<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________to___________
Commission file number: 1-9083
POLYPHASE CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 23-2708876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4800 Broadway, Suite A
Addison, Texas 75001
(Address of principal executive offices)
(972) 386-0101
(Registrants's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12
months (or for such shorter period 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
------------- -------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 17,812,464
--------------------------------
Outstanding at February 10, 2000
<PAGE>
POLYPHASE CORPORATION
FORM 10-Q
QUARTER ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
- ----------------------------- --------
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
December 31, 1999 and September 30, 1999 2
Consolidated Condensed Statements of
Operations for the Three Months Ended
December 31, 1999 and 1998 4
Consolidated Condensed Statements of
Cash Flows for the Three Months Ended
December 31, 1999 and 1998 5
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page 17
</TABLE>
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<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
Assets
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1999 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 1,367,619 $ 375,408
Receivables, net of allowance for doubtful accounts
of $406,942 and $502,667
Trade accounts 19,353,359 17,373,364
Current portion of sales contracts 4,539,604 4,765,072
Notes receivable 3,009,280 3,359,777
Inventories 36,277,864 30,924,744
Prepaid expenses and other 1,987,026 1,663,269
----------- -----------
Total current assets 66,534,752 58,461,634
----------- -----------
Property and equipment:
Land 432,000 432,000
Buildings and improvements 3,548,302 3,481,009
Machinery, equipment and other 9,085,870 8,929,988
----------- -----------
13,066,172 12,842,997
Less-Accumulated depreciation (7,526,970) (7,114,989)
----------- -----------
5,539,202 5,728,008
----------- -----------
Other assets:
Noncurrent receivables, net of allowance for
doubtful accounts of $1,100,000 and
$1,305,220
Sales contracts 1,904,322 2,114,591
Notes receivable - -
Related parties 1,496,054 1,523,096
Excess of cost over fair value of net assets of businesses
acquired, net of accumulated amortization of $3,966,003
and $3,754,614 14,241,442 12,178,209
Other intangible assets 2,023,065 1,216,393
Restricted cash 592,381 625,623
Other 1,585,850 1,674,388
----------- -----------
21,843,114 19,332,300
----------- -----------
$93,917,068 $83,521,942
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (continued)
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1999 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Notes payable $ 4,595,059 $ 4,403,264
Accounts payable 16,348,021 9,937,347
Accrued expenses and other 3,442,055 3,374,493
Current maturities of long-term debt 6,600,118 6,798,467
------------ ------------
Total current liabilities 30,985,253 24,513,571
Long term debt, less current maturities 36,457,787 33,592,522
Note payable and accrued interest to related party 18,285,677 17,914,842
Reserve for credit guarantees 592,381 625,623
------------ ------------
Total liabilities 86,321,098 76,646,558
------------ ------------
Warrants to purchase common stock
in subsidiary 2,370,000 1,425,378
Stockholders' equity:
Preferred stock, $.01 par value, authorized
50,000,000 shares, issued and outstanding
none and 56,440 shares, respectively - 564
Common stock, $.01 par value, authorized
100,000,000 shares, issued and outstanding
17,812,464 shares 178,125 178,125
Paid-in capital 27,596,046 28,159,887
Accumulated deficit (22,548,201) (22,888,570)
------------ ------------
Total stockholders' equity 5,225,970 5,450,006
------------ ------------
$93,917,068 $83,521,942
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net revenues $44,442,950 $34,854,998
Cost of sales 35,000,258 28,830,810
----------- -----------
Gross profit 9,442,692 6,024,188
Selling, general and administrative expenses 6,316,610 4,392,887
----------- -----------
Operating income 3,126,082 1,631,301
----------- -----------
Other income (expenses):
Interest expense (1,992,724) (2,157,675)
Interest income and other 164,726 182,663
----------- -----------
Total other income (expenses) (1,827,998) (1,975,012)
----------- -----------
Income (loss) before income taxes, discontinued
operations and extraordinary item 1,298,084 (343,711)
Income taxes 18,741 -
----------- -----------
Income (loss) before discontinued operations
and extraordinary item 1,279,343 (343,711)
Discontinued operations - 3,326
Extraordinary item--early extinguishment of debt (1,290,431) -
----------- -----------
Net loss (11,088) (340,385)
Gain (dividends) on reacquired preferred stock 351,457 (33,098)
----------- -----------
Net income (loss) attributable to common stockholders $ 340,369 $ (373,483)
=========== ===========
Net income (loss) per share - basic and diluted:
Before discontinued operations and extraordinary item $ .09 $ (.02)
Discontinued operations - -
Extraordinary item (.07) -
=========== ===========
Net income (loss) per share $ .02 $ (.02)
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flow provided by (used in) operating activities:
Net loss $ (11,088) $ (340,385)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 855,192 982,132
Extraordinary item 1,290,431 -
Discontinued operations - (3,326)
Changes in:
Accounts and sales contracts receivable (1,544,258) 1,294,612
Inventories (5,353,120) (2,102,553)
Prepaid expenses and other (235,219) (259,600)
Accounts payable 6,410,674 1,477,645
Accrued expenses and other 95,457 148,985
----------- -----------
Net cash provided by
operating activities 1,508,069 1,197,510
----------- -----------
Cash flows provided by (used in) investing
activities:
Notes and other receivables 350,497 (26,614)
Receivables from related parties 27,042 (160,328)
Capital expenditures, net (223,175) (466,338)
----------- -----------
Net cash provided by (used in)
investing activities $ 154,364 $ (653,280)
----------- -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-5-
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
Cash flows provided by (used in) financing activities:
Refinancing of Overhill indebtedness:
Borrowings $ 38,502,176 $ -
Repayments (32,322,005) -
Redemption of warrants (3,700,000) -
Deferred financing costs (1,832,907) -
Borrowings (principal payments) on other
notes payable and long term debt, net (867,486) (120,850)
Repurchase of preferred stock (450,000) -
------------ -----------
Net cash used in
financing activities (670,222) (120,850)
------------ -----------
Net increase in cash 992,211 423,380
Cash - beginning of period 375,408 401,393
------------ -----------
Cash - end of period $ 1,367,619 $ 824,773
============ ===========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest $ 1,667,989 $ 1,948,674
Income taxes $ 5,000 $ -
</TABLE>
Supplemental schedule of noncash investing and financing activities:
In November 1999, in connection with the Overhill Farms refinancing, warrants
were issued having an estimated fair market value of $2,370,000.
In December 1998, the Company made partial payments on a lawsuit obligation,
together with certain associated expenses, by issuing 150,000 shares of common
stock.
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
December 31, 1999
1. NATURE OF BUSINESS
Polyphase Corporation (the "Company" or "Polyphase") is a diversified
holding company that, through its subsidiaries, operates in two industry
segments: the food segment and the forestry segment. The food segment (the
"Food Group"), which consists of the Company's wholly-owned subsidiary,
Overhill Farms, Inc. ("Overhill"), produces high quality entrees, plated
meals, soups, sauces and poultry, meat and fish specialities. The Company's
100% ownership of Overhill is subject to warrants outstanding to purchase a
minority position in Overhill. The forestry segment (the "Forestry Group"),
which consists of the Company's wholly-owned subsidiary Texas Timberjack,
Inc. ("Timberjack" or "TTI") and its majority-owned subsidiaries Southern
Forest Products LLC ("SFP") and Wood Forest Products LLC ("WFP"),
distributes, leases and provides financing for industrial and commercial
timber equipment and is also engaged in certain related timber and sawmill
operations. The Company's transformer segment, which manufactures and
markets electronic transformers, inductors and filters (the "Transformer
Group"), was discontinued in fiscal 1999, as a result of the sale of the
Company's wholly-owned subsidiary, Polyphase Instrument Co. ("PIC").
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and its majority-owned subsidiaries. All
material intercompany accounts and transactions are eliminated. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
The financial statements included herein have been prepared by the Company,
without an audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not misleading.
The information presented reflects all adjustments (consisting solely of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods when read
in conjunction with the financial statements and the notes thereto included
in the Company's latest financial statements filed as part of Form 10-K for
the year ended September 30, 1999.
-7-
<PAGE>
3. INVENTORIES
<TABLE>
<CAPTION>
Inventories are summarized as follows: December 31, September 30,
1999 1999
----------- ------------
<S> <C> <C>
Finished goods $26,623,401 $22,409,448
Raw materials 9,704,463 8,565,296
Inventory reserve (50,000) (50,000)
----------- -----------
Total $36,277,864 $30,924,744
=========== ===========
</TABLE>
As of December 31, 1999 and September 30, 1999, finished goods inventories
consisted of approximately $9,860,000 and $7,804,000 in inventories at the
Food Group, $15,891,000 and $13,603,000 in timber and logging related
equipment, and $872,000 and $1,003,000 in finished wood products,
respectively. As of December 31, 1999 and September 30, 1999, raw materials
inventories consisted of approximately $7,173,000 and $5,872,000 in
inventories at the Food Group and $2,531,000 and $2,693,000 in harvested but
unprocessed timber, respectively.
4. TAXES
For the quarter ended December 31, 1999, the actual federal income tax
expense attributable to income from continuing operations differed from the
net amounts recorded by the Company. The Company's subsidiaries recorded a
provision for federal income taxes of approximately $145,000 using the
statutory rate of 34% and the Company then applied a like amount of its
existing valuation allowance as a reduction of this amount, resulting in a
net federal provision for the quarter of zero. The provision for the quarter
represents state income taxes only.
5. LONG-TERM DEBT
In November 1999, Overhill refinanced substantially all its existing debt.
The new facility amounted to $44 million, consisting of a $16 million line
of credit provided by Union Bank of California, N.A. ("Union Bank"),
together with $28 million in the form of a five-year term loan provided by
Levine Leichtman Capital Partners II, L.P. ("LLCP").
The line of credit with Union Bank expires in November 2002 and provides for
borrowings limited to the lesser of $16 million or an amount determined by a
defined borrowing base consisting of eligible receivables and inventories.
Borrowings under the line bear interest at a rate, as selected by Overhill
at the time of borrowing, of prime plus .25% or LIBOR plus 2.75%. The
agreement contains various covenants including restrictions on capital
expenditures, requirements to maintain specified net worth levels and debt
service ratios, and generally prohibits loans, advances or dividends from
Overhill to the Company and limits payments of taxes and other expenses to
Polyphase to specified levels. The line of credit is guaranteed by the
Company and collateralized by certain assets of Overhill and the Overhill
common stock owned by Polyphase.
-8-
<PAGE>
The term loan with LLCP is a secured senior subordinated note bearing
interest at 12% per annum, with interest payable monthly until maturity in
October 2004. Principal payments in an amount equal to 50% of the excess
cash flow, as defined, for Overhill's previous fiscal year are also payable
annually commencing in January 2001. Voluntary principal payments are
permitted after October 31, 2001, subject to certain prepayment penalties.
The agreement contains various covenants including restrictions on capital
expenditures, minimum EBITDA and net worth levels, and specified debt
service and debt to equity ratios. In addition, the terms of the agreement
restrict changes in control, generally prohibit loans, dividends or advances
by Overhill to the Company and limit payments of taxes and other expenses to
Polyphase to specified levels. The term loan with LLCP is guaranteed by the
Company and collateralized by certain assets of Overhill. The agreement also
requires Overhill to pay to LLCP, during each January, annual consulting
fees of $180,000.
In connection with the agreement, LLCP was issued warrants to purchase 17.5%
of the common stock of Overhill, exercisable immediately at a nominal
exercise price. During the first two years following the date of the
agreement, Overhill has the right to repurchase 5% of Overhill's shares from
LLCP for $3 million and/or to repurchase all 17.5% of the Overhill shares
subject to the LLCP warrant within five days of the term loan being repaid
at their then determined fair market value. If such shares are not
purchased, LLCP will be entitled under the agreement to receive a cash
payment of $500,000 from Overhill. At the date of issuance, the warrants
granted to LLCP were estimated to have a fair value of $2.37 million.
As a result of the transactions, Overhill repaid in full the $22.7 million
senior subordinated notes and the $9.7 million balance of its revolving line
of credit with previous lenders. Additionally, Overhill repurchased, for
$3.7 million, the warrants held by a previous lender to purchase 30% of
Overhill's common stock; the excess of such repurchase amount over the
carrying value of the warrant amounted to approximately $2.3 million and was
recorded as goodwill. In connection with the refinancing, Overhill was
permitted to make a one-time advance of $1.25 million to Polyphase for
working capital and other specified purposes. Overhill incurred costs and
expenses in connection with the refinancing totaling approximately $1.9
million, substantially all of which has been, or will be, paid to the
lenders. The early extinguishment of the previous indebtedness resulted in
an extraordinary loss of approximately $1.3 million (net of a $500,000
refund for early payment of the senior subordinated notes) during the
quarter ended December 31, 1999.
-9-
<PAGE>
6. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
-------------------------------
1999 1998
----------- ----------
<S> <C> <C>
Numerator:
Income (loss) before discontinued operations
and extraordinary item $ 1,279,343 $ (343,711)
Gain (dividends) on reacquired preferred stock 351,457 (33,098)
------------- ------------
1,630,800 (376,809)
Discontinued operations - 3,326
Extraordinary item (1,290,431) -
------------- ------------
Net income (loss) attributable to common stockholders $ 340,369 $ (373,483)
============= ============
Denominator:
Denominator for basic earnings
per share - weighted average shares 17,812,464 15,396,070
------------- ------------
Effect of dilutive securities (a):
Convertible preferred stock 1,075,853 -
Stock options - -
Warrants - -
------------- ------------
Dilutive potential common shares (a) 1,075,853 -
------------- ------------
Denominator for diluted earnings per share 18,888,317 15,396,070
============= ============
Net income (loss) per share - basic and diluted:
Before discontinued operations and extraordinary item $ .09 $ (.02)
Discontinued operations - -
Extraordinary item (.07) -
------------- ------------
Net income (loss) per share $ .02 $(.02)
============= ============
</TABLE>
(a) Dilutive potential common shares were excluded from the computation in 1998
since their effect would have been antidilutive.
-10-
<PAGE>
7. STOCKHOLDERS' EQUITY
During November 1999, the Company and Infinity Investors Limited, the holder
of the Company's Series A-3 preferred stock, entered into a settlement
agreement whereby, among other things, the Company agreed to repurchase all
Series A-3 preferred stock owned by Infinity, including all accrued but
unpaid dividends, for $450,000 cash, and Infinity agreed to the dismissal of
all litigation against the Company with respect to various matters related
to its ownership of the preferred stock. As a result of the settlement, the
Company recorded a gain of approximately $351,000, related to the difference
in the carrying value of the preferred stock plus the accrued dividends and
the settlement amount. Such amount was accounted for by recording a
reduction of the Company's accumulated deficit during the quarter ended
December 31, 1999.
The Company, during November 1998, entered into an agreement, whereby it
agreed to pay a $500,000 judgment relating to certain litigation in fiscal
1998, in monthly payments of $8,000 (including interest at 10% per annum)
over an eighteen month period, with a balloon payment due at the end of that
period. In connection therewith, the Company, during the year ended
September 30, 1999, issued a total of 300,000 shares of its common stock
valued at $85,000, as partial payment against the judgment, together with
certain costs associated therewith. Of such shares, 150,000 were issued
during the quarter ended December 31, 1998.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Statements contained in this Form 10-Q that are not historical facts, including,
but not limited to, any projections contained herein, are forward-looking
statements and involve a number of risks and uncertainties. The actual results
of the future events described in such forward-looking statements in this Form
10-Q could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: adverse economic conditions, industry competition and other
competitive factors, government regulation and possible future litigation.
Results of Operations
Revenues for the three months ended December 31, 1999 increased $9,588,000
(27.5%) to $44,443,000 from $34,855,000 during the three months ended December
31, 1998. The increase in revenues is primarily attributable to sales gains by
Overhill. Gross profits increased $3,419,000 to $9,443,000 in the current year
from $6,024,000 in the prior year, as a result of both the volume increase, as
well as an increase in gross margins rates to 21.2% in the current quarter as
compared to 17.3% in the first quarter of fiscal 1999. During the period,
operating income increased 91.7% to $3,126,000 in fiscal 2000 from $1,631,000 in
fiscal 1999.
Consolidated net income before discontinued operations and extraordinary item
for the three months ended December 31, 1999 increased $1,623,000 to $1,279,000
from a net loss of $344,000 during the three months ended December 31, 1998.
After the effect of an extraordinary expense of $1,290,000 related to the early
extinguishment of debt in connection with major refinancing by Overhill and a
gain of $351,000 on the reacquisition of preferred stock, net income
attributable to common stockholders amounted to $340,000 ($.02 per share).
The Food Group's revenues increased $10,103,000 (42%) to $34,162,000 for the
three months ended December 31, 1999, as compared to $24,059,000 for the three
months ended December 31, 1998. Gross profits increased $3,128,000 (79.4%) to
$7,067,000, compared to $3,939,000 in the prior year, primarily due to continued
volume increases from both new and existing national accounts, together with
the effect of improved purchasing practices, including the outsourcing of
certain production. Operating income increased $1,435,000 to $2,837,000 in the
current period, compared to $1,402,000 in the same period in fiscal 1999.
Revenues for the Forestry Group for the three months ended December 31, 1999
decreased $515,000 (4.8%) to $10,281,000 from $10,796,000 for the three months
ended December 31, 1998. Operating income for the same period increased $148,000
to $338,000 for the three months ended December 31, 1999 from $190,000 for the
three months ended December 31, 1998. This increase is due to improved results
from increased sales and margins on timber products operations, and, while sales
of logging equipment decreased slightly, gross margins improved somewhat from
the comparable period in fiscal 1999.
-12-
<PAGE>
Liquidity and Capital Resources
During the three months ended December 31, 1999, the Company's operating
activities resulted in cash provided of approximately $1,508,000, compared to
cash provided of $1,198,000 during the comparable period in the previous year.
The cash provided during the current year is generally due to improved operating
results and increases in accounts payable, reduced by increases in receivables
and inventories, all resulting primarily from volume increases by Overhill.
During the three months ended December 31, 1999, the Company's investing
activities resulted in cash provided of approximately $154,000, compared to a
use of cash of $653,000 during the comparable period in the previous year. The
Company's cash provided resulted primarily from collections on notes and other
receivables.
During the three months ended December 31, 1999, the Company's financing
activities resulted in a use of cash of approximately $670,000 as compared to a
use of cash of $121,000 in the comparable period in the previous year. The cash
provided from the refinancing of substantially all indebtedness of Overhill was
offset by principal reductions on Timberjack loans and by the repurchase of the
Company's Series A-3 preferred stock.
The Company believes that funds available to it from operations and existing
capital resources will be adequate for its capital requirements for the next
twelve months.
Year 2000
The Company initiated a Year 2000 program to identify and address issues
associated with the ability of its business systems and equipment to properly
recognize the Year 2000. The purpose of this effort was to avoid interruption
of the operations of the Company as a result of the century change that occurred
on January 1, 2000. The Company's program included a review of its software
systems, a review of its operating systems, upgrading or retirement of non-
compliant hardware and contacting key suppliers to assess their Year 2000
readiness.
The Food Group has completed the installation of a new integrated accounting,
inventory, sales and purchasing system to replace the existing manual and
computer systems supporting operations. The system software and hardware has
been certified by the vendor to be Year 2000 compliant and has been implemented
as a parallel system. The Forestry Group has reviewed its existing software and
has completed an upgrade modification.
The Company began the second phase of its Year 2000 compliance project in late
January 1999. The Company's subsidiaries contacted key vendors to assess their
Year 2000 readiness and evaluate the effect of non-compliance on the Company's
future business.
-13-
<PAGE>
Subsequent to December 31, 1999, the Company has not experienced any disruptions
or additional costs as a result of the century change. However, because all Year
2000 issues may not reveal themselves until later in 2000, no assurances can be
given that the Company will not experience any interruptions due to Year 2000
issues. The Company will continue to monitor these matters throughout the year.
To date, the Company has had no material expenditures for direct Year 2000
compliance procedures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's interest expense is affected by changes in prime and LIBOR rates
as a result of its various line of credit arrangements. If these market rates
increase by an average of 1% in fiscal 2000, the Company's interest expense
would increase by approximately $200,000 based on the outstanding line of credit
balances at December 31, 1999.
The Company does not own, nor does it have an interest in any other market risk
sensitive instruments.
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During fiscal 1997, five substantially identical complaints were filed in the
United States District Court for the District of Nevada against the Company and
certain of its officers and directors. The complaints each sought certification
as a class action and asserted liability based on alleged misrepresentations
that the plaintiffs claimed resulted in the market price of the Company's stock
being artificially inflated. The defendants filed motions to dismiss in each of
the lawsuits. Without certifying the cases as class actions, the District Court
consolidated the cases into a single action. In June 1998, the District Court
ordered the plaintiffs to file an amended complaint within thirty days, finding
that their original allegations failed to state a claim under the federal
securities laws. The plaintiffs then filed a motion for reconsideration of the
Court's ruling. The defendants opposed that motion, and the Court denied the
plaintiff's motion for reconsideration. The plaintiffs did not file an amended
complaint within the specified thirty day time period, but subsequently filed an
amended complaint, claiming that they were entitled to additional time within
which to file an amended pleading by reason of a scheduling order issued by the
Court. The defendants moved to dismiss the case on the grounds that the amended
complaint was filed too late and failed to state a claim for securities fraud
under applicable legal authorities. The plaintiffs have sought a stay of the
Court's consideration of defendants' motion to dismiss, asserting that there is
uncertainty as to the legal standards to be applied in securities fraud cases.
The Court has not ruled on plaintiff's motion to stay or defendants' motion to
dismiss. However, management believes (based upon advice of legal counsel) that
this litigation will be resolved without material effect on the Company's
financial condition, results of operations or cash flows.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. Management believes (based
on the advice of legal counsel) that such litigation and claims will be resolved
without material effect on the Company's financial condition, results of
operations or cash flows.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Loan and Security Agreement, dated November 24, 1999, between
Overhill Farms, Inc., Overhill L.C. Ventures, Inc. and Union Bank of
California, N.A.
10.2 Revolving Note, dated November 24, 1999, in the principal amount
of $16,000,000, payable to the order of Union Bank of California, N.A.,
as payee, by Overhill Farms, Inc. as borrower.
10.3 Continuing Guaranty, dated November 24, 1999, by Overhill L.C.
Ventures, Inc. and Polyphase Corporation in favor of Union Bank of
California, N.A.
10.4 Pledge Agreement, dated November 24, 1999, by Overhill Farms,
Inc., Polyphase Corporation and Overhill L.C. Ventures, Inc. in favor
of Union Bank of California, N.A.
-15-
<PAGE>
10.5 Intercreditor and Subordination Agreement, entered into as of
November 24, 1999, by and between Levine Leichtman Capital Partners II,
L.P., as subordinated lender, and Union Bank of California, N. A., as
senior lender.
10.6 Securities Purchase Agreement, dated as of November 24, 1999, by
and among Overhill Farms, Inc., as issuer, Polyphase Corporation and
Overhill L.C. Ventures, Inc., as guarantors, and Levine Leichtman
Capital Partners II, L.P., as purchaser.
10.7 Secured Senior Subordinated Note, dated November 24, 1999, in the
principal amount of $28,000,000, payable to the order of Levine
Leichtman Capital Partners, II, L.P., as holder, by Overhill Farms,
Inc., as borrower.
10.8 Warrant to Purchase 166.04 Shares of Common Stock of Overhill
Farms, Inc., dated November 24, 1999, by Levine Leichtman Capital
Partners II, L.P.
10.9 Investor Rights Agreement, entered into as of November 24, 1999,
by and among Overhill Farms, Inc., Polyphase Corporation and Levine
Leichtman Capital Partners II, L.P.
27.1 Financial Data Schedule
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
quarter ended December 31, 1999.
-16-
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POLYPHASE CORPORATION
(Registrant)
Date: February 10, 2000 By: /s/ James Rudis
-------------------------
James Rudis
Chairman, President and
Chief Executive Officer
Date: February 10, 2000 By: /s/ William E. Shatley
------------------------
William E. Shatley
Senior Vice President and
Chief Financial Officer
-17-
<PAGE>
10.1
================================================================================
LOAN AND SECURITY AGREEMENT
BETWEEN
OVERHILL FARMS, INC.,
OVERHILL L.C. VENTURES, INC.
and
UNION BANK OF CALIFORNIA, N.A.
November 24, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. AMOUNT AND TERMS OF CREDIT................................................................ 1
--------------------------
1.1 Revolving Loans..................................................................... 1
---------------
1.2 Letters of Credit................................................................... 2
-----------------
1.3 Interest Rate Election Provisions Applicable to all Loans........................... 4
---------------------------------------------------------
1.4 Payment of Interest................................................................. 6
------------------
1.5 Maximum Rate of Interest............................................................ 6
-----------------------
1.6 Fees................................................................................ 7
----
1.7 Repayment and Prepayment............................................................ 8
------------------------
1.8 Term................................................................................ 8
----
1.9 Early Termination................................................................... 8
-----------------
1.10 Notes and Accounting................................................................ 8
--------------------
1.11 Manner of Payment................................................................... 9
-----------------
1.12 Application of Payments............................................................. 9
-----------------------
1.13 Use of Proceeds..................................................................... 10
---------------
1.14 All Obligations to Constitute One Obligation........................................ 10
--------------------------------------------
1.15 Authorization to Make Loans......................................................... 10
---------------------------
1.16 Authorization to Debit Accounts..................................................... 10
-------------------------------
2. CONDITIONS PRECEDENT...................................................................... 10
--------------------
2.1 Conditions Precedent to Closing..................................................... 10
-------------------------------
2.2 Further Conditions to the Loans..................................................... 11
-------------------------------
3. REPRESENTATIONS, WARRANTIES, AND AFFIRMATIVE COVENANTS.................................... 12
------------------------------------------------------
3.1 Corporate Existence; Compliance with Law............................................ 12
----------------------------------------
3.2 Executive Offices; Corporate or Other Names; Conduct of Business.................... 13
----------------------------------------------------------------
3.3 Corporate Power; Authorization; Enforceable Obligations............................. 13
-------------------------------------------------------
3.4 Financial Statements and Projections; Books and Records............................. 14
-------------------------------------------------------
3.5 Material Adverse Change............................................................. 14
-----------------------
3.6 Ownership of Property; Liens........................................................ 14
----------------------------
3.7 Labor Matters....................................................................... 15
-------------
3.8 Ventures, Subsidiaries and Affiliates; Outstanding Stock and Indebtedness........... 15
-------------------------------------------------------------------------
3.9 Government Regulation............................................................... 15
---------------------
3.10 Margin Regulations.................................................................. 15
------------------
3.11 Taxes............................................................................... 16
-----
3.12 ERISA............................................................................... 16
-----
3.13 Litigation.......................................................................... 17
----------
3.14 Intellectual Property............................................................... 17
---------------------
3.15 Full Disclosure..................................................................... 17
---------------
3.16 Hazardous Materials................................................................. 18
-------------------
3.17 Insurance........................................................................... 18
---------
3.18 Accounts............................................................................ 19
--------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
3.19 Inventory......................................................................... 19
---------
3.20 Payment of Obligations............................................................ 20
----------------------
3.21 Conduct of Business............................................................... 20
-------------------
3.22 Further Assurances; Schedule Supplements.......................................... 20
----------------------------------------
3.23 Collections and Proceeds of Collateral............................................ 20
---------------------------------------
3.24 Financial Covenants............................................................... 21
-------------------
3.25 Year 2000......................................................................... 22
---------
3.26 Solvency.......................................................................... 23
--------
3.27 Subordinated Debt................................................................. 23
-----------------
4. NEGATIVE COVENANTS...................................................................... 23
------------------
5. FINANCIAL REPORTS....................................................................... 25
-----------------
5.1 Reports and Notices............................................................... 25
-------------------
5.2 Other Reports..................................................................... 28
-------------
6. CREATION OF SECURITY INTEREST........................................................... 29
-----------------------------
6.1 Grant of Security Interest........................................................ 29
--------------------------
6.2 Bank's Rights..................................................................... 29
-------------
6.3 Power of Attorney................................................................. 31
-----------------
6.4 Grant of License to Use Intellectual Property Collateral.......................... 31
--------------------------------------------------------
6.5 Reinstatement..................................................................... 32
-------------
6.6 Termination of Liens.............................................................. 32
--------------------
6.7 Release of Liens on Stock......................................................... 32
-------------------------
7. EVENTS OF DEFAULT; RIGHTS AND REMEDIES.................................................. 32
--------------------------------------
7.1 Events of Default................................................................. 32
-----------------
7.2 Remedies.......................................................................... 35
--------
7.3 Waivers by Borrower............................................................... 36
-------------------
7.4 Proceeds.......................................................................... 37
--------
8. SUCCESSORS AND ASSIGNS.................................................................. 37
----------------------
9. DISPUTE RESOLUTION...................................................................... 37
------------------
10. YIELD PROTECTION........................................................................ 38
----------------
10.1 LIBOR Basis Determination......................................................... 38
-------------------------
10.2 Illegality........................................................................ 38
----------
10.3 Increased Costs................................................................... 38
---------------
10.4 Effect On Other Loans............................................................. 39
---------------------
10.5 Capital Adequacy.................................................................. 40
----------------
10.6 Federal Reserve System/Wire Transfers............................................. 40
-------------------------------------
11. MISCELLANEOUS........................................................................... 40
-------------
11.1 Complete Agreement; Modification of Agreement; Interpretation..................... 40
-------------------------------------------------------------
11.2 Reimbursement and Expenses........................................................ 40
--------------------------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
11.3 Indemnity........................................................................ 42
---------
11.4 No Waiver........................................................................ 42
---------
11.5 Severability..................................................................... 43
------------
11.6 Conflict of Terms................................................................ 43
-----------------
11.7 Notices.......................................................................... 43
-------
11.8 Confidentiality.................................................................. 44
---------------
11.9 Section Titles................................................................... 45
--------------
11.10 Counterparts..................................................................... 45
------------
11.11 Time of the Essence.............................................................. 45
-------------------
11.12 GOVERNING LAW; VENUE............................................................. 45
--------------------
11.13 WAIVER OF JURY TRIAL............................................................. 46
--------------------
</TABLE>
iii
<PAGE>
INDEX OF EXHIBITS AND SCHEDULES
-------------------------------
Exhibit A Form of Revolving Note
Exhibit B Form of Alternative Dispute Resolution Agreement
Exhibit C Form of Guaranty
Exhibit D Form of Borrowing Base Certificate
Exhibit E Form of Compliance Certificate
Schedule A Definitions and Rules of Construction
Schedule B Schedule of Documents
Schedule C Non-standard Concentration Account Debtors
Schedule 1.2 Letter of Credit Fee
Schedule 1.15 Authorized Signatories
Schedule 3.2 Executive Offices and Collateral Locations; Corporate or
Other Names
Schedule 3.6 Real Estate and Leases
Schedule 3.7 Labor Matters
Schedule 3.8 Ventures, Subsidiaries and Affiliates; Outstanding Stock and
Indebtedness
Schedule 3.11 Taxes
Schedule 3.12 ERISA Plans
Schedule 3.13 Litigation
Schedule 3.14 Intellectual Property
Schedule 3.16 Hazardous Materials
Schedule 3.17 Insurance
Schedule 3.23 Deposit and Other Bank Accounts
Schedule 4(c) Other Indebtedness
Schedule 4(h) Permitted Liens
Schedule 6.1 Financing Statement Jurisdictions; Consigned Goods
iv
<PAGE>
LOAN AND SECURITY AGREEMENT
---------------------------
THIS LOAN AND SECURITY AGREEMENT ("Agreement") is entered into as of
---------
November 24, 1999, between OVERHILL FARMS, INC., a Nevada corporation
("Borrower"), OVERHILL L.C. VENTURES, INC., a California corporation ("Overhill
-------- --------
Ventures"), and UNION BANK OF CALIFORNIA, N.A. ("Bank"). Capitalized terms used
- -------- ----
in this Agreement shall have the meanings ascribed to them in Schedule A and,
----------
for purposes of this Agreement and the other Loan Documents, the rules of
construction set forth in Schedule A shall govern.
----------
RECITALS
--------
A. Borrower has requested that Bank provide a revolving working
capital and letter of credit facility to Borrower.
