhead expenses incurred in conducting such audits.
9.1.16 Landlord's Agreements. Borrower will provide or cause to be
provided, on the Effective Date, landlord waivers and agreements in a
form acceptable to DFS with respect to leased real property and with
respect to any future leases, prior to entering into them.
9.1.17 Stock Redemption. Borrower will provide DFS with thirty (30)
days prior written notice of Borrower's intention to redeem or purchase
any of its outstanding capital stock, warrants in favour of anyone other
than DFS, or stock options or convert or permit such stock, warrants or
options to be converted into cash.
9.1.18 Reimbursement for Bank Charges. Borrower will reimburse DFS
for all charges made by banks for collection of cheques and other items
of payment and for transfer of funds to or from Borrower.
9.1.19 Maintenance of Management. Borrower shall use its best
efforts to cause competent management to remain engaged in the active
management of the Borrower, and to perform duties substantially similar
to those presently being performed. In the event of the retirement,
voluntary termination, involuntary termination for cause or death of any
member of management, such member shall be replaced by a person or
persons having similar business experience within two (2) months after
the date of any such event.
9.1.20 Provisions Relating to Equipment.
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(a) Immediately on request therefor by DFS,
Borrower shall deliver to DFS any and all evidence of
ownership, if any, of any of the Equipment (including, without
limitation, certificates of title and applications for title).
(b) Borrower shall maintain accurate records
itemising and describing the kind, type, quality, quantity and
value of its Equipment and all dispositions made in accordance
with Section 9.1.20(c) below, and shall furnish DFS with a
current schedule containing the foregoing information on at
least an annual basis and more often if requested by DFS.
(c) Borrower will not sell, lease or otherwise
dispose of or transfer any of the Equipment or any part
thereof without the prior written consent of DFS; provided,
however, that the foregoing restriction shall not apply, for
so long as no Default exists, to (i) dispositions of Equipment
which, in the aggregate during any consecutive twelve-month
period, has a fair market value or book value, whichever is
greater, of $50,000.00 or less, provided that all proceeds
thereof are turned over to DFS, or (ii) replacements of
Equipment that is substantially worn, damaged or obsolete with
Equipment of like kind, function and value, provided that the
replacement Equipment shall be acquired prior to or
concurrently with any disposition of the Equipment that is to
be replaced, the replacement Equipment shall be free and clear
of Liens other than Permitted Liens, Borrower shall give DFS
at least five (5) days prior written notice of such
disposition and Borrower shall turn over to DFS all proceeds
realised from such disposition.
9.2 Negative Covenants. During the term of this Agreement and hereafter,
for so long as any Obligations are outstanding and unpaid, Borrower covenants
that unless otherwise consented to in writing by DFS, Borrower shall not perform
or cause or permit to be performed the following acts:
9.2.1 Change of Name, Etc. Borrower and the Subsidiaries will not
change their name, or begin to trade under any assumed names or trade
names without thirty (30) days prior written notice to DFS. Borrower
will not, and will not permit any Subsidiary to, change its manner of
organisation, enter into any mergers, consolidations, reorganisations or
recapitalisations without DFS' prior written consent other than as
contemplated herein.
9.2.2 Sale or Transfer of Assets. Except in the ordinary course of
business, or except as consented to in writing by DFS, Borrower and the
Subsidiaries will not sell, transfer, lease (including sale-leaseback)
or otherwise dispose of all or any substantial part of their assets or
any portion of their assets which would be construed as a sale in bulk
under any applicable provincial bulk sales legislation. This provision
will not apply to any sale if the proceeds of such sale pay the
Obligations in full.
9.2.3 Encumbrance of Assets. Borrower will not, and will not permit
a Subsidiary to, mortgage, pledge, grant or permit to exist a security
interest in or Lien upon any of the Collateral, now owned or hereafter
acquired except for the Permitted Liens.
9.2.4 Acquisition of Stock or Assets. Borrower and the Subsidiaries
will not, without DFS' prior written consent, not to be unreasonably
withheld, acquire, or enter into any agreement, commitment letter or
letter of intent to acquire, all or substantially all the assets of,
equity interest or capital stock in, another business, nor will Borrower
hereafter create any new Subsidiaries.
9.2.5 False Certificates or Documents. Borrower has not and will
not, and will not permit any Subsidiary to, furnish DFS with any
certificate or other document that contains any untrue statement of
material fact or that omits to state a material fact necessary to make
it not misleading in light of the circumstances under which it was
furnished.
9.2.6 Assignment. Borrower will not assign or attempt to assign the
Loan Documents or any of its interests under the Loan Documents, except
in favour of DFS.
9.2.7 Transactions with Affiliates. Borrower will not enter into
any contracts, leases, sales or
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other transactions with any Affiliate on terms less favourable to the
Borrower than could be obtained generally by Borrower from a
non-Affiliate.
9.2.8 Dividends. If and for so long as Borrower is not in
compliance with the financial covenant provisions found in Section 9.3
hereof, Borrower will not, and will not permit any Subsidiary to,
declare or pay any dividends upon its capital stock without DFS' prior
written consent.
9.2.9 Capital Expenditures. Borrower will not make, or commit to
make, any expenditure for capital improvements (including, without
limitation, capitalised leases) or the acquisition of capital goods in
excess of $100,000.00 per year without the prior written consent of DFS.
9.2.10 Loans by Borrower. Borrower will not, and will not permit
any Subsidiary to, make any loan to any Person, except for loans in
anticipation of reasonable and normally reimbursable business expenses
and trade credit extended in the ordinary course of Business.
9.2.11 Fiscal Year. Borrower will not, and will not permit any
Subsidiary to, change its fiscal year-end without sixty (60) days prior
written notice to DFS.
