SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
Of the Securities Exchange Act of 1934
For Quarter Ended December 31, 1997 Commission file number 0-6664
--------------------- -------------
K-TEL INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0946588
- ------------------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2605 Fernbrook Lane North, Minneapolis, Minnesota 55447-4736
- ------------------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 559-6888
-----------------------------
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 ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
At February 9, 1998 there were outstanding 3,815,609 shares of common stock,
$.01 par value per share, of K-tel International, Inc.
<PAGE>
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,330 $ 3,341
Accounts receivable 16,308 16,667
Inventories 5,167 4,287
Royalty and other advances 2,944 1,552
Prepaid expenses and other 3,549 2,587
--------- ---------
Total Current Assets 32,298 $ 28,434
--------- ---------
Property and Equipment 3,409 3,154
Less Accumulated Depreciation and Amortization (2,392) (2,172)
--------- ---------
Property and Equipment, Net 1,017 982
Other Assets 1,279 1,076
--------- ---------
$ 34,594 $ 30,492
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 2,010 $ 836
Note payable to affiliate -- 1,500
Accounts payable 4,641 3,708
Accrued royalties 8,439 11,296
Reserve for returns 5,971 4,930
Other current liabilities 3,499 3,572
Income taxes payable 124 70
--------- ---------
Total Current Liabilities 24,684 25,912
--------- ---------
Long Term Debt 4,000 --
Shareholders' Equity:
Common stock 37 37
Additional Paid In Capital 8,026 7,969
Deficit (817) (2,462)
Unrealized loss on Investment (332) --
Cumulative translation adjustment (1,004) (964)
--------- ---------
Total Shareholders' Equity 5,910 4,580
--------- ---------
$ 34,594 $ 30,492
========= =========
</TABLE>
<PAGE>
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(IN THOUSANDS - EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 23,215 $ 17,131 $ 48,350 $ 32,753
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of goods sold 12,502 8,431 27,306 15,909
Advertising 4,451 2,934 8,177 5,718
Selling, general & administrative 5,684 3,969 10,896 8,360
---------- ---------- ---------- ----------
Total Costs and Expenses 22,637 15,334 46,379 29,987
---------- ---------- ---------- ----------
OPERATING INCOME 578 1,797 1,971 2,766
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 10 13 26 30
Interest expense (105) (3) (175) (21)
Foreign currency transaction gain (loss) (14) 70 (44) 51
---------- ---------- ---------- ----------
Total Other Income (Expense) (109) 80 (193) 60
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 469 1,877 1,778 2,826
PROVISION FOR INCOME TAXES (31) (125) (133) (222)
---------- ---------- ---------- ----------
NET INCOME $ 438 $ 1,752 $ 1,645 $ 2,604
========== ========== ========== ==========
INCOME PER SHARE;
BASIC $ .11 $ .47 $ .43 $ .70
DILUTED $ .11 $ .45 $ .40 $ .68
SHARES USED IN THE CALCULATION OF
INCOME PER SHARE;
BASIC 3,816 3,749 3,810 3,746
DILUTED 4,000 3,876 4,107 3,842
</TABLE>
<PAGE>
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1997 1996
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 1,645 $ 2,604
Adjustments to reconcile net income to cash provided by (used for) operating
activities:
Depreciation and amortization 393 262
Changes in current operating items:
Accounts receivable 267 2,446
Inventories (917) (50)
Royalty and other advances (1,395) 85
Prepaid expenses and other (1,299) (828)
Current liabilities (771) 710
---------- ----------
Cash provided by (used for) operating activities (2,077) 5,229
---------- ----------
Cash flows from investing activities:
Property and equipment purchases (287) (311)
Proceeds from sale of property and equipment 3 30
Music catalog additions (321) (122)
Other (33) (42)
---------- ----------
Cash used for investing activities (638) (445)
---------- ----------
Cash flows from financing activities:
Issuance of Long term debt 4,000 --
Borrowings on line of credit, Foothill Capital 7,540 --
Repayments on line of credit, Foothill Capital (5,530) --
Repayments on line of credit (836) (1,864)
Repayments on note payable to affiliate, net (1,500) --
Proceeds from exercise of stock options 57 14
---------- ----------
Cash provided by (used for) financing activities 3,731 (1,850)
---------- ----------
Effect of exchange rates on cash (27) (3)
---------- ----------
Net increase in cash and cash equivalents 989 2,931
Cash and cash equivalents at beginning of year 3,341 3,255
---------- ----------
Cash and cash equivalents at period end $ 4,330 $ 6,186
========== ==========
</TABLE>
<PAGE>
K-TEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended
December 31, 1997 are not necessarily indicative of the results that
may be expected for the year as a whole. For further information, refer
to the consolidated financial statements and footnotes thereto included
in the Company's annual report on Form 10-K for the year ended June 30,
1997.
2. RECENTLY ISSUED ACCOUNTING STANDARD
During June 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information",
which requires a disclosure of business segments in the financial
statements of the Company. The Company expects to adopt SFAS No. 131 in
fiscal 1999 and anticipates a change in segment disclosure at the time
of adoption.
3. COMPUTATION OF NET INCOME PER SHARE
During the second quarter of fiscal 1998, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share."
As a result, all previously reported earnings per share have been
restated. Basic earnings per share have been computed by dividing net
income by the weighted average number of shares outstanding during the
period. Diluted earnings per share have been computed assuming the
exercise of stock options and their related income tax effect.
For the three-month periods ended December 31, 1997 and 1996, weighted
average shares outstanding included common stock equivalents of
approximately 184,000 shares and 127,000 shares, respectively, related
to stock options. For the six-month periods ended December 31, 1997 and
1996, weighted average shares outstanding included common stock
equivalents of approximately 297,000 shares and 96,000 shares,
respectively, related to stock options.
4. LOAN AND SECURITY AGREEMENT
On November 19, 1997, certain of the Company`s subsidiaries entered
into a new four year $10 million credit facility with a Foothill
Capital Corporation. The credit facility consists of a $4 million term
loan due November 19, 2001, and a $6 million revolving line of credit
facility. Borrowings under the facility bear interest at the prime rate
and are secured by the assets of certain U.S. subsidiaries, including
accounts receivable, inventories, equipment, music library and general
intangibles. The loan agreement contains certain financial and other
covenants or restrictions, including the maintenance of a minimum
tangible net worth by the Company, limitations on capital expenditures,
restrictions on music library acquisitions, limitations on the
incurrence of indebtedness, and restrictions on dividends to the
Company. The Company has guaranteed the obligations of its subsidiaries
under the credit facility and has pledged the stock of those
subsidiaries and its assets to secure the Company's obligations under
its guaranty. The proceeds of
<PAGE>
the credit facility were used to repay in full, and terminate, the
previously existing bank revolving credit agreement and the $1,500,000
note payable to affiliate.
5. RECLASSIFICATIONS
Certain June 30, 1997 amounts have been reclassified to conform to the
current period presentation.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General - K-tel International, Inc. is an international marketer and
distributor of entertainment and consumer products and is a leader in
the market niche for pre-recorded music compilations. With more than
twenty-five years of marketing experience in the United States
("U.S."), Canada and Europe, the Company has developed the resources,
knowledgeable personnel, information systems, distribution capabilities
and media buying ability, to launch music, consumer convenience and
video products quickly in the North American and European market
through both retail and direct response.
The Company markets and sells pre-recorded music both from the
Company's owned music master catalog and under licenses from third
party record companies. Sales of albums, cassettes and compact discs
are made to rackjobbers (distributors which stock and manage inventory
within certain music and video departments for some retail stores),
wholesalers and retailers in the U.S. and through subsidiaries and
licensees in the U.K. and Europe. Television direct response marketing
of pre-recorded music and consumer convenience product is a significant
source of revenue for the Company, specifically in Europe. In 1997, the
Company formed an U.S. media buying and infomercial-marketing
subsidiary, which performs media buying services for third parties and
also markets products through infomercials produced by third parties.
A. RESULTS OF OPERATIONS
Consolidated net sales for the six months ended December 31, 1997, were
$48,350,000 with operating income of $1,971,000 and net income of
$1,645,000, or $.40 per diluted share. Consolidated net sales for the
same period in the prior year were $32,753,000 with operating income of
$2,766,000 and net income of $2,604,000, or $.68 per diluted share. The
following tables set forth, for the periods indicated, results of
operations by geographic region as a percentage of net sales. All
amounts are in thousands of dollars.
<TABLE>
<CAPTION>
Six Months Ended December 31, 1997
----------------------------------------------------------------------
North America Europe Total
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 33,360 100% $ 14,990 100% $ 48,350 100%
Costs and expenses
Cost of goods sold 20,581 62% 6,725 45% 27,306 56%
Advertising 5,198 16% 2,979 20% 8,177 17%
Selling, general & administrative 6,174 18% 3,601 24% 9,775 20%
-------- -------- -------- -------- -------- --------
Operating Income $ 1,407 4% $ 1,685 11% $ 3,092 7%
======== ======== ======== ======== ======== ========
Six Months Ended December 31, 1996
----------------------------------------------------------------------
North America Europe Total
-------------------- -------------------- --------------------
Net Sales $ 18,627 100% $ 14,126 100% $ 32,753 100%
Costs and expenses
Cost of goods sold 9,381 50% 6,528 46% 15,909 49%
Advertising 2,843 15% 2,875 20% 5,718 17%
Selling, general & administrative 4,033 22% 3,615 26% 7,648 23%
-------- -------- -------- -------- -------- --------
Operating Income $ 2,370 13% $ 1,108 8% $ 3,478 11%
======== ======== ======== ======== ======== ========
</TABLE>
In addition to the operating amounts shown above for the six months
ended December 31, 1997 and 1996, the parent holding company incurred
expenses of $1,121,000 and $712,000, respectively.
<PAGE>
Consolidated net sales for the three months ended December 31, 1997,
were $23,215,000 with operating income of $578,000 and net income of
$438,000, or $.11 per diluted share. Consolidated net sales for the
same period in the prior year were $17,131,000 with operating income of
$1,797,000 and net income of $1,752,000 or $.45 per diluted share. The
following tables set forth, for the periods indicated results of
operations by geographic region as a percentage of net sales. All
amounts are in thousands of dollars.
<TABLE>
<CAPTION>
Quarter Ended December 31, 1997
----------------------------------------------------------------------
North America Europe Total
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 15,542 100% $ 7,673 100% $ 23,215 100%
Costs and expenses
Cost of goods sold 9,109 59% 3,393 44% 12,502 54%
Advertising 2,940 19% 1,511 20% 4,451 19%
Selling, general & administrative 3,231 21% 1,881 24% 5,112 22%
-------- -------- -------- -------- -------- --------
Operating Income $ 262 1% $ 888 12% $ 1,150 5%
======== ======== ======== ======== ======== ========
Quarter Ended December 31, 1996
----------------------------------------------------------------------
North America Europe Total
-------------------- -------------------- --------------------
Net Sales $ 8,979 100% $ 8,152 100% $ 17,131 100%
Costs and expenses
Cost of goods sold 4,580 51% 3,851 47% 8,431 49%
Advertising 1,255 14% 1,679 21% 2,934 17%
Selling, general & administrative 1,646 18% 1,815 22% 3,461 20%
-------- -------- -------- -------- -------- --------
Operating Income $ 1,498 17% $ 807 10% $ 2,305 14%
======== ======== ======== ======== ======== ========
</TABLE>
In addition to the operating amounts shown above for the quarters ended
December 31, 1997 and 1996, the parent holding company incurred
expenses of $572,000 and $508,000, respectively.
CONSOLIDATED NET SALES for the six months ended December 31, 1997
increased $15,597,000, or 48%, from the comparable period in 1996.
North American sales for the six months ended December 31, 1997
increased $14,733,000, or 79%, from the comparable period in 1996. This
increase was mainly due to $10,964,000 in sales derived from the
Company's media buying and infomercial subsidiary which was not in
existence in 1996, and an increase in approximately $5,000,000 of music
and consumer product sales from the comparable period in 1996. European
sales for the six months ended December 31, 1997 increased $864,000, or
6%, from the comparable period in 1996 due mainly to an increase in
direct response sales made in Germany.
For the quarter ended December 31, 1997 consolidated net sales
increased $6,084,000, or 36%, from the comparable period in 1996. North
American sales for the three months ended December 31, 1997 increased
$6,563,000, or 73%, from the comparable period in 1996. This increase
was mainly due to $5,119,000 in sales derived from the Company's media
buying and infomercial subsidiary which was not in existence in 1996,
and an increase in approximately $1,700,000 of music and consumer
product sales from the comparable period in 1996. European sales for
the three months ended December 31, 1997 decreased $479,000, or 6%,
from the comparable period in 1996 due mainly to a decrease in sales
from the Company's Finland music operation.
CONSOLIDATED COST OF GOODS SOLD AS A PERCENTAGE OF NET SALES for the
six months ended December 31, 1997 were 56% as compared to 49% in the
comparable period in 1996. Costs of goods sold as a percentage of net
sales for North America for the six months ended December 31, 1997 were
62% as compared to 50% in the comparable period in 1996. The increase
is mainly due to the higher costs of goods associated with the
Company's media buying and infomercial subsidiary, which was not in
existence in 1996, and whose cost of goods for the period approximated
63% of sales. Additionally, the Company experienced a slightly higher
cost of goods sold in its U.S. retail music business. European costs of
goods
<PAGE>
sold were 45% as compared to 46% in the comparable period in 1996 as
the Company was able to slightly improve its gross margin on
merchandise sold via direct response as compared to the merchandise
sold in the prior period.
For the quarter ended December 31, 1997 cost of goods sold were 54% as
compared to 49% in the comparable period in 1996. Cost of goods sold as
a percentage of net sales for North America for the three months ended
December 31, 1997 were 59% as compared to 51% in the comparable period
in 1996. This increase in the cost of sales percentage was due to the
higher cost of goods sold in the Company's U.S. retail music business,
as well as a high amount of returns on certain of the Company's
consumer product sales. European costs of goods sold were 44% as
compared to 47% in the comparable period in 1996 as the Company was
able to improve its gross margin on merchandise sold via direct
response as compared to the merchandise sold in the prior period.
CONSOLIDATED ADVERTISING COSTS for the six months ended December 31,
1997 increased $2,459,000, or 43%, from the comparable period in 1996.
North American advertising costs for the six months ended December 31,
1997 increased $2,355,000, or 83%, from the comparable period in 1996.
This increase was mainly due to advertising costs incurred by the
Company's media buying and infomercial subsidiary that was not in
existence in 1996. European advertising costs for the six months ended
December 31, 1997 remained fairly consistent with the comparable period
in 1996.
For the quarter ended December 31, 1997 advertising costs increased
$1,517,000, or 52%, from the comparable period in 1996. North American
advertising costs for the three months ended December 31, 1997
increased $1,685,000, or 134% from the comparable period in 1996. This
increase was mainly due to advertising costs incurred by the Company's
media buying and infomercial subsidiary that was not in existence in
1996. European advertising costs for the three months ended December
31, 1997 remained fairly consistent with the comparable period in 1996.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the six
months ended December 31, 1997 increased $2,127,000, or 28%, from the
comparable period in 1996. North American selling, general and
administrative expenses for the six months ended December 31, 1997
increased $2,141,000, or 53%, from the comparable period in 1996. The
difference primarily relates to a reduction of 1996 general and
administrative costs of $850,000 that resulted from the recovery of
certain legal and other costs related to a dispute with a company over
certain music licensing rights. Excluding the settlement amount,
general and administration expenses for the six-month period ended
December 31, 1997 as compared to same period in 1996 increased by
$1,291,000, or 26%. This remaining increase was mainly due to overhead
costs incurred by the Company's media buying and infomercial subsidiary
that was not in existence in 1996. European selling, general and
administrative expenses for the six months ended December 31, 1997
remained consistent with costs incurred in the comparable period in
1996. Additionally, the parent holding company incurred operating costs
of $1,121,000 compared to such expenses of $712,000 in the comparable
period in 1996. The increase of $409,000 was mainly due to legal and
professional fees associated with the proposed sale of certain of the
Company's music business assets (the sale was terminated in September
1997).
For the quarter ended December 31, 1997 selling, general and
administrative expenses increased $1,651,000, or 48%, from the
comparable period in 1996. North American selling, general and
administrative expenses for the three months ended December 31, 1997
increased $1,585,000, or 96%, from the comparable period in 1996. The
difference primarily relates to a reduction of 1996 general and
administrative costs of $850,000 that resulted from the recovery of
certain legal and other costs related to a dispute with a company over
certain music licensing rights. Excluding the settlement amount,
general and administration expenses for the three-month period ending
December 31, 1997 as compared to same period in 1996 increased by
$735,000, or 30%. This increase was mainly due to overhead costs
incurred by the Company's media buying and infomercial subsidiary that
was not in existence in 1996. European selling, general and
administrative expenses for the three months ended December 31, 1997
remained consistent with costs incurred in the comparable period in
1996. Additionally the parent holding company incurred operating costs
of $572,000 compared to $508,000 in the comparable period in 1996.
<PAGE>
OPERATING INCOME for the six months ended December 31, 1997 decreased
$795,000 to $1,971,000 from $2,766,000 from the comparable period in
1996. North American operating income decreased $963,000, or 41%, from
the comparable period in 1996. The decrease was primarily due to
$850,000 recognized in the second quarter of 1996 from the recovery of
certain legal and other costs related to a dispute with a company over
certain music licensing rights. European operating income increased
$577,000, or 52% from the comparable period in 1996. The operating
income improvement was due mainly to current year profitability in the
Company's German direct response operations.
For the quarter ended December 31, 1997 operating income decreased to
$578,000 from $1,797,000 from the comparable period in 1996. North
American operating income decreased $1,236,000, or 83%, from the
comparable period in 1996. The decrease was primarily due to; $850,000
recognized in the second quarter of 1996 from the recovery of certain
legal and other costs related to a dispute with a company over certain
music licensing rights and; approximately $400,000 from losses in the
Company's consumer products and direct response subsidiaries during the
current period. European operating income increased $81,000, or 10%,
from the comparable period in 1996 due to increased profit from the
Company's German direct response operations.
INTEREST EXPENSE for the six months ended December 31, 1997, increased
$154,000 to $175,000 as compared to the same period in 1996. For the
three months ended December 31, 1997, interest expense increased
$102,000 to $105,000 as compared to the prior year period. The increase
in interest expense corresponds with the increased borrowings made by
the Company during these periods under its existing credit facilities.
During the six months ended December 31, 1997, the Company experienced
a foreign currency transaction loss of $44,000 compared to a gain of
$51,000 experienced during the comparable period in the prior year. For
the three months ended December 31, 1997, the Company experienced a
foreign currency loss of $14,000 compared to a gain of $70,000 in the
prior year. In the three and six month periods ended December 31, 1997,
foreign exchange rate fluctuations were less favorable to the Company
than in the previous year comparable periods. Most of the Company's
foreign currency transaction exposure is due to its European
subsidiaries' liabilities, which are payable to the Company's U.S.
parent or U.S. Subsidiaries. In accordance with generally accepted
accounting principles the payable balances are adjusted quarterly to
the local currency equivalent of the U.S. dollar. The majority of the
translation losses for the six-month and three-month periods ended
December 31, 1997 were the result of these intercompany liabilities.
Gains or losses resulting from these intercompany liabilities remain
unrealized until such time as the underlying liabilities are settled.