B. Bank has agreed to provide such credit facility to Borrower, on
the terms and conditions set forth in this Agreement and the other Loan
Documents.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth in this Agreement, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged,
Borrower and Bank agree as follows:
1. AMOUNT AND TERMS OF CREDIT
--------------------------
1.1 Revolving Loans.
---------------
(a) Advances. Subject to the terms and conditions of this
--------
Agreement, Bank shall extend Revolving Loans to Borrower from time to time until
the Commitment Maturity Date. The aggregate amount of Revolving Loans
outstanding at any time shall not exceed Borrowing Availability at such time.
Prior to the Commitment Maturity Date, Borrower may repay at any time any
outstanding Revolving Loans and any amounts so repaid may be reborrowed, up to
Borrowing Availability. Revolving Loans shall be evidenced by and repayable in
accordance with the terms of the Revolving Note and this Agreement. The entire
unpaid balance of the Revolving Loans shall be immediately due and payable in
full in immediately available funds on the Commitment Maturity Date.
(b) Overadvances. Borrower shall immediately repay any
------------
Overadvance. Overadvances constitute Obligations that are evidenced by the
Revolving Note, secured by the Collateral, and entitled to all of the benefits
of the Loan Documents.
1
<PAGE>
(c) Request and Disbursement. Borrower shall give to Bank
------------------------
irrevocable notice of a request for a Revolving Loan (i) that is to be made as a
Reference Rate Loan by telephone or facsimile transmission not later than 11:00
a.m. (California time) on the date of the proposed Reference Rate Loan and (ii)
that is to be made as a LIBOR Loan within the time period specified therefor in
Section 1.3(b). Any notice in connection with a requested Revolving Loan under
- --------------
this Agreement that is received by Bank after 11:00 a.m. (California time) on
any Business Day, or at any time on a day that is not a Business Day, shall be
deemed received by Bank on the next succeeding Business Day. Prior to 3:00 p.m.
(California time) on the date of a Revolving Loan, Bank shall, subject to
satisfaction of the conditions set forth in Section 2.2, disburse the amount of
-----------
the requested Revolving Loan by deposit into the Disbursement Account.
1.2 Letters of Credit.
-----------------
(a) Issuance. Subject to the terms and conditions of this
--------
Agreement, Bank agrees to incur, from time to time until the Commitment Maturity
Date, upon the request of Borrower and for Borrower's account, Letter of Credit
Obligations by causing Letters of Credit to be issued by Bank. The aggregate
face amount of all Letters of Credit outstanding at any one time shall not
exceed the lowest of (i) $500,000, (ii) the Maximum Amount minus the aggregate
-----
outstanding amount at such time of the Revolving Loans, and (iii) the Borrowing
Base minus the aggregate outstanding amount at such time of the Revolving Loans,
-----
in each case less any reserves established by Bank in its reasonable credit
judgment from time to time. The expiration date of any Letter of Credit shall
not be later than the earlier of (A)(I) 365 days for commercial Letters of
Credit or (II) 180 days for standby Letters of Credit, in each case from the
date of issuance of such Letter of Credit and (B) the Commitment Maturity Date.
No Letter of Credit shall have any automatic or "evergreen" renewal provisions.
(b) Advances Automatic. In the event that Bank shall make any
------------------
payment on or pursuant to any Letter of Credit Obligation, such payment shall
then be deemed automatically to constitute a Revolving Loan under Section 1.1(a)
--------------
notwithstanding any failure by Borrower to satisfy the conditions precedent set
forth in Section 2.
---------
(c) Fees and Expenses. Borrower shall pay to Bank, as
-----------------
compensation for the Letter of Credit Obligations incurred hereunder,
immediately upon demand, (i) all amounts necessary for Bank to meet all
disbursements and payments of any kind or character that Bank has incurred or
will incur or to which Bank is entitled in connection with the Letters of Credit
or any draft drawn thereunder, (ii) the Letter of Credit Fee and (iii) any
interest, commissions, and other charges that Bank has incurred or will incur or
to which Bank is entitled in connection with the Letters of Credit or any draft
drawn thereunder; provided, that if no Default or Event of Default has occurred
--------
and is continuing, Borrower may, at its option, at any time prior to the
Commitment Maturity Date, finance all or part of its reimbursement obligations
under this Section 1.2 by requesting a Revolving Loan in an amount not to exceed
-----------
Net Borrowing Availability at such time.
(d) Request for Incurrence of Letter of Credit Obligations.
------------------------------------------------------
Borrower shall give Bank at least two Business Days' prior written notice
requesting the incurrence of any Letter of Credit Obligation, specifying the
date such Letter of Credit Obligation is to be incurred, identifying the
beneficiary to which such Letter of Credit Obligation relates and describing the
2
<PAGE>
nature of the transactions proposed to be supported thereby. Any such notice
shall be accompanied by the form of the Letter of Credit proposed to be issued
(which shall be acceptable to Bank). Notwithstanding anything contained herein
to the contrary, Letter of Credit applications by Borrower and approvals by Bank
may be made and transmitted pursuant to electronic codes and security measures
mutually agreed upon and established by Borrower and Bank.
(e) Reimbursement. The obligation of Borrower to reimburse Bank
-------------
for payments made with respect to any Letter of Credit Obligation shall be
absolute, unconditional and irrevocable, without necessity of presentment,
demand, protest or other formalities. Such obligations of Borrower shall be paid
strictly in accordance with the terms hereof under all circumstances including
the following circumstances:
(i) any lack of validity or enforceability of any Letter
of Credit, this Agreement or the other Loan Documents, or any other
agreement;
(ii) the existence of any claim, setoff, defense or other
right that Borrower or any of its Affiliates may at any time have against a
beneficiary or any transferee of any Letter of Credit (or any Persons for
which any such transferee may be acting), Bank or any other Person, whether
in connection with this Agreement, the Letter of Credit, the transactions
contemplated herein or therein or any unrelated transaction (including any
underlying transaction between Borrower or any of its Affiliates and the
beneficiary for which the Letter of Credit was procured);
(iii) any draft, demand, certificate or any other document
presented under any Letter of Credit proving to be forged, fraudulent,
invalid or insufficient in any respect (except as otherwise expressly
provided in Section 1.2(f)(iii)) or any statement therein being untrue or
-------------------
inaccurate in any respect;
(iv) payment by Bank (except as otherwise expressly
provided in Section 1.2(f)(iii)) under any Letter of Credit against
-------------------
presentation of a demand, draft or certificate or other document that does
not comply with the terms of such Letter of Credit;
(v) any other circumstance or happening whatsoever that is
related to any of the foregoing; or
(vi) the fact that a Default or an Event of Default shall
have occurred and be continuing.
(f) Assumption of Risk. As between Bank and Borrower, Borrower
------------------
assumes all risks of the acts and omissions of, or misuse of, any Letter of
Credit by beneficiaries of any Letter of Credit. To the fullest extent
permitted by law, Bank shall not be responsible for: (i) the form, validity,
sufficiency, accuracy, genuineness, or legal effect of any document issued by
any Person in connection with the application for and issuance of any Letter of
Credit that has been applied for and issued in accordance with Section 1.2(h),
--------------
even if it should in fact prove to be in any or all respects invalid,
insufficient, inaccurate, fraudulent, or forged; (ii) the validity or
3
<PAGE>
sufficiency of any instrument transferring or assigning or purporting to
transfer or assign any Letter of Credit or the rights or benefits thereunder or
proceeds thereof, in whole or in part, that may prove to be invalid or
ineffective for any reason; (iii) failure of the beneficiary of any Letter of
Credit to comply fully with conditions required in order to demand payment under
such Letter of Credit; provided, that, in the case of any payment by Bank under
--------
any Letter of Credit, Bank shall be liable to the extent such payment was made
solely as a result of its gross negligence or willful misconduct (as finally
determined by a court of competent jurisdiction) in determining that the demand
for payment under such Letter of Credit complies on its face with any applicable
requirements for a demand for payment under such Letter of Credit; (iv) errors,
omissions, interruptions, or delays in transmission or delivery of any messages,
by mail, cable, telegraph, telex, facsimile, or otherwise, whether or not they
be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or
delay in the transmission or otherwise of any document required in order to make
a payment under any Letter of Credit or of the proceeds thereof; (vii) the
credit of the proceeds of any drawing under any Letter of Credit; and (viii) any
consequences arising from causes beyond the control of Bank. None of the above
shall affect, impair, or prevent the vesting of any of Bank's rights or powers
under this Agreement.
(g) Governing Documents. Each Letter of Credit shall be governed
-------------------
by this Agreement and a Letter of Credit application agreement to be entered
into between Bank and Borrower, to the extent its terms are in addition to and
not inconsistent with the terms of this Agreement. The Uniform Customs and
Practice for Documentary Credits as published by the International Chamber of
Commerce most recently at the time of issuance of any Letter of Credit shall
apply to all such Letters of Credit. Borrower shall comply with Bank's
regulations and interpretations in connection with the Letters of Credit issued
by it and drafts related thereto, notwithstanding any difference in Borrower's
interpretation. Neither Bank nor any of Bank's correspondents shall be liable
for any error, negligence, or mistake, whether of omission or commission, in
following the instructions of an officer of Borrower listed on Schedule 1.15 or
-------------
those contained in any Letter of Credit or draft related to any Letter of Credit
or any modification to, amendment of, or supplement to, any Letter of Credit;
provided, that Bank shall be liable to the extent that such error, negligence or
- --------
mistake was the result of Bank's gross negligence or willful misconduct (as
finally determined by a court of competent jurisdiction).
(h) Authorized Signatories. Unless Bank has been previously
----------------------
notified in writing by an officer of Borrower listed on Schedule 1.15 to the
-------------
contrary, Bank shall only accept an application for issuance of a Letter of
Credit that is executed by an officer of Borrower listed on Schedule 1.15.
-------------
1.3 Interest Rate Election Provisions Applicable to all Loans.
---------------------------------------------------------
(a) Borrower shall give to Bank irrevocable notice of a request
for funding of any Revolving Loan that is to be made as a Reference Rate Loan no
later than the time and in the manner specified in Sections 1.1(c) or 1.3(b),
--------------- ------
respectively. Borrower shall give to Bank irrevocable notice of a request for
conversion of an outstanding LIBOR Loan into a Reference Rate Loan in accordance
with the provisions of Section 1.3(b). Each request for funding of a Reference
--------------
Rate Loan shall, among other things, specify (i) the date of the proposed Loan,
which shall be a Business Day, and (ii) the amount of the Loan.
4
<PAGE>
(b) Subject to the additional conditions precedent set forth in
Section 2.2, and without limiting the notice requirements for requests for
- -----------
Revolving Loans set forth in Section 1.1(c), Borrower shall have the option at
--------------
any time to (i) request that any Revolving Loan be made as a LIBOR Loan, (ii)
convert all or any portion of outstanding Loans from Reference Rate Loans to
LIBOR Loans, (iii) convert any LIBOR Loan to a Reference Rate Loan, subject to
payment of LIBOR breakage costs in accordance with Section 1.7(b)(ii) if such
------------------
conversion is made prior to the expiration of the applicable LIBOR Loan Period,
or (iv) continue all or any portion of any Loan as a LIBOR Loan upon the
expiration of the applicable LIBOR Loan Period (with the succeeding LIBOR Loan
Period of such continued Loan commencing on the last day of the LIBOR Loan
Period of the Loan to be continued). Any Loan to be made or continued as, or
converted into, a LIBOR Loan must be in a minimum amount of $500,000 or integral
multiples of $500,000 in excess thereof. Borrower shall give to Bank irrevocable
notice of any such election by telephone or facsimile transmission no later than
11:00 a.m. (California time) on the second Business Day and no earlier than
11:00 a.m. (California time) on the fourth Business Day prior to (A) the date of
any proposed Revolving Loan that is to bear interest by reference to the LIBOR
Basis, (B) the end of each LIBOR Loan Period with respect to any LIBOR Loans to
be continued as such or converted into Reference Rate Loans, or (C) the date on
which Borrower wishes to convert any Reference Rate Loan to a LIBOR Loan for a
LIBOR Loan Period designated by Borrower in such election. If no election is
received within the time period specified in the immediately preceding sentence
(or if a Default or an Event of Default shall have occurred and be continuing or
if the additional conditions precedent set forth in Section 2.2 shall not have
-----------
been satisfied), then the applicable Loan shall be made or continued as, or
converted to, a Reference Rate Loan (1) on the date of the proposed funding or
conversion of the requested Loan, with respect to initial fundings of requested
LIBOR Loans or proposed conversions of Reference Rate Loans to LIBOR Loans, and
(2) at the end of the applicable LIBOR Loan Period, with respect to proposed
continuations of outstanding LIBOR Loans. Each such election notice shall advise
Bank of (I) with respect to Loans to be made or continued as, or converted into,
LIBOR Loans, the LIBOR Basis quoted by Bank on the date such election notice is
provided, (II) the applicable principal amount of the proposed Loan (a) to be
made or continued as, or converted into, a LIBOR Loan, or (b) to be converted
into a Reference Rate Loan, as applicable, (III) the duration of the LIBOR Loan
Period of the proposed Loan, if applicable, and (IV) the date of the proposed
funding, continuation, or conversion of such Loan, which shall be a Business
Day. The amount of any LIBOR Basis quoted by Bank as of the date of receipt of
Borrower's notice for a requested LIBOR Loan shall be determined by Bank
consistent with this Agreement, and each determination by Bank of a LIBOR Basis
shall, absent manifest error, be deemed final, binding, and conclusive upon
Borrower. Bank shall, upon the reasonable request of Borrower from time to time,
provide to Borrower such information with regard to the LIBOR Basis as Borrower
may request. Bank shall confirm the terms of any such election notice by
notifying Borrower in writing promptly after such election is made. Failure to
send any such confirmation shall not affect the right of Bank to collect
interest at the rates selected by Borrower in any such election notice. If, on
the date any such election notice is received by Bank, the LIBOR Basis selected
is unavailable for any reason, then the election notice shall be void. Bank
reserves the right to fund the principal of any requested LIBOR Loan from any
source of funds notwithstanding any LIBOR Basis selected by Borrower.
5
<PAGE>
1.4 Payment of Interest.
-------------------
(a) Interest on Revolving Loans shall be payable as follows:
(i) Interest on each outstanding Revolving Loan made as or
converted into a Reference Rate Loan shall be computed for the actual number of
days elapsed on the basis of a year of 365 days or, in the event of a leap year,
366 days, and shall be payable to Bank in arrears (A) on the first Business Day
of each calendar month, (B) on the Commitment Maturity Date, and (C) if any
interest accrues or remains payable after the Commitment Maturity Date or during
the continuance of an Event of Default, upon demand by Bank. Interest shall
accrue and be payable on each such Reference Rate Loan at a per annum interest
---------
rate equal to the Reference Rate plus one-quarter of one percent (0.25%).
----
(ii) Interest on each outstanding Revolving Loan made as or
converted into a LIBOR Loan shall be computed for the actual number of days
elapsed on the basis of a year of 365 days or, in the event of a leap year, 366
days, and shall be payable to Bank in arrears (A) on the last day of the
applicable LIBOR Loan Period in the case of any LIBOR Loan with a LIBOR Loan
Period of 30, 60 or 90 days, (B) on the 90th day and the last day of the
applicable LIBOR Loan Period in the case of any LIBOR Loan with a LIBOR Loan
Period of 180 days, (C) on the Commitment Maturity Date, and (D) if any interest
accrues or remains payable after the Commitment Maturity Date or during the
continuance of an Event of Default, upon demand by Bank. Interest shall accrue
and be payable on each such LIBOR Loan at a per annum interest rate equal to the
LIBOR Basis applicable to such LIBOR Loan plus two and three-quarters percent
----
(2.75%).
(b) Default Rate. Upon the occurrence and during the continuance
------------
of an Event of Default, interest on all outstanding Obligations shall, upon the
election of Bank, confirmed by written notice from Bank to Borrower, accrue and
be payable at the Default Rate. Interest accruing at the Default Rate shall be
payable to Bank on demand. Bank shall not be required to (i) accelerate the
maturity of the Loans or (ii) exercise any other rights or remedies under the
Loan Documents, in order to charge the Default Rate. Upon the occurrence and
during the continuance of an Event of Default specified in Sections 7.1(e), (f),
-------- ------ ---
or (g), the interest rate applicable to the Obligations shall be increased
---
automatically to the Default Rate without the necessity of any action by Bank.
1.5 Maximum Rate of Interest. In no event shall the aggregate of
------------------------
all interest on the Obligations charged or collected pursuant to the terms of
this Agreement or pursuant to the Revolving Note exceed the highest rate
permissible under any law that a court of competent jurisdiction shall, in a
final determination, deem applicable. In the event that such a court determines
that Bank has charged or received interest under this Agreement or the Revolving
Note in excess of the highest applicable rate, the rate in effect under this
Agreement and the Revolving Note shall automatically be reduced to the maximum
rate permitted by Applicable Law and Bank shall promptly apply such excess to
reduce the principal balance of the Obligations, or if the principal balance of
the Obligations has been paid in full, Bank shall promptly apply such excess to
reduce any other Obligations, and if all Obligations have been paid in full,
then Bank shall refund to Borrower any interest received by Bank in excess of
the maximum lawful rate;
6
<PAGE>
provided, that if at any time thereafter the rate of interest payable hereunder
- --------
is less than the highest applicable rate, Borrower shall continue to pay
interest hereunder at the highest applicable rate until such time as the total
interest received by Bank from the making of Loans hereunder is equal to the
total interest that Bank would have received had the interest rate payable
hereunder been (but for the operation of this Section 1.5) the interest rate
-----------
payable since the Closing Date as otherwise provided in this Agreement. It is
the intent of this Agreement that Borrower not pay or contract to pay, and that
Bank not receive or contract to receive, directly or indirectly, interest in
excess of that which may be paid by Borrower under Applicable Law.
1.6 Fees. Bank shall be paid the following fees:
----
(a) Unused Line Fee. Borrower shall pay to Bank an Unused Line
---------------
Fee, payable in arrears on the first Business Day of each calendar month
beginning on the first Business Day of the month following the month in which
the Closing Date occurs and on the Commitment Maturity Date.
(b) Letter of Credit Fee. Borrower shall pay to Bank a Letter of
--------------------
Credit Fee, payable in arrears on the first Business Day of each calendar month
and on the Commitment Maturity Date, together with all other standard and
customary fees of Bank in connection with the Letters of Credit, including those
standard and customary fees provided for in any Letter of Credit application
agreement to be entered into between Bank and Borrower and Bank's regulations,
interpretations, and published schedule of fees in connection with the Letters
of Credit. Upon the occurrence and during the continuance of an Event of
Default, Borrower shall, upon the election of Bank confirmed by written notice
from Bank to Borrower, pay to Bank the Default Letter of Credit Fee, which shall
be payable in lieu of the Letter of Credit Fee. Upon the occurrence and during
the continuance of an Event of Default specified in Sections 7.1(e), (f) or (g),
--------------- --- ---
the Letter of Credit Fee shall be increased automatically to the Default Letter
of Credit Fee without the necessity of any action by Bank.
(c) Audit Fee. Borrower shall pay to Bank an audit fee of $600
---------
per day per field auditor, plus reasonable out-of-pocket expenses for each
financial analysis and examination of Borrower and the Collateral performed by
Bank or its agents, plus any other out-of-pocket fees and expenses reasonably
incurred by Bank with respect to any field examination of Borrower or the
Collateral, when and as incurred up to a maximum of $7,500 in the aggregate for
each 12 month period prior to the Commitment Maturity Date; provided, that if a
--------
Default or an Event of Default has occurred and is continuing, there shall be no
maximum limit on the audit fees payable by Borrower under this Section 1.6(c).
--------------
Such fee shall be fully earned when due and non-refundable when paid.
1.7 Repayment and Prepayment.
------------------------
(a) Revolving Loans. Borrower shall pay the principal balance of
---------------
the Revolving Loans and all other Obligations in full on the Commitment Maturity
Date. Prior to the Commitment Maturity Date, Borrower may repay at any time any
outstanding Revolving Loans and any amounts so repaid may be reborrowed up to
Borrowing Availability.
7
<PAGE>
(b) Prepayment. Notwithstanding the foregoing clause (a), and
---------- ----------
subject to the requirements of Section 1.9, (i) the principal amount of any Loan
-----------
made as a Reference Rate Loan may be prepaid prior to the Commitment Maturity
Date at any time and (ii) the principal amount of any Loan made as a LIBOR Loan
together with all accrued and unpaid interest thereon may be prepaid prior to
the applicable Payment Date therefor upon five Business Days' prior notice to
Bank; Provided, that Borrower shall (A) reimburse Bank at such time for any
--------
reasonable direct loss or out-of-pocket expense incurred by Bank in connection
with such prepayment as set forth in Sections 1.9 and 11.2 and (B) pay to Bank
------------ ----
the applicable LIBOR Prepayment Premium. Each notice of prepayment shall be
irrevocable.
1.8 Term. The Credit Facilities shall be in effect until the
----
Commitment Maturity Date. The Credit Facilities and all other Obligations
related thereto shall be immediately due and payable in full in immediately
available funds on the Commitment Maturity Date, if not sooner paid in full.
1.9 Early Termination. Borrower may, at any time on the last
-----------------
Business Day of any calendar month, upon not less than five Business Days' prior
written notice to Bank, voluntarily prepay, in whole and not in part, all of the
Loans and terminate the Revolving Loan Commitments; provided, that at such time
--------
Borrower shall (a) pay all Loans and other Obligations, (b) cause the
outstanding Letters of Credit to be cancelled and returned to Bank or provide
Bank with a standby letter of credit or collateral therefor acceptable to Bank
in its sole discretion, (c) pay any LIBOR breakage costs in accordance with
Section 1.7 (b)(ii), and (d) reimburse Bank for any reasonable direct loss or
- -------------------
out-of-pocket expenses incurred by Bank in connection with such prepayment and
termination. If the Revolving Loans are terminated prior to the Commitment
Maturity Date, Borrower shall pay to Bank, in addition to amounts payable as
provided in Sections 1.7(b)(ii) and 11.2, an amount equal to the Applicable
------------------- ----
Percentage multiplied by the Maximum Amount as liquidated damages and
-------------
compensation for the costs of being prepared to make funds available hereunder.
Upon any such prepayment and termination of the Revolving Loan Commitments,
Borrower shall have no further right to request Loans or other financial
accommodations under this Agreement.
1.10 Notes and Accounting. Bank shall provide a monthly accounting to
--------------------
Borrower of the Loans and Letter of Credit Obligations and other transactions
under this Agreement, including Bank's calculation of principal, interest,
expenses, and the Borrowing Base for the preceding month. Each and every such
accounting shall, absent clear error, be deemed final, binding, and conclusive
upon Borrower unless Borrower, within 90 days after the date any such accounting
is rendered, provides Bank with written notice of any objection that Borrower
may have to any item in such accounting, describing the basis for such objection
with specificity. In that event, only those items expressly objected to in such
notice shall be deemed to be disputed by Borrower and Bank's determination,
based upon the facts available, of any such disputed item shall, absent clear
error, be deemed final, binding, and conclusive upon Borrower.
8
<PAGE>
1.11 Manner of Payment.
-----------------
(a) When Payments Due.
-----------------
(i) Each payment (including any prepayment) by Borrower on
account of the principal of or interest on the Loans and any other amount owed
to Bank on account of the Obligations shall be made not later than 11:00 a.m.
(California time) on the date specified for payment under this Agreement to Bank
in Dollars and in immediately available funds. Any payment received by Bank on a
day that is not a Business Day or after 11:00 a.m. (California time) on a
Business Day shall be deemed received on the next succeeding Business Day.
(ii) If any payment on any Obligation is specified to be
made upon a day that is not a Business Day, it shall be deemed to be specified
to be made on the next succeeding day that is a Business Day, and such extension
of time shall in such case be included in computing interest and fees, if any,
in connection with such payment.
(b) No Deductions. Borrower shall pay principal, interest,
-------------
fees, and all other amounts due on the Obligations without setoff or
counterclaim or any deduction whatsoever.
(c) Inadequate Payments. If, on the date on which any amount
-------------------
(including any payment of principal, interest, or other costs and expenses)
shall be due and payable by Borrower to Bank, the amount received by Bank from
Borrower or withdrawn by Bank from the Control Account pursuant to Section
-------
3.23(c) shall not be adequate to pay the entire amount then due and payable,
- -------
then Bank shall be authorized, but shall not be obligated, to make a Reference
Rate Loan to Borrower in the amount of the deficiency.
1.12 Application of Payments. Borrower irrevocably waives the right
-----------------------
to direct the application of any and all payments received at any time by Bank
from or on behalf of Borrower and specifically waives the provisions of
California Civil Code Sections 1479 and 2822 or similar provisions under any
other Applicable Law giving Borrower the right to designate application of
payments. Borrower irrevocably agrees that Bank shall have the continuing
exclusive right to determine the order and method of the application of payments
against the then due and payable Obligations of Borrower in Bank's sole
discretion and to revise such application prospectively or retroactively in
Bank's sole discretion. In the absence of a specific determination by Bank with
respect thereto, payments shall be applied to amounts then due and payable in
the following order: (i) to Fees and Bank's expenses reimbursable hereunder; (ii
to interest on the Loans; (ii to principal payments on the Loans and to cash
collateralize the Letter of Credit Obligations; and (iv to all other
Obligations, including expenses of Bank to the extent reimbursable under
Section 12.3.
- ------------
1.13 Use of Proceeds. The proceeds of the Loans shall be used by
---------------
Borrower (a) to refinance Borrower's existing debt with Prior Lender, (b)
together with a portion of the proceeds of the Subordinated Note, to refinance
Borrower's existing debt with LHF and (c) for general working capital needs and
other corporate purposes.
9
<PAGE>
1.14 All Obligations to Constitute One Obligation. All Obligations
--------------------------------------------
related to the Credit Facilities constitute one general obligation of Borrower
and shall be secured by Bank's Liens upon all of the Collateral, and by all
other Liens previously, now, or at any time in the future granted by Borrower to
Bank, to the extent provided in the Collateral Documents.
1.15 Authorization to Make Loans. Bank is authorized to make any
---------------------------
Loan and issue any Letter of Credit (a) based on telephonic or other oral or
written instructions received from any Person that Bank believes in good faith
to be an officer of Borrower listed on Schedule 1.15 or (b) if, at the
-------------
discretion of Bank, such Loan is necessary to satisfy any of the Obligations.
Borrower consents to the recordation of any telephonic or other communications
between Bank and Borrower for the purpose of maintaining Bank's business records
of such transactions.
1.16 Authorization to Debit Accounts. Borrower immediately
-------------------------------
authorizes Bank to debit any of Borrower's loan accounts or bank accounts with
Bank for the purpose of Borrower's payment of principal, interest, or other
costs and expenses payable by Borrower to Bank under this Agreement.
2. CONDITIONS PRECEDENT
--------------------
2.1 Conditions Precedent to Closing. Bank shall not be obligated to
-------------------------------
make any of the Loans or incur any Letter of Credit Obligations, or to take,
fulfill, or perform any other action under this Agreement, until the following
conditions have been satisfied in a manner satisfactory to Bank or waived in
writing by Bank:
(a) Bank shall have received each of the documents set forth on
the Schedule of Documents, each duly executed by the appropriate parties and in
form and substance satisfactory to Bank;
(b) (i) (A) Bank shall have received a fully executed original
of a pay-off letter satisfactory to Bank confirming that all of the Prior Lender
Obligations will be repaid in full from the proceeds of the initial Loan and all
Liens upon any of the property of Borrower or any of its Subsidiaries in favor
of Prior Lender shall be terminated by Prior Lender immediately upon such
payment; and (B) all letters of credit issued or guaranteed by Prior Lender
shall have been cash collateralized, supported by a guaranty of Bank or
supported by a Letter of Credit issued pursuant to this Agreement as mutually
agreed upon by Bank, Borrower and Prior Lender; and (ii) Bank shall have
received a fully executed original of a pay-off letter satisfactory to Bank
confirming that all of obligations of Borrower to LHF will be repaid in full on
the Closing Date, and all Liens upon any of the property of Borrower or any of
its Subsidiaries in favor of LHF shall be terminated by LHF immediately upon
such payment.
(c) Bank shall have received satisfactory evidence that Borrower
and its Subsidiaries have obtained all required consents and approvals of all
Persons, including all requisite Governmental Authorities, to the execution,
delivery and performance of this Agreement and the other Loan Documents and the
consummation of the Related Transactions;
10
<PAGE>
(d) all of the assets supporting the initial Loans to be made and
Letters of Credit to be issued and the amount, if any, of the reserves to be
established on the Closing Date shall be sufficient in value, as determined by
Bank, to provide Borrower with Net Borrowing Availability of not less than
$1,750,000 (after giving effect to such initial Loans and Letters of Credit and
the amount, if any, of the reserves to be established on the Closing Date in
accordance with this Agreement), without any deterioration in Borrower's
accounts payable or increase in Borrower's other current liabilities above the
average of those reflected on Borrower's balance sheet for the three months
preceding the Closing Date;
(e) payment by Borrower of all fees, costs, and expenses of closing
(including reasonable fees of consultants and counsel to Bank presented as of
the Closing Date);
(f) no action, proceeding, investigation, regulation, or legislation
shall have been instituted, threatened, or proposed before any court,
Governmental Authority, or legislative body to enjoin, restrain, or prohibit, or
to obtain damages in respect of, or that is related to or arises out of, this
Agreement or any other Loan Document or the consummation of the transactions
contemplated hereby or thereby and that, in Bank's sole judgment, would make it
inadvisable to consummate the transactions contemplated by this Agreement or any
other Loan Document;
(g) Bank shall have completed its business and legal due diligence,
including a roll forward of its previous Collateral audit, with results
satisfactory to Bank;
(h) (i) Bank shall have received fully executed copies of the
Subordinated Note and each of the other Related Transactions Documents, each of
which shall be in form and substance satisfactory to Bank and its counsel, and
(ii) the Related Transactions shall have been consummated in accordance with the
terms of the Subordinated Note and the other Related Transactions Documents; and
(i) no Material Adverse Effect shall have occurred since the most
recent audited Financial Statements delivered to Bank prior to the Closing Date.
If any other term of any Loan Document should conflict, or appear to
conflict, with this Section 2.1, the terms of this Section 2.1 shall control,
----------- -----------
and Borrower shall have no rights under this Agreement or any other Loan
Document until each of the conditions of this Section 2.1 has been complied with
-----------
to Bank's satisfaction or specifically waived in writing by Bank.
2.2 Further Conditions to the Loans. It shall be a further condition to
-------------------------------
the funding or advance of any Loan or the incurrence of any Letter of Credit
Obligation that the following statements be true on the date of each such
funding, advance or incurrence, as the case may be:
(a) all of the representations and warranties of Borrower under this
Agreement and the other Loan Documents shall be true and correct as of such
date, except to the extent any such representation or warranty relates to an
earlier date, both before and after giving
11
<PAGE>
effect to the funding of such Loan or the incurrence of such Letter of Credit
Obligation, and Bank shall have received, if it so elects, a certification to
that effect signed by an Authorized Signatory;
(b) Bank shall determine that, after giving effect to any
requested Revolving Loan or the incurrence of such Letter of Credit Obligation,
an Overadvance will not occur;
(c) no event shall have occurred and be continuing, or would
result from the funding, advance, or incurrence of any Loan or Letter of Credit
Obligation, that constitutes or would constitute a Default or an Event of
Default or result in a Material Adverse Effect; and
(d) Bank shall have received all other reports, certificates,
statements, or opinions in connection with the funding or incurrence of any Loan
or Letter of Credit Obligation as Bank may reasonably request.
The request and acceptance by Borrower of the proceeds of the Loans
and the incurrence of any Letter of Credit Obligations by Bank shall be deemed
to constitute, as of the date of such Loan or incurrence of such Letter of
Credit Obligations, (i) a representation and warranty by Borrower that the
conditions in this Section 2.2 have been satisfied and (ii) a confirmation by
-----------
Borrower of the granting and continuance of Bank's Liens pursuant to the
Collateral Documents.