9.2.12 Total Indebtedness. Borrower shall not create, incur,
assume, or suffer to exist, or permit any Subsidiary to create, incur or
suffer to exist, any Indebtedness, except:
(i) the Obligations;
(ii) Subordinated Debt;
(iii) Indebtedness of any Subsidiary to
Borrower;
(iv) Accounts payable to trade creditors and
current operating expenses (other than for money
borrowed) incurred in the ordinary course of business
which are aged not more than thirty (30) days past due,
unless actively contested in good faith and by
appropriate and lawful proceedings;
(v) Obligations to pay Rentals permitted by
Section 9.2.18;
(vi) Permitted Purchase Money Indebtedness; and
(vii) Indebtedness not included in paragraphs
(i) through (vi) above which does not exceed at any
time, in the aggregate, the sum of $200,000.00.
9.2.13 Adverse Transactions. Borrower will not enter into any
transaction, or permit any Subsidiary to enter into any transaction,
which materially and adversely affects or may materially and adversely
affect the Collateral or Borrower's ability to repay the Obligations or
permit or agree to any material extension, compromise or settlement or
make any change or modification of any kind or nature with respect to
any Account, including any of the terms relating thereto, other than
discounts and allowances in the ordinary course of business, all of
which shall be reflected in the Borrowing Base Certificate submitted to
DFS pursuant to Section 3.2 of this Agreement.
9.2.14 Guarantees. Borrower will not guarantee, assume, endorse or
otherwise, in any way, become directly or contingently liable with
respect to the Indebtedness of any Person, except by endorsement of
instruments or items of payment for deposit or collection.
9.2.15 Bill-and-Hold Sales, Etc. Borrower will not make a sale to
any customer on a bill-and-hold, guaranteed sale, sale and return, sale
on approval or consignment basis, or any sale on a repurchase or return
basis.
9.2.16 Use of DFS' Name. Borrower will not without the prior
written consent of DFS, use the name of DFS or the name of any
Affiliates of DFS in connection with any of Borrower's business or
activities, except in connection with internal business matters, as
required in dealings with governmental agencies and financial
institutions and to trade creditors of Borrower solely for credit
reference purposes.
9.2.17 Leases. Borrower will not become a lessee under any
operating lease of property if the aggregate Rentals (defined below)
payable during any current or future period of twelve (12) consecutive
months under the lease in question and all other leases under which
Borrower is then lessee would exceed $100,000.00.
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The term "Rentals" means, as of the date of determination, all payments
which the lessee is required to make by the terms of any lease.
9.2.18 Tax Consolidation. Borrower will not file or consent to the
filing of any consolidated income tax return with any Person other than
a Subsidiary or Affiliate.
9.3 FINANCIAL COVENANTS.
9.3.1 Amounts. Borrower agrees that it will at all times maintain
the following:
(a) Determined as at December 31, 1997:
(i) a Tangible Net Worth plus
Subordinated Debt in the combined
amount of not less than ONE MILLION
Dollars ($1,000,000.00);
(ii) a ratio of Debt less Subordinated
Debt to Tangible Net Worth plus
Subordinated Debt of not more than
five to one (5.0:1.0); and
(iii) a ratio of Current Tangible Assets
to total liabilities of not less
than one and one-quarter to one
(1.25:1.0); and
(b) Determined as at December 31, 1998:
(iv) a Tangible Net Worth plus
Subordinated Debt in the combined
amount of not less than ONE MILLION
THREE HUNDRED THOUSAND Dollars
($1,300,000.00);
(v) a ratio of Debt less Subordinated
Debt to Tangible Net Worth plus
Subordinated Debt of not more than
four to one (4.0:1.0); and
(vi) a ratio of Current Tangible Assets
to total liabilities of not less
than one and three-tenths to one
(1.3:1.0).
For purposes of this paragraph: (i) "Current Tangible Assets"
means Borrower's current assets less, to the extent otherwise
included therein, all prepaid expenses and Intangibles; (ii)
"Debt" means all of Borrower's liabilities and indebtedness
for borrowed money of any kind and nature whatsoever, whether
direct or indirect, absolute or contingent, and including
obligations under capitalized leases, guarantees, or with
respect to which Borrower has pledged assets to secure
performance, whether or not direct recourse liability has
been assumed by Borrower; (iii) "Intangibles" means and
includes general intangibles (as that term is defined in the
PPSA); accounts receivable and advances due from officers,
directors, member, owner, employees, stockholders and
affiliates; leasehold improvements net of depreciation;
licenses; good will; prepaid expenses; escrow deposits;
covenants not to compete; the excess of cost over book value
of acquired assets; franchise fees; organisational costs;
finance reserves held for recourse obligations; capitalised
research and development costs; and such other similar items
as DFS may from time to time determine in DFS' sole
discretion; (iii) "Subordinated Debt" means all of Borrower's
Debt which is subordinated to the payment of Borrower's
liabilities to DFS by an agreement in form and substance
satisfactory to DFS; (iv) "Tangible Net Worth" means the book
value of Borrower's assets less liabilities (including as
liabilities all reserves for contingencies and other
potential liabilities), excluding from such assets all
Intangibles. The foregoing terms will be determined in
accordance with GAAP consistently applied, and, if
applicable, on a consolidated basis ("Financial Covenants").
Notwithstanding anything to the contrary above, the Financial
Covenants shall be subject to a review of Borrower's June 30,
1998 interim financial statements and upon written notice may
be modified, amended or replaced, at the sole and reasonable
discretion of DFS, following such review.
9.3.2 Covenant Compliance Certificate. The President or Chief
Financial Officer of Borrower will certify to DFS by the 10th Business
day of each month, or more often if requested by DFS, that Borrower is
in compliance with the Financial Covenants as set forth in a form
acceptable to DFS in its sole discretion.