INCOME TAXES for the six months ended December 31, 1997 were $133,000
compared to a provision of $222,000 in the prior year comparable
period. For the three months ended December 31, 1997 the provision for
income tax was $31,000 compared to $125,000 in the prior year period.
Variations in the Company's tax provision are a factor of the country
of origin of profits and the availability of net operating loss
carryforwards.
Operating results for the three and six month periods are not
necessarily indicative of the results that may be expected for the full
year.
B. LIQUIDITY AND CAPITAL RESOURCES
During the six months ended December 31, 1997, the Company experienced
negative cash flow from operations of $2,077,000. This was mainly due
to investments of approximately $1,400,000 in royalties and other
advances for music product, and $1,300,000 for the purchase and
deferment of certain media and advertising costs, the benefit of which
are expected to be realized later in fiscal 1998. The Company's overall
cash and cash equivalents increased by $989,000 that resulted mostly
from increased borrowings under its credit facilities.
Until November 20, 1997, the Company had a revolving credit agreement
with a U.S. bank that provided borrowing up to $2,500,000 based upon a
monthly borrowing base derived from certain of the Company's U.S.
Subsidiary's accounts receivable. The loan was secured by assets of the
Company's U.S.
<PAGE>
Subsidiaries, including accounts receivable, inventories, equipment and
owned music master recordings and was guaranteed by the Company
On November 19, 1997, certain of the Company's subsidiaries entered
into a new four year $10 million credit facility with Foothill Capital
Corporation. The credit facility consists of a $4 million term loan due
November 19, 2001, and a $6 million revolving line of credit. Borrowing
under the facility bear interest at the prime rate and are secured by
the assets of certain U.S. subsidiaries, including accounts receivable,
inventories, equipment, music library and general intangibles. The loan
agreement contains certain financial and other covenants or
restrictions, including the maintenance of a minimum tangible net worth
by the Company, limitations on capital expenditures, restrictions on
music library acquisitions, limitations on the incurrence of
indebtedness, and restrictions on dividends to the Company. The Company
has guaranteed the obligations of its subsidiaries under the credit
facility and has pledged the stock of those subsidiaries and its assets
to secure the company's obligations under its guaranty. On November 20,
1997, $7,716,692 was borrowed under the credit facility and a portion
of the proceeds were used to repay in full the bank revolving credit
agreement discussed in the preceding paragraph and such agreement was
terminated. The amount outstanding under this credit facility was
$2,010,000 at December 31, 1997.
As of November 20, 1997, an affiliate controlled by the Company's
Chairman of the Board and Chief Executive Officer, had provided
$1,500,000 in financing to the Company to fund the Company's U.S.
operations. The Company pays interest on this advance, which is due on
demand, at the same rate as the company pays on its bank revolving
credit agreement. The debt was repaid in full on November 20, 1997 from
a portion of the borrowings under the new credit facility discussed
above.
Management considers its cash needs for the current fiscal year to be
adequately covered by its operations and available borrowings under the
new financing arrangement. Additionally, the Company has available to
it funding from a company owned by Mr. Philip Kives, the Company's
Chairman of the Board and Chief Executive Officer. Although management
is not privy to the financial statements of the Chairman's other
companies, he has assured K-tel International, Inc. that he will fund
its operations on an as needed basis consistent with his past practices
which have mainly been by way of giving the Company open ended payment
terms on product purchased for his affiliate companies.
During the first six months of fiscal 1998, the Company purchased
approximately $295,000 of consumer convenience product from an
affiliate controlled by Mr. Philip Kives, the Company's Chairman of the
Board and Chief Executive Officer. The Company owed approximately
$131,000 to the affiliate at December 31, 1997. This same affiliate
purchased approximately $31,000 of consumer convenience products from
the Company during the six months ended December 31, 1997 and owed the
Company $87,000 at December 31, 1997. No interest will be charged on
the related outstanding balances during fiscal 1998.
Important Factors Relating to Forward Looking Statements. - Information
contained in this Form 10-Q contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of
1995, which can be identified by the use of forward-looking terminology
such as "may," "will," "would," "could," "intend," "plan," "expect,"
"anticipate," "estimate," or "continue," or negative variations thereof
or other variations thereon or comparable terminology. Many factors
could cause actual results to differ materially from those in the
forward-looking statements, including overall economic conditions,
consumer purchasing, customer acceptance of products, marketing and
promotion efforts, foreign currency variations and changes in interest
rates.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
10.53 Loan and Security Agreement - Foothill Capital Corporation
27 Financial Data Schedule (SEC use)
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1997.
<PAGE>
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.
K-TEL INTERNATIONAL, INC.
REGISTRANT
/S/ PHILIP KIVES
----------------------------------------
PHILIP KIVES
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/S/ DAVID WEINER
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DAVID WEINER
PRESIDENT
/S/ COREY FISCHER
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COREY FISCHER
CHIEF FINANCIAL OFFICER
(principal accounting officer)
EXHIBIT 10.53
LOAN AND SECURITY AGREEMENT
AMONG
K-TEL INTERNATIONAL (USA), INC.,
DOMINION ENTERTAINMENT, INC.,
K-TEL CONSUMER PRODUCTS, INC.,
K-TEL TV, INC.
AND
K-TEL VIDEO, INC.,
as Borrowers, on the one hand,
and
FOOTHILL CAPITAL CORPORATION,
on the other hand
Dated as of November 19, 1997
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TABLE OF CONTENTS
Page(s)
1. DEFINITIONS AND CONSTRUCTION............................................ 1
1.1 Definitions.................................................... 1
1.2 Accounting Terms............................................... 15
1.3 Code........................................................... 15
1.4 Construction................................................... 15
1.5 Schedules and Exhibits......................................... 15
2. LOAN AND TERMS OF PAYMENT............................................... 16
2.1 Revolving Advances............................................. 16
2.2 Letters of Credit.............................................. 16
2.3 Term Loan...................................................... 19
2.4 Intentionally Omitted.......................................... 19
2.5 Overadvances................................................... 19
2.6 Interest and Letter of Credit Fees: Rates, Payments,
and Calculations............................................... 19
2.7 Collection of Accounts......................................... 21
2.8 Crediting Payments; Application of Collections................. 21
2.9 Designated Account............................................. 22
2.10 Maintenance of Loan Account; Statements of Obligations......... 22
2.11 Fees........................................................... 22
3. CONDITIONS; TERM OF AGREEMENT........................................... 23
3.1 Conditions Precedent to the Initial Advance and the Issuance
of the Initial Letter of Credit................................ 23
3.2 Conditions Precedent to all Advances and the issuance of all
Letters of Credit.............................................. 25
3.3 Conditions Subsequent.......................................... 25
3.4 Term; Automatic Renewal........................................ 26
3.5 Effect of Termination.......................................... 26
3.6 Early Termination by Borrowers................................. 26
3.7 Termination Upon Event of Default.............................. 26
4. CREATION OF SECURITY INTEREST........................................... 27
4.1 Grant of Security Interest..................................... 27
4.2 Negotiable Collateral.......................................... 27
4.3 Collection of Accounts, General Intangibles, and Negotiable
Collateral..................................................... 27
4.4 Delivery of Additional Documentation Required.................. 27
4.5 Power of Attorney.............................................. 28
4.6 Right to Inspect............................................... 28
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5. REPRESENTATIONS AND WARRANTIES.......................................... 28
5.1 No Encumbrances................................................ 29
5.2 Eligible Accounts.............................................. 29
5.3 Intentionally Omitted.......................................... 29
5.4 Equipment...................................................... 29
5.5 Location of Inventory and Equipment............................ 29
5.6 Inventory Records.............................................. 29
5.7 Location of Chief Executive Office; FEIN....................... 29
5.8 Due Organization and Qualification; Subsidiaries............... 30
5.9 Due Authorization; No Conflict................................. 30
5.10 Litigation..................................................... 31
5.11 No Material Adverse Change. ................................... 31
5.12 Solvency....................................................... 32
5.13 Employee Benefits.............................................. 32
5.14 Environmental Condition........................................ 32
5.15 Business of Dominion........................................... 32
6. AFFIRMATIVE COVENANTS................................................... 33
6.1 Accounting System.............................................. 33
6.2 Collateral Reporting........................................... 33
6.3 Financial Statements, Reports, Certificates.................... 34
6.4 Tax Returns.................................................... 35
6.5 Guarantor Reports.............................................. 35
6.6 Returns........................................................ 35
6.7 Title to Equipment............................................. 35
6.8 Maintenance of Equipment....................................... 35
6.9 Taxes.......................................................... 36
6.10 Insurance...................................................... 36
6.11 No Setoffs or Counterclaims.................................... 37
6.12 Location of Inventory and Equipment............................ 37
6.13 Compliance with Laws........................................... 37
6.14 Employee Benefits.............................................. 38
6.15 Leases......................................................... 39
6.16 Royalty Payments............................................... 39
7. NEGATIVE COVENANTS...................................................... 39
7.1 Indebtedness................................................... 39
7.2 Liens.......................................................... 40
7.3 Restrictions on Fundamental Changes............................ 40
7.4 Disposal of Assets............................................. 40
7.5 Change Name.................................................... 40
7.6 Guarantee...................................................... 40
7.7 Nature of Business............................................. 40
7.8 Prepayments and Amendments..................................... 40
7.9 Change of Control.............................................. 41
7.10 Consignments................................................... 41
7.11 Distributions.................................................. 41
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7.12 Accounting Methods............................................. 41
7.13 Investments.................................................... 41
7.14 Transactions with Affiliates................................... 41
7.15 Suspension..................................................... 42
7.16 Intentionally Omitted.......................................... 42
7.17 Use of Proceeds................................................ 42
7.18 Change in Location of Chief Executive Office; Inventory
and Equipment with Bailees..................................... 42
7.19 No Prohibited Transactions Under ERISA......................... 42
7.20 Financial Covenants............................................ 43
7.21 Capital Expenditures........................................... 43
7.22 Library Acquisitions........................................... 44
8. EVENTS OF DEFAULT....................................................... 44
9. FOOTHILL'S RIGHTS AND REMEDIES.......................................... 46
9.1 Rights and Remedies............................................ 46
9.2 Remedies Cumulative............................................ 48
10. TAXES AND EXPENSES...................................................... 48
11. WAIVERS; INDEMNIFICATION................................................ 49
11.1 Demand; Protest; etc........................................... 49
11.2 Foothill's Liability for Collateral............................ 49
11.3 Indemnification................................................ 49
11.4 Joint Borrowers................................................ 50
12. NOTICES................................................................. 55
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.............................. 56
14. DESTRUCTION OF BORROWERS' DOCUMENTS..................................... 57
15. GENERAL PROVISIONS...................................................... 57
15.1 Effectiveness.................................................. 57
15.2 Successors and Assigns......................................... 57
15.3 Section Headings............................................... 58
15.4 Interpretation................................................. 58
15.5 Severability of Provisions..................................... 58
15.6 Amendments in Writing.......................................... 58
15.7 Counterparts; Telefacsimile Execution.......................... 58
15.8 Revival and Reinstatement of Obligations....................... 58
15.9 Integration.................................................... 59
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SCHEDULES AND EXHIBITS
Schedule P-1 Permitted Liens
Schedule 5.8 Subsidiaries
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 6.12 Location of Inventory and Equipment
Exhibit C-1 Form of Compliance Certificate
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LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (THIS "AGREEMENT"), is entered into as
of November 19, 1997, among FOOTHILL CAPITAL CORPORATION, a California
corporation ("Foothill"), with a place of business located at 11111 Santa Monica
Boulevard, Suite 1500, Los Angeles, California 90025-3333, on the one hand, and
K-TEL INTERNATIONAL (USA), INC., a Minnesota corporation ("K-Tel (USA)"),
DOMINION ENTERTAINMENT, INC., a Minnesota corporation ("Dominion"), K-TEL
CONSUMER PRODUCTS, INC., a Minnesota ("Consumer"), K-TEL TV, INC., a Minnesota
corporation ("TV") and K-TEL VIDEO, INC., a Minnesota corporation ("Video")
each, with its chief executive office located at 2605 Fernbrook Lane North,
Minneapolis, Minnesota 55447, on the other hand.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. As used in this Agreement, the following terms shall
have the following definitions:
"Account Debtor" means any Person who is or who may become
obligated under, with respect to, or on account of, an Account.
"Accounts" means all currently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to
a Person arising out of the sale or lease of goods or the rendition of
services by such Person, irrespective of whether earned by performance,
and any and all credit insurance, guaranties, or security therefor.
"Advances" has the meaning set forth in Section 2.1(a).
"Affiliate" means, as applied to any Person, any other Person
who directly or indirectly controls, is controlled by, is under common
control with or is a director or officer of such Person. For purposes
of this definition, "control" means the possession, directly or
indirectly, of the power to vote 10% or more of the securities having
ordinary voting power for the election of directors or the direct or
indirect power to direct the management and policies of a Person.
"Agreement" has the meaning set forth in the preamble hereto.
"Authorized Person" means any officer or other employee of
Borrower.
"Average Unused Portion of Maximum Amount" means, as of any
date of determination, (a) the Maximum Amount, less (b) the sum of (i)
the average
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Daily Balance of Advances that were outstanding during the immediately
preceding month, plus (ii) the average Daily Balance of the undrawn
Letters of Credit that were outstanding during the immediately
preceding month.
"Bankruptcy Code" means the United States Bankruptcy Code (11
U.S.C. ss. 101 et seq.), as amended, and any successor statute.
"Benefit Plan" means a "defined benefit plan" (as defined in
Section 3(35) of ERISA) for which any Borrower, any Subsidiary of any
Borrower, or any ERISA Affiliate has been an "employer" (as defined in
Section 3(5) of ERISA) within the past six years.
"Borrower" means any one of K-Tel (USA), Dominion, Consumer,
TV or Video.
"Borrowers' Books" means all of Borrowers' books and records
including: ledgers; records indicating, summarizing, or evidencing
Borrowers' properties or assets (including the Collateral) or
liabilities; all information relating to Borrowers' business operations
or financial condition; and all computer programs, disk or tape files,
printouts, runs, or other computer prepared information.
"Borrowing Base" has the meaning set forth in Section 2.1(a).
"Business Day" means any day that is not a Saturday, Sunday,
or other day on which national banks are authorized or required to
close.
"Change of Control" shall be deemed to have occurred at such
time as a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934) becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) after the date hereof, directly or indirectly, of
more than 25% of the total voting power of all classes of stock then
outstanding of Parent entitled to vote in the election of directors or
if K-Tel (USA), Dominion, Consumer, TV, Video or K-Tel ceases to be
wholly-owned by Parent.
"Closing Date" means the date of the first to occur of the
making of the initial Advance or the issuance of the initial Letter of
Credit.
"Code" means the California Uniform Commercial Code.
"Collateral" means each Borrower's right, title, and interest
in each of the following:
(a) Accounts,
(b) Borrowers' Books,
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(c) Equipment,
(d) General Intangibles,
(e) Inventory,
(f) Investment Property,
(g) Negotiable Collateral,
(h) any money, or other assets of Borrowers that now
or hereafter come into the possession, custody, or control of
Foothill, and
(i) the proceeds and products, whether tangible or
intangible, of any of the foregoing, including proceeds of
insurance covering any or all of the Collateral of Borrowers,
and any and all Accounts, Borrowers' Books, Equipment, General
Intangibles, Inventory, Investment Property, Negotiable
Collateral, money, deposit accounts, or other tangible or
intangible property resulting from the sale, exchange,
collection, or other disposition of any of the foregoing, or
any portion thereof or interest therein, and the proceeds
thereof.
"Collateral Access Agreement" means a landlord waiver,
mortgagee waiver, bailee letter, or acknowledgement agreement of any
warehouseman, processor, lessor, consignee, or other Person in
possession of, having a Lien upon, or having rights or interests in the
Equipment or Inventory of any Borrower, in each case, in form and
substance satisfactory to Foothill.
"Collections" means all cash, checks, notes, instruments, and
other items of payment (including, insurance proceeds, proceeds of cash
sales, rental proceeds, and tax refunds).
"Compliance Certificate" means a certificate substantially in
the form of Exhibit C-1 and delivered by the chief accounting officer
of a Borrower to Foothill.
"Consumer" means K-tel Consumer Products, Inc., a Minnesota
corporation.
"Copyright Security Agreements" means those certain copyright
security agreements, of even date herewith between Dominion and
Foothill and USA and Foothill.
"Daily Balance" means the amount of an Obligation owed at the
end of a given day.
"deems itself insecure" means that the Person deems itself
insecure
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in accordance with the provisions of Section 1208 of the Code.
"Default" means an event, condition, or default that, with the
giving of notice, the passage of time, or both, would be an Event of
Default.
"Designated Account" means account number 5861561458 of
Borrowers maintained with Borrowers' Designated Account Bank, or such
other deposit account of Borrowers (located within the United States)
which has been designated, in writing and from time to time, by
Borrowers to Foothill.
"Designated Account Bank" means TCF National Bank Minnesota,
whose office is located at 801 Marquette Avenue, Minneapolis, Minnesota
55402, and whose ABA number is 291070001.
"Dilution" means, in each case based upon the experience of
the immediately [prior three months,] the result of dividing the Dollar
amount of (a) bad debt write-downs, discounts, cooperative advertising,
returns, promotions, credits, or other dilution with respect to the
Accounts of Borrowers, by (b) Borrowers' Collections (excluding
extraordinary items) plus the Dollar amount of clause (a).
"Dilution Reserve" means, as of any date of determination, an
amount sufficient to reduce Foothill's advance rate against Eligible
Accounts by one percentage point for each percentage point by which
Dilution is in excess of 10%.
"Disbursement Letter" means an instructional letter executed
and delivered by Borrowers to Foothill regarding the extensions of
credit to be made on the Closing Date, the form and substance of which
shall be satisfactory to Foothill.
"Dollars or $" means United States dollars.
"Dominion" means Dominion Entertainment, Inc., a Minnesota
corporation.
"Early Termination Premium" has the meaning set forth in
Section 3.6.