3. REPRESENTATIONS, WARRANTIES, AND AFFIRMATIVE COVENANTS
------------------------------------------------------
Borrower represents, warrants and agrees that from and after the Closing
Date and until the Termination Date:
3.1 Corporate Existence; Compliance with Law. Borrower and each of
----------------------------------------
its Subsidiaries: (a) is, as of the Closing Date, and will continue to be, (i) a
corporation duly organized, validly existing, and in good standing under the
laws of the jurisdiction of its incorporation, (ii) duly qualified to do
business and in good standing in each other jurisdiction where its ownership or
lease of property or the conduct of its business requires such qualification and
in which the failure to be so qualified and in good standing could reasonably be
expected to have a Material Adverse Effect, (iii) in compliance with its
articles or certificate of incorporation, as the case may be, and bylaws, and
(iv) in compliance with all Applicable Laws and for which the failure to be in
compliance could reasonably be expected to have a Material Adverse Effect; and
(b) has and will continue to have (i) the requisite corporate power and
authority and the legal right to own, pledge, mortgage, or otherwise encumber
and operate its properties, to lease the property it operates under lease, and
to conduct its business as now, previously, or proposed to be conducted, and
(ii) all licenses, permits, franchises, rights, powers, consents, or approvals
from or by all Persons or Governmental Authorities having jurisdiction over
Borrower or any of its Subsidiaries that are necessary or appropriate for the
conduct of its business. As of the Closing Date, Borrower and each of its
Subsidiaries has made and will continue to make all filings with any
Governmental Authority that are necessary or appropriate for the conduct of its
business and
12
<PAGE>
has given and will continue to give all notices to the extent required for the
ownership and operation of its property and the conduct of its business.
3.2 Executive Offices; Corporate or Other Names; Conduct of Business.
-----------------------------------------------------------------
The locations of Borrower's and each of its Subsidiaries' executive offices,
principal place of business, corporate offices, warehouses, other locations of
Collateral and locations where all of Borrower's and each of its Subsidiaries'
records with respect to Collateral are kept are as set forth in Schedule 3.2
------------
and, except as set forth in such schedule, such locations have not changed
during the preceding 12 months. During the five years preceding the Closing
Date, except as set forth in Schedule 3.2, neither Borrower nor any of its
------------
Subsidiaries has been known as or conducted business in any other name. Neither
Borrower nor any of its Subsidiaries shall change its (a) name, (b) chief
executive office, (c) principal place of business, (d) corporate offices, (e)
warehouses or other Collateral locations, or (f) location of its records
concerning the Collateral, without, in each instance, giving 30 days' prior
written notice thereof to Bank and taking all actions deemed necessary or
appropriate by Bank to protect and continuously perfect Bank's Liens upon the
Collateral.
3.3 Corporate Power; Authorization; Enforceable Obligations. The
-------------------------------------------------------
execution, delivery, and performance by Borrower and each of its Subsidiaries of
the Loan Documents to which it is a party, and the creation of all Liens
provided for in this Agreement and the other Loan Documents: (a) are and will
continue to be within Borrower's and each of its Subsidiaries' corporate power;
(b) have been and will continue to be duly authorized by all necessary or proper
corporate and shareholder action; (c) are not and will not be in contravention
of any provision of Borrower's or any of its Subsidiaries' charter or bylaws;
(d) do not and will not violate any Applicable Law or any order or decree of any
court or Governmental Authority; (e) do not and will not conflict with or result
in the breach or termination of, constitute a default under, or accelerate any
performance required by, any indenture, mortgage, deed of trust, lease,
agreement, or other instrument to which Borrower or any of its Subsidiaries is a
party or by which Borrower or any of its Subsidiaries or any of their property
is bound; (f) do not and will not result in the creation or imposition of any
Lien (other than Permitted Liens) upon any of the Collateral; and (g) do not and
will not require the consent or approval of any Governmental Authority or any
other Person, except those specifically referred to in the Schedule of Documents
(all of which will have been duly obtained, made, or complied with on or before
the Closing Date). As of the Closing Date, each Loan Document shall have been
executed and delivered for the benefit of or on behalf of Borrower and each of
its Subsidiaries, and each such Loan Document to which it is a party shall then
be and will continue to be a legal, valid, and binding obligation of Borrower
and each of its Subsidiaries, enforceable against it in accordance with its
terms, subject, as to enforceability, to applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws affecting creditors' rights
generally, and to general principles of equity.
3.4 Financial Statements and Projections; Books and Records.
-------------------------------------------------------
Borrower has delivered as of the Closing Date (a) the Financial Statements for
its Fiscal Year ending September 27, 1998, and the Fiscal Month ending September
26, 1999, which Financial Statements are true, correct, and complete and fairly
and accurately present the financial condition of Borrower as of the date of
each Financial Statement, in accordance with GAAP, and (b) the Projections,
which Projections have been prepared in good faith and are based upon facts and
13
<PAGE>
assumptions that are reasonable under the current and foreseeable circumstances
and are disclosed in the Projections.
3.5 Material Adverse Change. Since the date of Borrower's most
-----------------------
recently audited Financial Statements delivered to Bank: (a) neither Borrower
nor any of its Subsidiaries, has incurred any obligations, contingent or non-
contingent liabilities, or liabilities for Charges, long-term leases or unusual
forward or long-term commitments that are not reflected in the pro forma balance
sheet of Borrower and that could, alone or in the aggregate, reasonably be
expected to have a Material Adverse Effect; (b) there has been no material
adverse deviation from the Projections delivered at or prior to the Closing
Date; (c) no contract, lease, agreement, or other instrument to which Borrower
has become a party or by which it or any of its properties or assets is bound or
affected, and no provision of Applicable Law, has had or could reasonably be
expected to have a Material Adverse Effect; (d) neither Borrower nor any of its
Subsidiaries is in default, and to such Person's knowledge no third party is in
default under or with respect to any material contract, agreement, lease, or
other instrument to which it is a party that could, alone or in the aggregate,
reasonably be expected to have a Material Adverse Effect; and (e) no event has
occurred, and Borrower will not and will not allow any of its Subsidiaries to,
permit any event or events to occur, that could, alone or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
3.6 Ownership of Property; Liens. As of the Closing Date, the real
----------------------------
estate listed in Schedule 3.6 constitutes all of the real property owned,
------------
leased, or used in Borrower's or its Subsidiaries' business, and Borrower and
each of its Subsidiaries will not execute any material agreement or contract in
respect of any real estate after the Closing Date without giving 30 days' prior
written notice thereof to Bank. Borrower and each of its Subsidiaries holds and
will continue to hold good and marketable fee simple title to all of its owned
real estate, good and marketable title to all of its other properties and
assets, and valid and marketable leasehold interests in all of its leased
assets, and none of the properties and assets of Borrower or any of its
Subsidiaries are or will be subject to any Liens, except Permitted Liens.
Borrower and each of its Subsidiaries has received and will continue to obtain
all deeds, agreements, and other documents affecting real estate, and has duly
effected and will duly effect all recordings and filings and take other actions
necessary, in each case to establish and protect its right, title, and interest
in and to all real property and other properties and assets and to perfect the
interest of Bank in and to all real property and other properties and assets
constituting Collateral. All material permits required to allow the real
property owned or leased by Borrower and each of its Subsidiaries to be lawfully
occupied and used for all of the purposes for which they are occupied and used
on the Closing Date have been lawfully issued and are in full force and effect,
and all such permits will be maintained. Except as otherwise set forth therein,
with respect to each of the premises identified in Schedule 3.2 a landlord,
------------
mortgagee, or bailee agreement acceptable to Bank has been obtained, and
Borrower shall obtain and shall cause each of its Subsidiaries to obtain a
landlord's, mortgagee's, or bailee's agreement in form acceptable to Bank from
any lessor or mortgagee of any premises leased or acquired after the Closing
Date.
3.7 Labor Matters. As of the Closing Date, there are no strikes or
-------------
other material labor disputes against Borrower or any of its Subsidiaries that
are pending or, to Borrower's knowledge, threatened. Schedule 3.7 identifies
------------
each labor dispute, collective
14
<PAGE>
bargaining agreement, management agreement with an executive officer, or any
other material employment agreement to which Borrower or any of its Subsidiaries
is a party that is in effect as of the Closing Date, and a copy of each such
agreement has been made available to Bank. Promptly upon the execution of any
such agreement or incurrence of such obligation after the Closing Date and until
the Termination Date, Borrower shall provide and shall cause each of its
Subsidiaries to provide to Bank prompt written notice of such event and a copy
of such agreement. As of the Closing Date (a) there is no organizing activity
involving Borrower or any of its Subsidiaries pending or, to Borrower's
knowledge, threatened, planned, or contemplated by any labor union or group of
employees, (b) there are no representation proceedings pending or, to Borrower's
knowledge, threatened, planned, or contemplated with the National Labor
Relations Board, and (c) no labor organization or group of employees of Borrower
or any of its Subsidiaries has pending any demand for recognition, and Borrower
shall give to Bank prompt written notice of the occurrence of any of the
foregoing after the Closing Date.
3.8 Ventures, Subsidiaries and Affiliates; Outstanding Stock and
------------------------------------------------------------
Indebtedness. As of the Closing Date, Borrower has one operating Subsidiary,
- ------------
Overhill Ventures. Schedule 3.8 sets forth, as of the Closing Date, all
------------
outstanding Stock and Indebtedness of Borrower and its Subsidiary and the
holders (including affiliated holders known to Borrower or its Subsidiary) of
10% or more of the Stock of each such Person. Borrower will give Bank prompt
notice of (a) each issuance of Stock or change in ownership representing a sale
or issuance of 10% or more of the ownership of any of its or any of its
Subsidiaries' Stock, (b) any issuance or transfer of its Stock or 10% or more of
any of its Subsidiaries' Stock, and (c) each Change of Control of Borrower or
any of its Subsidiaries.
3.9 Government Regulation. Neither Borrower nor any of its
---------------------
Subsidiaries is (a) in violation of any Applicable Law, which violation has or
could reasonably be expected to have a Material Adverse Effect, or (b) subject
to or in default with respect to any final judgment, writ, injunction,
restraining order or order of any nature, decree, rule, or regulation of any
court or Governmental Authority, in each case that has or could reasonably be
expected to have a Material Adverse Effect. The making of the Loans by Bank to
Borrower, the incurrence of the Letter of Credit Obligations on behalf of
Borrower, the application of the proceeds thereof and repayment thereof, and the
consummation of the Related Transactions will not violate any provision of any
Applicable Law or any rule, regulation or order issued by the Securities and
Exchange Commission binding on Borrower or its Subsidiaries.
3.10 Margin Regulations. Borrower does not and will not own and
------------------
Borrower will not permit any of its Subsidiaries to own any "margin security,"
as that term is defined in Regulation U of the Federal Reserve Board, and none
of the proceeds of the Loans will be used directly or indirectly for (a)
purchasing or carrying any margin security, (b) reducing or retiring any
indebtedness that was originally incurred to purchase or carry any margin
security, or (c) any purpose that might cause any of the Loans or this Agreement
to be considered a "purpose credit" within the meaning of Regulations T, U or X
of the Federal Reserve Board.
15
<PAGE>
3.11 Taxes.
-----
(a) All tax returns, reports, and statements required by any
Governmental Authority to be filed by or on behalf of Borrower or any of its
Subsidiaries have, as of the Closing Date, been filed and will, until all
Obligations have been paid or performed in full, be filed with the appropriate
Governmental Authority, and all Charges and other impositions shown thereon have
been and will be paid when due, subject to Section 3.11(b). Proper and accurate
---------------
amounts have been and will be withheld by Borrower and each of its Subsidiaries
from its respective employees for all periods in full and complete compliance
with the tax, social security, and unemployment withholding provisions of all
Applicable Law, and such withholdings have and will be timely paid to the
respective Governmental Authorities. Except as set forth in Schedule 3.11,
-------------
neither Borrower nor any of its Subsidiaries: (i) has executed or filed with
any Governmental Authority, any agreement or other document extending, or having
the effect of extending, the period for assessment or collection of any Charges;
(ii) has agreed or been requested to make any adjustment in accounting method;
(iii) is a party to any tax sharing agreement other than tax sharing
arrangements with Polyphase and its Subsidiaries that are currently in effect;
or (iv) is currently being audited by any Governmental Authority. Borrower will
notify Bank promptly after it enters into any agreement or other document with
any Governmental Authority extending, or having the effect of extending, the
period for assessment or collection of any Charges. There are no assessments
or, to Borrower's knowledge, threatened assessments outstanding against Borrower
or any of its Subsidiaries.
(b) Borrower and each of its Subsidiaries may contest, by proper
legal actions or proceedings, the validity or amount of any Charges; provided,
that at the time of commencement of any such action or proceeding: (i) adequate
reserves with respect thereto are established on the books of the contesting
Person in accordance with GAAP; (ii) such contest operates to suspend collection
of the contested Charges and is maintained and prosecuted continuously with
diligence; (iii) none of the Collateral would be subject to forfeiture or loss
of Lien thereby; (iv) no Lien shall be imposed or be attempted to be imposed by
any Governmental Authority for such Charges or claims during such action or
proceeding; (v) the contesting Person shall promptly pay or discharge any
contested Charge and shall deliver to Bank evidence acceptable to Bank of such
compliance, payment, or discharge if such contest is terminated or discontinued
adversely; and (vi) Bank has not advised Borrower in writing that Bank
reasonably believes that nonpayment or nondischarge thereof could reasonably be
expected to have a Material Adverse Effect.
3.12 ERISA.
-----
(a) Schedule 3.12 lists all of Borrower's and each of its ERISA
-------------
Affiliates' Plans. Borrower is and will remain and will cause each of its ERISA
Affiliates to remain in compliance with (i) ERISA and (ii) all requirements of
each Plan, and each Plan complies with and is administered, and will continue to
be administered, in compliance with ERISA and all other Applicable Law in all
respects. All required contributions have been and will continue to be made in
accordance with the provisions of each of Borrower's and its ERISA Affiliates'
Plans, Borrower has not engaged or will engage, nor will it permit any of its
ERISA
16
<PAGE>
Affiliates to engage, in a "prohibited transaction," as defined in Section
4975 of the IRC or Section 406 of ERISA.
(b) Borrower shall notify Bank immediately in writing upon the
occurrence of any Reportable Event or a prohibited transaction with respect to
any Plan of Borrower or any of its ERISA Affiliates, or the institution or
threatened institution by the PBGC of proceedings under ERISA to terminate or to
partially terminate any such Plan, or the commencement or threatened
commencement of any litigation against any Plan, its fiduciaries or its assets,
or against Borrower or any of its Subsidiaries or any ERISA Affiliate in
connection with any Plan.
3.13 Litigation. As of the Closing Date, except as disclosed in
----------
Schedule 3.13, no Claim is pending or, to Borrower's knowledge, threatened
- -------------
against Borrower or any of its Subsidiaries that (a) challenges any such
Person's right or ability to enter into or perform any of its Obligations under
the Loan Documents or the validity or enforceability of any Loan Document or any
action taken thereunder or (b) if determined adversely, could reasonably be
expected to have a Material Adverse Effect. Borrower shall notify Bank in
writing promptly upon learning of the existence or commencement of any Claim
commenced or threatened against it or any of its Subsidiaries that (y) could
reasonably be expected to have a Material Adverse Effect whether or not
determined adversely or (z) regardless of amount (i) includes any demand for
injunctive relief, (ii) alleges criminal misconduct by Borrower or any of its
Subsidiaries, or (iii) alleges the violation of any law regarding, or seeks
remedies in connection with, any Environmental Liabilities and Costs.
3.14 Intellectual Property. As of the Closing Date, Borrower and each
---------------------
of its Subsidiaries owns or has the right to use and will own or have the right
to use all Intellectual Property necessary to continue to conduct its business
as now or heretofore conducted by it, and each such item (that is registrable)
of Intellectual Property is listed, together with application or registration
numbers, where applicable, in Schedule 3.14. Borrower will give Bank prompt
-------------
written notice of any change in the status of any of its or its Subsidiaries'
Intellectual Property. Borrower conducts and will continue to conduct and will
cause each of its Subsidiaries to conduct its affairs and business without
infringing upon any Intellectual Property of any other Person in a manner that
could reasonably be expected to have a Material Adverse Effect. Borrower shall
notify Bank immediately if it knows or discovers that its or any of its
Subsidiaries' Intellectual Property is or may become infringed upon,
misappropriated, or abandoned in a manner that could reasonably be expected to
have a Material Adverse Effect or of any other adverse determination or
development that could reasonably be expected to have a Material Adverse Effect.
3.15 Full Disclosure. No information contained in the Loan Documents,
---------------
the Financial Statements, or any written statement furnished by or on behalf of
Borrower under this Agreement or to induce Bank to execute the Loan Documents
contains any untrue statement of a material fact or, to Borrower's knowledge,
omits to state a material fact necessary to make the statements contained herein
or therein not misleading in light of the circumstances under which they were
made. Borrower has provided Bank and will continue to provide Bank with a true,
complete, and correct copy of each material contract executed by Borrower and
each of its Subsidiaries.
17
<PAGE>
3.16 Hazardous Materials. As of the Closing Date, Schedule 3.16
------------------- -------------
discloses any contamination of any Subject Property known to Borrower resulting
from any Hazardous Materials and any existing or potential environmental
liabilities of Borrower and each of its Subsidiaries known to Borrower that
could result in Environmental Liabilities and Costs, and, in each case, that
could reasonably be expected to have a Material Adverse Effect. As of the
Closing Date, neither Borrower nor any of its Subsidiaries has caused or, to the
knowledge of Borrower, suffered, or will cause, permit, or, to the knowledge of
Borrower, suffer to occur, any Release at, under, above, or within any Subject
Property, or the presence, use, generation, manufacture, installation, or
storage of any Hazardous Materials on, under, in, or about any Subject Property,
or the transportation of any Hazardous Materials to or from any Subject
Property, in each case that could reasonably be expected to have a Material
Adverse Effect, except to the extent such use, generation, manufacture,
installation, storage, or transportation is conducted in compliance with all
Environmental Laws and Environmental Permits. Borrower shall: (a) comply and
shall cause each of its Subsidiaries to comply with all applicable Environmental
Laws and Environmental Permits; (b) notify Bank in writing within seven days if
and when it becomes aware of any incident or ongoing case of non-compliance with
Environmental Laws or any past or present Release upon any Subject Property; (c)
promptly forward to Bank a copy of any written document or communication
received by it or any of its Subsidiaries in connection with any such Release or
any other matter relating to Environmental Laws that may affect Borrower or any
of its Subsidiaries; and (d) promptly notify Bank in writing of any
Environmental Liabilities and Costs that could reasonably be expected to have a
Material Adverse Effect. Borrower is not and will not become, nor will it permit
any of its Subsidiaries to become, involved in operations that could lead to the
imposition of Environmental Liabilities or Costs other than Environmental
Liabilities or Costs that could not reasonably be expected to have a Material
Adverse Effect, and no sub-tenant of such Person is permitted, or will be
permitted, to engage in any such activity.
3.17 Insurance. Schedule 3.17 lists all insurance of any nature
--------- -------------
maintained for current occurrences by Borrower and each of its Subsidiaries, as
well as a summary of the terms of such insurance. Borrower shall deliver to
Bank endorsements to all of its and its Subsidiaries' (a) "All Risk" and
business interruption insurance policies naming Bank as a loss payee, and (b)
general liability and other liability policies naming Bank as an additional
insured. All policies of insurance on real and personal property will include
an endorsement (Form 438 BFU or equivalent), in form and substance acceptable to
Bank, showing loss payable to Bank and extra expense and business interruption
endorsements. Each such endorsement, or an independent instrument furnished to
Bank, will provide that the insurer will give at least 30 days' prior written
notice to Bank before any such policy or policies of insurance shall be altered
or cancelled and that no act or default of Borrower or any other Person shall
affect the right of Bank to recover under such policy or policies of insurance
in case of loss or damage. Borrower hereby directs all present and future
insurers under its "All Risk" policies of insurance to pay all proceeds payable
thereunder directly to Bank. Bank acknowledges that, based on its current
understanding of Borrower's current risk profile, Borrower's insurance coverage
in existence on the Closing Date is satisfactory based on Borrower's current
operations. If the nature of the business of Borrower or its Subsidiaries
becomes subject to additional insurable risks at any time, then Bank shall the
right at such time to require additional forms and limits of insurance to
adequately protect Bank's
18
<PAGE>
interests in accordance with Bank's normal practices for similarly-situated
borrowers, and if the circumstances warrant, in Bank's sole discretion.
3.18 Accounts. Borrower represents and warrants that, with respect to
--------
each Account of Borrower:
(a) except as specifically disclosed in the most recent Schedule
of Accounts delivered to Bank: (i) such Account arises out of a bona fide sale
---- ----
and delivery of goods or rendition of services by Borrower in the ordinary
course of its business and is not evidenced by a judgment, Instrument or Chattel
Paper; (ii) there are no known setoffs, claims, or disputes existing or asserted
with respect thereto, and Borrower has not agreed and will not agree with the
applicable Account Debtor without Bank's consent to (A) any deduction therefrom,
(B) any extension of time for the payment thereof, (C) any compromise or
settlement for less than the full amount thereof, or (D) any release, in whole
or in part, of any Person liable therefor, except as to all of the foregoing
deductions, extensions, compromises, settlements, or releases allowed by
Borrower in the ordinary course of its business and disclosed to Bank; provided,
--------
that the aggregate amount of such deductions, extensions, compromises,
settlements, or releases shall not exceed $10,000 in any Fiscal Month; (iii)
there are no facts, events, or occurrences that Borrower knows or should know
that in any way impair the validity, collectibility, or enforceability thereof
or tend to reduce the amount payable thereunder as reflected on the invoices,
statements, and Schedules of Accounts delivered to Bank with respect thereto, or
that might result in any material adverse change in the financial condition of
the applicable Account Debtor or the collectibility thereof; and (iv) Borrower
has no knowledge that the applicable Account Debtor is unable generally to pay
its debts as they become due;
(b) the amounts reflected on all records, invoices, statements,
and Schedules of Accounts with respect thereto (i) to the knowledge of Borrower,
are actually and absolutely owing to Borrower as indicated thereon and (ii) are
not in any way contingent;
(c) (i) as of such date, no payments have been made on such
Account, and (ii) no payment shall be made on such Account except payments in
accordance with the provisions of Section 3.23; and
------------
(d) to the best of Borrower's knowledge, the applicable Account
Debtor has the capacity to contract.
3.19 Inventory. Borrower represents and warrants that, with respect
---------
to all Inventory of Borrower, (a) such Inventory (i) is, and will continue to
be, located at one of the locations set forth on Schedule 3.2 or (ii) is being
------------
shipped directly (A) to a customer of Borrower and such Inventory is scheduled
to arrive at its destination within 15 days after shipment or (B) between two of
the locations set forth on Schedule 3.2, (b) such Inventory has not been
------------
consigned to any Person, (c) such Inventory has been and will be produced in
compliance with all Applicable Laws, including the minimum wage and overtime pay
provisions of the Fair Labor Standards Act, (d) Borrower has good, indefeasible,
and merchantable title to such Inventory and such Inventory is not subject to
any Lien or document whatsoever except for Liens in favor of Bank and other
Permitted Liens, (e) except for Inventory that is manufactured by Borrower
19
<PAGE>
pursuant to confidential specifications for particular customers of Borrower and
that is subject to certain restrictions on the sale or disposition thereof that
have been disclosed to Bank and have been consented to by Bank (which consent
may be subject to terms and conditions satisfactory to Bank, including the
treatment of such Inventory as ineligible Inventory for the purpose of the
calculation of the Borrowing Base), such Inventory is not subject to any
licensing, patent, royalty, trademark, trade name, or copyright agreements with
any third parties that would require any consent of any third party upon sale or
disposition thereof or the payment of any monies to any third party as a
condition precedent to any such sale or other disposition, and (f) the
completion of manufacture, sale, or other disposition of such Inventory by Bank
following an Event of Default shall not require the consent of any Person and
shall not constitute a breach or default under any contract or agreement to
which Borrower is a party or to which any of its property is subject.
3.20 Payment of Obligations. Borrower will and will cause each of its
----------------------
Subsidiaries to: (a) pay and discharge or cause to be paid and discharged all
Obligations in a timely manner; and (b) (i) pay and discharge, or cause to be
paid and discharged, its Indebtedness in the ordinary course of business, (ii)
subject to Section 3.11(b), pay and discharge, or cause to be paid and
---------------
discharged promptly, all Charges, and (iii) pay all lawful claims for labor,
materials, supplies, and services or otherwise, before any thereof shall become
in default.
3.21 Conduct of Business. Borrower shall and shall cause each of its
-------------------
Subsidiaries to: (a) conduct its business substantially as now conducted or as
otherwise permitted hereunder and (b) at all times maintain, preserve, and
protect all of the Collateral and its other property in use or useful in the
conduct of its business and keep the same in good repair, working order, and
condition (taking into consideration ordinary wear and tear) and from time to
time make, or cause to be made, all necessary or appropriate repairs,
replacements, and improvements thereto consistent with industry practices, so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times.
3.22 Further Assurances; Schedule Supplements. At any time and from
----------------------------------------
time to time, upon the written request of Bank and at the sole expense of
Borrower, Borrower shall promptly and duly execute and deliver any and all such
further instruments and documents and take such further action as Bank may
reasonably request to obtain the full benefits of this Agreement and to protect,
preserve and maintain Bank's rights in the Collateral and under this Agreement.
On each anniversary of the Closing Date (or as often as Bank may require upon
the occurrence and continuation of a Default or an Event of Default), Borrower
will supplement each schedule to this Agreement with respect to any matter
hereafter arising that, if existing or occurring as of the Closing Date, would
have been required to be set forth or described in such Schedule; provided, that
--------
such supplement shall not be deemed to be an amendment thereof unless expressly
consented to in writing by Bank.
3.23 Collections and Proceeds of Collateral.
--------------------------------------
(a) All proceeds of the Collateral shall be deposited into a
Collection Account or the Control Account, as applicable. If Borrower or any of
its Subsidiaries receives any payments on account of such Person's Accounts or
any other Collateral, then Borrower shall
20
<PAGE>
hold or cause its Subsidiaries to hold such payments in trust for Bank and shall
deposit or cause its Subsidiaries to deposit promptly, and in any event no later
than the first Business Day after the date of receipt thereof, all such payments
into a Collection Account or the Control Account, as applicable. All amounts
deposited into a Collection Account or the Control Account shall immediately
become the property of Bank subject to application in accordance with Section
-------
3.23.
- ----
(b) Borrower shall maintain a Disbursement Account in its name
at Bank into which Bank shall, from time to time, deposit proceeds of Revolving
Loans made to Borrower pursuant to Section 1.1 for use by Borrower solely in
accordance with the provisions of Section 1.13.
------------
(c) Bank shall apply any amount that is deposited into the
Control Account in immediately available funds against the Obligations in the
manner provided for in Section 1.12; provided, that so long as no Event of
------------
Default has occurred and is continuing, (i) no money on deposit in the Control
Account shall be applied against any LIBOR Loan if such application would
constitute a prepayment of such LIBOR Loan prior to its Payment Date and such
funds shall be retained in the Control Account until the earlier of (A) the
Payment Date for such LIBOR Loan and (B) the next Business Day on which
additional Obligations arise, at which time such amount shall be applied to such
LIBOR Loan or such Obligations, as the case may be, in the manner provided in
this Agreement, and (ii) if (A) Borrower has repaid all Reference Rate Loans and
LIBOR Loans for which a LIBOR Loan Period has expired and (B) any funds are
being transferred to the Control Account in accordance with this Section 3.23,
------------
then, at Borrower's request made pursuant to a written notice delivered by
Borrower to Bank, such funds may be transferred to the Disbursement Account or
another bank account at Bank designated by Borrower. For purposes of calculating
interest and the Unused Line Fee, all collections and other proceeds of
Collateral will be deemed to be received by Bank one day after Bank's receipt of
immediately available funds therefor.
(d) Borrower shall not maintain any deposit, checking,
disbursement, operating, or other bank accounts except for those identified in
Schedule 3.23. So long as no Default or Event of Default has occurred and is
- -------------
continuing, Borrower may amend Schedule 3.23 to add or replace a Collection
-------------
Account or Disbursement Account if: (i) Bank has consented to the opening of
such account and the bank at which such account is to be maintained is
satisfactory to Bank in its sole discretion and (ii) Borrower and the bank at
which such account is to be maintained have executed and delivered to Bank a
tri-party blocked or pledged account agreement in form and substance
satisfactory to Bank in its sole discretion.
3.24 Financial Covenants. Borrower shall perform, comply with and
-------------------
observe the following financial covenants, each of which shall be calculated in
accordance with GAAP consistently applied:
(a) Tangible Net Worth. Tangible Net Worth at any time during
each of the periods set forth below shall not be less than the amounts set forth
opposite such period:
Minimum
Period: Tangible Net Worth
- -------------------------------------------------------
21
<PAGE>
from November 1, 1999 through and
including March 31, 2000................. $ 9,200,000
from April 1, 2000 through and
including June 30, 2000.................. $10,200,000
from July 1, 2000 through and
including September 30, 2000............. $10,800,000
from October 1, 2000 through and
including September 30, 2001............. $12,800,000
October 1, 2001 and thereafter........... $13,500,000
(b) Minimum Fixed Charge Coverage Ratio. For each of the four
-----------------------------------
(4) consecutive Fiscal Quarter periods listed in the table below, the Fixed
Charge Coverage Ratio shall not be less than the ratio set forth opposite such
period in the table:
Four (4) Consecutive Fiscal Minimum Fixed Charge
Quarter Period Ending in Coverage Ratio
------------------------ ---------------
December 1999......................... 1.42
March 2000............................ 1.38
June 2000............................. 1.33
September 2000........................ 1.33
December 2000......................... 1.51
March 2001............................ 1.55
June 2001............................. 1.58
September 2001........................ 1.62
December 2001......................... 1.68
March 2002............................ 1.74
June 2002............................. 1.80
September 2002........................ 1.86
and thereafter........................ 1.95
3.25 Year 2000. Borrower has performed all acts reasonably necessary
---------
to ensure that Borrower and any business in which Borrower holds a substantial
interest, become Year 2000 Compliant in a timely manner, including performing a
comprehensive review and assessment of all of Borrower's systems and, if
necessary, adopting a detailed plan, with itemized budget, for the remediation,
monitoring and testing of such systems. The replacement of internally developed
business critical software or other solutions necessary to be Year 2000
Compliant is expected to be completed by November 30, 1999. As of the Closing
Date the cost
22
<PAGE>
to Borrower and its Subsidiaries of such replacement or other solution, to the
extent not reflected or reserved for on the balance sheet of Borrower, could not
reasonably be expected to have a Material Adverse Effect on the financial
condition of Borrower.
3.26 Solvency. Both before and after giving effect to: (a) the Loans
--------
and Letter of Credit Obligations to be made or incurred on the Closing Date or
such other date as Loans and Letter of Credit Obligations requested hereunder
are made or incurred; (b) the disbursement of the proceeds of such Loans
pursuant to the instructions of Borrower; (c) the Refinancing, and the
consummation of the other Related Transactions; and (d) the payment and accrual
of all transaction costs in connection with the foregoing, Borrower is and will
be Solvent.
3.27 Subordinated Debt. As of the Closing Date, Borrower has
-----------------
delivered to Bank a complete and correct copy of the Subordinated Notes
(including all schedules, exhibits, amendments, supplements, modifications,
assignments and all other documents delivered pursuant thereto or in connection
therewith). Borrower has the corporate power and authority to incur the
Indebtedness evidenced by the Subordinated Note. To Borrower's knowledge, the
subordination provisions of the Subordinated Notes are enforceable against the
holder of the Subordinated Note by Bank. To Borrower's knowledge, all
Obligations, including the Obligations to pay principal of and interest on the
Loans, constitute senior Indebtedness entitled to the benefits of the
subordination provisions contained in the Subordinated Note. To Borrower's
knowledge, the principal of and interest on the Revolving Note, all Letter of
Credit Obligations and all other Obligations will constitute "senior debt" as
that or any similar term is or may be used in any other instrument evidencing or
applicable to any other Subordinated Debt. Borrower acknowledges that Bank is
entering into this Agreement in reliance upon the subordination provisions of
the Subordinated Note and this Section 3.27.
------------
3.28 Compliance with the Packers Acts. Borrower has promptly paid
--------------------------------
trade payables with respect to Inventory of Borrower subject to any lien or
trust arising under any state producers' lien statute or any of the other
Packers Acts and is in compliance with all applicable provisions of the Packers
Acts and for which the failure to be in compliance could reasonably be expected
to have a Material Adverse Effect, and no claims have been made by or against
Borrower in connection therewith that have not been or will not be promptly
reimbursed by Borrower, subject to Borrower's right to contest such claims in
accordance with Section 3.11(b). Borrower shall notify Bank of any Liens
---------------
asserted with respect to contracts or sales arrangements entered into by
Borrower for the purchase of Farm Products that are the subject of the Packers
Acts.