ARTICLE 10 DEFAULT/REMEDIES
Any of the following events which Borrower has failed to cure within the
applicable period described below will
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constitute a default (each, a "Default") by Borrower under this Agreement: (a)
Borrower materially breaches any terms, conditions, covenants, promises,
warranties or representations contained herein, or in any other Loan Document;
(b) any Guarantor materially breaches any terms, conditions, covenants,
promises, warranties or representations contained in any guarantee or other
agreement between the Guarantor and DFS; (c) any representation, statement,
report or certificate made or delivered by Borrower or any Guarantor to DFS is
not materially accurate when made; (d) Borrower fails to pay any portion of
Borrower's debts to DFS when due and payable hereunder or under any other
agreement between DFS and Borrower; (e) Borrower abandons any Collateral which
results in a material change to the Business; (f) Borrower or any Guarantor is
or becomes in default in the payment of any debt owed to any third party; (g) a
money judgement issues against Borrower in an amount greater than or equal to
$50,000.00 or any Guarantor in an amount greater than or equal to $250,000.00;
(h) an attachment, sale or seizure issues or is executed against any assets of
Borrower or against any assets of any Guarantor; (i) any individual Guarantor
dies; (j) Borrower ceases existence as a corporation, partnership, trust or
limited liability company; (k) Borrower ceases or suspends business; (l)
Borrower or any Guarantor makes a general assignment for the benefit of
creditors; (m) Borrower or any Guarantor becomes insolvent or voluntarily or
involuntarily becomes subject to the Bankruptcy and Insolvency Act (Canada), as
amended, or any similar law; (n) Borrower applies to a court of competent
jurisdiction or other applicable authority for a stay of proceedings from its
creditors pursuant to the provisions of the Companies' Creditors Arrangement Act
(Canada), as amended, the Bankruptcy and Insolvency Act (Canada), as amended, or
any other similar law; (o) any receiver is appointed for any of Borrower's or
any Guarantor's assets; (p) any guarantee of Borrower's debts to DFS is
terminated without the prior written consent of DFS; (q) Borrower loses any
franchise, permission, license or right to sell or deal in any Collateral, which
loss reduces Borrower's revenues during any fiscal year by more than 20%; (r)
Borrower or any Guarantor misrepresents Borrower's or such Guarantor's financial
condition or organisational structure; (s) any of the Collateral becomes subject
to any Lien other than a Permitted Lien; (t) Borrower shall be enjoined,
restrained or in any way prevented by court, governmental or administrative
order from conducting all or any material part of its Business; or any material
lease or agreement pursuant to which Borrower leases, uses or occupies any
property shall be cancelled or terminated prior to the expiration of its stated
term, or any part of the Collateral shall be taken through condemnation or the
value thereof shall be impaired through condemnation; (u) DFS determines in good
faith that it is insecure with respect to a material portion of the Collateral
or the payment of any part of Borrower's Obligations; or (v) Borrower is in
breach of Section 9.3.1. In the event of a Default by Borrower under this
Article 10, DFS shall notify Borrower in writing that Borrower is in Default
under this Agreement and Borrower shall have three (3) Business Days after such
notice to cure any such Default. If any event of Default is not cured within the
period specified above, DFS may act immediately thereafter and may at any time
of its election thereafter, in addition to any other rights or remedies it may
have available to it at law, without prior notice or demand to Borrower (except
as may be required by law), do any of the following:
(i) DFS may at any time at DFS' election, without notice or demand
to Borrower, do any one or more of the following: declare all or any of
the Obligations immediately due and payable, together with all costs and
expenses of DFS' collection activity, including, without limitation, all
reasonable legal fees; exercise any or all rights under applicable law
(including, without limitation, the right to possess, transfer and
dispose of the Collateral); and/or cease extending any additional credit
to Borrower.
(ii) Borrower will segregate and keep the Collateral in trust for
DFS, and in good order and repair, and will not sell, rent, lease,
consign, otherwise dispose of or use any Collateral, nor further
encumber any Collateral.
(iii) Upon DFS' oral or written demand, Borrower will immediately
deliver the Collateral to DFS, in good order and repair, at a place
specified by DFS, together with all related documents; or DFS may, in
DFS' sole discretion and without notice or demand to Borrower, take
immediate possession of the Collateral together with all related
documents.
(iv) DFS may, without notice, apply the Default Interest Rate.
(v) DFS may, without notice to Borrower and at any time or times
hereafter enforce payment and collect, by legal proceedings or
otherwise, Accounts in the name of Borrower or DFS; and take control of
any cash or non-cash items of payment or proceeds of Accounts and of any
rejected, returned, repossessed or stopped-in-transit goods relating to
Accounts. DFS may at its sole election and without demand enter, with or
without process of law, any premises where Collateral might be and,
without charge or liability to DFS therefor do one or more of the
following: (i) take possession of the Collateral and use or store it in
said premises or remove it to
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such other place or places as DFS may deem convenient; (ii) take
possession of all or part of such premises and the Collateral and place
a custodian in the exclusive control thereof until completion of
enforcement of DFS' security interest in the Collateral or until DFS'
removal of the Collateral and, (iii) remain on such premises and use the
same, together with Borrower's materials, supplies, books and records,
for the purpose of liquidating or collecting such Collateral and
conducting and preparing for disposition of such Collateral.
(vi) DFS may appoint or reappoint by instrument in writing, any
person or persons, whether its officer or officers or an employee or
employees, to be a receiver or receivers (a "receiver", when used herein
shall include a receiver and manager) of the Collateral or any part
thereof and may remove any receiver so appointed and appoint another.