"Eligible Accounts" means those Accounts created by a Borrower
in the ordinary course of business, that arise out of such Borrower's
sale of goods or rendition of services, that strictly comply with each
and all of the representations and warranties respecting Accounts made
by such Borrower to Foothill in the Loan Documents, and that are and at
all times continue to be acceptable to Foothill in all respects;
provided, however, that standards of eligibility may be fixed and
revised from time to time by Foothill in Foothill's reasonable credit
judgment. Eligible Accounts shall not include the following:
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(a) Accounts that the Account Debtor has failed to
pay within 120 days of invoice date or Accounts with selling
terms of more than 90 days from invoice date;
(b) Accounts owed by an Account Debtor or its
Affiliates where 50% or more of all Accounts owed by that
Account Debtor (or its Affiliates) are deemed ineligible under
clause (a) above;
(c) Accounts with respect to which the Account Debtor
is an employee, Affiliate, or agent of a Borrower;
(d) Accounts with respect to which goods are placed
on consignment, sale on approval, bill and hold, or other
terms by reason of which the payment by the Account Debtor may
be conditional;
(e) Accounts that are not payable in Dollars or with
respect to which the Account Debtor: (i) does not maintain its
chief executive office in the United States, or (ii) is not
organized under the laws of the United States or any State
thereof, or (iii) is the government of any foreign country or
sovereign state, or of any state, province, municipality, or
other political subdivision thereof, or of any department,
agency, public corporation, or other instrumentality thereof,
unless (y) the Account is supported by an irrevocable letter
of credit satisfactory to Foothill (as to form, substance, and
issuer or domestic confirming bank) that has been delivered to
Foothill, and upon request from Foothill, is directly drawable
by Foothill, or (z) the Account is covered by credit insurance
in form and amount, and by an insurer, satisfactory to
Foothill;
(f) Accounts with respect to which the Account Debtor
is either (i) the United States or any department, agency, or
instrumentality of the United States (exclusive, however, of
Accounts with respect to which the relevant Borrower has
complied, to the satisfaction of Foothill, with the Assignment
of Claims Act, 31 U.S.C. ss. 3727), or (ii) any State of the
United States (exclusive, however, of Accounts owed by any
State that does not have a statutory counterpart to the
Assignment of Claims Act);
(g) Accounts with respect to which the Account Debtor
is a creditor of any Borrower, has or has asserted a right of
setoff (including chargebacks) except for cooperative
advertising allowances and credits for returned Inventory in
the ordinary course of Borrowers' business, has disputed its
liability, or has made any claim with respect to the Account;
(h) Accounts with respect to an Account Debtor whose
total obligations owing to the Borrowers exceed 10% of all
Eligible Accounts of the Borrowers (or in the case of
Handleman Company 25% of all Eligible Accounts, in the case of
Anderson Merchandisers 20% of all Eligible Accounts and in the
case of each of Musicland and Transworld Entertainment 15% of
all Eligible Accounts), to the extent of the obligations owing
by such Account Debtor in excess of such percentage;
1
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(i) Accounts with respect to which the Account Debtor
is subject to any Insolvency Proceeding, or becomes insolvent,
or goes out of business;
(j) Accounts the collection of which Foothill, in its
reasonable credit judgment, believes to be doubtful by reason
of the Account Debtor's financial condition;
(k) Accounts with respect to which the goods giving
rise to such Account have not been shipped and billed to the
Account Debtor, the services giving rise to such Account have
not been performed and accepted by the Account Debtor, or the
Account otherwise does not represent a final sale;
(l) Accounts with respect to which the Account Debtor
is located in the states of New Jersey or West Virginia (or
any other state that requires a creditor to file a Business
Activity Report or similar document in order to bring suit or
otherwise enforce its remedies against such Account Debtor in
the courts or through any judicial process of such state),
unless the relevant Borrower has qualified to do business in
New Jersey, West Virginia, or such other states, or has filed
a Notice of Business Activities Report with the applicable
division of taxation, the department of revenue, or with such
other state offices, as appropriate, for the then-current
year, or is exempt from such filing requirement; and
(m) Accounts that represent progress payments or
other advance billings that are due prior to the completion of
performance by a Borrower of the subject contract for goods or
services.
"Equipment" means all of a Person's present and hereafter
owned machinery, machine tools, motors, equipment, furniture,
furnishings, fixtures, vehicles (including motor vehicles and
trailers), tools, parts, goods (other than consumer goods, farm
products, or Inventory), wherever located, including, all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of
1974, 29 U.S.C.ss.ss. 1000 et seq., amendments thereto, successor
statutes, and regulations or guidance promulgated thereunder.
"ERISA Affiliate" means (a) any corporation subject to ERISA
whose employees are treated as employed by the same employer as the
employees of a Borrower under IRC Section 414(b), (b) any trade or
business subject to ERISA whose employees are treated as employed by
the same employer as the employees of a Borrower under IRC Section
414(c), (c) solely for purposes of Section 302 of ERISA and Section 412
of the IRC, any organization subject to ERISA that is a member of an
affiliated service group of which a Borrower is a member under IRC
Section 414(m), or (d) solely for purposes of Section 302 of ERISA and
Section 412 of the IRC, any party subject to ERISA that is a party to
an arrangement with a Borrower and whose
<PAGE>
employees are aggregated with the employees of such Borrower under IRC
Section 414(o).
"ERISA Event" means (a) a Reportable Event with respect to any
Benefit Plan or Multiemployer Plan, (b) the withdrawal of a Borrower,
any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during
a plan year in which it was a "substantial employer" (as defined in
Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to
terminate a Benefit Plan in a distress termination (as described in
Section 4041(c) of ERISA), (d) the institution by the PBGC of
proceedings to terminate a Benefit Plan or Multiemployer Plan, (e) any
event or condition (i) that provides a basis under Section 4042(a)(1),
(2), or (3) of ERISA for the termination of, or the appointment of a
trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii)
that may result in termination of a Multiemployer Plan pursuant to
Section 4041A of ERISA, (f) the partial or complete withdrawal within
the meaning of Sections 4203 and 4205 of ERISA, of a Borrower, any of
its Subsidiaries or ERISA Affiliates from a Multiemployer Plan, or (g)
providing any security to any Plan under Section 401(a)(29) of the IRC
by a Borrower or its Subsidiaries or any of their ERISA Affiliates.
"Event of Default" has the meaning set forth in Section 8.
"Excess Availability" means the amount as determined by
Foothill at any time, equal to: (a) (i) the amount of the Advances
available to Borrowers as of such time based upon the applicable
lending formulas set forth in Section 2.1, subject to the sublimits and
reserves from time to time established in accordance with Sections
2.1(b), 6.15 and 10, minus (b) the sum of (i) the amount of the
outstanding Obligations (including Letters of Credit), plus (ii) the
aggregate amount of trade payables payable by Borrowers that are more
than 90 days from invoice date and those royalty payments payable by
Borrowers that are past due in accordance with normal industry
practices.
"Existing Lender" means TCF National Bank Minnesota.
"FEIN" means Federal Employer Identification Number.
"Foothill" has the meaning set forth in the preamble to this
Agreement.
"Foothill Account" has the meaning set forth in Section 2.7.
"Foothill Expenses" means all: reasonable costs or expenses
(including taxes, and insurance premiums) required to be paid by a
Borrower under any of the Loan Documents that are paid or incurred by
Foothill; reasonable out-of-pocket fees or charges paid or incurred by
Foothill in connection with Foothill's transactions with Borrowers,
including, fees or charges for photocopying, notarization, couriers and
messengers, telecommunication, public record searches (including tax
lien, litigation, and UCC searches and including searches with the
patent and trademark office, the
<PAGE>
copyright office, or the department of motor vehicles), filing,
recording, publication, appraisal (including periodic Collateral
appraisals); costs and expenses incurred by Foothill in the
disbursement of funds to Borrowers (by wire transfer or otherwise);
charges paid or incurred by Foothill resulting from the dishonor of
checks; costs and expenses paid or incurred by Foothill to correct any
default or enforce any provision of the Loan Documents, or in gaining
possession of, maintaining, handling, preserving, storing, shipping,
selling, preparing for sale, or advertising to sell the Collateral, or
any portion thereof, irrespective of whether a sale is consummated;
reasonable out-of-pocket costs and expenses paid or incurred by
Foothill in examining Borrowers' Books in addition to the fees set
forth in Section 2.11; costs and expenses of third party claims or any
other suit paid or incurred by Foothill in enforcing or defending the
Loan Documents or in connection with the transactions contemplated by
the Loan Documents or Foothill's relationship with Borrowers or any
guarantor; and Foothill's reasonable attorneys fees and expenses
incurred in advising, structuring, drafting, reviewing, administering,
amending, terminating, enforcing, defending or concerning the Loan
Documents (including attorneys fees and expenses incurred in connection
with a "workout," a "restructuring," or an Insolvency Proceeding
concerning Borrowers or any guarantor of the Obligations), irrespective
of whether suit is brought.
"GAAP" means generally accepted accounting principles as in
effect from time to time in the United States, consistently applied.
"General Intangibles" means all of any Person's present and
future general intangibles and other personal property (including
contract rights, rights arising under common law, statutes, or
regulations, choses or things in action, goodwill, patents, trade
names, trademarks, servicemarks, copyrights, blueprints, drawings,
purchase orders, customer lists, monies due or recoverable from pension
funds, route lists, rights to payment and other rights under any
royalty or licensing agreements, infringement claims, computer
programs, information contained on computer disks or tapes, literature,
reports, catalogs, deposit accounts, insurance premium rebates, tax
refunds, and tax refund claims), other than goods, Accounts, and
Negotiable Collateral.
"Governing Documents" means the certificate or articles of
incorporation, by-laws, or other organizational or governing documents
of any Person.
"Guaranty" means that certain continuing guaranty of the
Obligations, of even date herewith, from Parent.
"Hazardous Materials" means (a) substances that are defined or
listed in, or otherwise classified pursuant to, any applicable laws or
regulations as "hazardous substances," "hazardous materials,"
"hazardous wastes," "toxic substances," or any other formulation
intended to define, list, or classify substances by reason of
deleterious properties such as ignitability, corrosivity, reactivity,
carcinogenicity, reproductive toxicity, or "EP toxicity", (b) oil,
petroleum, or petroleum derived substances, natural gas, natural gas
liquids, synthetic gas, drilling fluids, produced waters, and other
wastes associated with the exploration, development, or production of
<PAGE>
crude oil, natural gas, or geothermal resources, (c) any flammable
substances or explosives or any radioactive materials, and (d) asbestos
in any form or electrical equipment that contains any oil or dielectric
fluid containing levels of polychlorinated biphenyls in excess of 50
parts per million.
"Indebtedness" means: (a) all obligations of a Person for
borrowed money, (b) all obligations of a Person evidenced by bonds,
debentures, notes, or other similar instruments and all reimbursement
or other obligations of a Person in respect of letters of credit,
bankers acceptances, interest rate swaps, or other financial products,
(c) all obligations of a Person under capital leases, (d) all
obligations or liabilities of others secured by a Lien on any property
or asset of a Person, irrespective of whether such obligation or
liability is assumed, and (e) any obligation of a Person guaranteeing
or intended to guarantee (whether guaranteed, endorsed, co-made,
discounted, or sold with recourse to such Person) any indebtedness,
lease, dividend, letter of credit, or other obligation of any other
Person.
"Insolvency Proceeding" means any proceeding commenced by or
against any Person under any provision of the Bankruptcy Code or under
any other bankruptcy or insolvency law, assignments for the benefit of
creditors, formal or informal moratoria, compositions, extensions
generally with creditors, or proceedings seeking reorganization,
arrangement, or other similar relief.
"Intangible Assets" means, with respect to any Person, that
portion of the book value of all of such Person's assets that would be
treated as intangibles under GAAP.
"Intellectual Property Security Agreement" means that certain
Intellectual Property Security Agreement between Foothill and Parent.
"Inventory" means all present and future inventory in which a
Person has any interest, including goods held for sale or lease or to
be furnished under a contract of service and all of such Person's
present and future raw materials, work in process, finished goods, and
packing and shipping materials, wherever located.
"Investment Property" has the meaning set forth in Section
9115 of the Code.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"K-Tel (USA)" means K-tel International (USA), Inc., a
Minnesota corporation.
"L/C" has the meaning set forth in Section 2.2(a).
"L/C Guaranty" has the meaning set forth in Section 2.2(a).
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"Letter of Credit" means an L/C or an L/C Guaranty, as the
context requires.
"Library" means the library of music rights owned by one or
more Borrowers.
"Lien" means any interest in property securing an obligation
owed to, or a claim by, any Person other than the owner of the
property, whether such interest shall be based on the common law,
statute, or contract, whether such interest shall be recorded or
perfected, and whether such interest shall be contingent upon the
occurrence of some future event or events or the existence of some
future circumstance or circumstances, including the lien or security
interest arising from a mortgage, deed of trust, encumbrance, pledge,
hypothecation, assignment, deposit arrangement, security agreement,
adverse claim or charge, conditional sale or trust receipt, or from a
lease, consignment, or bailment for security purposes and also
including reservations, exceptions, encroachments, easements,
rights-of-way, covenants, conditions, restrictions, leases, and other
title exceptions and encumbrances affecting Real Property.
"Loan Account" has the meaning set forth in Section 2.10.
"Loan Documents" means this Agreement, the Intellectual
Property Security Agreement, the Copyright Security Agreements, the
Disbursement Letter, the Letters of Credit, the Lockbox Agreements, the
Guaranty and any security agreements securing the Guaranty, any note or
notes executed by any Borrower and payable to Foothill, and any other
agreement entered into, now or in the future, in connection with this
Agreement.
"Lockbox Account" shall mean a depositary account established
pursuant to one of the Lockbox Agreements.
"Lockbox Agreements" means those certain Lockbox Operating
Procedural Agreements and those certain Depository Account Agreements,
in form and substance satisfactory to Foothill, each of which is among
a Borrower or Borrowers, Foothill, and one of the Lockbox Banks.
"Lockbox Banks" means TCF National Bank Minnesota, or such
other bank as may be agreed to by Foothill and Borrower from time to
time.
"Lockboxes" has the meaning set forth in Section 2.7.
"Material Adverse Change" means (a) a material adverse change
in the business, prospects, operations, results of operations, assets,
liabilities or financial condition of Borrowers on a consolidated
basis, (b) the material impairment of a Borrower's ability to perform
its obligations under the Loan Documents to which it is a party or of
Foothill to enforce the Obligations or realize upon the Collateral, (c)
a
<PAGE>
material adverse effect on the value of the Collateral or the amount
that Foothill would be likely to receive (after giving consideration to
delays in payment and costs of enforcement) in the liquidation of such
Collateral, or (d) a material impairment of the priority of Foothill's
Liens with respect to the Collateral.
"Maximum Amount" means $6,000,000.
"Multiemployer Plan" means a "multiemployer plan" (as defined
in Section 4001(a)(3) of ERISA) to which a Borrower, any of its
Subsidiaries, or any ERISA Affiliate has contributed, or was obligated
to contribute, within the past six years.
"Negotiable Collateral" means all of a Person's present and
future letters of credit, notes, drafts, instruments, security
entitlements, securities (including the shares of stock of Subsidiaries
of such Person), documents, personal property leases (wherein such
Person is the lessor), and chattel paper.
"Obligations" means all loans, Advances, debts, principal,
interest (including any interest that, but for the provisions of the
Bankruptcy Code, would have accrued), contingent reimbursement
obligations under any outstanding Letters of Credit, premiums
(including Early Termination Premiums), liabilities (including all
amounts charged to Borrowers' Loan Account pursuant hereto),
obligations, fees, charges, costs, or Foothill Expenses (including any
fees or expenses that, but for the provisions of the Bankruptcy Code,
would have accrued), lease payments, guaranties, covenants, and duties
owing by a Borrower to Foothill of any kind and description (whether
pursuant to or evidenced by the Loan Documents or pursuant to any other
agreement between Foothill and any Borrower, and irrespective of
whether for the payment of money), whether direct or indirect, absolute
or contingent, due or to become due, now existing or hereafter arising,
and including any debt, liability, or obligation owing from a Borrower
to others that Foothill may have obtained by assignment or otherwise,
and further including all interest not paid when due and all Foothill
Expenses that a Borrower is required to pay or reimburse by the Loan
Documents, by law, or otherwise.
"Overadvance" has the meaning set forth in Section 2.5.
"Parent" means K-tel International, Inc., a Minnesota
corporation.
"Pay-Off Letter" means a letter, in form and substance
reasonably satisfactory to Foothill, from Existing Lender respecting
the amount necessary to repay in full all of the obligations of
Borrowers owing to Existing Lender and obtain a termination or release
of all of the Liens existing in favor of Existing Lender in and to the
properties or assets of Borrowers.
"PBGC" means the Pension Benefit Guaranty Corporation as
defined in Title IV of ERISA, or any successor thereto.
<PAGE>
"Permitted Liens" means (a) Liens held by Foothill, (b) Liens
for unpaid taxes that either (i) are not yet due and payable or (ii)
are the subject of Permitted Protests, (c) Liens set forth on Schedule
P-1, (d) the interests of lessors under operating leases and purchase
money Liens of lessors under capital leases to the extent that the
acquisition or lease of the underlying asset is permitted under Section
7.21 and so long as the Lien only attaches to the asset purchased or
acquired and only secures the purchase price of the asset, (e) Liens
arising by operation of law in favor of warehousemen, landlords,
carriers, mechanics, materialmen, laborers, or suppliers, incurred in
the ordinary course of business of a Borrower and not in connection
with the borrowing of money, and which Liens either (i) are for sums
not yet due and payable, or (ii) are the subject of Permitted Protests,
(f) Liens arising from deposits made in connection with obtaining
worker's compensation or other unemployment insurance, (g) Liens or
deposits to secure performance of bids, tenders, or leases (to the
extent permitted under this Agreement), incurred in the ordinary course
of business of a Borrower and not in connection with the borrowing of
money, (h) Liens arising by reason of security for surety or appeal
bonds in the ordinary course of business of a Borrower, and (i) Liens
of or resulting from any judgment or award that would not have a
Material Adverse Effect and as to which the time for the appeal or
petition for rehearing of which has not yet expired, or in respect of
which a Borrower is in good faith prosecuting an appeal or proceeding
for a review, and in respect of which a stay of execution pending such
appeal or proceeding for review has been secured.
"Permitted Protest" means the right of a Borrower to protest
any Lien (other than any such Lien that secures the Obligations), tax
(other than payroll taxes or taxes that are the subject of a United
States federal tax lien), or rental payment, provided that (a) a
reserve with respect to such obligation is established on the books of
such Borrower in an amount that is reasonably satisfactory to Foothill,
(b) any such protest is instituted and diligently prosecuted by such
Borrower in good faith, and (c) Foothill is satisfied that, while any
such protest is pending, there will be no impairment of the
enforceability, validity, or priority of any of the Liens of Foothill
in and to the Collateral.
"Person" means and includes natural persons, corporations,
limited liability companies, limited partnerships, general
partnerships, limited liability partnerships, joint ventures, trusts,
land trusts, business trusts, or other organizations, irrespective of
whether they are legal entities, and governments and agencies and
political subdivisions thereof.
"Plan" means any employee benefit plan, program, or
arrangement maintained or contributed to by a Borrower or with respect
to which it may incur liability.
"Real Property" means any estates or interests in real
property now owned or hereafter acquired by a Borrower.
"Reference Rate" means the variable rate of interest, per
annum,
<PAGE>
most recently announced by Norwest Bank Minnesota, National
Association, or any successor thereto, as its "base rate," irrespective
of whether such announced rate is the best rate available from such
financial institution.
"Renewal Date" has the meaning set forth in Section 3.4.
"Reportable Event" means any of the events described in
Section 4043(c) of ERISA or the regulations thereunder other than a
Reportable Event as to which the provision of 30 days notice to the
PBGC is waived under applicable regulations.
"Retiree Health Plan" means an "employee welfare benefit plan"
within the meaning of Section 3(1) of ERISA that provides benefits to
individuals after termination of their employment, other than as
required by Section 601 of ERISA.