4. NEGATIVE COVENANTS
------------------
Borrower covenants and agrees (for itself and each of its
Subsidiaries) that, without Bank's prior written consent, from the Closing Date
until the Termination Date, Borrower shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, by operation of law or otherwise:
(a) merge with, consolidate with, acquire all or substantially
all of the assets or capital Stock of, or otherwise combine with, any Person or
form any Subsidiary, except
23
<PAGE>
that (i) any Subsidiary of Borrower may merge or consolidate with Borrower or
another Subsidiary of Borrower (so long as Borrower is the surviving corporation
from any such transaction) and (ii) Borrower or any Subsidiary of Borrower may
acquire all or substantially all of the assets or capital Stock of another
Subsidiary of Borrower;
(b) except as otherwise permitted in this Section 4, make any
---------
investment in, or make or accrue loans or advances of money to, any of its
Subsidiaries, Affiliates or any other Person;
(c) create, incur, assume, or permit to exist any Indebtedness,
except (i) the Obligations, (ii) Indebtedness incurred in the ordinary course of
its business, (iii) Indebtedness of up to $500,000 outstanding at any time for
Capital Expenditures secured by purchase money Liens permitted in clause (d) in
the definition of "Permitted Liens," (iv) deferred taxes, (v) the Subordinated
Debt, (vi) either (A) Borrower's obligations to LLCP evidenced by the
Subordinated Note and the documents entered into in connection therewith or (B)
obligations of Borrower arising out of a Permitted Subordinated Note
Refinancing, (vii) other Indebtedness set forth in Schedule 4(c), and (viii) as
-------------
otherwise permitted in this Section 4;
---------
(d) enter into any lending, borrowing or other commercial
transaction with any of its officers or directors or other Affiliates or any of
its Subsidiaries (including upstreaming and downstreaming of cash and
intercompany advances), except (i) loans or advances to officers or employees
under special circumstances in an amount not to exceed (A) $25,000 to any
officer or employee and (B) $100,000 in the aggregate at any one time, (ii)
advances of funds to Borrower's officers or employees for business-related
travel or other expenses in the ordinary course of Borrower's business, (iii)
payments permitted by Section 4(l), and (iv) payments made by Mr. Walter Serrano
-----------
to Overhill Ventures pursuant to the Promissory Note made by Mr. Serrano to the
order of Overhill Ventures dated as of October 23, 1999;
(e) make any changes in any of its business objectives,
purposes, or operations that could have or reasonably be expected to have a
Material Adverse Effect;
(f) amend its articles or certificate of incorporation, as the
case may be, or bylaws;
(g) incur any Guaranteed Indebtedness except (i) by endorsement
of Instruments or items of payment for deposit to the general account of
Borrower and (ii) for Guaranteed Indebtedness incurred for the benefit of
Borrower if the primary obligation is permitted by this Agreement;
(h) create or permit any Lien on any of its properties or
assets, except for the Liens set forth in Schedule 4(h) and other Permitted
------------
Liens;
(i) sell, transfer, convey, assign, or otherwise dispose of any
its assets or properties, including its Accounts; provided, that the foregoing
--------
shall not prohibit the sale of Inventory or obsolete or unnecessary Equipment or
real estate in the ordinary course of its business;
24
<PAGE>
(j) take any action or omit to take any action, which act or
omission would constitute a material default or an event of default pursuant to,
or noncompliance with, any contract, lease, mortgage, deed of trust, or
Instrument or any document creating a Lien to which it is a party or by which it
or any of its property is bound;
(k) (i) cancel any Indebtedness owing to it except for
reasonable consideration and in the ordinary course of its business or (ii)
prepay any Indebtedness owing by it to any other Person; provided, that Borrower
--------
may prepay (A) Subordinated Debt owing to LLCP pursuant to a Permitted
Subordinated Debt Refinancing or (B) Indebtedness of less than $250,000 so long
as no Default or Event of Default has occurred and is continuing at the time of
any such prepayment or would result after giving effect to any such prepayment;
(l) make or permit any Restricted Payment other than (i)
dividends to Borrower by Overhill Ventures and (ii) other payments by Borrower
to Polyphase that qualify as a Permitted Affiliate Transaction; provided, that
--------
any funds or proceeds or any such payment made by Borrower to Polyphase shall
not be loaned or advanced to, invested in or otherwise used for, any Subsidiary
of Polyphase (other than Borrower) or any Subsidiary of any such Subsidiary or
the business of any such Subsidiaries; provided, that no Default or Event of
--------
Default shall have occurred and be continuing or would result after giving
effect to any such dividend or other payment under clauses (i), (ii), (iii) of
- -- ---
this Section 4(l);
------------
(m) (i) voluntarily terminate any Plan so as to result in
liability of Borrower to PBGC, (ii) enter into any "Prohibited Transaction" (as
defined in ERISA) involving any Plan that could result in liability of Borrower
to PBGC, (iii) cause an occurrence of any Reportable Event that could result in
liability of Borrower to PBGC, or (iv) allow or suffer to exist any other event
or condition known to Borrower that could result in liability of Borrower to
PBGC;
(n) engage in any business other than that presently engaged in
by it;
(o) change its corporate name, its federal employer
identification number (or obtain additional numbers), the timing of its Fiscal
Year or the location of its chief executive office or principal place of
business; or
(p) make aggregate Capital Expenditures (other than Capital
Expenditures financed through the incurrence of Indebtedness (excluding
Revolving Loans)) in (i) any Fiscal Quarter in excess of $250,000 or (ii) any
Fiscal Year in excess of $800,000.
5. FINANCIAL REPORTS
-----------------
5.1 Reports and Notices. Borrower represents, warrants, and agrees
-------------------
that, from and after the Closing Date until the Termination Date, Borrower shall
deliver to Bank, or cause to be delivered to Bank:
(a) if requested by Bank, copies of sales journals or invoices,
customer's purchase orders or the equivalent, and shipping or delivery receipts
for all Inventory
25
<PAGE>
sold, and a report summarizing dilution of Borrower's Accounts, each of which
shall be prepared for the immediately preceding Business Day;
(b) On Wednesday of each week (to be furnished by facsimile
transmission), a package of information with respect to the prior week (the
"Weekly Reporting Package"), including: (i) the weekly internal sales report of
- -------------------------
Borrower and its Subsidiaries; (ii) the consolidated Accounts of Borrower and
its Subsidiaries as of the end of such prior week; (iii) the Accounts that are
then outstanding 90 days past the invoice date as of the end of such prior week;
(iv) the consolidated accounts payable aging report for Borrower and its
Subsidiaries as of the end of such prior week; (v) the Borrowing Base
Certificate; and (vi) any additional information mutually agreed upon by
Borrower and Bank;
(c) as frequently as Bank may request and in any event no later
than 30 days following the end of each Fiscal Month, each of the following,
certified by Borrower, in each case in form and substance acceptable to Bank and
prepared as of the last day of such Fiscal Month:
(i) a monthly summary report that rolls forward activity
in the Accounts of Borrower, certified by Borrower (each such report, a "Monthly
-------
Summary Report");
- --------------
(ii) a schedule of Accounts that provides a detailed
Accounts aging, a summary of Accounts, and a calculation of the Dilution of
Borrower's Accounts (each such schedule, a "Schedule of Accounts"); and
--------------------
(iii) a schedule of Inventory, certified by Borrower,
specifying the value of Borrower's Inventory valued at the lower of cost
(determined on a first-in, first-out basis) or wholesale market value, by
location and type with a supporting perpetual Inventory report, and further
specifying in-transit Inventory (enclosing copies of supporting documentation
such as bills of lading) and any other information that Bank may request (each
such schedule, a "Schedule of Inventory"), together with all stock status
---------------------
reports;
(d) as soon as practicable and in any event within (I) 30 days
following the end of each Fiscal Month (other than the end of any Fiscal Month
that is also the end of a Fiscal Quarter) or (II) 45 days after the end of any
Fiscal Month that is also the end of a Fiscal Quarter, each of the following:
(i) the Financial Statements for such Fiscal Month, which
Financial Statements shall provide comparisons to budget and actual results for
the corresponding period during the prior Fiscal Year, both on a monthly and
year-to-date basis;
(ii) a certification by the Chief Executive Officer or Chief
Financial Officer of Borrower that such Financial Statements are complete and
correct and are prepared in accordance with GAAP (subject to the inclusion of
footnotes and changes resulting from normal year-end audit adjustments) and that
no Default or Event of Default has occurred and is continuing (or specifying
those Defaults or Events of Default that have occurred and are continuing of
which he was aware); and
26
<PAGE>
(iii) a Compliance Certificate in respect of each of the
financial covenants set forth in Section 3.24 tested on a monthly (or, as
------------
applicable, quarterly or annual) basis;
(e) as soon as practicable and in any event within 90 days
following the close of each Fiscal Year (as such number of days may be extended
for an additional 15 days for such Fiscal Year if Borrower delivers to Bank in
draft form, not later than 90 days after the end of such Fiscal Year, copies of
the draft audited Financial Statements, including the notes thereto, required to
be furnished to Bank under this clause (e)), the Financial Statements for such
-----------
Fiscal Year certified without qualification in any respect (other than as to the
recharacterization of the intercompany accounts receivable owing from Polyphase
to Borrower as a dividend as opposed to an intercompany account receivable) by
an independent certified accounting firm acceptable to Bank, which Financial
Statements shall provide comparisons to budget and actual results for the prior
Fiscal Year, both on a monthly and annual basis, accompanied by each of the
following:
(i) a statement in reasonable detail showing the
calculations used in determining compliance with the financial covenants set
forth in Section 3.24; and
------------
(ii) any management letter that may be issued;
(f) not less than 30 days prior to the close of each Fiscal
Year, board-approved projections for the next succeeding Fiscal Year showing
forecasted monthly income statement, balance sheet, cash flow statement, and
Borrowing Availability, in each case prepared in a manner consistent with
Borrower's historical financial statements and GAAP, together with appropriate
supporting details and a statement of underlying assumptions;
(g) as frequently as Bank may request, a certification by the
chief executive officer or chief financial officer of Borrower to each of the
following matters:
(i) that all salaries and wages of Borrower's employees
have been paid through the most recent payroll date;
(ii) specifying any wage claims that have been filed
against Borrower by employees or former employees of Borrower since the previous
certification; and
(iii) that all Inventory has been and will be produced in
compliance with Applicable Law, including the minimum wage and overtime pay
provisions of the Fair Labor Standards Act;
(h) promptly upon receipt thereof, copies of all final reports,
if any, submitted to Borrower by its independent certified public accountants in
connection with any annual or interim audit of Borrower;
(i) upon Bank's request, a customer list specifying the address
and telephone number of each of Borrower's Account Debtors;
27
<PAGE>
(j) as soon as practicable and in any event within 10 Business
Days thereafter, notice to Bank of Borrower's acquisition of or agreement to
acquire, whether by purchase, lease, or otherwise, any tangible property in
excess of $250,000, other than purchases of Inventory in the ordinary course of
business;
(k) promptly after the sending thereof, copies of all financial
statements, reports and other information that Borrower or any of its
Subsidiaries sends to any holder of its Indebtedness or its securities;
(l) within 10 Business Days after filing with the appropriate
Governmental Authority, copies of Borrower's annual federal and state income tax
returns;
(m) promptly after (and in any event, within five Business Days)
any officer of Borrower has actual knowledge (i) of any condition or event that
constitutes a Default or an Event of Default, or becoming aware that Bank has
given any written notice with respect to a claimed Default or Event of Default,
(ii) that any Person (including any landlord under any real property lease) has
given any written notice to Borrower or any of its Subsidiaries or taken any
other action with respect to a claimed default, or (iii) of any condition or
event that has or could reasonably be expected to have a Material Adverse Effect
or materially and adversely affect the value of, or Bank's interest in, the
Collateral, Borrower shall deliver to Bank a certificate specifying (A) the
nature and period of existence of any such claimed default, Default, Event of
Default, condition, or event, (B) the notice given or action taken by such
Person in connection therewith, and (C) the remedial action that Borrower has
taken, is taking, and proposes to take with respect thereto;
(n) promptly (and in any event not later than five days) after
the issuance of any Compliance Report, or series of Compliance Reports, that
could reasonably be expected to have a Material Adverse Effect, a copy (or
copies) of such report or reports (or written summaries of any oral
determination(s)); and
(o) such other information respecting the business, financial
condition, prospects, or projections of Borrower or any of its Affiliates as
Bank reasonably may request from time to time.
5.2 Other Reports. Borrower shall notify Bank promptly of any
-------------
occurrence causing a material loss or decline in value of any Collateral and the
estimated (or actual, if available) amount of such loss or decline. Borrower
shall, upon the request of Bank, furnish to Bank such other reports in
connection with the affairs, business, financial condition, operations,
prospects, or management of Borrower or any of its Subsidiaries or the
Collateral as Bank may request, all in reasonable detail, and Borrower shall
advise Bank promptly, in reasonable detail, of: (a) any Lien, other than
Permitted Liens, attaching to or asserted against any of the Collateral; (b) any
material change in the composition of the Collateral; and (c) the occurrence of
any other event that could reasonably be expected to have a Material Adverse
Effect.
28
<PAGE>
6. CREATION OF SECURITY INTEREST
-----------------------------
6.1 Grant of Security Interest. Each of Borrower and each of its
--------------------------
Subsidiaries grants to Bank a Lien upon all of its right, title, and interest in
the Collateral to secure the prompt payment and performance of the Obligations.
Each of Borrower and each of its Subsidiaries represents, warrants, and agrees
as follows: (i) upon and as a result of the filing by Bank of appropriate
financing statements in the jurisdictions listed in Schedule 6.1, Bank's Liens
------------
in the Collateral are and will be fully perfected Liens on all Collateral with
respect to which Liens can be perfected by filing, which Liens are and will,
until the Termination Date, be enforceable as first priority, fully perfected
Liens as against all other creditors of, and purchasers from, Borrower and each
of its Subsidiaries (other than purchasers of Inventory in the ordinary course
of business); (ii) upon the filing by Bank of appropriate financing statements
as aforesaid, all action necessary or desirable to protect and perfect such
Liens in favor of Bank in all of the Collateral will have been duly taken as to
all Collateral with respect to which Liens can be perfected by filing; (iii)
except for Permitted Liens on Collateral, Borrower (and any of its Subsidiaries
granting a Lien in Collateral) is and will be the sole owner of each such item
of the Collateral (other than consigned goods specifically identified in
Schedule 6.1), and has and will have good and marketable title to such
- ------------
Collateral free and clear of any and all other Liens except for Liens in favor
of Bank; and (iv) no effective security agreement, mortgage, deed of trust,
financing statement, equivalent security or Lien instrument, or continuation
statement covering all or any part of the Collateral is or will be on file or of
record in any public office, except those filed by Borrower (and any of its
Subsidiaries granting a Lien to Bank in the Collateral) in favor of Bank
pursuant to the Loan Documents, and those relating to other Permitted Liens.
Each of Borrower and each of its Subsidiaries shall defend the right, title and
interest of Bank in and to the Collateral against the claims and demands of all
Persons, and shall take such actions, including (A) the prompt delivery of all
original Instruments, Chattel Paper, and certificated Stock owned by Borrower to
Bank, (B) notification of Bank's interest in Collateral at Bank's request, and
(C) the institution of litigation against third parties, as shall be prudent in
order to protect and preserve Borrower's, such Subsidiaries', and Bank's
respective and several interests in the Collateral. Borrower (and any of its
Subsidiaries granting a Lien in Collateral) shall mark its Books and Records
pertaining to the Collateral to evidence the Loan Documents and the Liens
granted under the Loan Documents. All Chattel Paper shall be marked with the
following legend: "THIS WRITING AND THE OBLIGATIONS EVIDENCED OR SECURED HEREBY
ARE SUBJECT TO THE LIEN OF UNION BANK OF CALIFORNIA, N.A."
6.2 Bank's Rights.
-------------
(a) Bank may, at any time in Bank's own name or in the name of
Borrower, (i) communicate with Account Debtors of Borrower or any of its
Subsidiaries, parties to Contracts of Borrower or any of its Subsidiaries, and
obligors in respect of Instruments or Chattel Paper of Borrower or any of its
Subsidiaries or other Collateral to verify to Bank's satisfaction the existence,
amount, and terms of any such Accounts, Contracts, Instruments, Chattel Paper,
or other Collateral, and (ii) at any time after the occurrence and during the
continuance of a Default or an Event of Default, and without prior notice to
Borrower, notify such Account Debtors, parties to such Contracts, and obligors
in respect of such Chattel Paper, Instruments, or other Collateral that such
Collateral has been assigned to Bank and that payments
29
<PAGE>
shall be made directly to Bank. Upon the request of Bank, Borrower or any of its
Subsidiaries shall so notify such Account Debtors, parties to such Contracts,
and obligors in respect of such Instruments, Chattel Paper, or other Collateral.
(b) It is expressly agreed by each of Borrower and each of its
Subsidiaries that such Person shall remain liable under each of its Contracts
and Licenses to observe and perform all the conditions and obligations to be
observed and performed by it thereunder, and Bank shall have no obligation or
liability whatsoever to any other Person under any such Contract or License
(between Borrower or any of its Subsidiaries and any Person other than Bank) by
reason of or arising out of the execution, delivery, or performance of this
Agreement, and Bank shall not be required or obligated in any manner (i) to
perform or fulfill any of the obligations of Borrower or any of its Subsidiaries
thereunder, (ii) to make any payment or inquiry, or (iii) to take any action of
any kind to collect or enforce any performance or the payment of any amounts
that may have been assigned to it or to which it may be entitled at any time or
times under or pursuant to any such Contract or License.
(c) Each of Borrower and each of its Subsidiaries shall, with
respect to each of its owned, leased, or controlled properties or facilities,
during normal business hours and upon reasonable advance notice (unless an Event
of Default has occurred and is continuing, in which event no notice shall be
required and Bank shall have access at any and all times): (i) provide access to
such facilities or properties to Bank and any of its officers, employees, and
agents, as frequently as Bank determines to be appropriate; (ii) permit Bank and
any of its officers, employees, and agents to inspect, audit, and make extracts
from all of such Person's Books and Records; and (iii) permit Bank to inspect,
review, evaluate, and make physical verifications and appraisals of such
Person's Inventory and other Collateral in any manner and through any medium
that Bank considers advisable, and each of Borrower and each of its Subsidiaries
shall provide to Bank, at Borrower's cost and expense, such clerical and other
assistance as may be reasonably requested with respect thereto. Each of Borrower
and each of its Subsidiaries shall make available to Bank and its counsel, as
quickly as practicable under the circumstances, originals or copies of all of
such Person's Books and Records and any other instruments and documents that
Bank may request. Each of Borrower and each of its Subsidiaries shall deliver
any document or instrument reasonably necessary for Bank, as it may from time to
time request, to obtain records from any service bureau or other Person that
maintains records for Borrower or any of its Subsidiaries.
(d) Upon the occurrence and during the continuance of an Event
of Default, Borrower, at its own expense, shall cause its independent certified
public accountants to prepare and deliver to Bank at any time and from time to
time, promptly upon Bank's request: (i) a reconciliation of all of its and its
Subsidiaries' Accounts; (ii) an aging of all such Accounts; (iii) trial
balances; and (iv) test verifications of such Accounts as Bank may request.
Borrower, at its own expense, shall cause its independent certified public
accountants to deliver to Bank the results of (A) any physical verifications of
all or any portion of its and its Subsidiaries' Inventory made or observed by
such accountants and (B) any verifications of its and its Subsidiaries'
Accounts, in each case when and if any such verifications are conducted. Bank
shall be permitted to observe and consult with Borrower or any of its
Subsidiaries and Borrower's certified public accountants in the performance of
these tasks.
30
<PAGE>
6.3 Power of Attorney. Each of Borrower and each of its Subsidiaries
-----------------
hereby irrevocably makes, constitutes, and appoints Bank (and any of Bank's
officers, employees, or agents designated by Bank), as its true and lawful
attorney-in-fact, with power to: (a) sign the name of Borrower or any of
Borrower's Subsidiaries on any document to be executed, recorded, or filed in
order to perfect or continue perfected Bank's Lien upon the Collateral if
Borrower or any of Borrower's Subsidiaries fails to do so promptly after request
therefor by Bank, including filing any financing or continuation statement
without the signature of Borrower or any of Borrower's Subsidiaries to the
extent permitted by applicable law; (b) upon the occurrence and during the
continuance of an Event of Default, sign Borrower's or any of Borrower's
Subsidiaries' name on any invoice or bill of lading relating to any Account,
drafts against Account Debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to Account Debtors; (c) send requests for
verification of Accounts; (d) upon the occurrence and during the continuance of
an Event of Default, endorse Borrower's or any of Borrower's Subsidiaries' name
on any checks, notices, acceptances, money orders, drafts, or other forms of
payment or security that may come into Bank's possession; and (e) upon the
occurrence and during the continuance of an Event of Default, (i) notify the
post office authorities to change the address for delivery of Borrower's or any
of Borrower's Subsidiaries' mail to an address designated by Bank, to receive
and open all mail addressed to Borrower or any of Borrower's Subsidiaries, and
to retain all mail relating to the Collateral and forward all other mail to
Borrower or any of Borrower's Subsidiaries, (ii) make, settle, and adjust all
claims under Borrower's or any of Borrower's Subsidiaries' policies of insurance
and make all determinations and decisions with respect to such policies of
insurance, and (iii) settle and adjust disputes and claims respecting any of
Borrower's or its Subsidiaries' Accounts directly with the applicable Account
Debtors for amounts and upon terms that Bank determines to be reasonable, and
Bank may cause to be executed and delivered any documents and releases that Bank
determines to be necessary. The appointment of Bank as each of Borrower's and
each of its Subsidiaries' attorney-in-fact, and each and every one of Bank's
rights and powers, being coupled with an interest, is irrevocable until all of
the Obligations have been fully repaid and performed and Bank's obligation to
provide Loans and incur Letter of Credit Obligations hereunder is terminated.
NEITHER BANK, NOR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, AGENTS
OR REPRESENTATIVES SHALL BE RESPONSIBLE TO BORROWER OR ANY OF BORROWER'S
SUBSIDIARIES FOR ANY ACT OR FAILURE TO ACT PURSUANT TO THE POWERS GRANTED UNDER
THE POWER OF ATTORNEY HEREIN OR OTHERWISE, EXCEPT FOR ITS OR THEIR OWN GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT. IN THE EVENT THAT BORROWER OR OVERHILL
VENTURES OBTAINS AN AWARD FOR PUNITIVE DAMAGES AGAINST BANK OR ANY OF ITS
OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS OR AGENTS, THE PARTIES HERETO AGREE
THAT THE AMOUNT OF SUCH PUNITIVE DAMAGE AWARD SHALL NOT EXCEED AN AMOUNT EQUAL
TO THREE TIMES THE AMOUNT OF THE ACTUAL DAMAGES AWARDED TO BORROWER.
6.4 Grant of License to Use Intellectual Property Collateral. For
--------------------------------------------------------
the purpose of enabling Bank to exercise its rights and remedies under the Loan
Documents, Borrower hereby grants to Bank an irrevocable, non-exclusive license
(exercisable upon the occurrence of an Event of Default without payment of
royalty or other compensation to Borrower) to use, transfer, license, or
sublicense any Intellectual Property of Borrower or any of Borrower's
Subsidiaries,
31
<PAGE>
including access to all media in which any of the licensed items may be recorded
or stored and to all computer and automatic machinery software and programs used
for the compilation or printout thereof, and each of Borrower and each of
Borrower's Subsidiaries represents, warrants, and agrees that any such license
or sublicense is not and will not be in conflict with the contractual or
commercial rights of any other Person; provided, that such license will
--------
terminate on the Termination Date.
6.5 Reinstatement. The provisions of this Section 6 shall remain in
------------- ---------
full force and effect and continue to be effective even if: (a) any petition is
filed by or against Borrower or any of Borrower's Subsidiaries for liquidation
or reorganization; (b) Borrower or any of Borrower's Subsidiaries becomes
insolvent or makes an assignment for the benefit of creditors; (c) a receiver or
trustee is appointed for all or any significant part of the assets of Borrower
or any of Borrower's Subsidiaries; or (d) at any time payment and performance of
the Obligations, or any part thereof, is, pursuant to Applicable Law, rescinded
or reduced in amount or must otherwise be restored or returned by any obligee of
the Obligations, whether as a "voidable preference," "fraudulent transfer," or
otherwise, all as though such payment or performance had not been made. In the
event that any payment or any part thereof is rescinded, reduced, restored, or
returned, the Obligations and Bank's Liens in the Collateral shall be reinstated
and deemed reduced only by any amount paid and not so rescinded, reduced,
restored, or returned.
6.6 Termination of Liens. Upon Borrower's payment in full in cash to
--------------------
Bank of all Obligations, Bank shall execute a termination of all security
agreements and Liens granted by Borrower or any of its Subsidiaries to Bank.
6.7 Release of Liens on Stock. Upon exercise of any of the options,
-------------------------
warrants, calls or commitments relating to the Stock of Borrower or Overhill
Ventures set forth on Schedule III to the Pledge Agreement (which options
------------
warrants, calls and commitments are hereby consented to by Bank), Bank shall
release its Lien on such Stock to effectuate such exercise.
7. EVENTS OF DEFAULT; RIGHTS AND REMEDIES
--------------------------------------
7.1 Events of Default. The occurrence of any one or more of the
-----------------
following events (regardless of the reason therefor) shall constitute an "Event
of Default" under this Agreement:
(a) Borrower shall fail to make any payment in respect of any
Obligations when due and payable or declared due and payable; or
(b) Borrower or any of its Subsidiaries shall fail or neglect to
perform, keep, or observe any of the other covenants, promises, agreements,
requirements, conditions, or other terms or provisions contained in this
Agreement or any of the other Loan Documents (other than any provision embodied
in or covered by any other clause of this Section 7.1), and such default shall
-----------
have continued for a period of 10 Business Days after the earlier to occur of
Borrower's receipt of notice of such breach from Bank or the date on which such
failure or neglect first becomes known to any officer of Borrower; provided,
--------
that there shall be no grace period for Borrower's failure to perform, keep, or
observe any of the covenants, promises,
32
<PAGE>
agreements, requirements, conditions, or other terms or provisions contained in
Section 3.23, Section 3.24, and Section 4; or
- ------------ ------------ ---------
(c) an event of default shall occur under (i) any other material
agreement, document, or instrument to which Borrower or any of its Subsidiaries
is a party, or by which any such Person or its property is bound, and such event
of default (A) involves the failure to make any payment, whether of principal,
interest, or otherwise, and whether due by scheduled maturity, required
prepayment, acceleration, demand, or otherwise, in respect of any Indebtedness
(other than the Obligations) of such Person in an aggregate amount exceeding
$100,000 or (B) causes (or permits any holder of such Indebtedness or a trustee
to cause) such Indebtedness, or a portion thereof in an aggregate amount
exceeding $100,000, to become due prior to its stated maturity or prior to its
regularly scheduled dates of payment or (ii) the Subordinated Note or any of the
documents entered into in connection therewith; or
(d) any representation or warranty in this Agreement, any other Loan
Document, or in any written statement pursuant hereto or thereto, or in any
report, financial statement, or certificate made or delivered to Bank by
Borrower or any of its Subsidiaries shall be untrue or incorrect in any respect
as of the date when made or deemed made; or
(e) (i) any of the assets of Borrower or any of its Subsidiaries with
a fair market value in excess of $200,000 in the aggregate shall be attached,
seized, levied upon, or subjected to a writ or distress warrant, or come within
the possession of any receiver, trustee, custodian, or assignee for the benefit
of creditors of such Person, and such condition shall remain unstayed or
undismissed for 60 consecutive days; (ii) any Person other than Borrower shall
apply for the appointment of a receiver, trustee, or custodian for the assets of
Borrower (or those of any of its Subsidiaries) and the order appointing such
receiver, trustee, or custodian shall remain unstayed or undismissed for 60
consecutive days; or (iii) Borrower or any of its Subsidiaries shall have
concealed, removed, or permitted to be concealed or removed any part of its
property with intent to hinder, delay, or defraud its creditors or any of them
or made or suffered a transfer of any of its property or the incurring of an
obligation that may be fraudulent under any bankruptcy, fraudulent transfer, or
other similar law; or
(f) a case or proceeding shall have been commenced involuntarily
against Borrower or any of its Subsidiaries in a court having competent
jurisdiction seeking a decree or order (i) under the Bankruptcy Code or any
other applicable federal, state, or foreign bankruptcy or other similar law,
(ii) for (A) the appointment of a custodian, receiver, liquidator, assignee,
trustee, or sequestrator (or similar official) of such Person or of any
substantial part of its properties or (B) the reorganization or winding up or
liquidation of the affairs of any such Person, or (iii) invalidating or denying
(A) any Person's right, power, or competence to enter into or perform any of its
obligations under any Loan Document or (B) the validity or enforceability of
this Agreement or any other Loan Document or any action taken hereunder or
thereunder, and such case or proceeding shall remain undismissed or unstayed for
60 days or more or a decree or order granting the relief sought in such case or
proceeding shall be entered by a court of competent jurisdiction over such case
or proceeding; or
33
<PAGE>
(g) Borrower or any of its Subsidiaries shall (i) file a petition for
an order for relief under the Bankruptcy Code or any other applicable federal,
state, or foreign bankruptcy or other similar law, (ii) consent to the
institution of proceedings thereunder or to the filing of any such petition or
to the appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee, or sequestrator (or similar official) of any such Person or
of any substantial part of its properties, (iii) fail generally to pay (or admit
in writing its inability to pay) its debts as such debts become due, or (iv)
take any corporate action in furtherance of any such action; or
(h) a final judgment or judgments (after the expiration of all times
to appeal therefrom) for the payment of money in excess of $250,000 in the
aggregate shall be rendered against Borrower or any of its Subsidiaries, unless
the same shall be (i) fully covered by insurance (exclusive of any applicable
deductible under any insurance policies insuring Borrower or its Subsidiaries
against such judgment) and the issuer(s) of the applicable policies shall have
acknowledged full coverage in writing within 30 days of such judgment, or (ii)
vacated, stayed, bonded, paid, or discharged within a period of 30 days from the
date of such judgment; or
(i) any Guarantor, (i) if an individual, dies, (ii) terminates, or
gives Bank notice of its intention to terminate, its Guaranty, (iii) becomes the
subject of a case or proceeding commenced under the Bankruptcy Code or any other
applicable federal, state, or foreign bankruptcy or other similar law seeking
either (A) the appointment of a custodian, receiver, liquidator, assignee,
trustee, or sequestrator (or similar official) of any such Guarantor or of any
substantial part of its properties, or (B) the reorganization, winding up, or
liquidation of the affairs of any such Guarantor and any such case or proceeding
under the foregoing clauses (A) or (B) shall remain undismissed or unstayed for
------------------
60 days or more or a decree or order granting the relief sought in such case or
proceeding shall be entered by a court of competent jurisdiction over such case
or proceeding, or (iv) such Guaranty otherwise becomes unenforceable or
ineffective; or
(j) any Person subordinating its claims against Borrower to those of
Bank (i) terminates, or gives Bank notice of its intention to terminate, its
subordination agreement, or (ii) such subordination agreement otherwise becomes
unenforceable or ineffective; or
(k) Borrower voluntarily or involuntarily dissolves or is dissolved,
terminates, or is terminated; or
(l) Borrower or any Guarantor is enjoined, restrained, or in any way
prevented by the order of any court or other Governmental Authority from
conducting all or any material part of its business; or
(m) any loss, suspension, revocation, or failure to renew any License
or permit now held or hereafter acquired by Borrower or any Guarantor, the
result of which might have a Material Adverse Effect; or
34
<PAGE>
(n) any Lien or any provision of any Loan Document shall for any
reason cease to be valid, binding, and enforceable in accordance with its terms,
or any Lien granted, or intended by the Loan Documents to be granted, to Bank
shall cease to be a valid and perfected Lien having the first priority (or a
lesser priority if expressly permitted in the Loan Documents) in any of the
Collateral covered or purported to be covered thereby; or
(o) any failure by Borrower or any of its Subsidiaries to (i) pay
salaries and wages when due or (ii) make all required withholding payments; or
(p) any Change of Control of Borrower or any of its Subsidiaries
shall have occurred; or
(q) a default or an event of default shall occur under any material
agreement, document, or instrument to which any Guarantor or Stockholder of
Borrower or any of its Subsidiaries is a party, or by which any such Person or
its property is bound, and such agreement, document, or instrument evidences any
Indebtedness of such Person owing to Bank.