Any such receiver shall, so far as concerns responsibility for his acts,
be deemed Borrower's (and not DFS') agent, and DFS shall not be
responsible for any misconduct, negligence or non-feasance on the part
of any such receiver, his servants, agents or employees. Subject to the
provisions of the instrument appointing him, any such receiver shall
have power to take possession of Collateral, to preserve Collateral or
its value, to carry on or concur in carrying on all or any part of the
Business and to sell, lease or otherwise dispose of or concur in
selling, leasing, accepting deferred payments or otherwise disposing of
the Collateral. To facilitate the foregoing powers, any such receiver
may, to the exclusion of all others, including Borrower, enter upon, use
and occupy all premises owned or occupied by Borrower wherein the
Collateral or any part thereof may be situate, maintain such Collateral
upon such premises, borrow money on a secured or unsecured basis and use
the Collateral or any part thereof directly in carrying on Borrower's
business or as security for loans or advances to enable him to carry on
Borrower's business or otherwise, as such receiver shall, in his sole
discretion, determine. Except as may be otherwise directed by DFS, all
moneys received by such receiver in carrying out his appointment shall
be received in trust for and paid over to DFS. Every such receiver may,
in DFS' discretion, be vested with all or any of DFS' rights and powers.
DFS may, either directly or through its agents, representatives and
employees, exercise any or all of the rights and powers given to a
receiver by virtue of the foregoing. DFS may proceed to realise the
security constituted and created hereby by proceedings in a court of
competent jurisdiction for the appointment of a receiver or for sale of
the Collateral or any part thereof.
(vii) Upon the occurrence of a Default, all Obligations shall
automatically be accelerated and due and payable and the Default
Interest Rate shall automatically apply as of the date of the first
occurrence of such Default, without any prior notice, demand or action
of any type on the part of DFS.
All of DFS' rights and remedies are cumulative. DFS' failure to exercise any of
DFS' rights or remedies hereunder will not waive any of DFS' rights or remedies
as to any past, current or future Default.
ARTICLE 11. SALE OF COLLATERAL
Borrower agrees that if DFS conducts a sale of any Collateral by requesting bids
from 10 or more dealers or distributors in that type of Collateral, any sale by
DFS of such Collateral in bulk or in parcels within 120 days of: (a) DFS' taking
possession and control of such Collateral; or (b) when DFS is otherwise
authorised to sell such Collateral; whichever occurs last, to the bidder
submitting the highest cash bid therefor, is a commercially reasonable sale of
such Collateral under the PPSA. Borrower agrees that the purchase of any
Collateral by a purchaser, as provided in any agreement between DFS and the
purchaser, is a commercially reasonable disposition and private sale of such
Collateral under the PPSA, and no request for bids shall be required. Borrower
further agrees that fifteen (15) or more days prior written notice will be
commercially reasonable notice of any public or private sale (including any sale
to a purchaser). Borrower irrevocably waives any requirement that DFS retain
possession and not dispose of any Collateral until after an arbitration hearing,
arbitration award, confirmation, trial or final judgement. If DFS disposes of
any such Collateral other than as herein contemplated, the commercial
reasonableness of such disposition will be determined in accordance with the
laws of the jurisdiction governing this Agreement.
ARTICLE 12. INDEMNIFICATIONS
12.1 Environmental and Safety and Health Indemnity. Borrower hereby
indemnifies DFS and agrees to hold DFS harmless from and against any and all
losses, liabilities, damages, injuries, costs, expenses and claims of any and
every kind whatsoever (including, without limitation, court costs and legal
fees) which at any time or from time to time may be paid, incurred or suffered
by, or asserted against, DFS for, with respect to, or as a direct
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or indirect result of the violation by Borrower or any Subsidiary, of any
Environmental Law or OHSA Law; or with respect to, or as a direct or indirect
result of (a) the presence on or under, or the escape, seepage, leakage,
spillage, disposal, discharge, emission or release from, properties utilised by
Borrower and/or any Subsidiary in the conduct of its business into or upon any
land, the atmosphere, or any watercourse, body of water or wetland, of any
Hazardous Material or other hazardous, toxic or dangerous waste, substance or
constituent, or other substance (including, without limitation, any losses,
liabilities, damages, injuries, costs, expenses or claims asserted or arising
under the Environmental Laws) or (b) the existence of any unsafe or unhealthful
condition on or at any premises utilised by Borrower and/or any Subsidiary in
the conduct of its business. The provision of and undertakings and
indemnification set out in this Section 12.1 shall survive satisfaction and
payment of the Obligations and termination of this Agreement.
12.2 General Indemnity. In addition to the payment of expenses and legal
fees, if applicable, whether or not the transactions contemplated hereby shall
be consummated, Borrower agrees to indemnify, pay and hold DFS and the officers,
directors, employees, agents, and affiliates of DFS and such holders
(collectively called the "Indemnitees") harmless from and against, any and all
other liabilities, obligations, losses, damages, penalties, actions, judgements,
suits, claims, costs, expenses and disbursements of any kind or nature
whatsoever (including, without limitation, the reasonable fees and disbursements
of counsel for any of such Indemnitees in connection with any investigative,
administrative or judicial proceeding commenced or threatened, whether or not
any of such Indemnitees shall be designated a party thereto), that may be
imposed on, incurred by, or asserted against the Indemnitees, in any manner
relating to or arising out of the Loan Documents, the statements contained in
any commitment letters delivered by DFS, DFS' agreement to make the Loans
hereunder, or the use or intended use of the proceeds of any of the Loans
hereunder (the "Indemnified Liabilities"); provided, however, that Borrower
shall have no obligation to an Indemnitee hereunder with respect to indemnified
liabilities arising from the negligence or wilful misconduct of an Indemnitee.
To the extent that the undertaking to indemnify, pay and hold harmless set forth
in the preceding sentence may be unenforceable because it is violative of any
law or public policy, Borrower shall contribute the maximum portion that it is
permitted to pay and satisfy under applicable law, to the payment and
satisfaction of all Indemnified Liabilities incurred by the Indemnitees or any
of them. The provisions of the undertakings and indemnification set out in this
Section 12.2 shall survive satisfaction and payment of the Obligations and
termination of this Agreement.