"Solvent" means, with respect to any Person on a particular
date, that on such date (a) at fair valuations, all of the properties
and assets of such Person are greater than the sum of the debts,
including contingent liabilities (but excluding payables to other
Subsidiaries of Parent), of such Person, (b) the present fair salable
value of the properties and assets of such Person is not less than the
amount that will be required to pay the probable liability of such
Person on its debts (other than payables to other Subsidiaries of
Parent) as they become absolute and matured, (c) such Person is able to
realize upon its properties and assets and pay its debts and other
liabilities, contingent obligations and other commitments (other than
payables to other Subsidiaries of Parent) as they mature in the normal
course of business, (d) such Person does not intend to, and does not
believe that it will, incur debts beyond such Person's ability to pay
as such debts mature, and (e) such Person is not engaged in business or
a transaction, and is not about to engage in business or a transaction,
for which such Person's properties and assets would constitute
unreasonably small capital after giving due consideration to the
prevailing practices in the industry in which such Person is engaged.
In computing the amount of contingent liabilities at any time, it is
intended that such liabilities will be computed at the amount that, in
light of all the facts and circumstances existing at such time,
represents the amount that reasonably can be expected to become an
actual or matured liability.
"Subsidiary" of a Person means a corporation, partnership,
limited liability company, or other entity in which that Person
directly or indirectly owns or controls the shares of stock or other
ownership interests having ordinary voting power to elect a majority of
the board of directors (or appoint other comparable managers) of such
corporation, partnership, limited liability company, or other entity.
"Tangible Net Worth" means, as of any date of determination,
the difference of (a) a Person's total stockholder's equity, minus (b)
the sum of: (i) all Intangible Assets of such Person, and (ii) all
amounts due to such Person from Affiliates.
"Term Loan" has the meaning set forth in Section 2.3.
<PAGE>
"TV" means K-tel TV, Inc., a Minnesota corporation.
"Video" means K-tel Video, Inc., a Minnesota corporation.
"Voidable Transfer" has the meaning set forth in Section 15.8.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP. When used herein, the term
"financial statements" shall include the notes and schedules thereto. Whenever
the term "Borrower" is used in respect of a financial covenant or a related
definition, it shall be understood to mean Borrowers on a consolidated basis
unless the context clearly requires otherwise.
1.3 CODE. Any terms used in this Agreement that are defined in the Code
shall be construed and defined as set forth in the Code unless otherwise defined
herein.
1.4 CONSTRUCTION. Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, references to the
singular include the plural, the term "including" is not limiting, and the term
"or" has, except where otherwise indicated, the inclusive meaning represented by
the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and
similar terms in this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement. An Event of Default shall "continue"
or be "continuing" until such Event of Default has been waived in writing by
Foothill. Section, subsection, clause, schedule, and exhibit references are to
this Agreement unless otherwise specified. Any reference in this Agreement or in
the Loan Documents to this Agreement or any of the Loan Documents shall include
all alterations, amendments, changes, extensions, modifications, renewals,
replacements, substitutions, and supplements, thereto and thereof, as
applicable.
1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits attached
to this Agreement shall be deemed incorporated herein by reference.
<PAGE>
2. LOAN AND TERMS OF PAYMENT.
2.1 REVOLVING ADVANCES.
(a) Subject to the terms and conditions of this Agreement,
Foothill agrees to make advances ("Advances") to Borrowers in an amount
outstanding not to exceed at any one time the lesser of (i) the Maximum
Amount less the outstanding balance of all undrawn or unreimbursed
Letters of Credit, or (ii) the Borrowing Base less the aggregate amount
of all undrawn or unreimbursed Letters of Credit. For purposes of this
Agreement, "Borrowing Base", as of any date of determination, shall
mean the result of:
(x) the lesser of (i) 80% of Eligible Accounts, less
the amount, if any, of the Dilution Reserve, and (ii) an
amount equal to Borrower's Collections with respect to
Accounts for the immediately preceding 120 day period, MINUS
(y) the aggregate amount of reserves, if any,
established by Foothill under Sections 2.1(b), 6.15 and 10.
(b) Anything to the contrary in Section 2.1(a) above
notwithstanding, Foothill may create reserves against the Borrowing
Base or reduce its advance rate based upon Eligible Accounts without
declaring an Event of Default if it determines that there has occurred
a Material Adverse Change.
(c) Amounts borrowed pursuant to this Section 2.1 may be
repaid and, subject to the terms and conditions of this Agreement,
reborrowed at any time during the term of this Agreement.
2.2 LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this Agreement,
Foothill agrees to issue letters of credit for the account of a
Borrower (each, an "L/C") or to issue guarantees of payment (each such
guaranty, an "L/C Guaranty") with respect to letters of credit issued
by an issuing bank for the account of a Borrower. Foothill shall have
no obligation to issue a Letter of Credit if either of the following
would result:
(i) the sum of 100% of the aggregate amount of
undrawn and unreimbursed Letters of Credit would exceed the
Borrowing Base less the amount of outstanding Advances; or
(ii) the aggregate amount of all undrawn or
unreimbursed Letters of Credit would exceed the lower of: (x)
the Maximum Amount less the amount of outstanding Advances; or
(y) $3,000,000.
<PAGE>
Each Borrower expressly understands and agrees that Foothill shall have
no obligation to arrange for the issuance by issuing banks of the
letters of credit that are to be the subject of L/C Guarantees. Each
Borrower and Foothill acknowledge and agree that certain of the letters
of credit that are to be the subject of L/C Guarantees may be
outstanding on the Closing Date. Each Letter of Credit shall have an
expiry date no later than 60 days prior to the date on which this
Agreement is scheduled to terminate under Section 3.4 (without regard
to any potential renewal term) and all such Letters of Credit shall be
in form and substance acceptable to Foothill in its sole discretion. If
Foothill is obligated to advance funds under a Letter of Credit,
Borrowers immediately shall reimburse such amount to Foothill and, in
the absence of such reimbursement, the amount so advanced immediately
and automatically shall be deemed to be an Advance hereunder and,
thereafter, shall bear interest at the rate then applicable to Advances
under Section 2.6.
(b) Each Borrower hereby agrees to indemnify, save, defend,
and hold Foothill harmless from any loss, cost, expense, or liability,
including payments made by Foothill, expenses, and reasonable attorneys
fees incurred by Foothill arising out of or in connection with any
Letter of Credit. Each Borrower agrees to be bound by the issuing
bank's regulations and interpretations of any Letters of Credit
guarantied by Foothill and opened to or for such Borrower's account or
by Foothill's interpretations of any L/C issued by Foothill to or for
such Borrower's account, even though this interpretation may be
different from such Borrower's own, and Borrowers understand and agree
that Foothill shall not be liable for any error, negligence, or
mistake, whether of omission or commission, in following any Borrower's
instructions or those contained in the Letter of Credit or any
modifications, amendments, or supplements thereto. Each Borrower
understands that the L/C Guarantees may require Foothill to indemnify
the issuing bank for certain costs or liabilities arising out of claims
by a Borrower against such issuing bank. Each Borrower hereby agrees to
indemnify, save, defend, and hold Foothill harmless with respect to any
loss, cost, expense (including reasonable attorneys fees), or liability
incurred by Foothill under any L/C Guaranty as a result of Foothill's
indemnification of any such issuing bank.
(c) Each Borrower hereby authorizes and directs any bank that
issues a letter of credit guaranteed by Foothill to deliver to Foothill
all instruments, documents, and other writings and property received by
the issuing bank pursuant to such letter of credit, and to accept and
rely upon Foothill's instructions and agreements with respect to all
matters arising in connection with such letter of credit and the
related application. A Borrower may or may not be the "applicant" or
"account party" with respect to such letter of credit.
(d) Any and all charges, commissions, fees, and costs incurred
by Foothill relating to the letters of credit guaranteed by Foothill
shall be considered Foothill Expenses for purposes of this Agreement
and immediately shall be reimbursable by Borrowers to Foothill.
(e) Immediately upon the termination of this Agreement,
Borrowers agree to: (i) provide cash collateral to be held by Foothill
in an amount equal
<PAGE>
to 102% of the maximum amount of Foothill's obligations under Letters
of Credit, (ii) cause to be delivered to Foothill releases of all of
Foothill's obligations under outstanding Letters of Credit, or (iii)
provide Foothill with a back to back letter of credit, in form and
substance acceptable to Foothill, issued by a bank reasonably
satisfactory to Foothill. At Foothill's discretion, any proceeds of
Collateral received by Foothill after the occurrence and during the
continuation of an Event of Default may be held as the cash collateral
required by this Section 2.2(e).
(f) If by reason of (i) any change in any applicable law,
treaty, rule, or regulation or any change in the interpretation or
application by any governmental authority of any such applicable law,
treaty, rule, or regulation, or (ii) compliance by the issuing bank or
Foothill with any direction, request, or requirement (irrespective of
whether having the force of law) of any governmental authority or
monetary authority including, without limitation, Regulation D of the
Board of Governors of the Federal Reserve System as from time to time
in effect (and any successor thereto):
(A) any reserve, deposit, or similar requirement is
or shall be imposed or modified in respect of any Letters of
Credit issued hereunder, or
(B) there shall be imposed on the issuing bank or
Foothill any other condition regarding any letter of credit,
or Letter of Credit, as applicable, issued pursuant hereto;
and the result of the foregoing is to increase, directly or indirectly,
the cost to Foothill or to the issuing bank (which is payable by
Foothill) of issuing, making, guaranteeing, or maintaining any letter
of credit, or Letter of Credit, as applicable, or to reduce the amount
receivable in respect thereof by such issuing bank or Foothill, then,
and in any such case, Foothill may, at any time within a reasonable
period after the additional cost is incurred or the amount received is
reduced, notify Borrowers, and Borrowers shall pay on demand such
amounts as the issuing bank or Foothill may specify to be necessary to
compensate the issuing bank or Foothill for such additional cost or
reduced receipt, together with interest on such amount from the date of
such demand until payment in full thereof at the rate set forth in
Section 2.6(a) or (c)(i), as applicable. The determination by the
issuing bank or Foothill, as the case may be, of any amount due
pursuant to this Section 2.2(f), as set forth in a certificate setting
forth the calculation thereof in reasonable detail, shall, in the
absence of manifest or demonstrable error, be final and conclusive and
binding on all of the parties hereto.
2.3 TERM LOAN. Foothill has agreed to make a term loan on the Closing
Date (the "Term Loan") to Borrowers in the original principal amount of
$4,000,000; provided, however, that the outstanding principal balance of the
Term Loan cannot, at any time, exceed an amount equal to 33% of the auction
value of the Library based upon the most recent appraisal of the Library
obtained by Foothill. The outstanding principal balance and all accrued and
unpaid interest under the Term Loan shall be due and payable upon the
termination of this Agreement, whether by its terms, by prepayment, by
acceleration, or otherwise. The unpaid principal balance of the Term
<PAGE>
Loan may be prepaid in whole or in part without penalty or premium at any time
during the term of this Agreement upon 30 days prior written notice by Borrowers
to Foothill. All amounts outstanding under the Term Loan shall constitute
Obligations.
2.4 INTENTIONALLY OMITTED.
2.5 OVERADVANCES. If, at any time or for any reason, the amount of
Obligations owed by Borrowers to Foothill pursuant to Sections 2.1, 2.2 and 2.3
is greater than either the Dollar or percentage limitations set forth in
Sections 2.1, 2.2 and 2.3 (an "Overadvance"), Borrowers immediately shall pay to
Foothill, in cash, the amount of such excess to be used by Foothill first, to
repay Advances outstanding under Section 2.1 and, thereafter, to be held by
Foothill as cash collateral to secure Borrower's obligation to repay Foothill
for all amounts paid pursuant to Letters of Credit.
2.6 INTEREST AND LETTER OF CREDIT FEES: RATES, PAYMENTS, AND
CALCULATIONS.
(a) Interest Rate. Except as provided in clause (b) below, all
Obligations (except for undrawn Letters of Credit) shall bear interest
on the Daily Balance at a per annum rate equal to the Reference Rate.
(b) Letter of Credit Fee. Borrowers shall pay Foothill a fee
(in addition to the charges, commissions, fees, and costs set forth in
Section 2.2(d)) equal to 1.25% per annum times the Daily Balance of the
aggregate undrawn amount of all outstanding Letters of Credit.
(c) Default Rate. Upon the occurrence and during the
continuation of an Event of Default, (i) all Obligations (except for
undrawn Letters of Credit) shall bear interest at a per annum rate
equal to four percentage points above the Reference Rate, and (ii) the
Letter of Credit fee provided in Section 2.6(b) shall be increased to
5.25% per annum times the aggregate undrawn amount of all outstanding
Letters of Credit.
(d) Minimum Interest. In no event shall the rate of interest
chargeable hereunder for any day be less than 7.00% per annum. To the
extent that interest accrued hereunder at the rate set forth herein
would be less than the foregoing minimum daily rate, the interest rate
chargeable hereunder for such day automatically shall be deemed
increased to the minimum rate.
(e) Payments. Interest and Letter of Credit fees payable
hereunder shall be due and payable, in arrears, on the first day of
each month during the term hereof. Each Borrower hereby authorizes
Foothill, at its option, without prior notice to such Borrower, to
charge such interest and Letter of Credit fees, all Foothill Expenses
(as and when incurred), the charges, commissions, fees, and costs
provided for in Section 2.2(d) (as and when accrued or incurred), the
fees and charges provided for in Section 2.11 (as and when accrued or
incurred), and all other payments due under any
<PAGE>
Loan Document to Borrowers' Loan Account, which amounts thereafter
shall accrue interest at the rate then applicable to Advances
hereunder. Any interest not paid when due shall be compounded and shall
thereafter accrue interest at the rate then applicable to Advances
hereunder.
(f) Computation. The Reference Rate as of the date of this
Agreement is 8.50% per annum. In the event the Reference Rate is
changed from time to time hereafter, the applicable rate of interest
hereunder automatically and immediately shall be increased or decreased
by an amount equal to such change in the Reference Rate. All interest
and fees chargeable under the Loan Documents shall be computed on the
basis of a 360 day year for the actual number of days elapsed and
charged or compounded monthly.
(g) Intent to Limit Charges to Maximum Lawful Rate. In no
event shall the interest rate or rates payable under this Agreement,
plus any other amounts paid in connection herewith, exceed the highest
rate permissible under any law that a court of competent jurisdiction
shall, in a final determination, deem applicable. Borrowers and
Foothill, in executing and delivering this Agreement, intend legally to
agree upon the rate or rates of interest and manner of payment stated
within it; provided, however, that, anything contained herein to the
contrary notwithstanding, if said rate or rates of interest or manner
of payment exceeds the maximum allowable under applicable law, then,
ipso facto as of the date of this Agreement, Borrowers are and shall be
liable only for the payment of such maximum as allowed by law, and
payment received from Borrowers in excess of such legal maximum,
whenever received, shall be applied to reduce the principal balance of
the Obligations to the extent of such excess.
2.7 COLLECTION OF ACCOUNTS. Borrowers shall at all times maintain
lockboxes (the "Lockboxes") and, immediately after the Closing Date, shall
instruct all Account Debtors (other than licensees from Dominion) with respect
to the Accounts, General Intangibles, and Negotiable Collateral of Borrowers to
remit all Collections in respect thereof to such Lockboxes. Borrowers, Foothill,
and the Lockbox Banks shall enter into the Lockbox Agreements, which among other
things shall provide for the opening of a Lockbox Account for the deposit of
Collections at a Lockbox Bank. Each Borrower agrees that all Collections and
other amounts received by such Borrower from any Account Debtor or any other
source immediately upon receipt shall be deposited into a Lockbox Account. No
Lockbox Agreement or arrangement contemplated thereby shall be modified by a
Borrower without the prior written consent of Foothill. Upon the terms and
subject to the conditions set forth in the Lockbox Agreements, all amounts
received in each Lockbox Account shall be wired each Business Day into an
account (the "Foothill Account") maintained by Foothill at a depositary selected
by Foothill.
2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The receipt of any
Collections by Foothill (whether from transfers to Foothill by the Lockbox Banks
pursuant to the Lockbox Agreements or otherwise) immediately shall be applied
provisionally to reduce the Obligations outstanding under Section 2.1, but shall
not be considered a payment on account unless such Collection item is a wire
transfer of
<PAGE>
immediately available federal funds and is made to the Foothill Account or
unless and until such Collection item is honored when presented for payment.
From and after the Closing Date, Foothill shall be entitled to charge Borrowers
for one Business Day of `clearance' or `float' at the rate set forth in Section
2.6(a) or Section 2.6(c)(i), as applicable, on all Collections that are received
by Foothill (regardless of whether forwarded by the Lockbox Banks to Foothill,
whether provisionally applied to reduce the Obligations under Section 2.1, or
otherwise). This across-the-board one Business Day clearance or float charge on
all Collections is acknowledged by the parties to constitute an integral aspect
of the pricing of Foothill's financing of Borrowers, and shall apply
irrespective of the characterization of whether receipts are owned by a Borrower
or Foothill, and whether or not there are any outstanding Advances, the effect
of such clearance or float charge being the equivalent of charging one Business
Day of interest on such Collections. Should any Collection item not be honored
when presented for payment, then Borrowers shall be deemed not to have made such
payment, and interest shall be recalculated accordingly. Anything to the
contrary contained herein notwithstanding, any Collection item shall be deemed
received by Foothill only if it is received into the Foothill Account on a
Business Day on or before 11:00 a.m. California time. If any Collection item is
received into the Foothill Account on a non-Business Day or after 11:00 a.m.
California time on a Business Day, it shall be deemed to have been received by
Foothill as of the opening of business on the immediately following Business
Day.
2.9 DESIGNATED ACCOUNT. Foothill is authorized to make the Advances and
issue or cause to be issued, the Letters of Credit under this Agreement based
upon telephonic or other instructions received from anyone purporting to be an
Authorized Person, or without instructions if pursuant to Section 2.6(e).
Borrowers agree to establish and maintain a single Designated Account with the
Designated Account Bank for the purpose of receiving the proceeds of the
Advances requested by Borrowers and made by Foothill hereunder. Unless otherwise
agreed by Foothill and Borrowers, any Advance requested by Borrowers and made by
Foothill hereunder shall be made to the Designated Account.
2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS. At the
request of Borrowers, to facilitate and expedite the administration and
accounting processes and procedures of their borrowings under this Agreement,
Foothill has agreed, in lieu of maintaining separate loan accounts on Foothill's
books in the name of each of the Borrowers, that Foothill shall maintain a
single account on its books in the names of all of the Borrowers (the "Loan
Account"). All Advances made by Foothill to Borrowers or for Borrowers' account,
including accrued interest, Foothill Expenses, and any other payment Obligations
of Borrowers shall be made jointly and severally to the Borrowers and shall be
charged to the Loan Account. In accordance with Section 2.8, the Loan Account
will be credited with all payments received by Foothill from any Borrower or for
any Borrower's account, including all amounts received in the Foothill Account
from any Lockbox Bank. Foothill shall render one statement regarding the Loan
Account to K-Tel USA on behalf of Borrowers, including principal, interest,
fees, and including an itemization of all charges and expenses constituting
Foothill Expenses
<PAGE>
owing, and such statements shall be conclusively presumed to be correct and
accurate, absent manifest error, and constitute an account stated between
Borrowers and Foothill unless, within 30 days after receipt thereof by
Borrowers, Borrowers shall deliver to Foothill written objection thereto
describing the error or errors contained in any such statements. Each Borrower
hereby expressly agrees and acknowledges that Foothill shall have no obligation
to account separately to such Borrower.
2.11 FEES. Borrowers shall pay to Foothill the following fees:
(a) Closing Fee. On the Closing Date, a closing fee of
$75,000;
(b) Unused Line Fee. On the first day of each month during the
term of this Agreement, an unused line fee in an amount equal to 0.25%
per annum times the Average Unused Portion of the Maximum Amount.