7.2 Remedies.
--------
(a) If any Default or Event of Default has occurred and is continuing,
then Bank may terminate or suspend its obligation to make further Loans or incur
further Letter of Credit Obligations. In addition, if any Event of Default
shall have occurred and be continuing, then Bank may, without notice, take any
one or more of the following actions: (A) declare all or any portion of the
Obligations to be forthwith due and payable, including contingent liabilities
with respect to Letter of Credit Obligations, whereupon such Obligations shall
become and be due and payable; (B) require that all Letter of Credit Obligations
be fully collateralized; (C) upon notice to Borrower from Bank, increase the
rate of interest applicable to the Loans to the Default Rate, and increase the
Letter of Credit Fee to the Default Letter of Credit Fee, effective as of the
date of the initial Event of Default or (D) exercise any rights and remedies
provided to Bank under the Loan Documents or at law or in equity, including all
remedies provided under the UCC; provided, that upon the occurrence of an Event
--------
of Default specified in Sections 7.1 (e), (f), or (g), the Obligations shall
------------ --- --- ---
become immediately due and payable (and any obligation of Bank to make further
Loans or incur any further Letter of Credit Obligations, if not previously
terminated, shall immediately be terminated) without declaration, notice, or
demand by Bank.
(b) In addition to all other rights and remedies of Bank under this
Agreement, Borrower expressly agrees that, upon the occurrence of any Event of
Default, Bank may collect, receive, assemble, process, appropriate, and realize
upon the Collateral, or any part thereof, and may forthwith sell, lease, assign,
give an option or options to purchase or otherwise dispose of and deliver said
Collateral (or contract to do so), or any part thereof, in one or more parcels
at public or private sale or sales, at any exchange and at such prices as it may
deem best, for cash, on credit, or for future delivery without assumption of any
credit risk. Bank shall have the right, upon any such public sale or sales and,
to the extent permitted by law, upon any such private sale or sales, to purchase
for the benefit of Bank by credit bid the whole or any part of said Collateral
so sold, free of any right or equity of redemption, which equity of redemption
Borrower hereby releases. Such sales may be adjourned or continued from time to
time with or
35
<PAGE>
without notice. Bank shall have the right to conduct such sales on Borrower's
premises or elsewhere and shall have the right to use Borrower's premises
without rent or other charge for such sales or other action with respect to the
Collateral for such time or times as Bank deems necessary or advisable.
(c) Borrower further agrees, upon the occurrence of an Event of
Default and at Bank's request, to assemble and cause its Subsidiaries to
assemble the Collateral and make it available to Bank at places that Bank shall
reasonably select, whether at Borrower's premises or elsewhere. Until Bank is
able to effect a sale, lease, or other disposition of the Collateral, Bank shall
have the right to complete, assemble, use, or operate the Collateral or any part
thereof, to the extent that Bank deems appropriate, for the purpose of
preserving such Collateral or its value or for any other purpose. Bank shall
have no obligation to Borrower to maintain or preserve the rights of Borrower as
against third parties with respect to any Collateral while such Collateral is in
the possession of Bank. Bank may, if it so elects, seek, and Borrower and its
Subsidiaries hereby consent in advance to, the appointment of a receiver or
keeper to take possession of any Collateral and to enforce any of Bank's
remedies with respect to such appointment without prior notice or hearing. To
the maximum extent permitted by Applicable Law, each of Borrower and Overhill
Ventures waives all claims, damages, and demands against Bank, its Affiliates,
agents, and the officers and employees of any of them arising out of the
repossession, retention, or sale of any Collateral except such as are determined
in a final judgment by a court of competent jurisdiction to have arisen solely
out of the gross negligence or willful misconduct of such Person. Borrower
agrees that five days' prior notice by Bank to Borrower of the time and place of
any public sale or of the time after which a private sale may take place is
reasonable notification of such matters. Borrower shall remain liable for any
deficiency if the proceeds of any sale or disposition of the Collateral are
insufficient to pay all amounts to which Bank is entitled.
(d) Bank's rights and remedies under this Agreement shall be
cumulative and nonexclusive of any other rights and remedies that Bank may have
under any Loan Document or at law or in equity. Recourse to the Collateral
shall not be required. All rights, remedies, and powers provided in this
Agreement may be exercised only to the extent that the exercise thereof does not
violate any Applicable Law, and all provisions of this Agreement are intended to
be subject to any Applicable Law that may be controlling and to be limited, to
the extent necessary, so that they do not render this Agreement invalid or
unenforceable, in whole or in part.
7.3 Waivers by Borrower. Except as otherwise provided for in this
-------------------
Agreement and to the fullest extent permitted by Applicable Law, Borrower
waives: (a) presentment, demand, and protest, and notice of presentment,
dishonor, intent to accelerate, acceleration, protest, default, nonpayment,
maturity, release, compromise, settlement, extension, or renewal of any or all
Loan Documents, the Revolving Note, or any other notes, commercial paper,
Accounts, Contracts, Documents, Instruments, Chattel Paper, and guaranties at
any time held by Bank on which Borrower may in any way be liable, and hereby
ratifies and confirms whatever Bank may do in this regard; (b) all rights to
notice and a hearing prior to Bank's taking possession or control of, or to
Bank's replevy, attachment, or levy upon, any Collateral or any bond or security
that might be required by any court prior to allowing Bank to exercise any of
its remedies; and (c) the benefit
36
<PAGE>
of all valuation, appraisal, and exemption laws. Borrower acknowledges that it
has been advised by counsel with respect to this Agreement, the other Loan
Documents, and the transactions evidenced hereby and thereby.
7.4 Proceeds. The Proceeds of any sale, disposition, or other
--------
realization upon any Collateral shall be applied by Bank upon receipt in the
following order of priority: first, to reimburse or pay in full the actual and
-----
reasonable expenses of Bank incurred in connection with such sale, disposition,
or other realization, including all other expenses, liabilities and advances
incurred or made by Bank in connection therewith; second, to Bank as specified
------
in Section 1.12; third, to collateralize any outstanding Letter of Credit
------------ -----
Obligations; and fourth, after payment and satisfaction in full in cash of all
------
of the Obligations and after the payment by Bank of any other amount required by
any provision of law, including Section 9504(1)(c) of the UCC (but only after
Bank has received what Bank considers reasonable proof of a subordinate party's
Lien), the surplus, if any, to Borrower or its representatives or to whomsoever
may be lawfully entitled to receive the same, or as a court of competent
jurisdiction may direct.
8. SUCCESSORS AND ASSIGNS
----------------------
Each Loan Document shall be binding on and shall inure to the benefit
of Borrower and its Subsidiaries, Bank, and their respective successors and
permitted assigns, except as otherwise provided herein or therein. Neither
Borrower nor any of its Subsidiaries shall assign, transfer, hypothecate, or
otherwise convey its rights, benefits, obligations, or duties under any Loan
Document without the prior written consent of Bank. Any such purported
assignment, transfer, hypothecation, or other conveyance by Borrower or any of
its Subsidiaries without the prior express written consent of Bank shall be
void. The terms and provisions of this Agreement and the other Loan Documents
are for the purpose of defining the relative rights and obligations of Borrower
and its Subsidiaries and Bank with respect to the transactions contemplated
hereby and thereby, and there shall be no third party beneficiaries of any of
the terms and provisions of any of the Loan Documents. Bank reserves the right
at any time to create and sell a participation in any portion of the Loans and
the Loan Documents and to sell, transfer or assign any or all of its rights in
the Loans and under the Loan Documents, and Borrower consents to Bank's sale of
participations in, at any time or times, the Loan Documents, Loans and Letter of
Credit Obligations, or of any portion thereof or interest therein, including
Bank's rights, title, interests, remedies, powers, or duties thereunder, whether
evidenced by a writing or not, to any bank or other financial institution.
9. DISPUTE RESOLUTION
------------------
(a) Any controversy or claim between or among the parties and their
agents, employees, and Affiliates, including (i) those arising out of or
relating to this Agreement or any of the other Loan Documents, (ii) any
negotiations, correspondence, or communications relating to this Agreement or
any of the other Loan Documents, whether or not incorporated herein or therein,
or to any Indebtedness evidenced hereby or thereby, (iii) the administration or
management of this Agreement or any of the other Loan Documents or any
Indebtedness evidenced hereby or thereby, or (iv) any alleged agreements,
promises, representations, or transactions in connection herewith or therewith,
including any claim or controversy that arises
37
<PAGE>
out of or is based upon an alleged tort, shall be subject to and resolved in
accordance with the Alternative Dispute Resolution Agreement.
(b) No provision of, or the exercise of any rights under, Section 9(a)
------------
shall limit the right of Bank to exercise self-help remedies such as offset
rights, to foreclose against any Collateral, or to obtain provisional or
ancillary remedies such as injunctive relief or the appointment of a receiver
from a court having jurisdiction before, during, or after the pendency of any
mediation or arbitration.
(c) To the extent any provision of the Alternative Dispute Resolution
Agreement is inconsistent with the other terms of this Agreement, the terms of
the Alternative Dispute Resolution Agreement shall prevail.
10. YIELD PROTECTION
----------------
10.1 LIBOR Basis Determination. If, with respect to any proposed
-------------------------
LIBOR Loan for any LIBOR Loan Period, Bank determines that deposits in Dollars
(in the applicable amount) are not being offered to Bank in the relevant market
for such LIBOR Loan Period, then Bank shall give notice thereof to Borrower,
whereupon the obligations of Bank to make LIBOR Loans shall be suspended until
Bank notifies Borrower that the circumstances giving rise to such situation no
longer exist.
10.2 Illegality. If any (a) Applicable Law or any change therein, (b)
----------
interpretation or change in interpretation or administration thereof by any
Governmental Authority, central bank, or comparable agency charged with the
interpretation or administration thereof, or (c) compliance by Bank with any
request or directive (whether or not having the force of law) of any such
authority, central bank, or comparable agency shall make it unlawful or
impossible for Bank to make, maintain, or fund any LIBOR Loans, then Bank shall
give notice thereof to Borrower. Upon receipt of such notice, Borrower shall
repay in full the then outstanding principal amount of each affected LIBOR Loan,
together with accrued interest thereon, either (i) on the last day of the then
current LIBOR Loan Period applicable to such LIBOR Loan if Bank may lawfully
continue to maintain and fund such LIBOR Loan to such day or (ii) immediately if
Bank determines it may not lawfully continue to fund and maintain such LIBOR
Loan to such day. Concurrently with repaying each affected LIBOR Loan, Borrower
shall borrow a Reference Rate Loan (or another type of LIBOR Loan, if available)
from Bank, and Bank shall make such Loan in an amount such that the outstanding
principal amount of the Loans immediately following such repayment shall equal
the outstanding principal amount of the Loans immediately prior to such
repayment.
10.3 Increased Costs.
---------------
(a) If any Applicable Law or any change therein, or any
interpretation or change in interpretation or administration thereof by any
Governmental Authority, central bank, or comparable agency charged with the
interpretation or administration thereof or compliance by Bank with any request
or directive (whether or not having any such authority) by any Governmental
Authority, central bank, or comparable agency:
38
<PAGE>
(i) shall subject Bank to any tax (other than taxes imposed on
or measured by the net income of Bank), duty, or other charge with respect to
its obligation to make LIBOR Loans, or its LIBOR Loans, or shall change the
basis of taxation of payments to Bank of the principal of or interest on its
LIBOR Loans or in respect of any other amounts due under this Agreement in
respect of its LIBOR Loans or its obligation to make LIBOR Loans (except for
changes in the rate of tax on the overall net income of Bank imposed by the
jurisdiction in which Bank's principal executive office is located); or
(ii) shall impose, modify, or deem applicable any reserve
(including any reserve imposed by the Federal Reserve Board, but excluding with
respect to any LIBOR Loan any such requirement included in any applicable LIBOR
Basis determination), special deposit, capital adequacy, assessment, or other
requirement or condition against assets of, deposits with or for the account of,
or commitments or credit extended by Bank, or shall impose on Bank or the London
interbank borrowing market any other condition affecting its obligation to make
such LIBOR Loans or its LIBOR Loans;
and the result of any of the foregoing is to increase the cost to Bank of making
or maintaining any such LIBOR Loans, or to reduce the amount of any sum received
or receivable by Bank under this Agreement or under the Revolving Note, and such
increase is not given effect in the determination of LIBOR Basis, then, on the
earlier of demand by Bank or the applicable Payment Date of such LIBOR Loan,
Borrower shall pay to Bank such additional amount or amounts as will compensate
Bank for such increased costs. Bank will promptly notify Borrower, of any event
of which it has knowledge occurring after the date hereof that will entitle Bank
to compensation pursuant to this Section 10.3, and will designate a different
------------
lending office if such designation will avoid the need for, or reduce the amount
of, such compensation and will not, in the sole judgment of Bank, be otherwise
disadvantageous to Bank.
(b) A certificate of Bank claiming compensation under this Section
-------
10.3 and setting forth the additional amount or amounts to be paid to it
- ----
hereunder and calculations therefor shall, absent manifest error, be deemed
final, binding and conclusive upon Borrower. In determining such amount, Bank
may use any reasonable averaging and attribution methods. If Bank demands
compensation under this Section 10.3, Borrower may at any time, upon at least
------------
five Business Days' prior notice to Bank, prepay in full the then outstanding
affected LIBOR Loans, together with accrued interest thereon to the date of
prepayment, along with any reimbursement required under Sections 1.9 and 11.2.
------------ ----
Concurrently with prepaying such LIBOR Loans Borrower shall borrow a Reference
Rate Loan, or a LIBOR Loan not so affected, from Bank, and Bank shall make such
Loan in an amount such that the outstanding principal amount of the Loans
immediately following such prepayment shall equal the outstanding principal
amount of the Loans immediately prior to such prepayment.
10.4 Effect On Other Loans. If notice has been given pursuant to
---------------------
Sections 10.1, 10.2, or 10.3 suspending the obligation of Bank to make any LIBOR
- ------------- ---- ----
Loan, or requiring LIBOR Loans to be repaid or prepaid, then, unless and until
Bank notifies Borrower that the circumstances giving rise to such repayment no
longer apply, all LIBOR Loans that would have been made by Bank shall be made
instead as Reference Rate Loans.
39
<PAGE>
10.5 Capital Adequacy. If, after the date hereof, Bank (or any
----------------
Affiliate of Bank) shall have reasonably determined that the adoption after the
date hereof of any Applicable Law, governmental rule, regulation, or order
regarding the capital adequacy of banks or bank holding companies, or any change
therein, or any change in the interpretation or administration thereof by any
Governmental Authority, central bank, or comparable agency charged with the
interpretation or administration thereof, or compliance by Bank (or any
Affiliate of Bank) with any request or directive regarding capital adequacy
(whether or not having the force of law) of any such Governmental Authority,
central bank, or comparable agency, has or would have the effect of reducing the
rate of return on the capital of Bank (or any Affiliate of Bank) as a
consequence of any of Bank's Credit Facilities or obligations hereunder to a
level below that which it could have achieved but for such adoption, change, or
compliance (taking into consideration the policies of Bank (or Affiliate of
Bank) with respect to capital adequacy immediately before such adoption, change,
or compliance and assuming that the capital of Bank (or Affiliate of Bank) was
fully utilized prior to such adoption, change or compliance), then, upon demand
by Bank, Borrower shall immediately pay to Bank such additional amounts as shall
be sufficient to compensate Bank for any such reduction actually suffered;
provided, that there shall be no duplication of amounts paid to Bank pursuant to
- --------
this sentence and Section 10.3. A certificate of Bank setting forth the amount
------------
to be paid to Bank by Borrower as a result of any event referred to in this
Section 10.5 shall, absent manifest error, be deemed final, binding, and
- ------------
conclusive upon Borrower.
10.6 Federal Reserve System/Wire Transfers. The obligation of Bank to
-------------------------------------
make any Loan by wire transfer to Borrower or any other Person shall be subject
to all Applicable Laws, including the policy of the Federal Reserve Board on
Reduction of Payments System Risk as in effect from time to time. Borrower
acknowledges that such laws, regulations, and policy may delay the transmission
of any funds to Borrower.
11. MISCELLANEOUS
-------------
11.1 Complete Agreement; Modification of Agreement; Interpretation.
-------------------------------------------------------------
This Agreement and the other Loan Documents constitute the complete agreement
between the parties with respect to the subject matter hereof and thereof,
supersede all prior agreements, commitments, understandings, or inducements
(oral or written, expressed or implied), and may not be modified, altered, or
amended except by a written agreement signed by Bank, Borrower and each other
Person executing this Agreement or any other Loan Document, as applicable. No
provision of this Agreement shall be construed against or interpreted to the
disadvantage of any party hereto by any court or other governmental or judicial
authority by reason of such party's having or being deemed to have structured,
drafted or dictated such provision.
11.2 Reimbursement and Expenses. Borrower will promptly pay:
--------------------------
(a) all reasonable out-of-pocket expenses of Bank in connection
with the preparation, negotiation, execution, and delivery of this Agreement,
the Notes, and the other Loan Documents, including all post-closing matters, and
the transactions contemplated hereunder and the Related Transactions and the
making of the Loans and the incurrence of the Letter of Credit Obligations,
including outside auditor costs, title and other insurance premiums, recording
and filing fees, intangible, documentary stamp, and other taxes, and the
reasonable attorneys' fees
40
<PAGE>
and disbursements of counsel for Bank and the reasonable allocated costs for
services of internal counsel for Bank;
(b) all reasonable out-of-pocket expenses of Bank in connection with
the administration, making, or monitoring of the Loans, the Letters of Credit,
and this Agreement and the other Loan Documents in accordance with the
provisions thereof, the restructuring and refinancing of the transactions herein
and therein contemplated, and the preparation, negotiation, execution, and
delivery of any waiver, amendment, or consent by Bank relating to any of the
Loan Documents or the Related Transactions Documents, including the reasonable
attorneys' fees and disbursements of counsel for Bank and the reasonable
allocated costs for services of internal counsel for Bank and a fee to
compensate Bank for any such waiver, amendment, or consent; provided, that audit
--------
fees and other out-of-pocket fees and expenses incurred by Bank with respect to
any field examination of Borrower or the Collateral shall be subject to the
limitation set forth in Section 1.6(c).
--------------
(c) all of Bank's costs and out-of-pocket expenses of obtaining
performance under this Agreement or the other Loan Documents and collection of
the Obligations in any arbitration, mediation, legal action, or proceeding
(including any case under the Bankruptcy Code or similar laws), which, in each
case, shall include reasonable fees and expenses of counsel for Bank and the
reasonable allocated fees and disbursements for the services of internal counsel
for Bank; provided, that Borrower shall not be required to reimburse Bank for
--------
any fees or expenses of Bank incurred in connection with any action (i) between
Borrower and Bank on this Agreement or any other Loan Document pending before a
referee or a court of competent jurisdiction, (ii) that has not been voluntarily
dismissed by Borrower or dismissed pursuant to a settlement thereof, and (iii)
in which a final, non-appealable judgment or order shall have been entered in
favor of Borrower containing a determination that Borrower is the prevailing
party;
(d) all taxes (other than taxes imposed on or measured by the net
income of Bank), assessments (general or special), and other Charges levied on,
or assessed, placed, or made against any Collateral, the Revolving Note or the
other Loan Documents, or the Obligations;
(e) Bank's standard and customary charges for the forwarding to
Borrower or any other Person on behalf of Borrower by Bank of the proceeds of
any of the Loans (including by wire transfer); and
(f) whenever Bank sustains or incurs any reasonable direct losses or
out-of-pocket expenses in connection with (i) the failure by Borrower to borrow
or reborrow any LIBOR Loan, or reborrow any Loan as a LIBOR Loan, in each case,
after having given notice of its intention to borrow in accordance with Section
-------
1.1 (whether by the election of Borrower not to proceed or the failure to
- ---
satisfy of any of the conditions set forth in Section 2) or (ii) prepayment of
---------
any LIBOR Loan in whole or in part, then Borrower shall pay to Bank, upon the
earlier of Bank's demand or the applicable Payment Date for such Loan, an amount
sufficient to compensate Bank for all such losses and out-of-pocket expenses.
Bank's good faith determination of the amount of such losses and out-of-pocket
expenses shall, absent manifest error, be deemed final, binding, and conclusive
upon Borrower. Losses subject to reimbursement under this
41
<PAGE>
Agreement shall include expenses incurred by Bank or any participant of Bank
permitted under this Agreement in connection with the re-employment of funds
prepaid, repaid, not borrowed, or paid, as the case may be, and any lost profit
of Bank or any participant of Bank over the remainder of the LIBOR Loan Period
for such prepaid LIBOR Loan.
11.3 Indemnity.
---------
(a) Borrower and each of its Subsidiaries shall indemnify and
hold each Indemnified Person harmless from and against any Claim that may be
instituted or asserted against or incurred by any such Indemnified Person by a
Person other than Borrower or Overhill Ventures as the result of credit having
been extended or not extended under this Agreement and the other Loan Documents
or otherwise in connection with or arising out of the transactions contemplated
hereunder, thereunder or the Related Transactions, including any Claim for
Environmental Liabilities and Costs and legal costs and expenses of disputes
between the parties to this Agreement; provided, that Borrower and its
--------
Subsidiaries shall not be liable for indemnification of an Indemnified Person to
the extent that any such Claim is finally determined by a court of competent
jurisdiction to have resulted solely from Indemnified Person's gross negligence
or willful misconduct.
(b) In any suit, proceeding, or action brought by Bank relating
to any item of Collateral or any amount owing hereunder, or to enforce any
provision of any item of Collateral, Borrower shall save, indemnify, and keep
Bank harmless from and against all expense, loss, or damage suffered by reason
of such action or any defense, setoff, or counterclaim asserted for any reason
by the other party or parties to such litigation and howsoever arising;
provided, that Borrower shall not be required to indemnify Bank under this
- --------
sentence in connection with any action (i) between Borrower and Bank on this
Agreement or any other Loan Document pending before a referee or a court of
competent jurisdiction, (ii) that has not been voluntarily dismissed by Borrower
or dismissed pursuant to a settlement thereof, and (iii) in which a final, non-
appealable judgment or order shall have been entered in favor of Borrower
containing a determination that Borrower is the prevailing party. All
obligations of Borrower or any of its Subsidiaries with respect to any item of
Collateral shall be and remain enforceable against, and only against, Borrower
or such Subsidiary, as the case may be, and shall not be enforceable against
Bank. This Section 11.3 shall survive the Termination Date.
------------
11.4 No Waiver. Neither Bank's failure, at any time or times, to
---------
require strict performance by Borrower or any of its Subsidiaries of any
provision of any Loan Document, nor Bank's failure to exercise, nor any delay in
exercising, any right, power, or privilege under this Agreement, (a) shall
waive, affect, or diminish any right of Bank thereafter to demand strict
compliance and performance therewith or (b) shall operate as a waiver thereof.
Any suspension or waiver of a Default, Event of Default, or other provision
under the Loan Documents must be in writing signed by an authorized employee of
Bank to be effective and shall not suspend, waive, or affect any other Default
or Event of Default, whether the same is prior or subsequent thereto and whether
of the same or of a different type, and shall not be construed as a bar to any
right or remedy that Bank would otherwise have had on any future occasion.
42
<PAGE>
11.5 Severability. Wherever possible, each provision of the Loan
------------
Documents shall be interpreted in such a manner as to be effective and valid
under Applicable Law, but if any provision of any Loan Document shall be
prohibited by or invalid under Applicable Law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of such
Loan Document. Except as otherwise expressly provided herein or in any other
Loan Document, all undertakings, agreements, covenants, warranties, and
representations of or binding upon Borrower or any of its Subsidiaries and all
rights of Bank, all as contained in the Loan Documents, shall not terminate or
expire, but rather shall survive such termination or cancellation and shall
continue in full force and effect until the Termination Date; provided, that the
--------
reimbursement and expense provisions of Section 11.2, the indemnity provisions
------------
of Section 11.3, the governing law and venue provisions of Section 11.12, and
------------ -------------
the Alternative Dispute Resolution Agreement shall all survive the Termination
Date.
11.6 Conflict of Terms. Except as otherwise provided in any Loan
-----------------
Document by specific reference to the applicable provisions of this Agreement,
if any provision contained in this Agreement is in conflict with, or
inconsistent with, any provision in any other Loan Document, the provision
contained in this Agreement shall govern and control.
11. Notices.
-------
(a) All notices and other communications under this Agreement
and the other Loan Documents shall be in writing and shall be deemed to have
been given three days after deposit in the United States mail, first class mail,
postage prepaid, or one day after being entrusted to a reputable commercial
overnight delivery service, or when sent out by facsimile transmission addressed
to the party to which such notice is directed at its address determined as
provided in this Section 11.7. All notices and other communications under this
------------
Agreement shall be given to the parties hereto at the following addresses:
(i) if to Borrower or Overhill Ventures:
Overhill Farms, Inc.
5730 Uplander Way, Suite 201
Culver City, California 90230-6617
Attn: Mr. James Rudis
Telephone No.: (310) 641-3680
Facsimile No.: (310) 645-3914
43
<PAGE>
with a copy to:
Freeman, Freeman & Smiley
3415 Sepulveda Boulevard, Suite 1200
Los Angeles, California 90034
Attn: Ross Arbiter, Esq.
Telephone No.: (310) 255-6161
Facsimile No.: (310) 391-4042
(ii) If to Bank:
Union Bank of California, N.A.
445 South Figueroa Street, 15/th/ Floor
Los Angeles, California 90071-1602
Attn: Commercial Finance Division
Telephone No.: (213) 236-5336
Facsimile No.: (213) 236-6089
with a copy to:
Murphy Sheneman Julian & Rogers
2049 Century Park East, Suite 2100
Los Angeles, California 90067
Attn: Gary B. Rosenbaum, Esq.
Telephone No.: (310) 788-3700
Facsimile No.: (310) 788-3777
(b) Any party to this Agreement may change the address to which
notices shall be directed under this Section 11.7 by giving ten days' written
------------
notice of such change to the other parties.
11.8 Confidentiality.
---------------
(a) Borrower agrees to keep the terms of this Agreement
confidential and not, without the Bank's prior written consent, deliver copies
of any portion hereof, nor divulge to or discuss with any other Person (other
than to (i) Borrower's accountants and legal counsel, (ii) LLCP or its
successors and assigns (iii) any Person that refinances the Subordinated Note
pursuant to a Permitted Subordinated Note Refinancing, or (iv) as required by
law), the provisions hereof. Borrower agrees that neither it nor its Affiliates
will in the future issue any press releases or other public disclosure using the
name of Bank or its Affiliates or referring to this Agreement, the other Loan
Documents or the Related Transactions Documents (other than direct disclosures
to any of its customers, vendors, advisors, auditors, employees, other lenders,
credit agencies or any other Person requiring such information as determined by
Borrower in its reasonable business judgment or disclosures made pursuant to
filings with the Securities and Exchange Commission or any Governmental
Authority or set forth in Borrower's Financial Statements) without at least two
Business Days' prior notice to Bank and without the prior
44
<PAGE>
written consent of Bank unless (and only to the extent that) Borrower or its
Affiliate is required to do so under law and then, in any event, Borrower or its
Affiliate will consult with Bank before issuing such press release or other
public disclosure.
(b) Bank agrees to use commercially reasonable efforts
(equivalent to the efforts Bank applies to maintain the confidentiality of its
own confidential information or the confidential information of its other
borrowers that are similarly situated to Borrower) to maintain as confidential
all confidential information provided to them by Borrower and designated as
confidential, except that Bank may disclosure such information: (a) to Bank's
examiners or auditors or as required or requested by any Governmental Authority
or reasonably believed by Bank to be compelled by any court decree, subpoena or
legal or administrative order or process; (b) as, on the advice of counsel, is
required by law; (c) in connection with the exercise of any right or remedy
under the Loan Documents or in connection with any litigation to which Bank is a
party; or (d) that ceases to be confidential through no fault of Bank; provided,
--------
that with respect to clauses (a) and (b) above, Bank shall notify Borrower as
----------- ---
soon as is reasonably practicable under the circumstances prior to any proposed
disclosure and afford Borrower the opportunity, at Borrower's expense, to limit
or eliminate the required disclosure or obtain one or more protective orders
with respect thereto, in each case only to the extent that Bank has determined
that the failure to immediately disclose would not subject it to any liability.
11.9 Section Titles. The section titles and table of contents
--------------
contained in this Agreement and any other Loan Document are and shall be without
substantive meaning or content of any kind whatsoever and are not a part of the
agreement between the parties hereto.
11.10 Counterparts. Each Loan Document may be executed in any number
------------
of identical counterparts, each of which shall constitute an original and all of
which shall collectively and separately constitute a single instrument or
agreement.
11.11 Time of the Essence. Time is of the essence for payment and
-------------------
performance of the Obligations.
11.12 GOVERNING LAW; VENUE. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN
--------------------
ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY, AND PERFORMANCE, THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS AND THE OBLIGATIONS ARISING HEREUNDER AND THEREUNDER SHALL BE GOVERNED
BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT
REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICTS OF LAWS, AND ANY APPLICABLE
LAWS OF THE UNITED STATES. BORROWER HEREBY CONSENTS AND AGREES THAT THE STATE OR
FEDERAL COURTS LOCATED IN LOS ANGELES, CALIFORNIA SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND
BANK PERTAINING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR TO ANY MATTER
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS;
PROVIDED, THAT BANK, AND BORROWER
- --------
45
<PAGE>
ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT
LOCATED OUTSIDE OF LOS ANGELES, CALIFORNIA; PROVIDED FURTHER, THAT NOTHING IN
-------- -------
THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE BANK FROM BRINGING SUIT OR
TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE COLLATERAL
OR ANY OTHER SECURITY FOR THE OBLIGATIONS OR TO ENFORCE A JUDGMENT OR OTHER
COURT ORDER IN FAVOR OF BANK. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE
TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND
BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE BASED UPON LACK OF
PERSONAL JURISDICTION, IMPROPER VENUE, OR FORUM NON CONVENIENS AND HEREBY
----- --- ----------
CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED
APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE
SUMMONS, COMPLAINT, AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND
AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT, AND OTHER PROCESS MAY BE MADE BY
REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN
SECTION 11.7 AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER
- ------------
OF BORROWER'S ACTUAL RECEIPT THEREOF OR THREE DAYS AFTER DEPOSIT IN THE UNITED
STATES MAIL, PROPER POSTAGE PREPAID.
11.13 WAIVER OF JURY TRIAL. AS SET FORTH IN THE ALTERNATIVE DISPUTE
--------------------
RESOLUTION AGREEMENT, EACH PARTY TO THIS AGREEMENT EXPRESSLY, INTENTIONALLY AND
DELIBERATELY WAIVES ITS RIGHT TO A TRIAL BY JURY AND AGREES TO HAVE ANY CLAIM,
CAUSE OF ACTION, ACTION, DISPUTE, OR CONTROVERSY BETWEEN IT AND THE OTHER PARTY
TO THIS AGREEMENT, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, RESOLVED
PURSUANT TO THE TERMS OF THE ALTERNATIVE DISPUTE RESOLUTION AGREEMENT.
46
<PAGE>
IN WITNESS WHEREOF, this Loan and Security Agreement has been duly
executed as of the date first written above.
"BORROWER" "OVERHILL VENTURES"
OVER
HILL FARMS, INC., OVERHILL L.C. VENTURES, INC.,
a Nevada corporation a California corporation
By:________________________ By:_________________________
James Rudis James Rudis
President and Chief Executive President and Chief Executive
Officer Officer
By:________________________ By:_________________________
Richard A. Horvath Richard A. Horvath
Vice President and Chief Financial Vice President and Chief
Officer Financial Officer
"BANK"
UNION BANK OF CALIFORNIA, N.A.