ARTICLE 13. OTHER TERMS
13.1 Amendment, Changes and Modification. The Loan Documents may be
amended, changed or modified only as may be agreed upon in writing by Borrower
and DFS from time to time.
13.2 Binding Effect. The Loan Documents will be binding upon the
parties, their successors and assigns.
13.3 Broker Fee. Neither party is obligated to pay any premium or other
charge, brokerage fee or commission in connection with the agreements set forth
herein. Each party will indemnify the other and hold it harmless from any such
claim arising out of such party's acts or those of its representatives.
13.4 Entire Agreement. The Loan Documents embody the entire agreement of
the parties relating to the Credit Facility. There are no promises, terms,
conditions, obligations or warranties other than those contained in the Loan
Documents. The Loan Documents supersede all prior communications,
representations or agreements, verbal or written, between the parties relating
to the Credit Facility.
13.5 Headings. The Table of Contents and the Headings to the sections of
this Agreement are included only for the convenience of the parties and will not
have the effect of defining, diminishing or enlarging the rights of the parties
or affecting the construction or interpretation of any portion of this
Agreement.
13.6 Incorporation by Reference. All other Loan Documents are
incorporated herein by this reference and are made a part of this Agreement as
if fully set forth herein. This Agreement, prior to such incorporation, controls
in the event of any conflict with the terms of any other Loan Documents.
13.7 Interpretation. For the purpose of construing this Agreement,
unless the context otherwise requires, words in the singular will be deemed to
include words in the plural, and vice versa.
13.8 Notices. Any notice under the Loan Documents, will be in writing.
Any notice to be given or
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document to be delivered under the Loan Documents will be deemed to have been
duly given upon delivery, if delivered in person or by any expedited delivery
service which provides proof of delivery, upon facsimile transmission, or on the
fifth Business Day after mailing, if mailed by certified mail, return receipt
requested, postage prepaid mail, addressed to DFS or Borrower at the appropriate
addresses. DFS will use reasonable efforts to deliver any notice DFS is required
to give to Borrower; provided, however, that failure by DFS to actually give any
such notice will not be deemed to be a waiver of any rights or remedies of DFS
and will not give rise to any claims, defences or damages by Borrower. The
addresses for notices are those set forth below or such other addresses as may
be hereafter specified by written notice by the parties:
to DFS: DEUTSCHE FINANCIAL SERVICES,
a division of Deutsche Bank Canada
90 Burnhamthorpe Road West. Suite 500
Mississauga, Ontario, L5B 3C3 CANADA
Attention: Regional Vice President
(Multi-Products Branch)
Facsimile No.: (905) 949-6552
to Borrower: RITEWAY PRODUCTS CANADA LTD.
430 Tapscott Road
Scarborough, Ontario, ______ CANADA
Attention: President
Facsimile No.: _________________________
with a copy to: K.C. Schaff
Mssrs. Stradling, Yocca, Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, CA, 92660 U.S.A.
Facsimile No.: (714)725-4100
and to: F. Herbert
Mssrs. Lang Michener
2500-181 Bay Street
Toronto, Ontario, M5J 2T7 CANADA
Facsimile No.: (416)365-1719
13.9 No Third Party Beneficiary Rights and Reliance. No Person not a
party to this Agreement will have any benefit under this Agreement nor have
third-party beneficiary rights as a result of any of the Loan Documents, nor
will any party be entitled to rely on any actions or inactions of DFS or its
agents, all of which are done for the sole benefit and protection of DFS.
13.10 Protection or Preservation of Collateral. DFS will not have any
contractual duty to protect, insure, collect or realise upon the Collateral or
preserve rights in it against prior parties. DFS will not be responsible or
liable for any shortage, discrepancy, damage, loss or destruction of any part of
the Collateral regardless of the cause.
13.11 Relationship of the Parties. Neither DFS on the one hand nor
Borrower on the other hand will be deemed a partner, joint venturer or related
entity of the other by reason of the Loan Documents.
13.12 Reversal of Payments. To the extent that Borrower makes a payment
or payments to DFS, which payment or payments or proceeds or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside or required to be repaid to a trustee, receiver or any other party under
any bankruptcy or insolvency law, provincial or federal law, common law, or
equitable cause, then to the extent of such payment or proceeds received, the
Credit Facility will be revived and continue in full force and effect, as if
such payment or proceeds had not been received by DFS.
<PAGE> 30
Page 29
13.13 Severability. If any provision of this Agreement (either
generally, or as to a specific application to a set of facts) will be held to be
invalid, illegal or unenforceable, such invalidity, illegality or
unenforceability will not affect any other provision of this Agreement (either
in its entirety, or as to or the application of such provision to any other set
of facts), but this Agreement will be construed as if such invalid, illegal or
unenforceable provision never had been included in this Agreement.
13.14 Maximum Interest. Borrower acknowledges that DFS intends to
strictly conform to the applicable usury laws governing this Agreement.
Regardless of any provision contained herein or in any other document executed
or delivered in connection herewith or therewith, DFS shall never be deemed to
have contracted for, charged or be entitled to receive, collect or apply as
interest on this Agreement (whether termed interest herein or deemed to be
interest by judicial determination or operation of law), any amount in excess of
the maximum amount allowed by applicable law, and, if DFS ever receives,
collects or applies as interest any such excess, such amount which would be
excessive interest will be applied first to the reduction of the unpaid
principal balances of advances under this Agreement, and, second, any remaining
excess will be paid to Borrower. In determining whether or not the interest paid
or payable under any specific contingency exceeds the highest lawful rate,
Borrower and DFS shall, to the maximum extent permitted under applicable law:
(a) characterise any non-principal payment (other than payments which are
expressly designated as interest payments hereunder) as an expense or fee rather
than as interest; (b) exclude voluntary pre-payments and the effect thereof; and
(c) spread the total amount of interest throughout the entire term of this
Agreement so that the interest rate is uniform throughout such term.