(c) Financial Examination, Documentation, and Appraisal Fees.
Foothill's customary fee of $650 per day per examiner, plus
out-of-pocket expenses for each financial analysis and examination
(i.e., audits) of Borrowers performed by personnel employed by
Foothill; and, the actual charges paid or incurred by Foothill if it
elects to employ the services of one or more third Persons to perform
such financial analyses and examinations (i.e., audits) of Borrowers or
to appraise the Library on an annual basis so long as the cost of any
such appraisal does not exceed $7,500. Foothill agrees to provide
Borrowers with a copy of all appraisals of the Library obtained by it;
and
(d) Servicing Fee. On the first day of each month during the
term of this Agreement, and thereafter so long as any Obligations are
outstanding, a servicing fee in an amount equal to $2,500.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE AND THE ISSUANCE OF THE
INITIAL LETTER OF CREDIT. The obligation of Foothill to make the initial
Advance, to issue or cause to be issued the initial Letter of Credit is subject
to the fulfillment, to the satisfaction of Foothill and its counsel, of each of
the following conditions on or before the Closing Date:
(a) the Closing Date shall occur on or before November 24,
1997;
(b) Foothill shall have received searches reflecting the
filing of its financing statements;
(c) Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full force
and effect:
<PAGE>
a. the Lockbox Agreements;
b. the Disbursement Letter;
c. the Pay-Off Letter, together with UCC termination
statements and other documentation evidencing the termination
by Existing Lender of its Liens in and to the properties and
assets of Borrowers;
d. the Intellectual Property Security Agreement;
e. the Copyright Security Agreements; and
f. the Guaranty and security agreements and a
security agreement - stock pledge securing such Guaranty;
(d) Foothill shall have received a certificate from the
Secretary of each Borrower attesting to the resolutions of each
Borrower's Board of Directors authorizing its execution, delivery, and
performance of this Agreement and the other Loan Documents to which
such Borrower is a party and authorizing specific officers of such
Borrower to execute the same, and Foothill shall have received a
certificate from the Secretary of Parent attesting to the resolutions
of Parent's Board of Directors authorizing its execution, delivery and
performance of the Guaranty and the security documents securing the
Guaranty;
(e) Foothill shall have received copies of Parent's and each
Borrower's Governing Documents, as amended, modified, or supplemented
to the Closing Date, certified by the Secretary of Parent or such
Borrower;
(f) Foothill shall have received a certificate of status with
respect to each Borrower and Parent, dated within 10 days of the
Closing Date, such certificate to be issued by the appropriate officer
of the jurisdiction of organization of such Borrower and Parent, which
certificate shall indicate that such Borrower or Parent is in good
standing in such jurisdiction;
(g) Foothill shall have received certificates of status with
respect to each Borrower and Parent, each dated within 15 days of the
Closing Date, such certificates to be issued by the appropriate officer
of the jurisdictions in which its failure to be duly qualified or
licensed would constitute a Material Adverse Change, which certificates
shall indicate that such Borrower is in good standing in such
jurisdictions;
(h) Foothill shall have received a certificate of insurance,
together with the endorsements thereto, as are required by Section
6.10, the form and substance of which shall be satisfactory to Foothill
and its counsel;
<PAGE>
(i) Foothill shall have received duly executed certificates of
title with respect to that portion of the Collateral that is subject to
certificates of title;
(j) Foothill shall have received an opinion of Borrowers'
counsel in form and substance satisfactory to Foothill in its sole
discretion;
(k) Foothill shall have received satisfactory evidence that
all tax returns required to be filed by Borrowers have been timely
filed and all taxes upon each Borrower or its properties, assets,
income, and franchises (including payroll taxes) have been paid prior
to delinquency, except such taxes that are the subject of a Permitted
Protest;
(l) As of the Closing Date, Borrowers shall have not less than
$500,000 of Excess Availability after giving effect to the payments
permitted by Section 7.17(a)(i); and
(m) all other documents and legal matters in connection with
the transactions contemplated by this Agreement shall have been
delivered, executed, or recorded and shall be in form and substance
satisfactory to Foothill and its counsel.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES AND THE ISSUANCE OF ALL
LETTERS OF CREDIT. The following shall be conditions precedent to all Advances
and the issuance of all Letters of Credit:
(a) the representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct in all
respects on and as of the date of such extension of credit, as though
made on and as of such date (except to the extent that such
representations and warranties relate solely to an earlier date);
(b) no Default or Event of Default shall have occurred and be
continuing on the date of such extension of credit, nor shall either
result from the making thereof; and
(c) no injunction, writ, restraining order, or other order of
any nature prohibiting, directly or indirectly, the extending of such
credit shall have been issued and remain in force by any governmental
authority against any Borrower, Foothill, or any of their Affiliates.
3.3 CONDITIONS SUBSEQUENT. As conditions subsequent to initial closing
hereunder, Borrowers shall perform or cause to be performed the following (the
failure by Borrowers to so perform or cause to be performed constituting an
Event of Default):
(a) within 30 days of the Closing Date, deliver to Foothill
the certified copies of the policies of insurance, together with the
endorsements thereto, as are required by Section 6.10, the form and
substance of which shall be satisfactory to
<PAGE>
Foothill and its counsel; and
(b) within 30 days of the Closing Date, deliver to Foothill
Collateral Access Agreements from each of their lessors.
3.4 TERM; AUTOMATIC RENEWAL. This Agreement shall become effective upon
the execution and delivery hereof by Borrowers and Foothill and shall continue
in full force and effect for a term ending on the date (the "Renewal Date") that
is four years from the Closing Date and automatically shall be renewed for
successive one year periods thereafter, unless sooner terminated pursuant to the
terms hereof. Either party may terminate this Agreement effective on the Renewal
Date or on any anniversary of the Renewal Date by giving the other party at
least 90 days prior written notice. The foregoing notwithstanding, Foothill
shall have the right to terminate its obligations under this Agreement
immediately and without notice upon the occurrence and during the continuation
of an Event of Default.
3.5 EFFECT OF TERMINATION. On the date of termination of this
Agreement, all Obligations (including contingent reimbursement obligations of
Borrowers with respect to any outstanding Letters of Credit) immediately shall
become due and payable without notice or demand. No termination of this
Agreement, however, shall relieve or discharge Borrowers of Borrowers' duties,
Obligations, or covenants hereunder, and Foothill's continuing security
interests in the Collateral shall remain in effect until all Obligations have
been fully and finally discharged and Foothill's obligation to provide
additional credit hereunder is terminated. If Borrowers have sent a notice of
termination pursuant to the provisions of Section 3.4, but fail to pay the
Obligations in full on the date set forth in said notice, then Foothill may, but
shall not be required to, renew this Agreement for an additional term of one
year.
3.6 EARLY TERMINATION BY BORROWERS. The provisions of Section 3.4 that
allow termination of this Agreement by Borrowers only on the Renewal Date and
certain anniversaries thereof notwithstanding, Borrowers have the option, at any
time upon 90 days prior written notice to Foothill, to terminate this Agreement
by paying to Foothill, in cash, the Obligations (including an amount equal to
102% of the undrawn amount of the Letters of Credit), in full, together with a
premium (the "Early Termination Premium") equal to: (a) $150,000 if the
termination occurs within the first 12 months after the Closing Date, (b)
$125,000 if the termination occurs during months 13 through 24 after the Closing
Date, (c) $100,000 if the termination occurs during months 25 through 36 after
the Closing Date, and (d) $75,000 at all times after the 36th month after the
Closing Date.
3.7 TERMINATION UPON EVENT OF DEFAULT. If Foothill terminates this
Agreement upon the occurrence of an Event of Default, in view of the
impracticability and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Foothill's
lost profits as a result thereof, Borrowers shall pay to Foothill upon the
effective date of such termination, a premium in an amount equal to the Early
Termination Premium. The Early Termination Premium
<PAGE>
shall be presumed to be the amount of damages sustained by Foothill as the
result of the early termination and Borrowers agree that it is reasonable under
the circumstances currently existing. The Early Termination Premium provided for
in this Section 3.7 shall be deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST.
4.1 GRANT OF SECURITY INTEREST. Each Borrower hereby grants to Foothill
a continuing security interest in all of such Borrower's currently existing and
hereafter acquired or arising Collateral in order to secure prompt repayment of
any and all Obligations and in order to secure prompt performance by such
Borrower of each of its covenants and duties under the Loan Documents.
Foothill's security interests in the Collateral shall attach to all Collateral
without further act on the part of Foothill or Borrowers. Anything contained in
this Agreement or any other Loan Document to the contrary notwithstanding,
except for the sale of Inventory to buyers in the ordinary course of business,
no Borrower has any authority, express or implied, to dispose of any item or
portion of the Collateral.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral, including
proceeds, is evidenced by or consists of Negotiable Collateral, Borrowers,
immediately upon the request of Foothill, shall endorse and deliver physical
possession of such Negotiable Collateral to Foothill.
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE
COLLATERAL. At any time that an Event of Default has occurred and is continuing
or Foothill deems itself insecure, Foothill or Foothill's designee may (a)
notify customers or Account Debtors of any Borrower that the Accounts, General
Intangibles, or Negotiable Collateral of such Borrower have been assigned to
Foothill or that Foothill has a security interest therein, and (b) collect the
Accounts, General Intangibles, and Negotiable Collateral of such Borrower
directly and charge the collection costs and expenses to the Loan Account. Each
Borrower agrees that it will hold in trust for Foothill, as Foothill's trustee,
any Collections that it receives and immediately will deliver said Collections
to Foothill in their original form as received by Borrower.
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time upon the
request of Foothill, Borrowers shall execute and deliver to Foothill all
financing statements, continuation financing statements, fixture filings,
security agreements, pledges, assignments, endorsements of certificates of
title, applications for title, affidavits, reports, notices, schedules of
accounts, letters of authority, amendments to the Copyright Security Agreements
and all other documents that Foothill reasonably may request, in form
satisfactory to Foothill, to perfect and continue perfected Foothill's security
interests in the Collateral, and in order to fully consummate all of the
transactions contemplated hereby and under the other the Loan Documents.
4.5 POWER OF ATTORNEY. Each Borrower hereby irrevocably makes,
constitutes, and appoints Foothill (and any of Foothill's officers, employees,
or agents
<PAGE>
designated by Foothill) as such Borrower's true and lawful attorney, with power
to (a) if such Borrower refuses to, or fails timely to execute and deliver any
of the documents described in Section 4.4, sign the name of such Borrower on any
of the documents described in Section 4.4, (b) at any time that an Event of
Default has occurred and is continuing or Foothill deems itself insecure, sign
such Borrower's name on any invoice or bill of lading relating to any Account of
such Borrower, drafts against Account Debtors, schedules and assignments of
Accounts of such Borrower, verifications of Accounts of such Borrower, and
notices to Account Debtors, (c) send requests for verification of Accounts of
such Borrower, (d) endorse such Borrower's name on any Collection item that may
come into Foothill's possession, (e) at any time that an Event of Default has
occurred and is continuing or Foothill deems itself insecure, notify the post
office authorities to change the address for delivery of such Borrower's mail to
an address designated by Foothill, to receive and open all mail addressed to
such Borrower, and to retain all mail relating to the Collateral of such
Borrower and forward all other mail to such Borrower, (f) at any time that an
Event of Default has occurred and is continuing or Foothill deems itself
insecure, make, settle, and adjust all claims under such Borrower's policies of
insurance and make all determinations and decisions with respect to such
policies of insurance, and (g) at any time that an Event of Default has occurred
and is continuing or Foothill deems itself insecure, settle and adjust disputes
and claims respecting the Accounts of such Borrower directly with Account
Debtors, for amounts and upon terms that Foothill determines to be reasonable,
and Foothill may cause to be executed and delivered any documents and releases
that Foothill determines to be necessary. The appointment of Foothill as such
Borrower's attorney, and each and every one of Foothill's rights and powers,
being coupled with an interest, is irrevocable until all of the Obligations have
been fully and finally repaid and performed and Foothill's obligation to extend
credit hereunder is terminated.
4.6 RIGHT TO INSPECT. Foothill (through any of its officers, employees,
or agents) shall have the right, from time to time, during normal business
hours, hereafter to inspect Borrowers' Books and to check, test, and appraise
the Collateral in order to verify Borrowers' financial condition or the amount,
quality, value, condition of, or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce Foothill to enter into this Agreement, each Borrower
makes the following representations and warranties which shall be true, correct,
and complete in all respects as of the date hereof, and shall be true, correct,
and complete in all respects as of the Closing Date, and at and as of the date
of the making of each Advance and the issuance of each Letter of Credit made
thereafter, as though made on and as of the date of such Advance and the
issuance of each Letter of Credit (except to the extent that such
representations and warranties relate solely to an earlier date) and such
representations and warranties shall survive the execution and delivery of this
Agreement:
5.1 NO ENCUMBRANCES. Each Borrower has good and indefeasible title
<PAGE>
to its Collateral, free and clear of Liens except for Permitted Liens.
5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts of each Borrower are bona
fide existing obligations created by the sale and delivery of Inventory, the
licensing of copyrights or the rendition of services to Account Debtors in the
ordinary course of such Borrower's business, unconditionally owed to such
Borrower without defenses, disputes, offsets, counterclaims, or rights of return
or cancellation. The property giving rise to such Eligible Accounts has been
delivered to the Account Debtor, or to the Account Debtor's agent for immediate
shipment to and unconditional acceptance by the Account Debtor. Borrowers have
not received notice of actual or imminent bankruptcy, insolvency, or material
impairment of the financial condition of any Account Debtor regarding any
Eligible Account.
5.3 INTENTIONALLY OMITTED.
5.4 EQUIPMENT. All of the Equipment of Borrowers is used or held for
use in Borrowers' business and is fit for such purposes.
5.5 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and Equipment of
Borrowers are not stored with a bailee, warehouseman, or similar party (without
Foothill's prior written consent) and are located only at the locations
identified on Schedule 6.12 or otherwise permitted by Section 6.12.
5.6 INVENTORY RECORDS. Each Borrower keeps correct and accurate records
itemizing and describing the kind, type, quality, and quantity of its Inventory,
and such Borrower's cost therefor.
5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief executive
office of each Borrower is located at 2605 Fernbrook Lane North, Minneapolis,
Minnesota 55447 and each Borrower's FEIN is set forth below:
Borrower FEIN
-------- ----
K-Tel (USA) 41-1550160
Dominion 41-1545922
Consumer 41-1862470
TV 41-1773274
Video 41-1862472
5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(a) Each Borrower is duly organized and existing and in good
standing under the laws of the State of Minnesota and qualified and
licensed to do business in, and in good standing in, any state where
the failure to be so licensed or qualified reasonably could be expected
to have a Material Adverse Change.
<PAGE>
(b) Set forth on Schedule 5.8, is a complete and accurate list
of each Borrower's direct and indirect Subsidiaries, showing: (i) the
jurisdiction of their incorporation; (ii) the number of shares of each
class of common and preferred stock authorized for each of such
Subsidiaries; and (iii) the number and the percentage of the
outstanding shares of each such class owned directly or indirectly by
such Borrower. All of the outstanding capital stock of each such
Subsidiary has been validly issued and is fully paid and
non-assessable.
(c) Except as set forth on Schedule 5.8, no capital stock (or
any securities, instruments, warrants, options, purchase rights,
conversion or exchange rights, calls, commitments or claims of any
character convertible into or exercisable for capital stock) of any
direct or indirect Subsidiary of any Borrower is subject to the
issuance of any security, instrument, warrant, option, purchase right,
conversion or exchange right, call, commitment or claim of any right,
title, or interest therein or thereto.
5.9 DUE AUTHORIZATION; NO CONFLICT.
(a) The execution, delivery, and performance by each Borrower
of this Agreement and the Loan Documents to which it is a party have
been duly authorized by all necessary corporate action.
(b) The execution, delivery, and performance by each Borrower
of this Agreement and the Loan Documents to which it is a party do not
and will not (i) violate any provision of federal, state, or local law
or regulation (including Regulations G, T, U, and X of the Federal
Reserve Board) applicable to such Borrower, the Governing Documents of
such Borrower, or any order, judgment, or decree of any court or other
Governmental Authority binding on such Borrower, (ii) conflict with,
result in a breach of, or constitute (with due notice or lapse of time
or both) a default under any material contractual obligation or
material lease of such Borrower, (iii) result in or require the
creation or imposition of any Lien of any nature whatsoever upon any
properties or assets of such Borrower, other than Permitted Liens, or
(iv) require any approval of stockholders or any approval or consent of
any Person under any material contractual obligation of such Borrower.
(c) Other than the filing of appropriate financing statements,
fixture filings, and mortgages, the execution, delivery, and
performance by each Borrower of this Agreement and the Loan Documents
to which such Borrower is a party do not and will not require any
registration with, consent, or approval of, or notice to, or other
action with or by, any federal, state, foreign, or other Governmental
Authority or other Person.
(d) This Agreement and the Loan Documents to which any
Borrower is a party, and all other documents contemplated hereby and
thereby, when executed and delivered by such Borrower will be the
legally valid and binding obligations of such Borrower, enforceable
against such Borrower in accordance with
<PAGE>
their respective terms, except as enforcement may be limited by
equitable principles or by bankruptcy, insolvency, reorganization,
moratorium, or similar laws relating to or limiting creditors' rights
generally.
(e) The Liens granted by each Borrower to Foothill in and to
its properties and assets pursuant to this Agreement and the other Loan
Documents are validly created, perfected, and first priority Liens,
subject only to Permitted Liens.
5.10 LITIGATION. There are no actions or proceedings pending by or
against any Borrower before any court or administrative agency and no Borrower
has any knowledge or belief of any pending, threatened, or imminent litigation,
governmental investigations, or claims, complaints, actions, or prosecutions
involving any Borrower or any guarantor of the Obligations, except for: (a)
ongoing collection matters in which a Borrower is the plaintiff; (b) matters
disclosed on Schedule 5.10; and (c) matters arising after the date hereof that,
if decided adversely to a Borrower, would not have a Material Adverse Change.
5.11 NO MATERIAL ADVERSE CHANGE. All financial statements relating to
any Borrower or any guarantor of the Obligations that have been delivered by any
Borrower to Foothill have been prepared in accordance with GAAP (except, in the
case of unaudited financial statements, for the lack of footnotes and being
subject to year-end audit adjustments) and fairly present, in all material
respects, such Borrower's (or such guarantor's, as applicable) financial
condition as of the date thereof and such Borrower's results of operations for
the period then ended. There has not been a Material Adverse Change with respect
to any Borrower (or such guarantor, as applicable) since the date of the latest
financial statements submitted to Foothill on or before the Closing Date.
5.12 SOLVENCY. Each Borrower is Solvent. No transfer of property is
being made by any Borrower and no obligation is being incurred by any Borrower
in connection with the transactions contemplated by this Agreement or the other
Loan Documents with the intent to hinder, delay, or defraud either present or
future creditors of any Borrower.