By:________________________
Name:______________________
Title:_____________________
47
<PAGE>
SCHEDULE A - DEFINITIONS AND RULES OF CONSTRUCTION
1. Capitalized terms used in the Agreement and the other Loan
Documents shall have (unless otherwise provided elsewhere in the Agreement or in
the other Loan Documents) the following respective meanings:
"Account Debtor" means any Person who is obligated under an Account.
--------------
"Accounts" means all "accounts," as such term is defined in the UCC,
--------
now owned or hereafter acquired by any Person, including (a) all accounts
receivable, other receivables, book debts, and other forms of obligations (other
than forms of obligations evidenced by Chattel Paper, Documents, or
Instruments), whether arising out of goods sold or services rendered by it or
from any other transaction (including any such obligations that may be
characterized as an account or contract right under the UCC), (b) all purchase
orders or receipts for goods or services, (c) all rights to any goods
represented by any of the foregoing (including unpaid sellers' rights of
rescission, replevin, reclamation, and stoppage in transit and rights to
returned, reclaimed, or repossessed goods), (d) all monies due or to become due
to such Person under all purchase orders and contracts for the sale of goods or
the performance of services or both by such Person or in connection with any
other transaction (whether or not yet earned by performance on the part of such
Person), including the right to receive the proceeds of said purchase orders and
contracts, and (e) all collateral security and guaranties of any kind given by
any Person with respect to any of the foregoing.
"Affiliate" means, with respect to any Person: (a) each Person that,
---------
directly or indirectly, owns or controls, whether beneficially or as a trustee,
guardian, or other fiduciary, 5% or more of the Stock having ordinary voting
power in the election of directors of such Person; (b) each Person that
controls, is controlled by, or is under common control with such Person or any
Affiliate of such Person; (c) each of such Person's officers, directors,
partners, and Subsidiaries; or (d) with respect to Borrower, each Related
Person. For the purpose of this definition, "control" of a Person shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of its management or policies, whether through the ownership of voting
securities, by contract, or otherwise.
"Agreement" means the Loan and Security Agreement to which this
---------
Schedule A is attached or otherwise identified.
- ----------
"Alternative Dispute Resolution Agreement" means (a) the Alternative
----------------------------------------
Dispute Resolution Agreement between Bank and Borrower and (b) the Alternative
Dispute Resolution Agreement between Bank and Overhill Ventures, each in
substantially the form of Exhibit B.
---------
"Applicable Law" means, in respect of any Person, all provisions of
--------------
constitutions, statutes, rules, regulations, and orders of governmental bodies
or regulatory agencies applicable to such Person and all orders and decrees of
all courts and arbitrators in proceedings or actions to which such Person is a
party or by which it or its properties are bound, including Environmental Laws
and the Fair Labor Standards Act.
A-1
<PAGE>
"Applicable Percentage" means (a) two percent (2%), in the case of
---------------------
termination of the Agreement and the Credit Facilities during the period
commencing on the Closing Date and ending one year after the Closing Date, (b)
one percent (1%), in the case of termination of the Agreement and the Credit
Facilities during the period commencing after the date that is one year after
the Closing Date and ending two years after the Closing Date, and (c) one-half
of one percent (0.5%) in case of a termination of the Agreement and the Credit
Facilities during the period commencing after the date that is two years after
the Closing Date and ending at any time thereafter prior to the Commitment
Maturity Date.
"Authorized Signatory" means such senior personnel of Borrower as may
--------------------
be duly authorized and designated in writing by Borrower to execute documents,
agreements, and instruments on behalf of Borrower and to grant a lien upon
Borrower's real and personal property.
"Bank" means Union Bank of California, N.A. and its successors and
----
assigns.
"Bankruptcy Code" means the provisions of title 11 of the United
---------------
States Code, 11 U.S.C. Sections 101 et seq.
-- ----
"Books and Records" means, with respect to any Person, all books,
-----------------
records, board minutes, contracts, licenses, insurance policies, environmental
audits, business plans, files, accounting books and records, financial
statements (actual and pro forma), and filings with Governmental Authorities.
---------
"Borrower" means Overhill Farms, Inc., a Nevada corporation.
--------
"Borrowing Availability" means, at any time, the lesser of (a) the
----------------------
Maximum Amount minus the aggregate face amount of the Letters of Credit
-----
outstanding at such time or (b) the Borrowing Base minus the sum of (i)
-----
aggregate face amount of the Standby Letters of Credit outstanding at such time
and (ii) 45% of the outstanding amount of commercial Letters of Credit, in each
case less Producer Payable Reserves and any other reserves established by Bank
in its reasonable credit judgment from time to time. Bank reserves the right,
at any time and from time to time after the Closing Date, to establish and
modify reserves in its reasonable credit judgment.
"Borrowing Base" means, at any time, an amount equal to:
--------------
(a) up to 85% of the value, as determined by Bank based on the
Schedule of Accounts most recently delivered by Borrower to Bank or on any other
information available to Bank, of Eligible Accounts, and less any Dilution
----
Reserve or other reserve established by Bank in its reasonable credit judgment;
plus
- ----
(b) the lesser of (i) 8,000,000 and (ii) up to 55% of the value
of Eligible Inventory, and less any reserve established by Bank in its
----
reasonable credit judgment, in each case as determined by Bank based on the
Schedule of Inventory most recently delivered by Borrower to Bank or on any
other information available to Bank, valued at the lower of cost (determined on
a first-in, first-out basis) or market. Bank reserves the right, in its
reasonable
A-2
<PAGE>
credit judgment, at any time and from time to time after the Closing Date, to
(x) establish and modify the criteria set forth in, or establish new criteria
for, the definition of "Eligible Accounts" and "Eligible Inventory," (y)
establish and modify reserves, and (z) to adjust advance rates based on the
results of field examinations or inventory appraisals or reviews conducted by a
firm acceptable to Bank.
"Borrowing Base Certificate" means a certificate to be delivered by
--------------------------
Borrower to Bank pursuant to Section 5.1(b), which shall be substantially in the
--------------
form of Exhibit D.
---------
"Business Day" means any day that is not a Saturday, Sunday, or other
------------
day on which banks in the State of California are authorized or required to
close, and in reference to LIBOR Loans means a Business Day that is also a day
on which banks in the city of London are open for interbank or foreign exchange
transactions.
"Capital Expenditures" means, with respect to any Person, all payments
--------------------
or accruals (including Capital Lease Obligations) for any fixed assets or
improvements or for replacements, substitutions, or additions thereto, that have
a useful life of more than one year and that are required to be capitalized
under GAAP.
"Capital Lease Obligation" means, with respect to any Person, that
------------------------
portion of any obligation as lessee under a lease that is required to be
capitalized on, or disclosed in a footnote to, the balance sheet of such Person
in accordance with GAAP.
"Cash Interest Expense" means, for any period, without duplication and
---------------------
only to the extent deducted in determining Net Income (Loss), calculated without
regard to any limitation on the payment thereof and determined in accordance
with GAAP, (i) total consolidated interest expense of Borrower and its
Subsidiaries (including, without limitation, interest paid to Affiliates and the
portion of any Capital Lease Obligations allocable to interest expense), whether
paid or accrued, minus (ii) to the extent included in total consolidated
-----
interest expense, any non-cash interest expense, including, without limitation,
any payment-in-kind interest, amortization of original issue discount, non-cash
losses on hedging agreements and amortization of capitalized up-front costs.
"Change of Control" means, with respect to any Person, that (a) any
-----------------
other Person or "group" shall increase its "beneficial ownership" (as such terms
are defined under Section 13d-3 of and Regulation 13D under the Securities
Exchange Act), either directly or indirectly, by more than 10% of the
outstanding shares of Stock of such Person having the right to vote for the
election of directors of such Person under ordinary circumstances, (b) any
change in the composition of such Person's Stockholders as of the Closing Date
shall occur that would result in any Stockholder or group that does not, as of
the Closing Date, own 50% or more of any class of Stock of such Person owning
50% or more of any class of Stock of such Person, or (c) any other Person (or
group of Persons acting in concert) shall otherwise acquire the power to direct
the management or affairs of such Person by obtaining proxies, entering into
voting agreements or trusts, acquiring securities, or otherwise, in each case
from and after the Closing Date. Nothing contained in this Agreement shall be
deemed or construed to prohibit or restrict in any way, or require notice to
Bank of, any change in control of Polyphase.
A-3
<PAGE>
"Charges" means all federal, state, county, city, municipal, local,
-------
foreign or other governmental taxes (including taxes owed to PBGC at the time
due and payable), levies, assessments, charges, liens, and all additional
charges, interest, penalties, expenses, claims, or encumbrances upon or relating
to (a) the Collateral, (b) the Obligations, (c) the employees, payroll, income,
or gross receipts of Borrower, (d) the ownership or use of any assets by
Borrower, or (e) any other aspect of Borrower's business.
"Chattel Paper" means all "chattel paper," as such term is defined in
-------------
the UCC, now owned or hereafter acquired by any Person, wherever located.
"Claim" means any and all: (a) suits, actions, or proceedings in any
-----
court or forum, at law, in equity or otherwise; (b) costs, fines, deficiencies,
or penalties; (c) asserted claims or demands by any Person; (d) arbitration
demands, proceedings, or awards; (e) damages, losses, liabilities, and expenses
(including reasonable attorneys' fees and disbursements and other costs of
collection, defense, or appeal); (f) enforcement of rights and remedies; or (g)
criminal, civil, or regulatory investigations.
"Closing Date" means November 24, 1999.
------------
"Collateral" means all right, title, and interest of Borrower or any
----------
Subsidiary of Borrower in, to and under any property, whether now existing or
hereafter acquired, real or personal, tangible or intangible, and whether owned
by, consigned to, held by, or under the care, custody, or control of, Borrower
or such Subsidiary, including all Accounts, Books and Records, Chattel Paper,
Contracts, Documents, Equipment, Fixtures, General Intangibles (including all
Intellectual Property, Stock, Claims, contract rights, payment intangibles, and
choses in action), Goods, Instruments, Inventory, Investment Property, Letter of
Credit Rights, money, cash, and cash equivalents, real property interests,
Supporting Obligations, the Disbursement Accounts and other Deposit Accounts
(including the Collection Accounts, the Control Account, the Disbursement
Accounts, and any other bank accounts maintained by Borrower at Bank), and all
of Borrower's or such Subsidiary's other interests in property of every kind and
description, and the products, profits, and rents of, dividends or distributions
on, accessions to, and all Proceeds (including insurance proceeds) of any of the
foregoing, regardless of whether the foregoing, or any portion of it,
constitutes property as to which the UCC provides for the perfection of a Lien,
and all rights and remedies applicable to such property, but excluding, in all
events, Hazardous Materials.
"Collateral Documents" means the Pledge Agreement, the Intellectual
--------------------
Property Security Agreement and all other Loan Documents granting Liens to Bank
to secure the Obligations or other rights with respect to the Collateral.
"Collection Accounts" means any of the bank accounts in the name of
-------------------
Borrower maintained at Bank and designated as collection accounts on Schedule
--------
3.23.
- ----
"Commitment Maturity Date" means the earliest of (a) November 24,
------------------------
2002, (b) the date Bank's obligation to make Loans and incur Letter of Credit
Obligations is terminated and the Obligations are declared to be due and payable
pursuant to Section 7.2, and (c) the date of
-----------
A-4
<PAGE>
prepayment in full by Borrower of the Obligations in accordance with the
provisions of Section 1.9.
-----------
"Compliance Certificate" means a statement in reasonable detail
----------------------
certified by the Chief Financial Officer of Borrower showing the calculations
used in determining compliance with each of the financial covenants set forth in
Section 3.24, which shall be substantially in the form of Exhibit E.
- ------------ ---------
"Contracts" means all "contracts," as such term is defined in the UCC,
---------
now owned or hereafter acquired by any Person, including all contracts,
undertakings, or agreements (other than rights evidenced by Chattel Paper,
Documents, or Instruments), including any agreement relating to the terms of
payment or the terms of performance of any Account.
"Control Account" means account number 3350183662 in the name of
---------------
Borrower maintained at Bank.
"Credit Facilities" means the Revolving Loans and the Letters of
-----------------
Credit.
"Default" means any event that, with the passage of time or notice or
-------
both, would, unless cured or waived, become an Event of Default.
"Default Letter of Credit Fee" means a per annum default rate equal to
---------------------------- --- -----
two percentage points in excess of the otherwise applicable Letter of Credit Fee
(calculated on the basis of a 360-day year and actual days elapsed) on the face
amount of the Letters of Credit then outstanding.
"Default Rate" means a per annum default rate equal to two percentage
------------ ---------
points in excess of the maximum interest rate(s) otherwise applicable to the
Obligations.
"Deposit Account" means any demand, time, savings, passbook or similar
---------------
account maintained by any Person with Bank or any other bank or financial
institution.
"Dilution" means, for any period of 12 consecutive months, (a) non-
--------
cash reductions in the Accounts of Borrower during such period divided by (b)
------- --
Borrower's gross sales for such period. The amounts of any non-cash reductions
to Borrower's accounts receivable and Borrower's gross sales shall each be
determined in accordance with GAAP.
"Dilution Reserve" means the reserve established by Bank and applied
----------------
from time to time to reduce the portion of the Borrowing Base for Eligible
Accounts, which reserve shall be implemented in the event that Dilution exceeds
five percent (5%), and such reserve shall be in an amount equal to one percent
(1%) of Eligible Accounts for each one percent (1%) of Dilution that is in
excess of five percent (5%).
"Disbursement Account" means account number 3350183654 in the name of
--------------------
Borrower maintained at Bank.
A-5
<PAGE>
"Documents" means all "documents," as such term is defined in the UCC,
---------
now owned or hereafter acquired by any Person, wherever located, including all
bills of lading, dock warrants, dock receipts, warehouse receipts, and other
documents of title, whether negotiable or non-negotiable.
"Dollars" means lawful currency of the United States.
-------
"EBITDA" shall mean, for any period, without duplication and
------
determined on a consolidated basis and in accordance with GAAP:
(i) the sum of (A) Net Income (Loss), (B) interest expense
deducted in determining Net Income (Loss) (including cash interest, payment-in-
kind interest and amortization of original issue discount), (C) the amount of
Taxes deducted in determining Net Income (Loss), (D) the amount of depreciation
and amortization expense deducted in determining Net Income (Loss), and (E) any
extraordinary or unusual non-cash losses (provided that such extraordinary or
--------
unusual non-cash losses do not result in any cash outlay at any time after the
Closing Date), in each case for such period; minus
-----
(ii) any extraordinary or unusual income or gains for such
period.
"Eligible Account" means, as of any date of determination, an Account
----------------
of Borrower:
(a) that is due and payable within 90 days following its
original invoice date;
(b) that conforms to all of the representations and warranties
pertaining to Accounts set forth in the Agreement or any other Loan Document;
(c) (i) that arises from the sale of goods of, or the
performance of services by, Borrower in the ordinary course of its business,
(ii) that is subject to a valid, perfected, and continuing first priority Lien
in favor of Bank and is owned by Borrower free and clear of any rights, claims,
Liens, or other interests of any Person other than (A) Liens in favor of Bank,
(B) Liens that secure the Subordinated Debt, and (C) other Permitted Liens, and
(iii) with respect to which an invoice, in form and substance acceptable to
Bank, has been sent to the applicable Account Debtor;
(d) that (i) is a bona fide, valid, and enforceable obligation
---- ----
of the applicable Account Debtor upon which Borrower's right to receive payment
is absolute and not contingent upon the fulfillment of any condition whatsoever
and (ii) does not arise with respect to goods that are placed on consignment or
delivered on a guaranteed sale, sale or return or sale on approval, bill-and-
hold, or cash-on-delivery basis or upon other terms by reason of which payment
by the applicable Account Debtor is or may be conditional;
(e) with respect to which the applicable Account Debtor has not
asserted any defense, counterclaim, offset or dispute, and such Account is not a
"contra" Account;
A-6
<PAGE>
(f) with respect to which the applicable Account Debtor (i) is
not a federal, state, or local governmental entity or agency unless Bank, in its
sole discretion, has agreed to the contrary in writing and Borrower, if
necessary or desirable, has complied with the Federal Assignment of Claims Act
of 1940 or any applicable state statute or municipal ordinance of similar
purpose and effect with respect thereto, (ii) is not an Affiliate, a Subsidiary,
a Related Person, or an employee of Borrower, and (iii) has its principal place
of business located outside of or is not a resident of the United States unless
such Account is supported by a letter of credit assigned to Bank in form and
substance, and issued by an institution, satisfactory to Bank in Bank's sole
discretion;
(g) with respect to which the applicable Account Debtor: (i) is
not the subject of a case or proceeding under the Bankruptcy Code or any other
federal, state, foreign receivership, or any other insolvency or bankruptcy
laws; (ii) has not made a general assignment for the benefit of creditors; (iii)
has not failed to pay its debts generally as they come due, suspended business,
or become insolvent; or (iv) has not consented to or suffered the appointment of
a receiver, trustee, liquidator, or custodian for it or for all or a significant
portion of its assets or affairs and such receiver, trustee, liquidator, or
custodian has not been dismissed;
(h) the collection of which, in Bank's sole discretion, is not
doubtful by reason of the applicable Account Debtor's financial condition or
otherwise;
(i) that is not evidenced by any Chattel Paper, Instrument, or
judgment;
(j) to the extent that the total unpaid amount of such Account,
when added together with all other Accounts due to Borrower from the applicable
Account Debtor, does not exceed fifteen percent (15%) of all Accounts of
Borrower (except for those Account Debtors identified in Schedule C, with
----------
respect to which the concentration limit shall be 25%);
(k) that is payable only in Dollars;
(l) that is not in default (an Account shall be deemed to be in
default under this clause (l) if (i) such Account is not paid within the earlier
----------
of 60 days following its due date or 90 days following its original invoice date
or (ii) such Account is an obligation of an Account Debtor with respect to which
more than 50% of all Accounts due to Borrower from such Account Debtor are not
otherwise eligible under the other criteria set forth in clause (i) of this
----------
subparagraph);
(m) that does not consist of a credit balance that is more than
90 days following its due date; and
(n) that is otherwise acceptable to Bank in its reasonable
credit judgment.
"Eligible Inventory" means, as of any date of determination, Inventory
------------------
of Borrower:
A-7
<PAGE>
(a) that (i) consists of first quality raw materials consisting
of Ingredients or finished goods held for sale in the ordinary course of
Borrower's business, (ii) is subject to a valid, perfected, and continuing first
priority Lien in favor of Bank and (iii) is owned by Borrower free and clear of
any rights, claims, Liens, or other interests of any Person, other than (A)
Liens in favor of Bank, (B) Liens that secure the Subordinated Debt, and (C)
other Permitted Liens;
(b) that is located only on premises owned, leased, or operated
by Borrower and referenced in Schedule 3.2, and (i) if such location is a public
------------
warehouse, then the warehouseman has executed a bailee letter in form and
substance acceptable to Bank, and Bank has determined the amount of, and is
maintaining, a reserve against the Borrowing Base with respect to the Inventory
located at such public warehouse, or (ii) if such location is one of Borrower's
owned or leased locations, either the landlord has executed a mortgagee's waiver
or a landlord's waiver, as the case may be, in form and substance acceptable to
Bank, or Bank has determined the amount of, and is maintaining, a reserve
against the Borrowing Base with respect to the Inventory located at such owned
or leased location;
(c) that is not located at any outside processing facility;
(d) that conforms to all of the representations or warranties
pertaining to Inventory set forth in this Agreement or any other Loan Document;
(e) that is not (i) placed on consignment or (ii) in transit;
(f) that does not consist of (i) work-in-process, (ii) fresh
poultry, beef or produce, (iii) refurbished goods, (iv) goods that have spoiled
or are past spoilage dating, (v) goods that have been returned by the buyer,
(vi) packaging or shipping materials, (vii) display items, (viii) samples, (ix)
labels, (x) supplies, or (xi) spare, replacement or repair parts;
(g) that does not constitute Slow Moving Inventory or obsolete,
shopworn, unmerchantable, unsalable, returned, damaged, defective, off-season or
out-of-season, excess, unusable, or unworkable goods or goods unfit for further
processing;
(h) that is covered by property and casualty insurance
acceptable to Bank;
(i) that consists of goods that can be transported or sold only
with licenses that are readily available;
(j) that does not consist of any costs associated with "freight-
in" charges;
(k) that is only covered by non-negotiable documents of title
unless the negotiable document representing such Inventory has been delivered to
Bank; and
A-8
<PAGE>
(l) that is otherwise acceptable to Bank in its reasonable
credit judgment.
"Environmental Laws" means any and all federal, state, local, and
------------------
municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees, or requirements of any Governmental Authority regulating, relating to,
or imposing liability or standards of conduct concerning, environmental
protection matters, including Hazardous Materials, as now or hereafter in
effect.
"Environmental Liabilities and Costs" means all liabilities,
-----------------------------------
obligations, responsibilities, remedial actions, removal costs, losses, damages,
costs, and expenses that relate to any health or safety condition regulated
under any Environmental Law or in connection with any other environmental matter
or Release, threatened Release, or the presence of any Hazardous Material.
"Environmental Permits" means all permits, licenses, administrative
---------------------
orders, consent orders, consent decrees, governmental agency agreements, or
other written documents detailing required environmental performance expected of
Borrower or any of its Subsidiaries by any Governmental Authority.
"Equipment" means all "equipment," as such term is defined in the UCC,
---------
now owned or hereafter acquired by any Person, wherever located, including all
machinery and equipment, including processing equipment, conveyors, machine
tools, data processing and computer equipment with software and peripheral
equipment, and all engineering, processing, and manufacturing equipment, office
machinery, furniture, materials handling equipment, tools, attachments,
accessories, automotive equipment, trailers, trucks, forklifts, molds, dies,
stamps, motor vehicles, rolling stock, and other equipment of every kind and
nature, trade fixtures, and fixtures, together with all additions and accessions
thereto, replacements therefor, all parts therefor, all substitutes for any of
the foregoing, fuel therefor, and all manuals, drawings, instructions,
warranties, and rights with respect thereto.
"ERISA" means the Employee Retirement Income Security Act of 1974 and
-----
any regulations promulgated thereunder.
"ERISA Affiliate" means any trade or business (whether or not
---------------
incorporated) that is a member of a "controlled group of corporations," a group
of trades or businesses under "common control," or an "affiliated service
group," that includes Borrower, in each case within the meaning of Sections
414(b), (c), (m), or (o) of the IRC.
"Event of Default" means any of the events specified in Section 7.1.
---------------- -----------
"Fair Labor Standards Act" means the provisions of the Fair Labor
------------------------
Standards Act, 29 U.S.C. (S)(S) 201 et seq.
-- ----
"Farm Products" shall mean "farm products," as such term is defined in
-------------
the UCC, now owned or hereafter acquired by any Person, including all livestock,
livestock products,
A-9
<PAGE>
poultry, poultry products, seafood, seafood products, and all other products or
byproducts produced therefrom.
"FDA" means the United States Food and Drug Administration.
---
"Federal Reserve Board" means the Board of Governors of the Federal
---------------------
Reserve System.
"Financial Statements" means the consolidated and consolidating income
--------------------
statement, balance sheet, and statement of cash flows of Borrower and each of
its Subsidiaries, including all notes and schedules thereto, internally prepared
for each Fiscal Month, and audited for each Fiscal Year, in each case prepared
in accordance with GAAP.
"Fiscal Month" means any of the monthly accounting periods of
------------
Borrower.
"Fiscal Quarter" means any of the quarterly accounting periods of
--------------
Borrower.
"Fiscal Year" means the 12 month period of Borrower ending on (i) the
-----------
last Sunday in September of each year, if September 30 does not fall on a
Saturday, or (ii) October 1, if September 30 falls on a Saturday. Subsequent
changes to the Fiscal Year of Borrower shall not change the term "Fiscal Year"
unless Bank shall consent in writing to such change.
"Fixed Charge Coverage Ratio" means, with respect to any period, the
---------------------------
ratio of (i) EBITDA for such period to (ii) Fixed Charges for such period.
"Fixed Charges" means, for any period and without duplication, the sum
-------------
of (i) Cash Interest Expense, (ii) scheduled payments of principal on any
Indebtedness of Borrower and its Subsidiaries, (iii) scheduled Capital Lease
Obligations of Borrower or any of its Subsidiaries for such period representing
principal, (iv) Taxes estimated to be paid by Borrower and its Subsidiaries,
after giving effect to the net operating loss carryforward of Polyphase, (v)
cash dividends or distributions, if any, paid by Borrower or any of its
Subsidiaries, (vi) Capital Expenditures, and (vii) all Tax Sharing Cash
Payments, in each case for such period.
"Fixtures" means "fixtures," as such term is defined in the UCC, now
--------
owned or hereafter acquired by any Person, wherever located.
"GAAP" means generally accepted accounting principles as in effect
----
from time to time in the United States, applied on a basis consistent with past
practices, subject to the exceptions set forth in paragraph 2 of this
Schedule A.
- ----------
"General Intangibles" means all "general intangibles," as such term is
-------------------
defined in the UCC, now owned or hereafter acquired by any Person, including all
customer lists, licenses, copyrights, trademarks, patents, and all applications
therefor and reissues, extensions, or renewals thereof, rights in Intellectual
Property, interests in partnerships, joint ventures, and other business
associations, Licenses, permits, trade secrets, proprietary or confidential
information, inventions (whether or not patented or patentable), technical
information, procedures, designs, knowledge,
A-10
<PAGE>
know-how, software, data bases, data, skill, expertise, experience, processes,
models, drawings, materials and records, Goodwill (including the Goodwill
associated with any Intellectual Property), all rights and claims in or under
insurance policies (including insurance for fire, damage, loss, and casualty,
whether covering personal property, real property, tangible rights or intangible
rights, all liability, life, key man, and business interruption insurance, and
all unearned premiums), uncertificated securities, certificated securities,
choses in action, deposit, checking, and other bank accounts, rights to receive
tax refunds and other payments, rights to receive dividends, distributions,
cash, instruments, and other property in respect of or exchange for pledged
shares or other equity interests, rights of indemnification, all Books and
Records, correspondence, credit files, invoices and other papers, including all
tapes, cards, computer runs, and other papers and documents in the possession or
under the control of such Person or any computer bureau or service company from
time to time acting for such Person.
"Goods" means all "goods," as such term is defined in the UCC, now
-----
owned or hereafter acquired by any Person, wherever located, including movables,
fixtures, equipment, inventory, or other tangible property.
"Goodwill" means all goodwill, trade secrets, proprietary or
--------
confidential information, technical information, procedures, formulae, quality
control standards, designs, operating and training manuals, customer lists, and
distribution agreements now owned or hereafter acquired by any Person.
"Governmental Authority" means any nation or government, any state or
----------------------
other political subdivision thereof, or any agency, department, or other entity
exercising executive, legislative, judicial, regulatory, or administrative
functions of or pertaining to government.
"Guaranteed Indebtedness" means, with respect to any Person, any
-----------------------
obligation of such Person guaranteeing any indebtedness, lease, dividend, or
other obligation ("primary obligations") of any other Person (the "primary
obligor") in any manner, including any obligation or arrangement of such Person
(a) to purchase or repurchase any such primary obligation, (b) to advance or
supply funds (i) for the purchase or payment of any such primary obligation or
(ii) to maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency or any balance sheet condition
of the primary obligor, (c) to purchase property, securities, or services
primarily for the purpose of assuring the holder of any such primary obligation
of the ability of the primary obligor to make payment of such primary
obligation, or (d) to indemnify the holder of such primary obligation against
loss in respect thereof. The amount of any "Guaranteed Indebtedness" at any
time shall be deemed to be an amount equal to the lesser at such time of (x) the
stated or determinable amount of the primary obligation in respect of which such
Guaranteed Indebtedness is made and (y) the maximum amount for which such Person
may be liable pursuant to the terms of the instrument embodying such Guaranteed
Indebtedness; or, if not stated or determinable, the maximum reasonably
anticipated liability (assuming full performance) in respect thereof.
"Guarantor" means each of Polyphase and Overhill Ventures and each
---------
other Person, if any, that executes a guaranty or other similar agreement in
favor of Bank in connection with the transactions contemplated by this Agreement
and the other Loan Documents.
A-11
<PAGE>
"Guaranty" means that certain guaranty executed by each Guarantor in
--------
favor of Bank, in substantially the form of Exhibit C.
---------
"Hazardous Material" means any substance, material, or waste, the
------------------
generation, handling, storage, treatment, or disposal of which is regulated by
any Governmental Authority, or forms the basis of liability under any
Environmental Law in any jurisdiction in which Borrower or any of its
Subsidiaries has owned, leased, or operated real property or disposed of
hazardous materials.
"Indebtedness" of any Person means: (a) all indebtedness of such
------------
Person for borrowed money or for the deferred purchase price of property or
services (including reimbursement and all other obligations with respect to
surety bonds, letters of credit, and bankers' acceptances, whether or not
matured, but excluding (i) obligations to trade creditors incurred in the
ordinary course of business and not more than 45 days past due and (ii) deferred
taxes); (b) all obligations evidenced by notes, bonds, debentures, or similar
instruments; (c) all indebtedness created or arising under any conditional sale
or other title retention agreement with respect to property acquired by such
Person (even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property); (d) all Capital Lease Obligations; (e) all Guaranteed Indebtedness;
(f) all indebtedness referred to in clauses (a), (b), (c), (d) or (e) above
----------- --- --- --- ---
secured by (or for which the holder of such indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien upon or in property
(including Accounts and contract rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such indebtedness
therefor; (g) the Obligations; and (h) all liabilities under Title IV of ERISA.
"Indemnified Person" means Bank, Bank's Affiliates, and each of their
------------------
respective employees, and agents.
"Ingredients" means food items used in the preparation of finished
-----------
goods Inventory.
"Instruments" means all "instruments," as such term is defined in the
-----------
UCC, now owned or hereafter acquired by any Person, wherever located, including
all certificated securities, all certificates of deposit, and all notes and
other evidences of indebtedness, other than Instruments that constitute, or are
a part of a group of writings that constitute, Chattel Paper.
"Intangible Assets" means the book value of all intangible assets (as
-----------------
defined under GAAP) shown on the consolidated balance sheet of Borrower and its
Subsidiaries, including organization costs, securities issuance costs, goodwill
(including any amounts, however designated on such balance sheet, representing
the excess of the purchase price paid for assets or Stock acquired over the
value assigned thereto on the books of Borrower and its Subsidiaries), covenants
not to compete, patents, trademarks, copyrights, trade secrets, customer lists,
know-how, licenses, contracts, franchises, software costs, research and
development costs, deferred financing costs, investments in and monies from
Affiliates (including the intercompany accounts receivable owing from Polyphase
to Borrower referred to clause (ii) of the definition of Permitted Affiliate
-----------
Transaction), and any other intangible assets.
A-12
<PAGE>
"Intellectual Property" means all of the following now owned or
---------------------
hereafter acquired by any Person: (a) patents, trademarks, trade dress, trade
names, service marks, copyrights, trade secrets, and all other intellectual
property or Licenses thereof; and (b) all Proceeds of the foregoing.
"Intellectual Property Security Agreement" shall mean the Patent,
----------------------------------------
Trademark and Copyright Security Agreement of even date herewith executed by
Borrower and Overhill Ventures in favor of Bank.
"Intercreditor Agreement" shall mean an Intercreditor and
-----------------------
Subordination Agreement, in form and substance satisfactory to Bank, between
Bank and LLCP, acknowledged by Borrower, Polyphase and Overhill Ventures.
"Inventory" means all "inventory," as such term is defined in the UCC,
---------
now owned or hereafter acquired by any Person, wherever located, including
inventory, merchandise, goods, and other personal property that are held by or
on behalf of such Person for sale or lease or are furnished or are to be
furnished under a contract of service, or that constitute raw materials, work in
process, or materials used or consumed or to be used or consumed in such
Person's business or in the processing, production, packaging, promotion,
delivery, or shipping of the same, including other supplies.
"Investment Property" means all "investment property," as such term is
-------------------
defined in the UCC in those jurisdictions in which such definition has been
adopted, now owned or hereafter acquired by any Person, including (a) all
securities, whether certificated or uncertificated, including stocks, bonds,
interests in limited liability companies, partnership interests, treasuries,
certificates of deposit, and mutual fund shares; (b) all securities entitlements
of such Person, including the rights of such Person to any securities account
and the financial assets held by a securities intermediary in such securities
account and any free credit balance or other money owing by any securities
intermediary with respect to that account; (c) all securities accounts held by
any Person, (d) all commodity contracts held by any Person; and (e) all
commodity accounts held by any Person.