13.15 Waivers by DFS. DFS may at any time or from time to time waive all
or any rights under any of the Loan Documents, but any waiver or indulgence at
any time or from time to time will not constitute, unless specifically so
expressed by DFS in writing, a future waiver by DFS of performance by Borrower.
13.16 Survival. The grant of security interest herein to secure all
Obligations, and all provisions relating to the Collateral will survive
termination of this Agreement and will remain in full force and effect until all
Obligations have been paid in full and this Agreement has been terminated. The
Agreement to arbitrate all Disputes will survive termination of this Agreement.
13.17 Participations; Assignments; Information. DFS may, with the prior
written consent of Borrower, not to be unreasonably withheld, grant
participations in or assign, at any time and from time to time hereafter, its
interest in this Agreement or any Loan Document, or of any portion thereof. DFS
may furnish any information concerning Borrower in the possession of DFS from
time to time to its participants and assignees (including prospective assignees
and participants) who sign confidentiality agreements in form reasonably
satisfactory to Borrower with respect to all such disclosed information relating
to Borrower.
13.18 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and either of the parties hereto may execute this Agreement by
signing any such counterpart.
13.19 Release of Information. DFS may provide credit references to any
third party from time to time in response to credit reference requests. DFS will
attempt to provide written or verbal notification to Borrower of such credit
reference requests from third parties and to obtain Borrower's prior consent to
DFS' provision of credit references to any such third parties, however, no
inadvertence or inability on the part of DFS to provide such notice or obtain
such consent will negate DFS' ability, in its sole and reasonable discretion, to
provide such credit references or make DFS in any way liable for doing so.
13.20 Release. Borrower releases DFS from all claims and causes of
action which Borrower may now or hereafter have for any loss or damage to it
claimed to be caused by or arising from: (a) any failure of DFS to protect,
enforce or collect, in whole or in part, any Account; (b) DFS' notification to
any Account Debtors thereon of DFS' security interest in any of the Accounts;
(c) DFS' directing any Account Debtor to pay any sum owing to Borrower directly
to DFS; and (d) any other act or omission to act on the part of DFS, its
officers, agents or employees, except for wilful misconduct or negligence.
13.21 Miscellaneous. Time is of the essence regarding Borrower's
performance of its obligations to DFS
<PAGE> 31
Page 30
notwithstanding any course of dealing or custom on DFS' part to grant extensions
of time. Borrower's liability under this Agreement is direct and unconditional
and will not be affected by the release or nonperfection of any security
interest granted hereunder. DFS will have the right to refrain from or postpone
enforcement of this Agreement or any other Loan Documents without prejudice and
the failure to strictly enforce the Loan Documents will not be construed as
having created a course of dealing between DFS and Borrower contrary to the
specific terms of the Loan Documents or as having modified, released or waived
the same. The express terms of this Agreement and the other Loan Documents will
not be modified by any course of dealing, usage of trade, or custom of trade
which may deviate from the terms hereof. If Borrower fails to pay any taxes,
fees or other obligations which may impair DFS' interest in the Collateral, or
fails to keep the Collateral insured, DFS may, but shall not be required to, pay
such taxes, fees or obligations and pay the cost to insure the Collateral, and
the amounts paid will be: (a) an additional debt owed by Borrower to DFS, which
shall be subject to finance charges as provided herein; and (b) due and payable
immediately in full. Borrower agrees to pay all of DFS' reasonable legal fees
and expenses incurred by DFS in enforcing DFS' rights hereunder.
13.22 Waivers by Borrower. Borrower irrevocably waives notice of: DFS'
acceptance of this Agreement, presentment, demand, protest, non-payment,
non-performance, and dishonour. Borrower and DFS irrevocably waive all rights to
claim any punitive and/or exemplary damages. Borrower waives all rights of
offset and counter claims Borrower may have against DFS. Borrower waives all
notices of default and non-payment at maturity of any or all of the Accounts.
13.23 NO ORAL AGREEMENTS. ORAL AGREEMENTS OR COMMITMENTS TO LEND MONEY,
EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING
PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU,
(BORROWER(S)) AND US (CREDITOR) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY
AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH
IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS
WE MAY LATER AGREE IN WRITING TO MODIFY IT. THERE ARE NO UNWRITTEN AGREEMENTS
BETWEEN THE PARTIES.
13.24 Supplement. If Borrower and DFS have heretofore executed other
agreements in connection with all or any part of the Collateral, this Agreement
shall supplement each and every other agreement previously executed by and
between Borrower and DFS, and in that event, this Agreement shall neither be
deemed a novation nor a termination of such previously executed agreement nor
shall execution of this Agreement be deemed a satisfaction of any obligation
secured by such previously executed agreement.
13.25 Use of Counsel and Receipt of Agreement. Borrower acknowledges
that it has received a true and complete copy of this Agreement. Borrower
acknowledges that it has (a) had representation of counsel during negotiation of
this Agreement, and (b) read and understood this Agreement.
13.26 Facsimiles, Etc. Notwithstanding anything herein to the contrary:
(a) DFS may rely on any facsimile copy, electronic data transmission or
electronic data storage of any statement, financial statements or other reports,
and (b) such facsimile copy, electronic data transmission or electronic data
storage will be deemed an original, and the best evidence thereof for all
purposes, including, without limitation, under this Agreement or any other
agreements entered into between DFS and Borrower, and for all evidentiary
purposes before any arbitrator, court or other adjudicatory authority.