5.13 EMPLOYEE BENEFITS. None of Borrowers, any of their Subsidiaries,
or any of their ERISA Affiliates maintains or contributes to any Benefit Plan,
other than those listed on Schedule 5.13. Each Borrower, each of its
Subsidiaries and each ERISA Affiliate have satisfied the minimum funding
standards of ERISA and the IRC with respect to each Benefit Plan to which it is
obligated to contribute. No ERISA Event has occurred nor has any other event
occurred that may result in an ERISA Event that reasonably could be expected to
result in a Material Adverse Change. None of Borrowers or their Subsidiaries,
any ERISA Affiliate, or any fiduciary of any Plan is subject to any direct or
indirect liability with respect to any Plan under any applicable law, treaty,
rule, regulation, or agreement. None of Borrowers or their Subsidiaries or any
ERISA Affiliate is required to provide security to any Plan under Section
401(a)(29) of the IRC.
1
<PAGE>
5.14 ENVIRONMENTAL CONDITION. None of Borrowers' properties or assets
has ever been used by any Borrower or, to the best of each Borrower's knowledge,
by previous owners or operators in the disposal of, or to produce, store,
handle, treat, release, or transport, any Hazardous Materials. None of
Borrowers' properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a Hazardous Materials
disposal site, or a candidate for closure pursuant to any environmental
protection statute. No Lien arising under any environmental protection statute
has attached to any revenues or to any real or personal property owned or
operated by any Borrower. No Borrower has received a summons, citation, notice,
or directive from the Environmental Protection Agency or any other federal or
state governmental agency concerning any action or omission by any Borrower
resulting in the releasing or disposing of Hazardous Materials into the
environment.
5.15 BUSINESS OF DOMINION. Dominion's sole business is to own the
Library and to license the various music rights to other Persons. The only
liabilities of Dominion are royalties and claims relating to the Library. None
of such claims will materially and adversely affect the value of the Library.
6. AFFIRMATIVE COVENANTS.
Each Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, such Borrower shall do all of the following:
6.1 ACCOUNTING SYSTEM. Maintain a standard and modern system of
accounting that enables such Borrower to produce financial statements in
accordance with GAAP, and maintain records pertaining to its Collateral that
contain information as from time to time may be requested by Foothill. Such
Borrower also shall keep a modern inventory reporting system that shows all
additions, sales, claims, returns, and allowances with respect to its Inventory.
6.2 COLLATERAL REPORTING. Provide Foothill with the following documents
at the following times in form satisfactory to Foothill: (a) on weekly basis or
more frequently upon Foothill's request, a summary of Borrowers' sales journal,
collection journal, and credit register since the last such schedule and an
estimated calculation of the Borrowing Base as of such date, (b) on a monthly
basis and, in any event, by no later than the 15th day of each month during the
term of this Agreement, (i) a detailed calculation of the Borrowing Base, (ii) a
detailed aging, by total, of such Borrower's Accounts, together with a
reconciliation to the detailed calculation of the Borrowing Base previously
provided to Foothill, and (iii) a schedule of additional copyright filings and
copyrights, (c) on a monthly basis and, in any event, by no later than the 15th
day of each month during the term of this Agreement, a summary aging, by vendor,
of such Borrower's accounts payable and any book overdraft, and a report of
accrued royalties and royalty payments payable by such Borrower, (d) upon
request, Inventory reports specifying such Borrower's cost and the wholesale
market value of its Inventory by category, with additional detail showing
additions to and deletions from its
<PAGE>
Inventory, (e) on weekly basis or more frequently upon Foothill's request, a
summary of returns, disputes, or claims, unless such information is contained in
another report required in this Section 6.2, (f) upon request, copies of
invoices in connection with its Accounts, customer statements, credit memos,
remittance advices and reports, deposit slips, shipping and delivery documents
in connection with its Accounts and for Inventory and Equipment acquired by such
Borrower, purchase orders and invoices, (g) on a quarterly basis, a detailed
list of such Borrower's customers, (h) on a monthly basis, a calculation of the
Dilution for the prior month; and (i) such other reports as to the Collateral or
the financial condition of such Borrower as Foothill may request from time to
time. Original sales invoices evidencing daily sales shall be mailed by such
Borrower to each Account Debtor and, after the occurrence of an Event of
Default, at Foothill's direction, the invoices shall indicate on their face that
such Borrower's Account has been assigned to Foothill and that all payments are
to be made directly to Foothill.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to Foothill:
(a) as soon as available, but in any event within 30 days after the end of each
month during each of such Parent's fiscal years, a company prepared balance
sheet, income statement, and statement of cash flow covering Parent's operations
during such period; and (b) as soon as available, but in any event within 90
days after the end of each of Parent's fiscal years, financial statements of
Parent's for each such fiscal year, audited by independent certified public
accountants reasonably acceptable to Foothill and certified, without any
qualifications, by such accountants to have been prepared in accordance with
GAAP, together with a certificate of such accountants addressed to Foothill
stating that such accountants do not have knowledge of the existence of any
Default or Event of Default. Such audited financial statements shall include a
balance sheet, profit and loss statement, and statement of cash flow and, if
prepared, such accountants' letter to management. In addition to the financial
statements referred to above, Parent agrees to deliver financial statements
prepared on a consolidating basis so as to present Parent and each such related
entity separately, and on a consolidated basis.
Together with the above, Borrowers also shall deliver to Foothill
Parent's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K
Current Reports, and any other filings made by Parent with the Securities and
Exchange Commission, if any, as soon as the same are filed, or any other
information that is provided by Parent to its shareholders, and any other report
reasonably requested by Foothill relating to the financial condition of such
Parent.
Each month, together with the financial statements provided pursuant to
Section 6.3(a), Parent shall deliver to Foothill a certificate signed by its
chief financial officer to the effect that: (i) all financial statements
delivered or caused to be delivered to Foothill hereunder have been prepared in
accordance with GAAP (except, in the case of unaudited financial statements, for
the lack of footnotes and being subject to year-end audit adjustments) and
fairly present the financial condition of Parent in all material respects, (ii)
the representations and warranties of Borrowers contained in this Agreement and
the other Loan Documents are true and correct in all material respects on and as
of the date of such certificate, as though made on and as of such date (except
to
<PAGE>
the extent that such representations and warranties relate solely to an earlier
date), (iii) for each month that also is the date on which a financial covenant
in Section 7.20 is to be tested, a Compliance Certificate demonstrating in
reasonable detail compliance at the end of such period with the applicable
financial covenants contained in Section 7.20, and (iv) on the date of delivery
of such certificate to Foothill there does not exist any condition or event that
constitutes a Default or Event of Default (or, in the case of clauses (i), (ii),
or (iii), to the extent of any non-compliance, describing such non-compliance as
to which he or she may have knowledge and what action Parent has taken, is
taking, or proposes to take with respect thereto).
Each Borrower shall have issued written instructions to its independent
certified public accountants authorizing them to communicate with Foothill and
to release to Foothill whatever financial information concerning such Borrower
that Foothill may request. Each Borrower hereby irrevocably authorizes and
directs all auditors, accountants, or other third parties to deliver to
Foothill, at such Borrower's expense, copies of such Borrower's financial
statements, papers related thereto, and other accounting records of any nature
in their possession, and to disclose to Foothill any information they may have
regarding such Borrower's business affairs and financial conditions.
6.4 TAX RETURNS. Deliver to Foothill copies of each of such Borrower's
future federal income tax returns, and any amendments thereto, within 30 days of
the filing thereof with the Internal Revenue Service.
6.5 GUARANTOR REPORTS. Cause any guarantor of any of the Obligations to
deliver its annual financial statements at the time when such Borrower provides
its audited financial statements to Foothill and copies of all federal income
tax returns as soon as the same are available and in any event no later than 30
days after the same are required to be filed by law.
6.6 RETURNS. Cause returns and allowances, if any, as between such
Borrower and its Account Debtors to be on the same basis and in accordance with
the usual customary practices of such Borrower, as they exist at the time of the
execution and delivery of this Agreement. If, at a time when no Event of Default
has occurred and is continuing, any Account Debtor returns any Inventory to such
Borrower, such Borrower promptly shall determine the reason for such return and,
if such Borrower accepts such return, issue a credit memorandum (with a copy to
be sent to Foothill) in the appropriate amount to such Account Debtor. If, at a
time when an Event of Default has occurred and is continuing, any Account Debtor
returns any Inventory to such Borrower, such Borrower promptly shall determine
the reason for such return and, if Foothill consents (which consent shall not be
unreasonably withheld), issue a credit memorandum (with a copy to be sent to
Foothill) in the appropriate amount to such Account Debtor.
6.7 TITLE TO EQUIPMENT. Upon Foothill's request, such Borrower
immediately shall deliver to Foothill, properly endorsed, any and all evidences
of
<PAGE>
ownership of, certificates of title, or applications for title to any items of
its Equipment.
6.8 MAINTENANCE OF EQUIPMENT. Maintain its Equipment in good operating
condition and repair (ordinary wear and tear excepted), and make all necessary
replacements thereto so that the value and operating efficiency thereof shall at
all times be maintained and preserved. Other than those items of Equipment that
constitute fixtures on the Closing Date, such Borrower shall not permit any item
of its Equipment to become a fixture to real estate or an accession to other
property, and such Equipment shall at all times remain personal property.
6.9 TAXES. Cause all assessments and taxes, whether real, personal, or
otherwise, due or payable by, or imposed, levied, or assessed against such
Borrower or any of its property to be paid in full, before delinquency or before
the expiration of any extension period, except to the extent that the validity
of such assessment or tax shall be the subject of a Permitted Protest. Such
Borrower shall make due and timely payment or deposit of all such federal,
state, and local taxes, assessments, or contributions required of it by law, and
will execute and deliver to Foothill, on demand, appropriate certificates
attesting to the payment thereof or deposit with respect thereto. Such Borrower
will make timely payment or deposit of all tax payments and withholding taxes
required of it by applicable laws, including those laws concerning F.I.C.A.,
F.U.T.A., state disability, and local, state, and federal income taxes, and
will, upon request, furnish Foothill with proof satisfactory to Foothill
indicating that such Borrower has made such payments or deposits.
6.10 INSURANCE.
(a) At its expense, keep its Collateral insured against loss
or damage by fire, theft, explosion, sprinklers, and all other hazards
and risks, and in such amounts, as are ordinarily insured against by
other owners in similar businesses. Such Borrower also shall maintain
business interruption, public liability, product liability, and
property damage insurance relating to such Borrower's ownership and use
of its Collateral, as well as insurance against larceny, embezzlement,
and criminal misappropriation.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as may be reasonably satisfactory
to Foothill. All insurance required herein shall be written by
companies which are authorized to do insurance business in the State of
California. All hazard insurance and such other insurance as Foothill
shall specify, shall contain a California Form 438BFU (NS) mortgagee
endorsement, or an equivalent endorsement satisfactory to Foothill,
showing Foothill as sole loss payee thereof, and shall contain a waiver
of warranties. Every policy of insurance referred to in this Section
6.10 shall contain an agreement by the insurer that it will not cancel
such policy except after 30 days prior written notice to Foothill and
that any loss payable thereunder shall be payable notwithstanding any
act or negligence of such Borrower or Foothill which might, absent such
agreement, result in a forfeiture of all or a part of such insurance
payment. Such Borrower shall deliver to
<PAGE>
Foothill certified copies of such policies of insurance and evidence of
the payment of all premiums therefor.
(c) Original policies or certificates thereof satisfactory to
Foothill evidencing such insurance shall be delivered to Foothill at
least 30 days prior to the expiration of the existing or preceding
policies. Such Borrower shall give Foothill prompt notice of any loss
covered by such insurance, and Foothill shall have the right to adjust
any loss. If an Event of Default has occurred and is continuing,
Foothill shall have the exclusive right to adjust all losses payable
under any such insurance policies without any liability to such
Borrower whatsoever in respect of such adjustments. Any monies received
as payment for any loss under any insurance policy including the
insurance policies mentioned above, shall be paid over to Foothill to
be applied at the option of Foothill either to the prepayment of the
Obligations without premium, in such order or manner as Foothill may
elect. Upon the occurrence of an Event of Default, Foothill shall have
the right to apply all prepaid premiums to the payment of the
Obligations in such order or form as Foothill shall determine.
(d) Such Borrower shall not take out separate insurance
concurrent in form or contributing in the event of loss with that
required to be maintained under this Section 6.10, unless Foothill is
included thereon as named insured with the loss payable to Foothill
under a standard California 438BFU (NS) Mortgagee endorsement, or its
local equivalent. Such Borrower immediately shall notify Foothill
whenever such separate insurance is taken out, specifying the insurer
thereunder and full particulars as to the policies evidencing the same,
and originals of such policies immediately shall be provided to
Foothill.
6.11 NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and under the
other Loan Documents by or on behalf of such Borrower without setoff or
counterclaim and free and clear of, and without deduction or withholding for or
on account of, any federal, state, or local taxes. Foothill represents to
Borrowers that it is a California corporation that is wholly-owned by Norwest
Corporation, a Delaware corporation.
6.12 LOCATION OF INVENTORY AND EQUIPMENT. Keep its Inventory and
Equipment only at the locations identified on Schedule 6.12; provided, however,
that Borrowers may amend Schedule 6.12 so long as such amendment occurs by
written notice to Foothill not less than 30 days prior to the date on which the
Inventory or Equipment of Borrowers is moved to such new location, so long as
such new location is within the continental United States, and so long as, at
the time of such written notification, Borrowers provide any financing
statements or fixture filings necessary to perfect and continue perfected
Foothill's security interests in such assets and also provides to Foothill a
Collateral Access Agreement.
6.13 COMPLIANCE WITH LAWS. Comply with the requirements of all
applicable laws, rules, regulations, and orders of any governmental authority,
including the Fair Labor Standards Act and the Americans With Disabilities Act,
other than laws,
<PAGE>
rules, regulations, and orders the non-compliance with which, individually or in
the aggregate, would not have and could not reasonably be expected to have a
Material Adverse Change.
6.14 EMPLOYEE BENEFITS.
(a) Deliver to Foothill: (i) promptly, and in any event within
10 Business Days after such Borrower or any of its Subsidiaries knows
or has reason to know that an ERISA Event has occurred that reasonably
could be expected to result in a Material Adverse Change, a written
statement of the chief financial officer of such Borrower describing
such ERISA Event and any action that is being taking with respect
thereto by such Borrower, any such Subsidiary or ERISA Affiliate, and
any action taken or threatened by the IRS, Department of Labor, or
PBGC. Such Borrower or such Subsidiary, as applicable, shall be deemed
to know all facts known by the administrator of any Benefit Plan of
which it is the plan sponsor, (ii) promptly, and in any event within 3
Business Days after the filing thereof with the IRS, a copy of each
funding waiver request filed with respect to any Benefit Plan and all
communications received by such Borrower, any of its Subsidiaries or,
to the knowledge of such Borrower, any ERISA Affiliate with respect to
such request, and (iii) promptly, and in any event within 3 Business
Days after receipt by such Borrower, any of its Subsidiaries or, to the
knowledge of such Borrower, any ERISA Affiliate, of the PBGC's
intention to terminate a Benefit Plan or to have a trustee appointed to
administer a Benefit Plan, copies of each such notice.
(b) Cause to be delivered to Foothill, upon Foothill's
request, each of the following: (i) a copy of each Plan (or, where any
such plan is not in writing, complete description thereof) (and if
applicable, related trust agreements or other funding instruments) and
all amendments thereto, all written interpretations thereof and written
descriptions thereof that have been distributed to employees or former
employees of such Borrower or its Subsidiaries; (ii) the most recent
determination letter issued by the IRS with respect to each Benefit
Plan; (iii) for the three most recent plan years, annual reports on
Form 5500 Series required to be filed with any governmental agency for
each Benefit Plan; (iv) all actuarial reports prepared for the last
three plan years for each Benefit Plan; (v) a listing of all
Multiemployer Plans, with the aggregate amount of the most recent
annual contributions required to be made by such Borrower or any ERISA
Affiliate to each such plan and copies of the collective bargaining
agreements requiring such contributions; (vi) any information that has
been provided to such Borrower or any ERISA Affiliate regarding
withdrawal liability under any Multiemployer Plan; and (vii) the
aggregate amount of the most recent annual payments made to former
employees of such Borrower or its Subsidiaries under any Retiree Health
Plan.
6.15 LEASES. Pay when due all rents and other amounts payable under any
leases to which such Borrower is a party or by which such Borrower's properties
and assets are bound, unless such payments are the subject of a Permitted
Protest. To the extent that such Borrower fails timely to make payment of such
rents and other
<PAGE>
amounts payable when due under its leases, Foothill shall be entitled, in its
discretion, to reserve an amount equal to such unpaid amounts against the
Borrowing Base.
6.16 ROYALTY PAYMENTS. Make royalty payments in accordance with normal
industry practices.
7. NEGATIVE COVENANTS.
Each Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, such Borrower will not do any of the following:
7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:
(a) Indebtedness evidenced by this Agreement, together with
Indebtedness to issuers of letters of credit that are the subject of
L/C Guarantees;
(b) Indebtedness set forth in the latest financial statements
of Borrowers submitted to Foothill on or prior to the Closing Date;
(c) Indebtedness secured by Permitted Liens; and
(d) refinancings, renewals, or extensions of Indebtedness
permitted under clauses (b) and (c) of this Section 7.1 (and
continuance or renewal of any Permitted Liens associated therewith) so
long as: (i) the terms and conditions of such refinancings, renewals,
or extensions do not materially impair the prospects of repayment of
the Obligations by Borrowers, (ii) the net cash proceeds of such
refinancings, renewals, or extensions do not result in an increase in
the aggregate principal amount of the Indebtedness so refinanced,
renewed, or extended, (iii) such refinancings, renewals, refundings, or
extensions do not result in a shortening of the average weighted
maturity of the Indebtedness so refinanced, renewed, or extended, and
(iv) to the extent that Indebtedness that is refinanced was
subordinated in right of payment to the Obligations, then the
subordination terms and conditions of the refinancing Indebtedness must
be at least as favorable to Foothill as those applicable to the
refinanced Indebtedness.
7.2 LIENS. Create, incur, assume, or permit to exist, directly or
indirectly, any Lien on or with respect to any of its property or assets, of any
kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
Section 7.1(d) and so long as the replacement Liens only encumber those assets
or property that secured the original Indebtedness).
<PAGE>
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Except for transactions among
Borrowers, enter into any merger, consolidation, reorganization, or
recapitalization, or reclassify its capital stock, or liquidate, wind up, or
dissolve itself (or suffer any liquidation or dissolution), or convey, sell,
assign, lease, transfer, or otherwise dispose of, in one transaction or a series
of transactions, all or any substantial part of its property or assets.
7.4 DISPOSAL OF ASSETS. Sell, lease, assign, transfer, or otherwise
dispose of any of such Borrower's properties or assets other than: (a) sales of
Inventory to buyers in the ordinary course of such Borrower's business as
currently conducted and (b) licenses of music rights from the Library in the
ordinary course of such Borrower's business as currently conducted.
7.5 CHANGE NAME. Change such Borrower's name, FEIN, corporate structure
(within the meaning of Section 9402(7) of the Code), or identity, or add any new
fictitious name.
7.6 GUARANTEE. Guarantee or otherwise become in any way liable with
respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of such Borrower or
which are transmitted or turned over to Foothill.
7.7 NATURE OF BUSINESS. Make any change in the principal nature of such
Borrower's business.