"IRC" means the Internal Revenue Code of 1986 and any regulations
---
promulgated thereunder.
"Letter of Credit" means an irrevocable commercial or standby letter
----------------
of credit issued for the account of Borrower pursuant to Section 1.2.
-----------
"Letter of Credit Fee" means the fee to be paid by Borrower to Bank
--------------------
for each Letter of Credit, as set forth on Schedule 1.2.
------------
"Letter of Credit Rights" means all "letter of credit rights," as such
-----------------------
term is defined in the UCC in those jurisdictions in which such definition has
been adopted, now owned or hereafter acquired by any Person, including any right
to payment under a Letter of Credit.
A-13
<PAGE>
"Letter of Credit Obligations" means all obligations incurred by Bank
----------------------------
at the request of Borrower in connection with the issuance of Letters of Credit.
"LHF" means The Long Horizons Fund L.P., a New York limited
---
partnership, or Ableco Finance LLC, a Delaware limited liability company, as
assignee of The Long Horizons Fund, L.P., as the case may be, and any other
assignees of LHF or any assignees of Ableco Finance LLC.
"LIBOR" means, for any LIBOR Loan Period, the rate determined by Bank
-----
to be the per annum rate of interest (rounded upward to the nearest one-
--- -----
hundredth of one percent (1/100%)) at which Dollar deposits in immediately
available funds would be offered to Bank in the London interbank market at
approximately 11:00 a.m. (California time) on the date Borrower provides its
irrevocable notice to Bank of its request for the applicable LIBOR Loan in
accordance with Section 1.3(b), in an amount approximately equal to the
--------------
principal amount of, and for a length of time approximately equal to the LIBOR
Loan Period for, such LIBOR Loan.
"LIBOR Basis" means a per annum interest rate equal to (a) LIBOR, as
----------- ---------
adjusted for reserve requirements imposed on Bank from time to time, divided by
------- --
(b) one minus the LIBOR Reserve Percentage, stated as a decimal. The LIBOR
Basis shall be rounded upward to the nearest one-hundredth of one percent
(1/100%) and, once determined, shall remain unchanged during the applicable
LIBOR Loan Period, except for changes to reflect adjustments for the LIBOR
Reserve Percentage or other reserve requirements.
"LIBOR Loan" means a Loan or any portion thereof bearing interest by
----------
reference to the LIBOR Basis.
"LIBOR Loan Period" means, with respect to any Loan made or continued
-----------------
as or converted into a LIBOR Loan, any fixed calendar period of 30, 60, 90 or
180 days, as selected by Borrower pursuant to Section 1.3(b), during which
--------------
period LIBOR applicable to such LIBOR Loan shall remain unchanged; provided,
--------
that (a) any applicable LIBOR Loan Period that would otherwise end on a day that
is not a Business Day shall be extended to the next succeeding Business Day,
unless such Business Day falls in another calendar month, in which case such
LIBOR Loan Period shall end on the immediately preceding Business Day, (b) any
applicable LIBOR Loan Period that begins on a day for which there is no
numerically corresponding day in the calendar month during which such LIBOR Loan
Period is to end shall (subject to clause (a) above) end on the last day of such
----------
calendar month, (c) no LIBOR Loan Period shall extend beyond the Commitment
Maturity Date, and (d) Borrower shall select LIBOR Loan Periods so that there
shall be no more than three separate LIBOR Loans in existence at any one time.
"LIBOR Prepayment Premium" means, for any LIBOR Loan that Borrower
------------------------
intends to prepay, an amount equal to (a)(i) the LIBOR Basis on the principal
amount of such LIBOR Loan minus (ii) the Yield Rate, multiplied by (b)(i) the
----- -------------
number of days in the period between the date of prepayment and the applicable
Payment Date divided by (ii) 365 or, in the event of a leap year, 366,
----------
multiplied by (c) the amount of the principal so prepaid, which product is then
- -------------
discounted to present value using the Yield Rate as the annual discount factor.
A-14
<PAGE>
"LIBOR Reserve Percentage" means the percentage in effect from time to
------------------------
time under Regulation D of the Federal Reserve Board as the maximum reserve
requirement applicable with respect to Eurocurrency Liabilities (as that term is
defined in Regulation D), whether or not Bank has any Eurocurrency Liabilities
subject to such reserve requirement at that time. The LIBOR Basis for any LIBOR
Loan shall be adjusted as of the effective date of any change in the LIBOR
Reserve Percentage.
"License" means any license under any written agreement now owned or
-------
hereafter acquired by any Person granting the right to use any Intellectual
Property or other license of rights or interests now held or hereafter acquired
by any Person.
"Lien" means, with respect to any property, any security deed,
----
mortgage, deed to secure debt, deed of trust, lien, pledge, assignment, charge,
security interest, title retention agreement, negative pledge, levy, execution,
seizure, attachment, garnishment, or other encumbrance of any kind in respect of
such property, whether or not choate, vested, or perfected.
"LLCP" means Levine Leichtman Capital Partners II, L.P.
----
"Loan Documents" means, collectively, the Agreement, the Revolving
--------------
Note, the Collateral Documents, the Alternative Dispute Resolution Agreements,
the Guaranty, the Schedule of Accounts, the Schedule of Inventory, and any and
all other agreements, documents, or instruments (including financing statements)
identified in the Schedule of Documents and entered into in connection with the
transactions contemplated by the Agreement, together with all alterations,
amendments, changes, extensions, modifications, refinancings, refundings,
renewals, replacements, restatements, or supplements of or to any of the
foregoing.
"Loans" means all loans and advances made by Bank to or for the
-----
benefit of Borrower under the Agreement or under any of the other Loan
Documents, including the Revolving Loans.
"Material Adverse Effect" means a material adverse effect on or
-----------------------
adverse change in, as the case may be, (a) the business, assets, operations,
prospects, or financial or other condition of Borrower, its Subsidiaries, or any
Guarantor, individually or taken as a whole, (b) the ability of Borrower or any
Guarantor to pay or perform in accordance with the terms of any of its
respective agreements with Bank or any other Person, or (c) the rights and
remedies of Bank under any of the Loan Documents.
"Maximum Amount" means $16,000,000.
--------------
"Monthly Summary Report" has the meaning set forth in Section 5.1(b).
---------------------- --------------
"Net Borrowing Availability" means, at any time, the lesser of (a) the
--------------------------
Maximum Amount minus the aggregate outstanding amount at such time of (i) the
-----
Revolving Loans and (ii) the face amount of the Letters of Credit and (b) the
Borrowing Base minus the aggregate outstanding amount at such time of (i) the
-----
Revolving Loans and (ii) the face amount of the Letters of Credit, in each case
less any reserves established by Bank in its reasonable credit judgment
A-15
<PAGE>
from time to time. Bank reserves the right, at any time and from time to time
after the Closing Date, to establish and modify reserves in its reasonable
credit judgment.
"Net Income (Loss)" means, with respect to any Person, on a
-----------------
consolidated basis, for any period, the aggregate net income (or loss) after
taxes and extraordinary items of such Person for such period, determined in
accordance with GAAP.
"Obligations" means all loans, advances, debts, expense
-----------
reimbursements, fees, liabilities, and obligations for the performance of
covenants, tasks, or duties or for payment of monetary amounts (whether or not
such performance is then required or contingent, or such amounts are liquidated
or determinable) owing by Borrower or any of its Subsidiaries to Bank, of any
kind or nature, present or future, whether or not evidenced by any note,
agreement or other instrument, arising under this Agreement or any of the other
Loan Documents, and all covenants and duties regarding such amounts. This term
includes all principal, interest (including interest that accrues after the
commencement of any case or proceeding by or against Borrower in bankruptcy or
for the reorganization of Borrower whether or not allowed in such case or
proceeding), fees, Charges, expenses, attorneys' fees and any other sum
chargeable to Borrower or its Subsidiaries under the Agreement or any of the
other Loan Documents.
"Overadvance" means the amount, if any, by which the aggregate
-----------
outstanding amount of Revolving Loans at any time exceeds Borrowing
Availability.
"Packers Acts" shall mean (i) the PSA, (ii) any state or local law,
------------
rule or regulation that provides protection that is similar to that provided by
the PSA, (iii) any state or local law, rule or regulation that provides
protection to producers of seafood or seafood products, or (iv) the rules or
regulations promulgated under any of the foregoing by any Government Authority.
"Payment Date" means the last day of each LIBOR Loan Period for a
------------
LIBOR Loan.
"PBGC" means the Pension Benefit Guaranty Corporation.
----
"Permitted Affiliate Transaction" means any one or more of the
-------------------------------
following transactions:
(i) the payment by Borrower of the salary and
other compensation of James Rudis in his capacity
as the President and Chief Executive Officer of
Polyphase, which salary and other compensation
shall be determined annually by the Boards of
Directors of Borrower and Polyphase (or the
compensation committees thereof, if any);
(ii) the intercompany accounts receivable owing
from Polyphase to Borrower and reflected on the
consolidated balance sheet of Borrower and its
A-16
<PAGE>
Subsidiaries as of September 26, 1999 in an amount
not to exceed $11,038,000; provided, that the
--------
amount of such intercompany accounts receivable
may be increased by the one-time payment permitted
under clause (iv) of this definition;
-----------
(iii) the payment by Borrower to Polyphase out of
legally available funds of the Tax Sharing Cash
Payments; provided, that any such payment is
--------
recorded as an expense on the books of Borrower
that is deducted from Net Income (Loss) with
respect to such Fiscal Year; and provided further,
that no such payment shall in any event exceed
$150,000 in any Fiscal Quarter; and
(iv) a one-time payment by Borrower to Polyphase out
of legally available funds at or immediately
following the Closing Date of an amount not
exceeding $1,250,000 in the aggregate.
"Permitted Liens" means: (a) Liens securing taxes, assessments, and
---------------
other governmental Charges or levies (excluding any Lien imposed pursuant to any
of the provisions of ERISA) or the claims of materialmen, suppliers, mechanics,
carriers, warehousemen, or landlords for labor, materials, supplies, or rentals
incurred in the ordinary course of business, (i) in each case only if payment
shall not at the time be required to be made and (ii) in the case of
warehousemen or landlords, only if such Liens are junior to the Liens granted
and conveyed by Borrower and each of its Subsidiaries to secure the Obligations;
(b) Liens consisting of deposits or pledges made in the ordinary course of
business in connection with, or to secure payment of, obligations under worker's
compensation, unemployment insurance, or similar legislation; (c) Liens
constituting encumbrances in the nature of zoning restrictions, easements, and
rights or restrictions of record on use of real property that, in the reasonable
judgment of Bank, do not materially detract from the value of such property or
impair the use thereof in the business of Borrower; (d) Liens created after the
Closing Date by conditional sale or other title retention agreements or for
purchase money security interests, in each case with respect to Equipment
acquired by Borrower in the ordinary course of business, securing Indebtedness
within the total permitted under clause (iii) of Section 4(c), provided, that
------------ ------------ --------
such Liens attach only to the particular Equipment being purchased and the
Indebtedness secured does not exceed 100% of the purchase price of such
Equipment; (e) Liens on Borrower's Accounts, Inventory or the proceeds thereof
under any of the Packers Acts to the extent such Liens do not exceed the
Producer Payables Reserves maintained by Bank; (f) Liens of record set forth in
Schedule 4(h); (g) Liens in favor of LLCP or its permitted assigns under the
- -------------
Intercreditor Agreement that secure the Subordinated Debt or any Indebtedness
resulting from a Permitted Subordinated Note Refinancing and (h) Liens in favor
of Bank under the Loan Documents.
"Permitted Subordinated Note Refinancing" means a refinancing of the
---------------------------------------
Subordinated Note that does not increase the aggregate principal amount of the
Subordinated Debt and is on the same terms as the Subordinated Note or terms and
conditions no less favorable
A-17
<PAGE>
to the interests of Borrower and Bank, and which refinanced Indebtedness is
subordinated to the Obligations pursuant to an intercreditor and subordination
agreement that is identical to the Intercreditor Agreement or otherwise in form
and substance satisfactory to Bank in its sole discretion.
"Person" means any individual, sole proprietorship, partnership,
------
limited liability partnership, joint venture, trust, unincorporated
organization, association, corporation, limited liability company, institution,
public benefit corporation, entity or government (whether federal, state,
county, city, municipal, or otherwise, including any instrumentality, division,
agency, body, or department thereof).
"Plan" means, with respect to Borrower or any of its Affiliates, at
----
any time, an "employee benefit plan," as defined in Section 3(3) of ERISA, that
Borrower or any of its Subsidiaries or Affiliates maintains, contributes to, or
has an obligation to contribute to on behalf of participants who are or were
employed by any of them.
"Pledge Agreement" means the Pledge Agreement of even date herewith
----------------
executed by Borrower, Overhill Ventures and Polyphase in favor of Bank.
"Polyphase" means Polyphase Corporation, a Nevada corporation.
---------
"Prior Lender" means FINOVA Capital Corporation.
------------
"Prior Lender Obligations" shall mean all obligations of Borrower to
------------------------
Prior Lender pursuant to that certain Loan Agreement dated as of May 5, 1995,
between Borrower and Prior Lender, as amended, and all other agreements,
instruments, or documents executed and delivered to, or in favor of, Prior
Lender in connection therewith or the transactions contemplated thereby.
"Proceeds" means "proceeds," as such term is defined in the UCC,
--------
including: (a) any and all proceeds of any insurance, indemnity, warranty, or
guaranty payable to any Person from time to time with respect to any Collateral;
(b) any and all payments (in any form whatsoever) made or due and payable to any
Person from time to time in connection with any requisition, confiscation,
condemnation, seizure, or forfeiture of any Collateral by any Governmental
Authority (or any Person acting under color of Governmental Authority); (c) any
claim of any Person against third parties for past, present, or future
infringement or dilution of any Intellectual Property or for injury to the
Goodwill associated with any Intellectual Property; (d) any recoveries by any
Person against third parties with respect to any litigation or dispute
concerning any Collateral; and (e) any and all other amounts from time to time
paid or payable under or in connection with any Collateral, upon disposition or
otherwise.
"Producer Payables Reserves" means the reserves, if any, against
--------------------------
Borrowing Availability established by Bank from time to time based upon the
aggregate amount of unpaid trade payables for Inventory of Borrower subject to
any asserted lien or trust arising under any state producers' lien statute or
any of the other Packers Acts, which lien or trust is senior to or pari passu
with the Liens in favor of Bank.
A-18
<PAGE>
"Projections" means the consolidated and consolidating balance sheet,
-----------
statements of income, and cash flow for Borrower and each of Borrower's
Subsidiaries delivered to Bank on the Closing Date (including forecasted Capital
Expenditures and Net Borrowing Availability) by month for the Fiscal Year
immediately following the Fiscal Year in which the Closing Date occurs, in each
case prepared in a manner consistent with GAAP and accompanied by senior
management's discussion and analysis thereof.
"PSA" shall mean the Packers and Stockyards Act of 1921, together with
---
the rules and regulations of any Governmental Authority promulgated thereunder.
"Reference Rate" means the variable per annum rate of interest most
--------------
recently announced by Bank at its corporate headquarters as the "Union Bank of
California, N.A. Reference Rate," with the understanding that the "Union Bank of
California, N.A. Reference Rate" (a) is one of Bank's index rates and is not
directly tied to any external rate of interest or index, (b) merely serves as a
basis upon which effective rates of interest are calculated for loans making
reference thereto, and (c) may not be the lowest or best rate at which Bank
calculates interest or extends credit. The Reference Rate shall be adjusted as
of the effective date of any change in the "Union Bank of California, N.A.
Reference Rate." The Reference Rate, as adjusted, shall constitute the
Reference Rate on the date when such adjustment is made and shall continue as
the applicable Reference Rate until further adjustment.
"Reference Rate Loan" means a Loan or any portion thereof bearing
-------------------
interest by reference to the Reference Rate.
"Refinancing" means the repayment in full by Borrower of the Prior
-----------
Lender Obligations, which repayment shall occur on the Closing Date.
"Registration Rights Agreement" means the Registration Rights
-----------------------------
Agreement between Borrower and LLCP.
"Related Person" means any (a) individual (i.e., natural person) that
-------------- ----
is an employee, officer, director, Stockholder, partner or member of Borrower or
any Affiliate of Borrower (other than corporate Stockholders of Polyphase that
own less than five percent of the common Stock of Polyphase) , (b) individual
spouse, descendant, or other individual related by blood or marriage to any
officer, director, Stockholder, partner, or member of Borrower or any Subsidiary
of Borrower, or (c) trust in which any such individual is a grantor, settlor, or
beneficiary.
"Related Transactions" means the initial borrowing under the Revolving
--------------------
Loan on the Closing Date, the Refinancing, the repayment in full by Borrower on
the Closing Date of all of the obligations of Borrower to LHF, the issuance of
the Subordinated Note, the payment of all fees, costs and expenses associated
with all of the foregoing, and the execution and delivery of all of the Related
Transactions Documents.
"Related Transactions Documents" means the Loan Documents, the
------------------------------
Subordinated Note, and all other documents executed in connection with the
Related Transactions.
A-19
<PAGE>
"Release" means, as to any Person, any release, spill, emission,
-------
leaking, pumping, injection, deposit, disposal, discharge, dispersal, dumping,
leaching, or migration of Hazardous Materials in the indoor or outdoor
environment by such Person, including the movement of Hazardous Materials
through or in the air, soil, surface water, ground water, or property.
"Reportable Event" has the meaning set forth in Title IV of ERISA.
----------------
"Restricted Payment" means (a) the declaration or payment of any
------------------
dividend or the incurrence of any liability to make any other payment or
distribution of cash or other property or assets on or in respect of Borrower's
or any of its Subsidiaries' Stock (other than any dividend or other distribution
on account of any Stock of Borrower or any of its Subsidiaries that is payable
solely in shares of the same class of Stock of such Person), (b) any payment on
account of the purchase, redemption, defeasance, or other retirement (other than
pursuant to a Permitted Subordinated Note Refinancing) of Borrower's or any of
its Subsidiaries' Stock or Indebtedness other than (i) the Obligations or (ii)
so long as no Default or Event of Default has occurred and is continuing, or
shall be caused thereby, interest and principal, when due, under Indebtedness
described in Schedule 3.8 or otherwise permitted under Section 4 of the
------------ ---------
Agreement or that is secured by Permitted Liens, without acceleration or
modification of the amortization thereof as in effect on the Closing Date, or
any other payment or distribution made in respect thereof, either directly or
indirectly, or (c) any payment, loan, contribution, or other transfer of funds
or other property to any Stockholder of such Person that is not expressly
permitted in the Agreement; provided, that neither (I) any payment to Bank nor
--------
(II) any payment to LLCP permitted by the Intercreditor Agreement shall
constitute a Restricted Payment.
"Revolving Loan Commitment" means the commitment of Bank to make
-------------------------
Revolving Loans or issue Letters of Credit Obligations which commitment shall be
Sixteen Million Dollars ($16,000,000) on the Closing Date, as such amount may be
adjusted, if at all, from time to time in accordance with the Agreement.
"Revolving Loans" means the revolving loans made to Borrower pursuant
---------------
to Section 1.1(a).
--------------
"Revolving Note" means the Revolving Credit Note executed and
--------------
delivered by Borrower to Bank, dated as of the Closing Date, in the original
principal amount of $16,000,000, substantially in the form of Exhibit A,
---------
together with any other notes executed and delivered by Borrower to Bank
evidencing at any time any portion of the Revolving Loans.
"Schedule of Accounts" has the meaning set forth in Section 5.1(c).
-------------------- --------------
"Schedule of Documents" means the schedule, including all appendices,
---------------------
exhibits or schedules thereto, listing certain documents and information to be
delivered in connection with the Agreement and the transactions contemplated
thereunder, substantially in the form of Schedule B.
----------
"Schedule of Inventory" has the meaning set forth in Section 5.1(c).
--------------------- --------------
A-20
<PAGE>
"Securities Act" shall mean the provisions of the Securities Act of
--------------
1933, 15 U.S.C. Sections 77a et seq.
-- ----
"Securities Exchange Act" shall mean the provisions of the Security
-----------------------
Exchange Act of 1934, 15 U.S.C. Sections 78a et seq.
-- ----
"Slow Moving Inventory" means, as of any date, Inventory produced by
---------------------
Borrower more than 12 months prior to such date.
"Solvent" means, with respect to any Person on a particular date, that
-------
on such date (a) the fair value of the property of such Person is greater than
the total amount of liabilities, including contingent liabilities, of such
Person; (b) the present fair salable value of the 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 as they become absolute and matured; (c) such Person does
not intend to, and does not believe that it will, incur debts or liabilities
beyond such Person's ability to pay as such debts and liabilities mature; and
(d) such Person is not engaged in a business or transaction, and is not about to
engage in a business or transaction, for which such Person's property would
constitute an unreasonably small capital. The amount of contingent liabilities
(such as litigation, guaranties and pension plan liabilities) at any time shall
be computed as the amount that, in light of all the facts and circumstances
existing at the time, represents the amount that can be reasonably be expected
to become an actual or matured liability.
"Stock" means all certificated and uncertificated shares, options,
-----
warrants, general or limited partnership interests, participation or other
equivalents (regardless of how designated) of or in a corporation, partnership,
limited liability company, or equivalent entity, whether voting or nonvoting,
including common stock, preferred stock, or any other "equity security" (as such
term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated
by the Securities and Exchange Commission under the Securities Exchange Act.
"Stockholder" means, with respect to any Person, each holder of Stock
-----------
of such Person.
"Subject Property" means each real property location owned, leased, or
----------------
occupied by Borrower or any of its Subsidiaries.
"Subordinated Debt" means the Indebtedness of Borrower evidenced by
-----------------
the Subordinated Note and any Indebtedness of Borrower subordinated to the
Obligations in a manner and form satisfactory to Bank in its sole discretion, as
to right and time of payment and as to any other rights and remedies thereunder.
"Subordinated Note" means the Secured Senior Subordinated Note due
-----------------
2004, made by Borrower to the order of LLCP in an original principal amount of
$26,000,000 in the aggregate, together with the Intercreditor and Subordination
Agreement between LLCP and Bank dated as of the Closing Date.
"Subsidiary" means, with respect to any Person, (a) any corporation or
----------
limited liability company whose stock (other than directors' qualifying shares)
having ordinary voting
A-21
<PAGE>
power to elect a majority of its board of directors (or other governing body) is
50% or more owned, directly or indirectly, by such Person, or (b) a partnership
or joint venture whose partnership or venture interests are 50% or more owned,
directly or indirectly, by such Person. The term "Subsidiary," when used in this
Agreement without reference to any particular Person, means a Subsidiary of
Borrower.
"Supporting Obligations" means "supporting obligations," as such term
----------------------
is defined in the UCC in those jurisdictions in which such definition has been
adopted, now owned or hereafter acquired by any Person.
"Tangible Net Worth" means, with respect to Borrower and its
------------------
Subsidiaries on any date, (i) the sum of, without duplication, (a) the excess of
the book value of assets over liabilities at such time, determined on a
consolidated basis in accordance with GAAP, plus (b) the amount shown for
----
redeemable warrants on the consolidated balance sheet of Borrower and its
Subsidiaries at such time, plus (c) the Tax Sharing Payable determined at such
----
time, plus (d) the principal amount of the Subordinated Note, minus (ii)
---- -----
Intangible Assets at such time.
"Tax" or "Taxes" means any present and future income, excise, sales,
--- -----
use, stamp or franchise taxes and any other taxes, fees, duties, levies,
withholdings or other charges of any nature whatsoever imposed by any taxing
authority, whether federal, state, local or foreign, together with any interest
and penalties and additions to tax.
"Tax Sharing Cash Payments" means, for any period, all cash payments
-------------------------
actually made by Borrower to Polyphase during such period on account of the Tax
Sharing Payable.
"Tax Sharing Payable" means, at any time, the total amount owed by
-------------------
Borrower to Polyphase at such time arising from accrued payments of all income
or franchise Taxes that Borrower would have incurred if Borrower had filed its
income or franchise Tax returns on a stand-alone basis.
"Termination Date" means the date on which the Loans, the Letters of
----------------
Credit and all other Obligations under the Agreement and the other Loan
Documents are indefeasibly paid in full, in cash (other than amounts in respect
of Letter of Credit Obligations, if any, then outstanding, provided that
Borrower shall have paid to Bank, in immediately available funds, the maximum
amount then available to be drawn under outstanding Letters of Credit), and
Borrower shall have no further right to borrow any moneys or obtain other credit
extensions or financial accommodations under the Agreement.
"UCC" means the Uniform Commercial Code as the same may, from time to
---
time, be enacted and in effect in the State of California; provided, that in the
--------
event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection, or priority of Bank's Lien on any Collateral is governed
by the Uniform Commercial Code as enacted and in effect in a jurisdiction other
than the State of California, the term "UCC" shall mean the Uniform Commercial
---
Code as enacted and in effect in such other jurisdiction solely for purposes of
the provisions hereof relating to such attachment, perfection, or priority and
for purposes of definitions related to such provisions.
A-22
<PAGE>
"Unused Line Fee" means an amount equal to (a) (i) the Maximum Amount
---------------
minus (ii) the average for the period of the daily closing balances of the
- -----
Revolving Loans during the period for which such fee is due, multiplied by (b)
---------- --
(i) 0.25% multiplied by (ii) (A) the number of days in such period divided by
---------- -- ------- --
(B) 365 or, in the event of a leap year, 366.
"USDA" means the United States Department of Agriculture.
----
"Weekly Reporting Package" has the meaning set forth in Section
------------------------ -------
5.1(b).
"Weekly Settlement Date" means the third Business Day of each week (or
----------------------
such other day of the week as may be designated from time to time by Bank).
"Year 2000 Compliant" means, with respect to Borrower and any other
-------------------
Person, that all Year 2000 Date-Sensitive System/Components utilized by or
material to the business, operations or financial condition of such Person will
properly perform data sensitive functions before, during and after the year
2000.
"Year 2000 Date-Sensitive System/Component" means any system software,
-----------------------------------------
network software, applications software, data base, computer file, embedded
microchip, firmware, hardware, equipment, goods or other systems; such systems
and components shall include mainframe computers, file server/client systems,
computer workstations, routers, hubs, other network-related hardware, and other
computer-related software, firmware or hardware and information processing and
delivery systems of any kind and telecommunications systems and other
communications processors, security systems, alarms, elevators and HVAC systems.
"Yield Rate" means the return that Bank could obtain if it used the
----------
amount of each prepayment of principal of any LIBOR Loan to purchase, at bid
price, regularly quoted securities (a) issued by the United States having a
maturity date most closely coinciding with the relevant Payment Date and (b)
held by Bank until the relevant Payment Date.
2. Accounting Terms and Computations. The term "GAAP" and all
---------------------------------
accounting terms used, but not specifically defined, in the Agreement shall be
construed and defined in accordance with generally accepted accounting
principles and practices set forth in the opinions and pronouncements of the
Accounting Principles Board and the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession, all as of the
date hereof, applied on a basis consistent with past practices, except that any
such financial statements or other financial information (a) that are unaudited
may be subject to year-end audit adjustments and may omit footnotes and (b) may
be qualified only with respect to the characterization or recharacterization of
the intercompany receivable owing from Polyphase to Borrower and referred to in
clause (ii) of the definition of "Permitted Affiliate Transaction" as a dividend
- -----------
rather than an intercompany loan.
3. UCC. Any terms that are defined in the UCC and used, but not
---
specifically defined, in the Agreement shall be construed and defined in
accordance with the UCC.
A-23
<PAGE>
4. Knowledge of Borrower. Whenever the term "knowledge of Borrower"
---------------------
or words of similar import are used in this Agreement or any other Loan Document
with respect to the existence or absence of any fact, it shall mean that any one
or more of the following Persons knows or should have known, based upon the
reasonable inquiry of such Person, of the existence or absence of such fact:
James Rudis, Richard A. Horvath and William E. Shatley.
5. Construction. For purposes of the Agreement and the other Loan
------------
Documents, the following rules of construction shall apply, unless specifically
indicated to the contrary: (a) wherever from the context it appears
appropriate, each term stated in either the singular or plural shall include the
singular and the plural, and pronouns stated in the masculine, feminine, or
neuter gender shall include the masculine, the feminine, and the neuter; (b) the
term "or" is not exclusive; (c) the term "including" (or any form thereof) shall
not be limiting or exclusive; (d) all references to statutes and related
regulations shall include any amendments thereof and any successor statutes and
regulations; (e) references to Persons include their respective successors and
assigns (to the extent and only to the extent permitted by the Loan Documents)
or, in the case of governmental Persons, Persons succeeding to the relevant
functions of such Persons; (f) the words "herein," "hereof," and "hereunder" or
other words of similar import refer to the Agreement as a whole, including the
exhibits and schedules hereto, as the same may from time to time be amended,
modified, or supplemented, and not to any particular section, subsection, or
clause contained in the Agreement; (g) all references in the Agreement or in the
schedules to the Agreement to sections, schedules, disclosure schedules,
exhibits, and attachments shall refer to the corresponding sections, schedules,
disclosure schedules, exhibits, and attachments of or to the Agreement; and (h)
all references to any instruments or agreements, including references to any of
the Loan Documents, shall include any and all modifications or amendments
thereto and any and all extensions or renewals thereof.
A-24
<PAGE>
SCHEDULE B - SCHEDULE OF DOCUMENTS
----------------------------------
See attached.
A-25
<PAGE>
SCHEDULE C - NON-STANDARD CONCENTRATION ACCOUNT DEBTORS
-------------------------------------------------------
Jenny Craig
King's Hawaiian
American Airlines
A-26
<PAGE>
EXHIBIT 10.2
REVOLVING NOTE
$16,000,000 November 24, 1999
FOR VALUE RECEIVED, the undersigned, OVERHILL FARMS INC., a Nevada
corporation ("Borrower"), hereby promises to pay to the order of UNION BANK OF
CALIFORNIA, N.A. ("Payee"), or its assigns, at its address at 445 South Figueroa
Street, 15/th/ Floor, Los Angeles, California 90071-1602, or at such other place
as Payee may designate from time to time in writing, in lawful money of the
United States of America and in immediately available funds, the principal
amount of SIXTEEN MILLION DOLLARS ($16,000,000), or such lesser or greater
principal amount as may be from time to time outstanding pursuant to the Loan
Agreement (as defined below) with respect to the Revolving Loans (as defined in
the Loan Agreement).
Capitalized terms or matters of construction defined or established in
Schedule A to the Loan and Security Agreement of even date herewith by and
- ----------
between Borrower and Payee (including all exhibits and schedules thereto, and as
the same may be amended, restated, supplemented, or otherwise modified from time
to time, the "Loan Agreement") shall be applied herein as defined or established
--------------
therein. This Revolving Note ("Note") is issued pursuant to the Loan Agreement,
----
is the "Revolving Note" referred to therein, and is entitled to the benefit and
security of the Loan Documents provided for therein, to which a reference is
hereby made for a statement of all of the terms and conditions under which the
Revolving Loans are made and are to be repaid. All of the terms, covenants, and
conditions of the Loan Agreement and all other Instruments evidencing or
securing the Indebtedness hereunder, including the Loan Documents, are hereby
made a part of this Note and are deemed incorporated herein in full. The date
and amount of each Revolving Loan made by Payee to Borrower, the rates of
interest applicable thereto, and each payment made on account of the principal
thereof shall be recorded by Payee on its books and records; provided, that the
--------
failure by Payee to make any such recordation shall not affect the obligations
of Borrower to make payment when due of any amount owing under the Loan
Documents in respect of the Revolving Loan made by Payee to Borrower.
The principal amount of the Indebtedness from time to time evidence
hereby may be repaid and reborrowed and shall be payable in the amounts and on
the dates specified in the Loan Agreement and, if not sooner paid in full, on
the Commitment Maturity Date. Interest on the outstanding principal amount of
this Note shall be paid until such principal amount is paid in full at such
rates of interest, including the Default Rate, if applicable, and at such times
as are specified in the Loan Agreement.
Except as otherwise provided in the Loan Agreement, if any payment or
prepayment on this Note becomes due and payable on a day other than a Business
Day, the maturity thereof shall be extended to the next succeeding Business Day
and, with respect to payments of principal,interest thereon shall be payable at
the then applicable rate during such extension.