13.27 Power of Attorney. Borrower irrevocably appoints DFS (and any
person designated by it) as Borrower's true and lawful Attorney with full power
to at any time, in the discretion of DFS (whether or not Default has occurred)
to: (a) endorse the name of Borrower upon any of the items of payment of
proceeds of the Collateral and deposit the same in the account of DFS for
application to the Obligations; (b) sign the name of Borrower to verify the
accuracy of the Accounts; (c) sign the name of Borrower on any document or
instrument that DFS shall deem necessary or appropriate to perfect and maintain
perfected the security interests in the Collateral under this Agreement and
other Loan Documents; (d) after allowing Borrower a period of ninety (90) days
to do so in its own name and unless after such time Borrower has provided DFS
with satisfactory cash collateral or additional security acceptable to DFS in
its sole discretion, initiate and settle any insurance claim and, in any event,
endorse Borrower's name on any cheque, instrument or other item of payment; (e)
endorse the name of Borrower upon financing statements, instruments pertaining
to the Collateral; (f) supply omitted information and correct errors of a
clerical nature in any documents between DFS and Borrower; and (g) do anything
to preserve and protect the Collateral and DFS' rights and interest
<PAGE> 32
Page 31
therein. In the event of a Default, Borrower irrevocably appoints DFS (and any
person designated by it) as Borrower's true and lawful Attorney with full power
to at any time, in the discretion of DFS to: (i) demand payment, enforce payment
and otherwise exercise all of Borrower's rights, and remedies with respect to
the collection of any Accounts; (ii) settle, adjust, compromise, extend or renew
any Accounts; (iii) settle, adjust or compromise any legal proceedings brought
to collect any Accounts; (iv) sell or assign any Accounts upon such terms, for
such amounts and at such time or times as DFS may deem advisable; (v) discharge
and release any Accounts; (vi) prepare, file and sign Borrower's name on any
Proof of Claim in Bankruptcy or similar document against any Account Debtor;
(vii) endorse the name of Borrower upon any chattel paper, document, instrument,
invoice, freight bill, bill of lading or similar document or agreement relating
to any Account or goods pertaining thereto; (viii) take control in any manner of
any item of payments or proceeds and for such purpose to notify the postal
authorities to change the address for delivery of mail addressed to Borrower to
such address as DFS may designate. This power of attorney is for value and
coupled with an interest and is irrevocable so long as any Obligations remain
outstanding and by DFS exercising such right, DFS shall not waive any right
against Borrower until the Obligations are paid in full.
13.28 Expenses. Borrower agrees, whether or not any Loan is made
hereunder, to pay DFS upon demand for all reasonable expenses, including
reasonable legal fees for DFS (who may be employees of DFS), incurred by (a) DFS
in connection with the preparation, negotiation, and execution of this Agreement
and any other Loan Document (not to exceed $3,500.00), (b) DFS in connection
with the preparation of any and all amendments to this Agreement and any other
Loan Document, and all search, recording, filing, and registration expenses, and
(c) DFS in connection with the enforcement of the Borrower's obligations
hereunder or under any other Loan Document. Borrower also agrees to (i)
indemnify and hold DFS harmless from any loss or expense which may arise or be
created by the acceptance of telephonic or other instructions for making Loans,
except for any loss or expense arising from DFS' gross negligence or wilful
misconduct (provided however, that reliance alone upon telephonic or other
instructions shall not itself be deemed to constitute gross negligence or wilful
misconduct), and (ii) to pay and save DFS harmless from all liability for, any
stamp or other taxes which may be payable with respect to the execution or
delivery of this Agreement or any of the other Loan Documents. Borrower's
obligations under this Section 13.28 shall survive any termination of this
Agreement.
13.29 Language. Les parties conviennent que la presente convention et
tous les documents s'y rattachant soient rediges et signes en anglais. It is the
express wish of the parties that this agreement and any related documents be
drawn up and executed in English.
ARTICLE 14. BINDING ARBITRATION.
14.1 Arbitrable Claims. Except as otherwise specified below, all
actions, disputes, claims and controversies under common law, statutory law or
in equity of any type or nature whatsoever (including, without limitation, all
torts, whether regarding negligence, breach of fiduciary duty, restraint of
trade, fraud, conversion, duress, interference, wrongful replevin, wrongful
sequestration, fraud in the inducement, usury or any other tort, all contract
actions, whether regarding express or implied terms, such as implied covenants
of good faith, fair dealing, and the commercial reasonableness of any Collateral
disposition, or any other contract claim, all claims of deceptive trade
practices or lender liability, and all claims questioning the reasonableness or
lawfulness of any act), whether arising before or after the date of this
Agreement, and whether directly or indirectly relating to: (a) this Agreement
and/or any amendments and schedules or exhibits hereto, or the breach,
invalidity or termination hereof; (b) any previous or subsequent agreement
between DFS and Borrower; (c) any act committed by DFS or by any parent company,
subsidiary or affiliated company of DFS (the "DFS Companies"), or by any
employee, agent, officer or director of a DFS Company whether or not arising
within the scope and course of employment or other contractual representation of
the DFS Companies provided that such act arises under a relationship,
transaction or dealing between DFS and Borrower; and/or (d) any other
relationship, transaction or dealing between DFS and Borrower (collectively the
"Disputes"), will be subject to and resolved by binding arbitration.
14.2 Administrative Body. All arbitration hereunder will be conducted in
accordance with the then current Rules of Procedure for the Conduct of
Arbitrations of the Arbitration and Mediation Institute of Ontario Inc.