7.8 PREPAYMENTS AND AMENDMENTS.
(a) Except in connection with a refinancing permitted by
Section 7.1(d), prepay, redeem, retire, defease, purchase, or otherwise
acquire any Indebtedness owing to any third Person, other than the
Obligations in accordance with this Agreement, and
(b) Directly or indirectly, amend, modify, alter, increase, or
change any of the terms or conditions of any agreement, instrument,
document, indenture, or other writing evidencing or concerning
Indebtedness permitted under Sections 7.1(b), (c), or (d).
7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or
indirectly, any Change of Control.
7.10 CONSIGNMENTS. Consign any Inventory or sell any of its Inventory
on bill and hold, or other conditional terms of sale.
7.11 DISTRIBUTIONS. Make any distribution or declare or pay any
dividends (in cash or other property, other than capital stock) on, or purchase,
acquire, redeem, or retire any of such Borrower's capital stock, of any class,
whether now or
<PAGE>
hereafter outstanding; provided, however, that Borrowers may pay dividends to
Parent or redeem or retire shares of Borrowers' capital so long as all of the
following conditions are met: (a) no Event of Default has occurred and is
continuing, (b) Borrowers' have not less than $500,000 of Excess Availability
after giving effect to the dividend, redemption or retirement, and (c) the
aggregate amount of such payments by all Borrowers during the term of this
Agreement does not exceed $4,000,000.
7.12 ACCOUNTING METHODS. Modify or change its method of accounting or
enter into, modify, or terminate any agreement currently existing, or at any
time hereafter entered into with any third party accounting firm or service
bureau for the preparation or storage of such Borrower's accounting records
without said accounting firm or service bureau agreeing to provide Foothill
information regarding the Collateral or such Borrower's financial condition.
Such Borrower waives the right to assert a confidential relationship, if any, it
may have with any accounting firm or service bureau in connection with any
information requested by Foothill pursuant to or in accordance with this
Agreement, and agrees that Foothill may contact directly any such accounting
firm or service bureau in order to obtain such information.
7.13 INVESTMENTS. Directly or indirectly make, acquire, or incur any
liabilities (including contingent obligations) for or in connection with (a) the
acquisition of the securities (whether debt or equity) of, or other interests
in, a Person, (b) loans, advances, capital contributions, or transfers of
property to a Person, or (c) the acquisition of all or substantially all of the
properties or assets of a Person.
7.14 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of such Borrower
except for: (a) transactions that are in the ordinary course of such Borrower's
business, upon fair and reasonable terms, that are fully disclosed to Foothill
and (b) reimbursements to Parent for expenses and taxes paid by Parent for the
benefit of Borrowers.
7.15 SUSPENSION. Suspend or go out of a substantial portion of its
business.
7.16 INTENTIONALLY OMITTED.
7.17 USE OF PROCEEDS. Use (a) the proceeds of the Advances made
hereunder for any purpose other than (i) on the Closing Date, (w) to repay in
full the outstanding principal, accrued interest, and accrued fees and expenses
owing to Existing Lender, (x) to pay $1,850,000 to satisfy royalty audit claims,
(y) to repay to Parent outstanding Indebtedness in the amount of $1,500,000, and
(z) to pay transactional costs and expenses incurred in connection with this
Agreement, and (ii) thereafter, consistent with the terms and conditions hereof,
for its lawful and permitted corporate purposes.
7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new location
without providing 30 days prior written notification thereof to Foothill and so
long as, at the time
<PAGE>
of such written notification, such Borrower provides any financing statements or
fixture filings necessary to perfect and continue perfected Foothill's security
interests and also provides to Foothill a Collateral Access Agreement with
respect to such new location. The Inventory and Equipment of such Borrower shall
not at any time now or hereafter be stored with a bailee, warehouseman, or
similar party without Foothill's prior written consent.
7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA. Directly or indirectly:
(a) engage, or permit any Subsidiary of such Borrower to
engage, in any prohibited transaction which is reasonably likely to
result in a civil penalty or excise tax described in Sections 406 of
ERISA or 4975 of the IRC for which a statutory or class exemption is
not available or a private exemption has not been previously obtained
from the Department of Labor;
(b) permit to exist with respect to any Benefit Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and
412 of the IRC), whether or not waived;
(c) fail, or permit any Subsidiary of such Borrower to fail,
to pay timely required contributions or annual installments due with
respect to any waived funding deficiency to any Benefit Plan;
(d) terminate, or permit any Subsidiary of such Borrower to
terminate, any Benefit Plan where such event would result in any
liability of such Borrower, any of its Subsidiaries or any ERISA
Affiliate under Title IV of ERISA;
(e) fail, or permit any Subsidiary of such Borrower to fail,
to make any required contribution or payment to any Multiemployer Plan;
(f) fail, or permit any Subsidiary of such Borrower to fail,
to pay any required installment or any other payment required under
Section 412 of the IRC on or before the due date for such installment
or other payment;
(g) amend, or permit any Subsidiary of such Borrower to amend,
a Plan resulting in an increase in current liability for the plan year
such that either of such Borrower, any Subsidiary of such Borrower or
any ERISA Affiliate is required to provide security to such Plan under
Section 401(a)(29) of the IRC; or
(h) withdraw, or permit any Subsidiary of such Borrower to
withdraw, from any Multiemployer Plan where such withdrawal is
reasonably likely to result in any liability of any such entity under
Title IV of ERISA;
which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of such Borrower, any of its
Subsidiaries or any
<PAGE>
ERISA Affiliate in excess of $100,000.
7.20 FINANCIAL COVENANTS. Have Parent fail to have Tangible Net Worth
of at least the following amounts, as of the dates set forth below:
Minimum Tangible Net Worth Fiscal Quarter Ending:
-------------------------- ----------------------
$4,675,000 September 30, 1997
5,000,000 December 31, 1997
5,475,000 March 31, 1998
5,675,000 June 30, 1998
6,000,000 September 30, 1998
6,475,000 December 31, 1998
6,875,000 March 31, 1999
7,275,000 June 30, 1999
7,675,000 September 30, 1999
$8,000,000 December 31, 1999 and thereafter
7.21 CAPITAL EXPENDITURES. Borrowers shall not, in the aggregate, make
capital expenditures in any fiscal year in excess of $1,000,000. To the extent
that Borrowers' capital expenditures in any fiscal year are less than
$1,000,000, the difference between $1,000,000 and the amount actually incurred
can be carried forward to future fiscal years so long as the maximum amount of
such expenditures (including the carried forward amounts) does not exceed
$2,000,000 in any fiscal year. In addition to the amounts permitted in the
preceding sentences, Borrowers may incur a one time charge for computer system
upgrades in an amount not to exceed $750,000.
7.22 LIBRARY ACQUISITIONS. Borrowers shall not, in the aggregate, make
acquisitions of music rights for the Library at a cost payable in cash in any
fiscal year in excess of $2,000,000 and after giving effect to each such
acquisition, Borrowers' must have at least $500,000 of Excess Availability.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an event of
default (each, an "Event of Default") under this Agreement:
8.1 If Borrowers fail to pay when due and payable or when declared due
and payable, any portion of the Obligations (whether of principal, interest
(including any interest which, but for the provisions of the Bankruptcy Code,
would have accrued
<PAGE>
on such amounts), fees and charges due Foothill, reimbursement of Foothill
Expenses, or other amounts constituting Obligations);
8.2 If any Borrower fails to perform, keep, or observe any term,
provision, condition, covenant, or agreement contained in this Agreement, in any
of the Loan Documents, or in any other present or future agreement between such
Borrower and Foothill; provided, however, that Borrowers' failure to perform,
keep, or observe the terms of Sections 6.2, 6.3, 6.4, 6.7, 6.8, 6.13 or 6.15
shall not constitute an Event of Default unless such failure continues for five
days or more;
8.3 If there is a Material Adverse Change;
8.4 If any material portion of any Borrower's properties or assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any third Person, and such attachment, seizure or
levy is not released within 10 days of the date thereof;
8.5 If an Insolvency Proceeding is commenced by any Borrower;
8.6 If an Insolvency Proceeding is commenced against any Borrower and
any of the following events occur: (a) such Borrower consents to the institution
of the Insolvency Proceeding against it; (b) the petition commencing the
Insolvency Proceeding is not timely controverted; (c) the petition commencing
the Insolvency Proceeding is not dismissed within 45 calendar days of the date
of the filing thereof; provided, however, that, during the pendency of such
period, Foothill shall be relieved of its obligation to extend credit hereunder;
(d) an interim trustee is appointed to take possession of all or a substantial
portion of the properties or assets of, or to operate all or any substantial
portion of the business of, such Borrower; or (e) an order for relief shall have
been issued or entered therein;
8.7 If any Borrower is enjoined, restrained, or in any way prevented by
court order from continuing to conduct all or any material part of its business
affairs;
8.8 If a notice of Lien, levy, or assessment is filed of record with
respect to any of any Borrower's properties or assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, or if any taxes or debts owing
at any time hereafter to any one or more of such entities becomes a Lien,
whether choate or otherwise, upon any of such Borrower's properties or assets
and the same is not paid on the payment date thereof;
8.9 If a judgment or other claim becomes a Lien or encumbrance upon any
material portion of any Borrower's properties or assets and such Lien or
encumbrance is not discharged or released within 30 days of the date thereof;
8.10 If there is a default in any material agreement to which any
<PAGE>
Borrower is a party with one or more third Persons and such default (a) occurs
at the final maturity of the obligations thereunder, or (b) results in a right
by such third Person(s), irrespective of whether exercised, to accelerate the
maturity of such Borrower's obligations thereunder;
8.11 If any Borrower makes any payment on account of Indebtedness that
has been contractually subordinated in right of payment to the payment of the
Obligations, except to the extent such payment is permitted by the terms of the
subordination provisions applicable to such Indebtedness;
8.12 If any material misstatement or misrepresentation exists now or
hereafter in any warranty, representation, statement, or report made to Foothill
by any Borrower or any officer, employee, agent, or director of any Borrower, or
if any such warranty or representation is withdrawn; or
8.13 If the obligation of Parent under the Guaranty is limited or
terminated by operation of law or by the Parent, or Parent becomes the subject
of an Insolvency Proceeding, or Parent shall be in default of the Guaranty or
any of the security agreements securing the Guaranty.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence, and during the
continuation, of an Event of Default Foothill may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrowers:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise,
immediately due and payable;
(b) Cease advancing money or extending credit to or for the
benefit of Borrowers under this Agreement, under any of the Loan
Documents, or under any other agreement between Borrowers and Foothill;
(c) Terminate this Agreement and any of the other Loan
Documents as to any future liability or obligation of Foothill, but
without affecting Foothill's rights and security interests in the
Collateral and without affecting the Obligations;
(d) Settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which Foothill considers advisable,
and in such cases, Foothill will credit Borrowers' Loan Account with
only the net amounts received by Foothill in payment of such disputed
Accounts after deducting all Foothill Expenses incurred or expended in
connection therewith;
<PAGE>
(e) Cause Borrowers to hold all of their returned Inventory in
trust for Foothill, segregate all such returned Inventory from all
other property of any Borrower or in any Borrower's possession and
conspicuously label said returned Inventory as the property of
Foothill;
(f) Without notice to or demand upon any Borrower or any
guarantor, make such payments and do such acts as Foothill considers
necessary or reasonable to protect its security interests in the
Collateral. Borrowers agree to assemble the Collateral if Foothill so
requires, and to make the Collateral available to Foothill as Foothill
may designate. Each Borrower authorizes Foothill to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or
compromise any encumbrance, charge, or Lien that in Foothill's
determination appears to conflict with its security interests and to
pay all expenses incurred in connection therewith. With respect to any
of Borrowers' owned or leased premises, each Borrower hereby grants
Foothill a license to enter into possession of such premises and to
occupy the same, without charge, for up to 120 days in order to
exercise any of Foothill's rights or remedies provided herein, at law,
in equity, or otherwise;
(g) Without notice to any Borrower (such notice being
expressly waived), and without constituting a retention of any
collateral in satisfaction of an obligation (within the meaning of
Section 9505 of the Code), set off and apply to the Obligations any and
all (i) balances and deposits of any Borrower held by Foothill
(including any amounts received in the Lockbox Accounts), or (ii)
indebtedness at any time owing to or for the credit or the account of
any Borrower held by Foothill;
(h) Hold, as cash collateral, any and all balances and
deposits of any Borrower held by Foothill, and any amounts received in
the Lockbox Accounts, to secure the full and final repayment of all of
the Obligations;
(i) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Foothill is hereby granted a license or
other right to use, without charge, any Borrower's labels, patents,
copyrights, rights of use of any name, trade secrets, trade names,
trademarks, service marks, and advertising matter, or any property of a
similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and
each Borrower's rights under all licenses and all franchise agreements
shall inure to Foothill's benefit;
(j) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including any Borrower's
premises) as Foothill determines is commercially reasonable. It is not
necessary that the Collateral be present at any such sale;
(k) Foothill shall give notice of the disposition of the
Collateral
<PAGE>
as follows:
(1) Foothill shall give Borrowers and each holder of
a security interest in the Collateral who has filed with
Foothill a written request for notice, a notice in writing of
the time and place of public sale, or, if the sale is a
private sale or some other disposition other than a public
sale is to be made of the Collateral, then the time on or
after which the private sale or other disposition is to be
made;
(2) The notice shall be personally delivered or
mailed, postage prepaid, to Borrowers as provided in Section
12, at least 5 days before the date fixed for the sale, or at
least 5 days before the date on or after which the private
sale or other disposition is to be made; no notice needs to be
given prior to the disposition of any portion of the
Collateral that is perishable or threatens to decline speedily
in value or that is of a type customarily sold on a recognized
market. Notice to Persons other than Borrowers claiming an
interest in the Collateral shall be sent to such addresses as
they have furnished to Foothill;
(3) If the sale is to be a public sale, Foothill also
shall give notice of the time and place by publishing a notice
one time at least 5 days before the date of the sale in a
newspaper of general circulation in the county in which the
sale is to be held;
(l) Foothill may credit bid and purchase at any public sale;
and
(m) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrowers. Any
excess will be returned, without interest and subject to the rights of
third Persons, by Foothill to Borrowers.
9.2 REMEDIES CUMULATIVE. Foothill's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Foothill shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Foothill of one
right or remedy shall be deemed an election, and no waiver by Foothill of any
Event of Default shall be deemed a continuing waiver. No delay by Foothill shall
constitute a waiver, election, or acquiescence by it.
<PAGE>
10. TAXES AND EXPENSES.
If any Borrower fails to pay any monies (whether taxes, assessments,
insurance premiums, or, in the case of leased properties or assets, rents or
other amounts payable under such leases) due to third Persons, or fails to make
any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement, then, to the extent that Foothill
determines that such failure by such Borrower could result in a Material Adverse
Change, in its discretion and without prior notice to Borrowers, Foothill may do
any or all of the following: (a) make payment of the same or any part thereof;
(b) set up such reserves in Borrowers' Loan Account as Foothill deems necessary
to protect Foothill from the exposure created by such failure; or (c) obtain and
maintain insurance policies of the type described in Section 6.10, and take any
action with respect to such policies as Foothill deems prudent. Any such amounts
paid by Foothill shall constitute Foothill Expenses. Any such payments made by
Foothill shall not constitute an agreement by Foothill to make similar payments
in the future or a waiver by Foothill of any Event of Default under this
Agreement. Foothill need not inquire as to, or contest the validity of, any such
expense, tax, or Lien and the receipt of the usual official notice for the
payment thereof shall be conclusive evidence that the same was validly due and
owing.
11. WAIVERS; INDEMNIFICATION.
11.1 DEMAND; PROTEST; ETC. Each Borrower waives demand, protest, notice
of protest, notice of default or dishonor, notice of payment and nonpayment,
nonpayment at maturity, release, compromise, settlement, extension, or renewal
of accounts, documents, instruments, chattel paper, and guarantees at any time
held by Foothill on which such Borrower may in any way be liable.
11.2 FOOTHILL'S LIABILITY FOR COLLATERAL. So long as Foothill complies
with its obligations, if any, under Section 9207 of the Code, Foothill shall not
in any way or manner be liable or responsible for: (a) the safekeeping of the
Collateral; (b) any loss or damage thereto occurring or arising in any manner or
fashion from any cause; (c) any diminution in the value thereof; or (d) any act
or default of any carrier, warehouseman, bailee, forwarding agency, or other
Person. All risk of loss, damage, or destruction of the Collateral shall be
borne by Borrowers.
11.3 INDEMNIFICATION. Borrowers shall pay, indemnify, defend, and hold
Foothill, and each of its officers, directors, employees, counsel, agents, and
attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest
extent permitted by law) from and against any and all claims, demands, suits,
actions, investigations, proceedings, and damages, and all reasonable attorneys
fees and disbursements and other costs and expenses actually incurred in
connection therewith (as and when they are incurred and irrespective of whether
suit is brought), at any time asserted against, imposed upon, or incurred by any
of them in connection with or as a result of or related to the execution,
delivery, enforcement, performance, and administration (including any of the
foregoing arising out of the administration of the
<PAGE>
credit facilities hereunder on a joint borrowing basis) of this Agreement and
any other Loan Documents or the transactions contemplated herein, and with
respect to any investigation, litigation, or proceeding related to this
Agreement, any other Loan Document, or the use of the proceeds of the credit
provided hereunder (irrespective of whether any Indemnified Person is a party
thereto), or any act, omission, event or circumstance in any manner related
thereto (all the foregoing, collectively, the "Indemnified Liabilities").
Borrowers shall have no obligation to any Indemnified Person under this Section
11.3 with respect to any Indemnified Liability that a court of competent
jurisdiction finally determines to have resulted from the gross negligence or
willful misconduct of such Indemnified Person. This provision shall survive the
termination of this Agreement and the repayment of the Obligations.
11.4 JOINT BORROWERS.
(a) Each Borrower agrees that it is jointly and severally,
directly and primarily liable to Foothill for payment in full of all
Obligations, whether for principal, interest or otherwise and that such
liability is independent of the duties, obligations, and liabilities of
the other Borrowers. Foothill may bring a separate action or actions on
each, any, or all of the Obligations against any Borrower, whether
action is brought against the other Borrowers or whether the other
Borrowers are joined in such action. In the event that any Borrower
fails to make any payment of any Obligations on or before the due date
thereof, the other Borrowers immediately shall cause such payment to be
made or each of such Obligations to be performed, kept, observed, or
fulfilled.
(b) The Loan Documents are a primary and original obligation
of each Borrower, are not the creation of a surety relationship, and
are an absolute, unconditional, and continuing promise of payment and
performance which shall remain in full force and effect without respect
to future changes in conditions, including any change of law or any
invalidity or irregularity with respect to the Loan Documents. Each
Borrower agrees that its liability under the Loan Documents shall be
immediate and shall not be contingent upon the exercise or enforcement
by Foothill of whatever remedies it may have against the other
Borrowers, or the enforcement of any lien or realization upon any
security Foothill may at any time possess. Each Borrower consents and
agrees that Foothill shall be under no obligation (under Section 2899
or 3433 of the California Civil Code or otherwise) to marshal any
assets of any Borrower against or in payment of any or all of the
Obligations.