("AMIO"). If AMIO is dissolved, disbanded or becomes subject to any provincial
of federal bankruptcy or insolvency proceeding, the parties will remain subject
to binding arbitration which will be conducted by a mutually agreeable arbitral
forum. The parties agree that one (1) mutually acceptable arbitrator shall be
selected from a list of potential arbitrators obtained from AMIO and will be a
commercial lawyer with at least five (5) years secured transactions
<PAGE> 33
Page 32
experience. The arbitrator will decide if any inconsistency exists between the
rules of any applicable arbitral forum and the arbitration provisions contained
herein. If such inconsistency exists, the arbitration provisions contained
herein will control and supersede such rules. The site of all arbitration
proceedings will be in the City of Toronto, Ontario.
14.3 Discovery. Discovery permitted in any arbitration proceeding
commenced hereunder is limited as follows. No later than thirty (30) days after
the filing of a claim for arbitration, the parties will exchange detailed
statements setting forth the facts supporting the claim(s) and all defences to
be raised during the arbitration, and a list of all exhibits and witnesses. No
later than twenty-one (21) days prior to the arbitration hearing, the parties
will exchange a final list of all exhibits and all witnesses, including any
designation of any expert witness(es) together with a summary of their
testimony; a copy of all documents and a detailed description of any property to
be introduced at the hearing. Under no circumstances will the use of
interrogatories, requests for admission, requests for the production of
documents or the taking of depositions be permitted. However, in the event of
the designation of any expert witness(es), the following will occur: (a) all
information and documents relied upon by the expert witness(es) will be
delivered to the opposing party, (b) the opposing party will be permitted to
depose the expert witness(es), (c) the opposing party will be permitted to
designate rebuttal expert witness(es), and (d) the arbitration hearing will be
continued to the earliest possible date that enables the foregoing limited
discovery to be accomplished.
14.4 Exemplary or Punitive Damages. The arbitrator will not have the
authority to award exemplary or punitive damages.
14.5 Confidentiality of Awards. All arbitration proceedings, including
testimony or evidence at hearings, will be kept confidential, although any award
or order rendered by the arbitrator pursuant to the terms of this Agreement may
be entered as a judgement or order in any provincial or federal court and may be
confirmed within the judicial district which includes the residence of the party
against whom such award or order was entered. The Arbitration Act (Ontario), as
amended ("OAA") will govern all arbitration(s) and confirmation proceedings
hereunder.
14.6 Prejudgment and Provisional Remedies. Nothing herein will be
construed to prevent DFS' or Borrower's use of bankruptcy, receivership,
injunction, repossession, replevin, claim and delivery, sequestration, seizure,
attachment, foreclosure, and/or any other prejudgement or provisional action or
remedy relating to any Collateral for any current or future debt owed by either
party to the other. Any such action or remedy will not waive DFS' or Borrower's
right to compel arbitration of any Dispute.
14.7 Legal Fees. If either Borrower or DFS brings any other action for
judicial relief with respect to any Dispute (other than those set forth in
Section 14.6) the party bringing such action will be liable for and immediately
pay all of the other party's costs and expenses (including legal fees) incurred
to stay or dismiss such action and remove or refer such Dispute to arbitration.
If either Borrower or DFS brings or appeals an action to vacate or modify an
arbitration award and such party does not prevail, such party will pay all costs
and expenses, including legal fees, incurred by the other party in defending
such action. Additionally, in any arbitration claim or counterclaim the
unsuccessful party will pay all reasonable costs and expenses (including legal
fees) incurred by the prevailing party in the course of such action or
proceeding.
14.8 Limitations. Any arbitration proceeding must be instituted: (a)
with respect to any Dispute for the collection of any debt owed by either party
to the other, within two (2) years after the date the last payment was received
by the instituting party; and (b) with respect to any other Dispute, within two
(2) years after the date the incident giving rise thereto occurred, whether or
not any damage was sustained or capable of ascertainment or either party knew of
such incident. Failure to institute an arbitration proceeding within such period
will constitute an absolute bar and waiver to the institution of any proceeding,
whether arbitration or a court proceeding, with respect to such Dispute.
14.9 Survival After Termination. The agreement to arbitrate will survive
the termination of this Agreement.
ARTICLE 15. INVALIDITY/UNENFORCEABILITY OF BINDING ARBITRATION.
IF THIS AGREEMENT IS FOUND TO BE NOT SUBJECT TO BINDING ARBITRATION, ANY LEGAL
PROCEEDING WITH RESPECT TO ANY DISPUTE WILL BE TRIED IN A COURT OF COMPETENT
<PAGE> 34
Page 33
JURISDICTION BY A JUDGE WITHOUT A JURY. BORROWER AND DFS WAIVE ANY RIGHT TO A
JURY TRIAL IN ANY SUCH PROCEEDING.
ARTICLE 16. GOVERNING LAW.
Borrower acknowledges and agrees that this and all other agreements between
Borrower and DFS have been substantially negotiated, and will be substantially
performed, in the Province of Ontario. Accordingly, Borrower agrees that all
Disputes will be governed by, and construed in accordance with, the laws of the
Province of Ontario, and that the provisions of the OAA shall control and govern
all arbitration proceedings hereunder.
IN WITNESS WHEREOF, the parties have, by their duly authorised officers,
executed this Agreement as of the Effective Date.
THIS AGREEMENT CONTAINS BINDING ARBITRATION, JURY WAIVER AND PUNITIVE DAMAGES
WAIVER PROVISIONS.
RITEWAY PRODUCTS CANADA LTD.
By: /s/ MICHAEL HAYNES
-------------------------------------
Print Name: Michael Haynes
Title: President
By: /s/ FRANK HERBERT
-------------------------------------
Print Name: Frank Herbert
Title: Secretary
DEUTSCHE FINANCIAL SERVICES,
a division of Deutsche Bank Canada
By: /s/ C. BRAZEAU
-------------------------------------
Print Name: C. Brazeau
Title: Vice President
By: /s/ JOE CONTE
-------------------------------------
Print Name: Joe Conte
Title: Vice President
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