(c) Each Borrower acknowledges that it is presently informed
as to the financial condition of the other Borrowers and of all other
circumstances which a diligent inquiry would reveal and which bear upon
the risk of nonpayment of the Obligations. Each Borrower hereby
covenants that it will continue to keep informed as to the financial
condition of the other Borrowers, the status of the other Borrowers and
of all circumstances which bear upon the risk of nonpayment of the
Obligations. Absent a written request from any Borrower to Foothill for
information, such Borrower hereby waives any and all rights it may have
to require Foothill to disclose to such Borrower
<PAGE>
any information which Foothill may now or hereafter acquire concerning
the condition or circumstances of the other Borrowers.
(d) The liability of each Borrower under the Loan Documents
includes Obligations arising under successive transactions continuing,
compromising, extending, increasing, modifying, releasing, or renewing
the Obligations, changing the interest rate, payment terms, or other
terms and conditions thereof, or creating new or additional Obligations
after prior Obligations have been satisfied in whole or in part. To the
maximum extent permitted by law, each Borrower hereby waives any right
to revoke its liability under the Loan Documents as to future
indebtedness, and in connection therewith, each Borrower hereby waives
any rights it may have under Section 2815 of the California Civil Code.
If such a revocation is effective notwithstanding the foregoing waiver,
each Borrower acknowledges and agrees that (a) no such revocation shall
be effective until written notice thereof has been received by
Foothill, (b) no such revocation shall apply to any Obligations in
existence on such date (including, any subsequent continuation,
extension, or renewal thereof, or change in the interest rate, payment
terms, or other terms and conditions thereof), (c) no such revocation
shall apply to any Obligations made or created after such date to the
extent made or created pursuant to a legally binding commitment of
Foothill in existence on the date of such revocation, (d) no payment by
such Borrower or from any other source prior to the date of such
revocation shall reduce the maximum obligation of the other Borrowers
hereunder, and (e) any payment by such Borrower or from any source
other than Borrowers, subsequent to the date of such revocation, shall
first be applied to that portion of the Obligations as to which the
revocation is effective and which are not, therefore, guaranteed
hereunder, and to the extent so applied shall not reduce the maximum
obligation of each Borrower hereunder.
(e) (i) Each Borrower absolutely, unconditionally, knowingly,
and expressly waives:
(1) (A) notice of acceptance hereof; (B) notice of
any loans or other financial accommodations made or extended
under the Loan Documents or the creation or existence of any
Obligations; (C) notice of the amount of the Obligations,
subject, however, to each Borrower's right to make inquiry of
Foothill to ascertain the amount of the Obligations at any
reasonable time; (D) notice of any adverse change in the
financial condition of the other Borrowers or of any other
fact that might increase such Borrower's risk hereunder; (E)
notice of presentment for payment, demand, protest, and notice
thereof as to any instruments among the Loan Documents; and
(F) all notices (except if such notice is specifically
required to be given to Borrowers hereunder or under the Loan
Documents) and demands to which such Borrower might otherwise
be entitled.
(2) its right, under Sections 2845 or 2850 of the
California Civil Code, or otherwise, to require Foothill to
institute suit against, or to exhaust any rights and remedies
which Foothill has or may have against, the
<PAGE>
other Borrowers or any third party, or against any Collateral
provided by the other Borrowers, or any third party. In this
regard, each Borrower agrees that it is bound to the payment
of all Obligations, whether now existing or hereafter
accruing, as fully as if such Obligations were directly owing
to Foothill by such Borrower. Each Borrower further waives any
defense arising by reason of any disability or other defense
(other than the defense that the Obligations shall have been
fully and finally performed and indefeasibly paid) of the
other Borrowers or by reason of the cessation from any cause
whatsoever of the liability of the other Borrowers in respect
thereof.
(3) (A) any rights to assert against Foothill any
defense (legal or equitable), set-off, counterclaim, or claim
which such Borrower may now or at any time hereafter have
against the other Borrowers or any other party liable to
Foothill; (B) any defense, set-off, counterclaim, or claim, of
any kind or nature, arising directly or indirectly from the
present or future lack of perfection, sufficiency, validity,
or enforceability of the Obligations or any security therefor;
(C) any defense such Borrower has to performance hereunder,
and any right such Borrower has to be exonerated, provided by
Sections 2819, 2822, or 2825 of the California Civil Code, or
otherwise, arising by reason of: the impairment or suspension
of Foothill's rights or remedies against the other Borrowers;
the alteration by Foothill of the Obligations; any discharge
of the other Borrowers' obligations to Foothill by operation
of law as a result of Foothill's intervention or omission; or
the acceptance by Foothill of anything in partial satisfaction
of the Obligations; (D) the benefit of any statute of
limitations affecting such Borrower's liability hereunder or
the enforcement thereof, and any act which shall defer or
delay the operation of any statute of limitations applicable
to the Obligations shall similarly operate to defer or delay
the operation of such statute of limitations applicable to
such Borrower's liability hereunder.
(ii) Each Borrower absolutely,
unconditionally, knowingly, and expressly waives any
defense arising by reason of or deriving from (i) any
claim or defense based upon an election of remedies
by Foothill including any defense based upon an
election of remedies by Foothill under the provisions
of Sections 580a, 580b, 580d, and 726 of the
California Code of Civil Procedure or any similar law
of California or any other jurisdiction; or (ii) any
election by Foothill under Bankruptcy Code Section
1111(b) to limit the amount of, or any collateral
securing, its claim against the Borrowers. Pursuant
to California Civil Code Section 2856(b):
"Each Borrower waives all rights and
defenses arising out of an election of remedies by
the creditor, even though that election of remedies,
such as a nonjudicial foreclosure with respect to
security for a guaranteed obligation, has destroyed
such Borrower's rights of subrogation and
reimbursement against the other Borrowers by the
operation of Section 580(d) of the California Code of
Civil Procedure or otherwise."
<PAGE>
If any of the Obligations at any time is secured by a
mortgage or deed of trust upon real property,
Foothill may elect, in its sole discretion, upon a
default with respect to the Obligations, to foreclose
such mortgage or deed of trust judicially or
nonjudicially in any manner permitted by law, before
or after enforcing the Loan Documents, without
diminishing or affecting the liability of any
Borrower hereunder except to the extent the
Obligations are repaid with the proceeds of such
foreclosure. Each Borrower understands that (a) by
virtue of the operation of California's
antideficiency law applicable to nonjudicial
foreclosures, an election by Foothill nonjudicially
to foreclose such a mortgage or deed of trust
probably would have the effect of impairing or
destroying rights of subrogation, reimbursement,
contribution, or indemnity of such Borrower against
the other Borrowers or other guarantors or sureties,
and (b) absent the waiver given by such Borrower,
such an election would prevent Foothill from
enforcing the Loan Documents against such Borrower.
Understanding the foregoing, and understanding that
such Borrower is hereby relinquishing a defense to
the enforceability of the Loan Documents, such
Borrower hereby waives any right to assert against
Foothill any defense to the enforcement of the Loan
Documents, whether denominated "estoppel" or
otherwise, based on or arising from an election by
Foothill nonjudicially to foreclose any such mortgage
or deed of trust. Each Borrower understands that the
effect of the foregoing waiver may be that each
Borrower may have liability hereunder for amounts
with respect to which such Borrower may be left
without rights of subrogation, reimbursement,
contribution, or indemnity against the other Borrower
or other guarantors or sureties. Each Borrower also
agrees that the "fair market value" provisions of
Section 580a of the California Code of Civil
Procedure shall have no applicability with respect to
the determination of such Borrower's liability under
the Loan Documents.
(iii) Until such time as all Obligations
have been fully, finally, and indefeasibly paid in
full, in cash, each Borrower hereby absolutely,
unconditionally, knowingly, and expressly postpones:
(1) any right of subrogation such Borrower has or may
have as against the other Borrowers with respect to
the Obligations; (2) any right to proceed against the
other Borrowers or any other Person, now or
hereafter, for contribution, indemnity,
reimbursement, or any other suretyship rights and
claims, whether direct or indirect, liquidated or
contingent, whether arising under express or implied
contract or by operation of law, which such Borrower
may now have or hereafter have as against the other
Borrowers with respect to the Obligations; and (3)
any right to proceed or seek recourse against or with
respect to any property or asset of the other
Borrowers.
(iv) WITHOUT LIMITING THE GENERALITY OF ANY
OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS
SECTION 11.4, EACH BORROWER HEREBY ABSOLUTELY,
KNOWINGLY, UNCONDITIONALLY, AND EXPRESSLY WAIVES AND
AGREES NOT TO ASSERT ANY AND ALL BENEFITS OR DEFENSES
ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE
OF CALIFORNIA CIVIL CODE SECTIONS 2799, 2808, 2809,
2810, 2815, 2819, 2820, 2821, 2822, 2825, 2839, 2845,
2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL
PROCEDURE
<PAGE>
SECTIONS 580a, 580b, 580c, 580d, AND 726, AND CHAPTER
2 OF TITLE 14 OF THE CALIFORNIA CIVIL CODE.
(f) Each Borrower consents and agrees that, without notice to
or by such Borrower, and without affecting or impairing the liability
of such Borrower hereunder, Foothill may, by action or inaction:
(i) compromise, settle, extend the duration or the
time for the payment of, or discharge the performance of, or
may refuse to or otherwise not enforce the Loan Documents, or
any part thereof, with respect to the other Borrowers;
(ii) release the other Borrowers or grant other
indulgences to the other Borrowers in respect thereof; or
(iii) release or substitute any guarantor, if any, of
the Obligations, or enforce, exchange, release, or waive any
security for the Obligations or any guaranty of the
Obligations, or any portion thereof.
(g) Foothill shall have the right to seek recourse against
each Borrower to the fullest extent provided for herein, and no
election by Foothill to proceed in one form of action or proceeding, or
against any party, or on any obligation, shall constitute a waiver of
Foothill's right to proceed in any other form of action or proceeding
or against other parties unless Foothill has expressly waived such
right in writing. Specifically, but without limiting the generality of
the foregoing, no action or proceeding by Foothill under the Loan
Documents shall serve to diminish the liability of any Borrower
thereunder except to the extent that Foothill finally and
unconditionally shall have realized indefeasible payment by such action
or proceeding.
(h) The Obligations shall not be considered indefeasibly paid
for purposes of this Section 11.4 unless and until all payments to
Foothill are no longer subject to any right on the part of any person,
including any Borrower, any Borrower as a debtor in possession, or any
trustee (whether appointed pursuant to 11 U.S.C., or otherwise) of any
Borrower's assets to invalidate or set aside such payments or to seek
to recoup the amount of such payments or any portion thereof, or to
declare same to be fraudulent or preferential. Upon such full and final
performance and indefeasible payment of the Obligations, Foothill shall
have no obligation whatsoever to transfer or assign its interest in the
Loan Documents to any Borrower. In the event that, for any reason, any
portion of such payments to Foothill is set aside or restored, whether
voluntarily or involuntarily, after the making thereof, then the
obligation intended to be satisfied thereby shall be revived and
continued in full force and effect as if said payment or payments had
not been made, and each Borrower shall be liable for the full amount
Foothill is required to repay plus any and all costs and expenses
(including attorneys'
<PAGE>
fees and attorneys' fees incurred pursuant to 11 U.S.C.) paid by
Foothill in connection therewith.
Borrowers and each of them warrant and agree that each of the
waivers and consents set forth herein are made after consultation with
legal counsel and with full knowledge of their significance and
consequences, with the understanding that events giving rise to any
defense or right waived may diminish, destroy or otherwise adversely
affect rights which Borrowers otherwise may have against other
Borrowers, the Lender Group or others, or against Collateral. If any of
the waivers or consents herein are determined to be contrary to any
applicable law or public policy, such waivers and consents shall be
effective to the maximum extent permitted by law.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other Loan Document shall be in
writing and (except for financial statements and other informational documents
which may be sent by first-class mail, postage prepaid) shall be personally
delivered or sent by registered or certified mail (postage prepaid, return
receipt requested), overnight courier, or telefacsimile to Borrower or to
Foothill, as the case may be, at its address set forth below:
IF TO BORROWERS: C/O K-TEL INTERNATIONAL (USA), INC.
2605 Fernbrook Lane North
Minneapolis, Minnesota 55447
Attn: Mark Dixon, Chief Operating Officer
Fax No. 612.559.6822
WITH COPIES TO: K-TEL INTERNATIONAL, INC.
23801 Calabasas Road, No. 2000
Calabasas, California 91302
Attn: Corey Fischer, Chief Financial Officer
Fax No. 818.223.4200
WITH COPIES TO: KAPLAN, STRANGIS AND KAPLAN, P.A.
5500 Norwest Center
90 S. Seventh Street
Minneapolis, Minnesota 55402
Attn: Bruce J. Parker, Esq.
Fax No. 612.375.1143
<PAGE>
IF TO FOOTHILL: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. 310.478.9788
WITH COPIES TO: BUCHALTER, NEMER, FIELDS & YOUNGER
601 South Figueroa, Suite 2400
Los Angeles, California 90017
Attn: Robert C. Colton, Esq.
Fax No. 213.896.0400
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other. All notices or demands sent in accordance with this Section 12, other
than notices by Foothill in connection with Sections 9504 or 9505 of the Code,
shall be deemed received on the earlier of the date of actual receipt or 3 days
after the deposit thereof in the mail. Each Borrower acknowledges and agrees
that notices sent by Foothill in connection with Sections 9504 or 9505 of the
Code shall be deemed sent when deposited in the mail or personally delivered,
or, where permitted by law, transmitted by telefacsimile or other similar method
set forth above.
<PAGE>
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS
EXPRESSLY PROVIDED TO THE CONTRARY IN AN ANOTHER LOAN DOCUMENT), THE
CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS
OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER
OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE
PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE
STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF
CALIFORNIA OR, AT THE SOLE OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH
FOOTHILL SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT
MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH BORROWER AND FOOTHILL
WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO
ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT
ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13. EACH BORROWER AND
FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF
THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH
BORROWER AND FOOTHILL REPRESENTS THAT THEY HAVE REVIEWED THIS WAIVER AND EACH
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE
FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWERS' DOCUMENTS.
All documents, schedules, invoices, agings, or other papers
delivered to Foothill may be destroyed or otherwise disposed of by Foothill four
months after they are delivered to or received by Foothill, unless Borrowers
request, in writing, the return of said documents, schedules, or other papers
and makes arrangements, at Borrowers' expense, for their return.
<PAGE>
15. GENERAL PROVISIONS.
15.1 EFFECTIVENESS. This Agreement shall be binding and deemed
effective when executed by Borrowers and Foothill.
15.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the
benefit of the respective successors and assigns of each of the parties;
provided, however, that no Borrower may assign this Agreement or any rights or
duties hereunder without Foothill's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Foothill
shall release the assigning Borrower from its Obligations. Foothill may assign
this Agreement and its rights and duties hereunder and no consent or approval by
Borrowers is required in connection with any such assignment. Foothill reserves
the right to sell, assign, transfer, negotiate, or grant participations in all
or any part of, or any interest in Foothill's rights and benefits hereunder. In
connection with any such assignment or participation, Foothill may disclose all
documents and information which Foothill now or hereafter may have relating to
any Borrower or any Borrower's business. To the extent that Foothill assigns its
rights and obligations hereunder to a third Person, Foothill thereafter shall be
released from such assigned obligations to Borrowers and such assignment shall
effect a novation between Borrowers and such third Person.
15.3 SECTION HEADINGS. Headings and numbers have been set forth herein
for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
15.4 INTERPRETATION. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against Foothill or Borrowers,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
15.5 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall
be severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
15.6 AMENDMENTS IN WRITING. This Agreement can only be amended by a
writing signed by both Foothill and Borrowers.
15.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver
<PAGE>
an original executed counterpart of this Agreement but the failure to deliver an
original executed counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement.
15.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence or
payment of the Obligations by any Borrower or any guarantor of the Obligations
or the transfer by either or both of such parties to Foothill of any property of
either or both of such parties should for any reason subsequently be declared to
be void or voidable under any state or federal law relating to creditors'
rights, including provisions of the Bankruptcy Code relating to fraudulent
conveyances, preferences, and other voidable or recoverable payments of money or
transfers of property (collectively, a "Voidable Transfer"), and if Foothill is
required to repay or restore, in whole or in part, any such Voidable Transfer,
or elects to do so upon the reasonable advice of its counsel, then, as to any
such Voidable Transfer, or the amount thereof that Foothill is required or
elects to repay or restore, and as to all reasonable costs, expenses, and
attorneys fees of Foothill related thereto, the liability of Borrowers or such
guarantor automatically shall be revived, reinstated, and restored and shall
exist as though such Voidable Transfer had never been made.
15.9 INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in Los Angeles, California.
K-TEL INTERNATIONAL (USA), INC.,
a Minnesota corporation
By ___________________________________
Title: _______________________________
DOMINION ENTERTAINMENT, INC.,
a Minnesota corporation
By ___________________________________
Title: _______________________________
<PAGE>
K-TEL CONSUMER PRODUCTS, INC.,
a Minnesota corporation
By ___________________________________
Title: _______________________________
K-TEL TV, INC.,
a Minnesota corporation
By ___________________________________
Title: _______________________________
K-TEL VIDEO, INC.,
a Minnesota corporation
By ___________________________________
Title: _______________________________
FOOTHILL CAPITAL CORPORATION,
a California corporation
By ___________________________________
Title: _______________________________
<PAGE>
COMPLIANCE CERTIFICATE SAMPLE COPY
(LOAN AND SECURITY AGREEMENT SECTION 6.3)
Date _______________
FOOTHILL CAPITAL CORPORATION
111111 Santa Monica Boulevard, Suite 1500
Santa Monica, California 90025-3333
Attention: ________________________
RE: LOAN AND SECURITY AGREEMENT, DATED AS OF NOVEMBER 19, 1997 (THE
"AGREEMENT") BY AND AMONG FOOTHILL CAPITAL CORPORATION ("FOOTHILL") AND
K-TEL INTERNATIONAL (USA), INC., DOMINION ENTERTAINMENT, INC., K-TEL
CONSUMER PRODUCTS, INC., K-TEL TV, INC. AND K-TEL VIDEO, INC.
(COLLECTIVELY, "BORROWERS").
Dear _______________:
In accordance with Section 6.3 of the Agreement, this letter shall serve as
certification to Foothill that to the best of my knowledge: (i) all financial
statements have been prepared in accordance with GAAP and fairly represent the
financial condition of Borrowers, (ii) the representations and warranties of
Borrowers set forth in the Agreement and other Loan Documents are true and
correct in all material respects on and as of the date of this certification,
(iii) as demonstrated on Exhibit 1 attached hereto, Borrowers and Parent are in
compliance with each of their financial covenants set forth in Section 7.20 of
the Agreement as of the date of this certification, and (iv) there does not
exist any condition or event that constitutes a Default or Event of Default.
Such certification is made as of the fiscal month ending ________________.
Sincerely,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,330
<SECURITIES> 0
<RECEIVABLES> 16,308
<ALLOWANCES> 0
<INVENTORY> 5,167
<CURRENT-ASSETS> 32,298
<PP&E> 3,409
<DEPRECIATION> (2,392)
<TOTAL-ASSETS> 34,594
<CURRENT-LIABILITIES> 24,684
<BONDS> 0
0
0
<COMMON> 4,107
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 34,594
<SALES> 48,350
<TOTAL-REVENUES> 0
<CGS> 27,306
<TOTAL-COSTS> 46,379
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (175)
<INCOME-PRETAX> 1,778
<INCOME-TAX> (133)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,645
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.40
</TABLE>