Upon the occurrence and during the continuance of an Event of Default,
this Note may, without demand, notice, or legal process of any kind, as provided
in the Loan Agreement,
1
<PAGE>
be declared, and upon such declaration immediately shall become, or upon certain
circumstances set forth in the Loan Agreement may become without declaration,
due and payable.
Time is of the essence of this Note. To the fullest extent permitted
by applicable law, Borrower waives presentment, demand, protest, and notice of
nonpayment and protest.
THIS NOTE SHALL BE GOVERNED BY, AND INTERPRETED AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO THE
PRINCIPLES THEREOF REGARDING CONFLICT OF LAWS, AND ANY APPLICABLE LAWS OF THE
UNITED STATES OF AMERICA.
OVERHILL FARMS, INC., a Nevada corporation
By: ____________________________________
Name: __________________________________
Title: _________________________________
By: ____________________________________
Name: __________________________________
Title: _________________________________
2
<PAGE>
EXHIBIT 10.3
CONTINUING GUARANTY
-------------------
THIS CONTINUING GUARANTY ("Guaranty"), dated as of November 24, 1999, is
--------
made by each undersigned (each, a "Guarantor," and collectively, "Guarantors")
--------- ----------
in favor of UNION BANK OF CALIFORNIA, N.A. ("Bank").
----
RECITALS
--------
A. Overhill Farms, Inc., a Nevada corporation ("Borrower"), Overhill
--------
L.C. Ventures, Inc., a California corporation ("Overhill Ventures"), and Bank
-----------------
are parties to that certain Loan and Security Agreement of even date herewith
(as the same may from time to time be amended, supplemented, or otherwise
modified, the "Loan Agreement"), pursuant to which Bank has agreed, among other
--------------
things, to make the Loans to Borrower upon the terms and conditions set forth
therein.
B. Polyphase Corporation, a Nevada corporation ("Polyphase") owns
---------
all of the issued and outstanding capital stock of Borrower. Overhill Ventures
is a wholly-owned Subsidiary of Borrower.
C. Each Guarantor is a Stockholder or Subsidiary of Borrower and
will derive substantial direct and indirect economic benefit if Bank enters into
the Loan Agreement, and Bank is willing to do so, but only upon the condition,
among others, that each Guarantor shall have executed and delivered this
Guaranty.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the receipt and adequacy of which are hereby
acknowledged, and to induce Bank to enter into the Loan Agreement, it is agreed
as follows:
1. DEFINITIONS; CERTAIN MATTERS OF CONSTRUCTION. Unless otherwise set forth
--------------------------------------------
herein, (a) capitalized terms or matters of construction defined or established
in Schedule A to the Loan Agreement shall be applied herein as defined or
----------
established therein, (b) any reference to a "Section" shall refer to the
relevant section of this Guaranty, and (c) the following terms shall have,
unless otherwise provided elsewhere in this Guaranty, the meanings set forth
below:
"Guaranty" shall mean this Continuing Guaranty, including any and all
--------
amendments, modifications and supplements to such guaranty, and shall refer to
such guaranty as the same may be in effect at the time such reference becomes
operative.
"Guaranty Obligations" shall mean (a) the Obligations and (b) all
--------------------
indebtedness, liabilities, and obligations of each Guarantor to Bank whether now
existing or hereafter arising under this Guaranty.
"Guaranty Termination Date" shall mean the date on which Borrower shall
-------------------------
have no further right to receive any financial accommodations under the Loan
Agreement and the then due and payable Obligations and Guaranty Obligations
shall have been completely satisfied.
<PAGE>
2. THE GUARANTY
------------
2.1 Guaranty of the Obligations.
---------------------------
(a) In consideration of the Loans and all other financial
accommodations to or for the benefit of Borrower and Guarantors, and for other
valuable consideration, the receipt and sufficiency of which each Guarantor
hereby acknowledges, each Guarantor hereby unconditionally, irrevocably,
absolutely, and jointly and severally guarantees to Bank and its successors,
endorsees, transferees, and assigns, the prompt payment (whether at stated
maturity, by acceleration, or otherwise) and performance of the Obligations,
whether now or hereafter existing, and whether for principal, interest, fees,
expenses, or otherwise, howsoever created, arising, or evidenced, whether direct
or indirect, absolute or contingent, or now or hereafter existing or due or to
become due (including in all cases all such amounts that would become due but
for the operation of the provisions of the Bankruptcy Code or any other similar
statutes).
(b) This Guaranty constitutes a guaranty of payment and performance
when due and not of collection, and each Guarantor specifically agrees that it
shall not be necessary or required that Bank or any of its successors,
endorsees, transferees, or assigns assert any claim or demand or enforce any
remedy whatsoever against Borrower or any other Person before or as a condition
to the obligations of such Guarantor under this Guaranty.
(c) Notwithstanding anything herein or in any other Loan Document to
the contrary, the maximum liability of each Guarantor hereunder and under the
other Loan Documents shall in no event exceed the amount which can be guaranteed
by such Guarantor under applicable federal and state laws relating to the
insolvency of debtors.
2.2 Absolute Guaranty. The Guaranty Obligations shall remain in full
-----------------
force and effect without regard to, and shall not be impaired or affected by, or
be deemed to be satisfied by, and no Guarantor or any Collateral shall be
exonerated, discharged, or released by, any of the following events:
(a) Bank's exercise or enforcement of, or failure or delay in
exercising or enforcing, legal proceedings to collect the Obligations or the
Guaranty Obligations or any power, right, or remedy with respect to any of the
Obligations, the Guaranty Obligations or the Collateral, including: (I) any
action or inaction of Bank to perfect, protect, or enforce any Lien upon any
Collateral; (ii) any impairment or invalidity of the Collateral or any
suspension of Bank's right to enforce against Borrower, any Guarantor, or any
other guarantor of the Obligations, any Obligations, any Guaranty Obligations,
or any Lien upon the Collateral; or (iii) any change in the time, manner, or
place of payment of, or in any other term of, any or all of the Obligations or
the Guaranty Obligations, or any other amendment to, or waiver of, the Loan
Agreement, any other Loan Document, or any other agreement or instrument
governing or evidencing any of the Obligations or the Guaranty Obligations;
(b) insolvency, bankruptcy, reorganization, arrangement, adjustment,
composition, assignment for the benefit of creditors, appointment of a receiver
or trustee for all or any part of Borrower's or any Guarantor's assets or of the
assets of any other guarantor of the Obligations, liquidation, winding-up, or
dissolution of Borrower, any Guarantor, or any other guarantor of the
Obligations;
(c) any limitation, discharge, cessation, or partial satisfaction of
the Obligations, the Guaranty Obligations, or the obligations of any other
guarantor of the Obligations (except as provided in subparagraphs f(i) or (ii)
of this Section 2.2), whether by operation of any statute, regulation, or rule
-----------
of law, or otherwise, regardless of the intervention or omission of Bank, or any
invalidity, voidability, unenforceability, or irregularity, or future change to
or amendment of, in whole or in part, the Loan
2
<PAGE>
Agreement, this Guaranty, any other Loan Document, or any other document
evidencing any Obligations or Guaranty Obligations;
(d) (i) any merger, acquisition, consolidation or change in structure
of Borrower, any Guarantor, or any other guarantor of the Obligations; (ii) any
sale, lease, transfer, or other disposition of any or all of the assets or Stock
of Borrower, any Guarantor, or any other guarantor of the Obligations, including
any transfer by Borrower of all or any part of any Collateral in which Bank has
been granted a Lien pursuant to the Loan Documents; or (iii) termination of
Borrower's existence for any reason;
(e) any assignment or other transfer, in whole or in part, of Bank's
interest in and rights under the Loan Agreement or any other Loan Document,
including this Guaranty, or of Bank's interest in the Obligations, the Guaranty
Obligations, or the Collateral;
(f) any claim, defense, counterclaim, or setoff that Borrower, any
Guarantor, or any other guarantor of the Obligations may have or assert,
including any defense of incapacity, disability, or lack of corporate or other
authority to execute any documents relating to the Obligations, the Guaranty
Obligations, the Collateral, or any other guaranty of the Obligations, other
than (i) upon the occurrence of the Guaranty Termination Date, the defense of
prior performance or (ii) any defense based on any applicable provision of the
UCC requiring that the Collateral be disposed of in a commercially reasonable
manner;
(g) any cancellation, renunciation, or surrender of any pledge,
guaranty, or any debt instrument evidencing the Obligations or the Guaranty
Obligations;
(h) Bank's vote, claim, distribution, election, acceptance, action,
or inaction in any bankruptcy or reorganization case related to the Obligations,
the Guaranty Obligations, or the Collateral;
(i) any other action or circumstance that might otherwise constitute
a defense available to, or a legal or equitable discharge of, any surety,
guarantor or pledgor (except as provided in subparagraphs f(i) or (ii) of this
Section 2.2); or
- -----------
(j) the fact that any of the Obligations or the Guaranty Obligations
may become due or payable in connection with or by reason of any agreement or
transaction that may be illegal, invalid, or unenforceable in whole or in part;
it being agreed by each Guarantor that the Guaranty Obligations shall not be
discharged until the Guaranty Termination Date.
2.3 Demand by Bank. In addition to the terms set forth in Section 2.1 and
-------------- -----------
Section 2.2, and in no manner imposing any limitation on such terms, it is
- -----------
expressly understood and agreed that if any of the Obligations are declared to
be or otherwise become immediately due and payable, then each Guarantor shall,
upon demand in writing therefor by Bank to such Guarantor, immediately pay the
Guaranty Obligations to Bank. Payment by Guarantors shall be made to Bank to be
credited and applied upon the Obligations, in immediately available funds in
Dollars, to an account designated by Bank or at the address set forth below the
signature of Bank or at any other address that may be specified in writing from
time to time by Bank. This Section 2.3 shall in no way affect Bank's right to
-----------
resort to the Collateral without demand under Section 8. Any payment received
---------
by Bank with respect to the Obligations shall reduce the Guaranty Obligations by
the amount of such payment.
3
<PAGE>
2.4 Guarantor Waivers. In addition to any other waivers contained herein,
-----------------
each Guarantor waives, agrees, and acknowledges as follows:
(a) The Guaranty Obligations are the immediate, direct, primary, and
absolute liabilities of such Guarantor, and are independent of, and not co-
extensive with, the Obligations or the obligations of any other guarantor
thereof. Such Guarantor expressly waives any right it may now or in the future
have to direct or affect the manner or timing of Bank's enforcement of its
rights or remedies. Such Guarantor expressly waives any right it may now or in
the future have to require Bank to, and Bank shall have no liability to, first
pursue or enforce against Borrower, any of the properties or assets of Borrower,
the Collateral, or any other security, guaranty, or pledge that may now or
hereafter be held by Bank for the Obligations or for the Guaranty Obligations,
or to apply such security, guaranty, or pledge to the Obligations or to the
Guaranty Obligations, or to pursue any other remedy in Bank's power that such
Guarantor may or may not be able to pursue itself and that may lighten such
Guarantor's burden, before proceeding against the Collateral. Such Guarantor
agrees that any notice or directive given at any time to Bank that is
inconsistent with the waiver in the immediately preceding sentence shall be null
and void and may be ignored by Bank, and, in addition, may not be pleaded or
introduced as evidence in any litigation or other dispute resolution procedure
relating to this Guaranty for the reason that such pleading or introduction
would be at variance with the written terms of this Guaranty, unless Bank has
specifically agreed otherwise in writing. Such Guarantor shall remain liable for
the Guaranty Obligations, notwithstanding any judgment Bank may obtain against
Borrower, any Guarantor, any other guarantor of the Obligations, or any other
Person, or any modification, extension, or renewal with respect thereto.
(b) Such Guarantor has entered into this Guaranty based solely upon
its independent knowledge of Borrower's and each other Guarantor's financial
condition and such Guarantor assumes full responsibility for obtaining any
further information with respect to such Person or the conduct of its business.
Such Guarantor represents that it is now, and during the terms of this Guaranty
will be, responsible for ascertaining the financial condition of Borrower and
each other Guarantor. Such Guarantor hereby waives any duty on the part of Bank
to disclose to such Guarantor, and agrees that it is not relying upon or
expecting Bank to disclose to it, any fact known or hereafter known by Bank
relating to the operation or condition of Borrower or any other Guarantor or its
business or relating to the existence, liability, or financial condition of any
other guarantor of the Obligations. Such Guarantor knowingly accepts the full
range of risk encompassed in a contract of continuing guaranty, which risk
includes the possibility that Borrower may incur Obligations after Borrower's
financial condition or its ability to pay its debts as they mature has
deteriorated.
(c) Bank shall not be under any liability to marshal any assets in
favor of any Guarantor or in payment of any or all of the Obligations or the
Guaranty Obligations.
(d) Except as specifically provided in Section 2.3 or as otherwise
-----------
provided for in this Guaranty or under applicable law, such Guarantor waives, to
the fullest extent permitted by applicable law: (i) notice of the acceptance by
Bank of this Guaranty, (ii) notice of the existence, creation, payment,
nonpayment, performance or nonperformance of all or any of the Guaranty
Obligations, (iii) presentment, demand and protest, and notice of presentment,
dishonor, intent to accelerate, acceleration, protest, default, nonpayment,
maturity, release, compromise, settlement, extension or renewal of any or all of
the Loan Documents, notes, commercial paper, accounts, contract rights,
documents, instruments, chattel paper and guaranties at any time held by Bank on
which such Guarantor may in any way be liable, and hereby ratifies and confirms
whatever Bank may do in this regard; (iv) all rights to notice and a hearing
prior to Bank's taking possession or control of, or to Bank's replevy,
attachment, or levy upon, the Collateral or any bond or security that might be
required by any court prior to allowing Bank to exercise any of its remedies;
(v) all rights to receive notices from Bank with respect to, or otherwise sent
to, any of the other Guarantors
4
<PAGE>
or any other guarantor, (vi) the benefit of all valuation, appraisal and
exemption laws, (vii) the benefit of any law purporting to reduce such
Guarantor's obligation in proportion to the principal obligation hereby
guarantied, such as Section 2809 of the California Civil Code, (viii) the
benefit of any law purporting to exonerate such Guarantor's obligation upon
performance or an offer of performance of the principal obligation, such as
Section 2839 of the California Civil Code, (ix) notice of any extension,
modification, renewal, or amendment of any of the terms of the Loan Agreement or
any other Loan Document relating to the Obligations or the Guaranty Obligations;
(x) notice of the occurrence of any Default or Event of Default with respect to
the Obligations, the Guaranty Obligations, the Collateral, or otherwise; and
(xi) notice of any exercise or non-exercise by Bank of any right, power, or
remedy with respect to the Obligations, the Guaranty Obligations, or the
Collateral.
(e) Notice to any Guarantor shall constitute notice to all of the
Guarantors.
(f) Such Guarantor has been advised by counsel of its choice with
respect to this Guaranty, the other Loan Documents, and the transactions
evidenced hereby and thereby.
(g) Until the Guaranty Termination Date, such Guarantor shall have no
right of subrogation, reimbursement, indemnity, or contribution, and shall have
no right of recourse with respect to the Collateral or any Lien held therefor,
all of which such Guarantor expressly waives.
(h) Bank may, under applicable law, proceed to realize its benefits
under any Loan Document giving Bank a Lien upon any Collateral, whether owned by
Borrower or by any other Person, either by judicial foreclosure or by
nonjudicial sale or enforcement, and Bank may, at its sole option, determine
which of its remedies or rights it may pursue without affecting any of its
rights and remedies under this Guaranty. In the event Bank shall bid at any
foreclosure or trustee's sale or at any public or private sale permitted by law
or the Loan Documents, Bank may bid all or less than the amount of the
Obligations or the Guaranty Obligations and the amount of such bid need not be
paid by Bank but shall be credited and applied as set forth in Section 9. The
---------
amount of the successful bid at any such sale, whether Bank or any other party
(including any Guarantor) is the successful bidder, shall be deemed to be prima
-----
facie evidence of the fair market value of the Collateral and the amount
- -----
remaining after application of such bid amount in the manner set forth in
Section 9 shall be deemed to be prima facie evidence of the amount of the
- --------- ----- -----
Obligations guaranteed under this Guaranty, notwithstanding that any present or
future law or court decision or ruling may have the effect of reducing the
amount of any deficiency claim to which Bank might otherwise be entitled but for
such bidding at any such sale.
(i) Such Guarantor agrees and represents that the Obligations and
Guaranty Obligations are and shall be incurred by Borrower and such Guarantor
for business and commercial purposes only. Such Guarantor agrees that any claim
of Bank against such Guarantor arising out of this Guaranty arises out of the
conduct by such Guarantor of its trade, business, or profession. Such Guarantor
undertakes all the risks encompassed in the Loan Agreement and the other Loan
Documents as they may be now or are hereafter agreed upon by Bank, and Borrower.
Such Guarantor agrees that prior to the Guaranty Termination Date, Bank, in such
manner and upon such terms and at such time as it deems best, and with or
without notice to any Guarantor, may release, add, subordinate, or substitute
security for the Obligations or the Guaranty Obligations.
(j) Such Guarantor waives and agrees that it shall not at any time
insist upon, plead, or in any manner whatever claim or take the benefit or
advantage of, any appraisal, valuation, stay, extension, or redemption laws, or
any exemption, whether now or at any time hereafter in force, that may delay,
prevent, or otherwise affect the performance by such Guarantor of the Guaranty
Obligations or the enforcement by Bank of this Guaranty.
5
<PAGE>
(k) A separate action or actions may be brought and prosecuted by
Bank against any Guarantor whether or not an action is brought against Borrower,
or whether Borrower is joined in any such action or actions. Without limiting
the generality of the foregoing, such Guarantor expressly waives the benefit of
any statute of limitation affecting the Obligations and expressly agrees that
the running of a period of limitation on, or Bank's delay or omission in, any
action by Bank against Borrower or for the foreclosure or enforcement of any
Lien upon the Collateral shall not exonerate or affect such Guarantor's
liability to pay and perform the Guaranty Obligations.
2.5 Waivers Under Statutes. Each Guarantor expressly acknowledges that:
----------------------
(a) If Borrower defaults in the payment or performance of the
Obligations and such Guarantor pays to Bank all or part of the Obligations, then
such Guarantor would have a right to proceed against Borrower to the extent of
the Obligations so paid by such Guarantor and to have the benefit of any Lien
held by Bank for the Obligations to the extent of the Obligations so paid by
such Guarantor. Such right is commonly known as the "right of subrogation."
(b) If Borrower defaults in the payment or performance of the
Obligations, then Bank, among other things, may enforce any Lien upon any
interest in real property of Borrower or such Guarantor, to the extent that any
such Lien is granted by Borrower or such Guarantor after the date hereof to
secure the payment and performance of the Obligations (any such Lien, a "Real
----
Property Lien"), by means of judicial action or by nonjudicial action commonly
- -------------
known as a "nonjudicial foreclosure," "trustee's sale," or "power of sale
foreclosure."
(c) If Borrower so defaults and Bank enforces any Real Property Lien
by means of a nonjudicial foreclosure, trustee's sale, or power of sale
foreclosure, then such Guarantor's right of subrogation to proceed against
Borrower would be extinguished by the operation of Section 580d of the
California Code of Civil Procedure ("CCP") or any other comparable provisions of
---
any other state, and, in such case, such Guarantor might have a defense against
payment under this Guaranty.
(d) If Borrower so defaults and Bank enforces any Real Property Lien
by means of judicial action, such Guarantor's right to proceed against Borrower
might be limited by the operation of Section 580a of the CCP or any other
comparable provisions of any other state, in which case such Guarantor might
have a complete or partial defense against payment under this Guaranty.
Nevertheless, such Guarantor expressly, knowingly, and intentionally
waives and relinquishes any and all rights, defenses, or benefits such Guarantor
might have under Sections 580a or 580d of the CCP or any other comparable
provisions of any other state. In addition, such Guarantor also expressly,
knowingly, and intentionally waives and relinquishes any and all rights,
defenses, or benefits such Guarantor may have based upon an election of remedies
by Bank that in any manner impairs, affects, reduces, releases, destroys or
extinguishes such Guarantor's subrogation rights or such Guarantor's rights to
proceed against Borrower or against any other Person or any security for the
Guaranty Obligations by way of subrogation, indemnity, contribution,
reimbursement, or otherwise. In particular, such Guarantor agrees that this
Guaranty will remain fully effective and such Guarantor will be liable to Bank
for any Guaranty Obligations even if Bank enforces any Real Property Lien that
secures the Obligations by means of a nonjudicial foreclosure, trustee's sale,
or power of sale foreclosure and the effect of such sale is to prevent such
Guarantor from taking any action against Borrower to recover any amounts paid by
such Guarantor to Bank under this Guaranty or otherwise limits or destroys such
Guarantor's right of subrogation.
6
<PAGE>
Such Guarantor waives all rights and defenses arising out of an
election of remedies by Bank, even though that election of remedies, such as a
nonjudicial foreclosure with respect to security for the Obligations, has
destroyed such Guarantor's rights of subrogation and reimbursement against
Borrower by the operation of Section 580d of the CCP or otherwise, or any other
comparable provisions of any other state.
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SUCH GUARANTOR
WAIVES ALL RIGHTS AND DEFENSES THAT IT MAY HAVE BECAUSE BORROWER'S DEBT IS NOW,
OR MAY HEREAFTER BE, SECURED BY REAL PROPERTY. THIS MEANS, AMONG OTHER THINGS:
(1) BANK MAY COLLECT FROM SUCH GUARANTOR WITHOUT FIRST FORECLOSING ON ANY REAL
OR PERSONAL PROPERTY COLLATERAL PLEDGED BY BORROWER; (2) IF BANK FORECLOSES ON
ANY REAL PROPERTY COLLATERAL PLEDGED BY BORROWER: (A) THE AMOUNT OF THE DEBT MAY
BE REDUCED ONLY BY THE PRICE FOR WHICH THAT COLLATERAL IS SOLD AT THE
FORECLOSURE SALE, EVEN IF THE COLLATERAL IS WORTH MORE THAN THE SALE PRICE; (B)
BANK MAY COLLECT FROM SUCH GUARANTOR EVEN IF BANK, BY FORECLOSING ON THE REAL
PROPERTY COLLATERAL, HAS DESTROYED ANY RIGHT SUCH GUARANTOR MAY HAVE TO COLLECT
FROM BORROWER. THIS IS AN UNCONDITIONAL AND IRREVOCABLE WAIVER OF ANY RIGHTS AND
DEFENSES ANY GUARANTOR MAY HAVE BECAUSE BORROWER'S DEBT IS NOW, OR HEREAFTER MAY
BE, SECURED BY REAL PROPERTY. THESE RIGHTS AND DEFENSES INCLUDE, BUT ARE NOT
LIMITED TO, ANY RIGHTS OR DEFENSES BASED UPON SECTIONS 580a, 580b, 580d, OR 726
OF THE CCP.
IN ADDITION, SUCH GUARANTOR WAIVES ALL RIGHTS AND DEFENSES ARISING OUT
OF AN ELECTION OF REMEDIES BY BANK, EVEN THOUGH THAT ELECTION OF REMEDIES, SUCH
AS A NONJUDICIAL FORECLOSURE WITH RESPECT TO SECURITY FOR A GUARANTEED
OBLIGATION, HAS DESTROYED SUCH GUARANTOR'S RIGHTS OF SUBROGATION AND
REIMBURSEMENT AGAINST THE PRINCIPAL BY THE OPERATION OF SECTION 580d OF THE CCP
OR OTHERWISE.
2.6 Waivers of Defenses. Except as provided in Section 2.2(f)(i) and
------------------- -----------------
(ii), such Guarantor waives any defense based upon or arising by reason of: (a)
- ----
any disability or other defense of Borrower or any other Person; (b) the
cessation of liability or limitation from any cause whatsoever of the
Obligations or any portion thereof, other than the occurrence of the Guaranty
Termination Date; (c) any lack of authority of any agent or other person acting
or purporting to act on behalf of Borrower, or any defect in the formation of
Borrower; (d) the application by Borrower of the proceeds of the Obligations for
purposes other than the purposes represented to, or intended or understood by,
Bank or such Guarantor; (e) any act or omission by Bank that directly or
indirectly results in or aids the discharge of Borrower or any portion of the
Obligations by operation of law or otherwise; or (f) any modification of the
Obligations in any form whatsoever, including the renewal, extension,
acceleration or other change in time for payment of the Obligations, or other
change in the terms of the Obligations or any part thereof, including increase
or decrease of the rate of interest thereon.
2.7 Benefits of Guaranty. The provisions of this Guaranty are for the
--------------------
benefit of Bank and its successors, transferees, endorsees, and assigns, and
nothing herein shall impair, as between Borrower, Guarantors, and Bank, the
Obligations. No such transfer, endorsement, or assignment shall increase or
diminish any of the Guaranty Obligations hereunder. This Guaranty binds each
Guarantor, and no Guarantor may assign, transfer, or endorse this Guaranty. In
the event all or any part of the Obligations
7
<PAGE>
are transferred, endorsed, or assigned by Bank to any Person or Persons, any
reference to "Bank" herein shall be deemed to refer equally to such Person or
Persons.
2.8 Continuing Guaranty. Each Guarantor agrees that (a) this is a
-------------------
continuing guaranty, (b) this Guaranty shall remain in full force and effect
until the Guaranty Termination Date, and (c) the Guaranty Obligations hereunder
shall extend to each and every extension or renewal, if any, of the Loan
Agreement, regardless of whether the Obligations may, in successive
transactions, be paid, repaid, advanced, or renewed from time to time.
2.9 Subordination.
-------------
(a) Each Guarantor hereby agrees that, until the Guaranty Termination
Date, all obligations and all indebtedness of Borrower to such Guarantor,
including any and all present and future indebtedness regardless of its nature
or manner of origination now or hereafter to become due and owing by Borrower to
such Guarantor (collectively, the "Subordinated Indebtedness"), are hereby
-------------------------
subordinated and postponed and shall be inferior, in all respects, to the
Obligations.
(b) In no circumstance shall any Subordinated Indebtedness be
entitled to any collateral security; provided, that in the event any such
--------
collateral security exists, each Guarantor hereby agrees that any now existing
or hereafter arising Lien upon any of the assets of Borrower, in favor of such
Guarantor, whether created by contract, assignment, subrogation, reimbursement,
indemnity, operation of law, principles of equity, or otherwise, shall be junior
and inferior to, and is hereby subordinated in priority to any now existing or
hereafter arising Liens in favor of Bank, or in and against the Collateral,
regardless of the time, manner, or order of creation, attachment, or perfection
of the respective Liens.
(c) Each Guarantor hereby agrees that it shall not assert, collect,
accept payment on, or enforce any of the Subordinated Indebtedness or take
collateral or other security to secure payment of the Subordinated Indebtedness
until the Guaranty Termination Date. Each Guarantor shall not demand payment of,
accelerate the maturity of, or declare a default or event of default under the
Subordinated Indebtedness until the Guaranty Termination Date. Each Guarantor
shall not cause or permit Borrower to make or give, and such Guarantor shall not
receive or accept, payment in any form (direct or indirect, including by
transfer to an Affiliate of Borrower or any Guarantor) on account of the
Subordinated Indebtedness, make any transfers in respect of the Subordinated
Indebtedness unless expressly permitted by the Loan Agreement or without the
express prior written consent of Bank (which consent may be withheld for any
reason in Bank's sole discretion), or give any collateral security for the
Subordinated Indebtedness. Any payment, transfer, or collateral security so made
or given by Borrower and received or accepted by such Guarantor, without the
express prior written consent of Bank, shall be held in trust by such Guarantor
for Bank, and such Guarantor shall immediately turn over, in kind, any such
payment to Bank for application in reduction of, or (in the case of property
other than cash) as security for, the Guaranty Obligations. Bank is authorized
and empowered, but not obligated, in its discretion, (i) in the name of any
Guarantor, to collect and enforce, and to submit claims in respect of,
Indebtedness of Borrower to such Guarantor and to apply any amounts received
thereon to the Guaranty Obligations, and (ii) to require any Guarantor (A) to
collect and enforce, and to submit claims in respect of, any indebtedness of
Borrower to such Guarantor, and (B) to pay any amounts received on such
Indebtedness to Bank for application to the Guaranty Obligations.
3. SECURITY FOR CONTINUING GUARANTY. Polyphase's performance under this
--------------------------------
Guaranty is secured in accordance with the terms of the Pledge Agreement, and
Overhill Ventures' performance under this Guaranty is secured in accordance with
the terms of the Loan Agreement. In addition, to secure such performance under
this Guaranty, each Guarantor grants to Bank a Lien upon all monies, general and
8
<PAGE>
special deposits, Instruments, and other property of such Guarantor at any time
maintained with or held by Bank, and all Proceeds of the foregoing.
4. REPRESENTATIONS AND WARRANTIES. To induce Bank to make the Loans under the
------------------------------
Loan Agreement, each Guarantor makes the following representations and
warranties, each and all of which shall survive the execution and delivery of
this Guaranty:
4.1 Guarantors' Addresses. Such Guarantor's name and address are
---------------------
accurately set forth on the signature page to this Guaranty.
4.2 Capacity to Execute Guaranty. The execution, delivery and performance
----------------------------
by such Guarantor of this Guaranty are within the capacity of such Guarantor.
4.3 No Violation or Default. The execution, delivery, and performance of
-----------------------
this Guaranty and all other Loan Documents and all Instruments and documents to
be delivered by such Guarantor hereunder and under the Loan Agreement (a) will
not violate any law or regulation, or any order or decree of any court or
Governmental Authority (each, a "Requirement of Law"), (b) will not conflict
------------------
with or result in the breach of, or constitute a default under, any obligation
under any indenture, mortgage, deed of trust, lease, agreement, or other
Instrument to which such Guarantor is a party or by which such Guarantor or any
of its property is bound (each, a "Contractual Obligation"), (c) will not result
----------------------
in the creation or imposition of any Lien upon any of the property of such
Guarantor (except as granted to Bank) and (e) do not require the consent or
approval of any Governmental Authority or any other Person except those already
obtained.
4.4 Solvency. Now, and upon the consummation of the transactions
--------
contemplated by this Guaranty and the other Loan Documents, (a) the fair value
of the property of such Guarantor is greater than the total amount of
liabilities, including contingent liabilities, of such Guarantor; (b) the
present fair salable value of the assets of such Guarantor is not less than the
amount that will be required to pay the probable liability of such Guarantor on
its debts as they become absolute and matured; (c) such Guarantor does not
intend to, and does not believe that it will, incur debts or liabilities beyond
such Guarantor's ability to pay as such debts and liabilities mature; and (d)
such Guarantor is not engaged in a business or transaction, and is not about to
engage in a business or transaction, for which such Guarantor's property would
constitute an unreasonably small capital. The amount of contingent liabilities
(such as litigation, guaranties and pension plan liabilities) at any time shall
be computed as the amount that, in light of all the facts and circumstances
existing at the time, represents the amount that can be reasonably be expected
to become an actual or matured liability.
4.5 Enforceable Liabilities. At or prior to the Closing Date, this
-----------------------
Guaranty shall have been duly executed and delivered by such Guarantor, and
shall then constitute a legal, valid, and binding obligation of such Guarantor,
enforceable against such Guarantor in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, or other similar laws
affecting the rights of creditors generally or by the application of general
principles of equity.
4.6 No Setoff, Defense, or Counterclaim. As of the date of this Guaranty,
-----------------------------------
the Guaranty Obligations are not subject to any setoff or defense of any kind
against Bank or Borrower, and such Guarantor specifically waives its right to
assert any such defense or right of setoff. The Guaranty Obligations shall not
be subject to any counterclaims, setoffs, or defenses against Bank or Borrower
that may arise in the future, except for (a) any defense of prior performance or
payment based on the occurrence of the Guaranty Termination Date, or (b) any
defense based on any applicable provision of the UCC requiring that the
Collateral be disposed of in a commercially reasonable manner, that Borrower,
any Guarantor, or other guarantor of the Obligations may have or assert.
9
<PAGE>
4.7 Payment of Taxes. Such Guarantor has paid all taxes and other charges
----------------
imposed by any Governmental Authority due and payable by such Guarantor other
than those that are being challenged in good faith by appropriate proceedings
and for which adequate reserves have been established.
4.8 No Violation. Such Guarantor is not in violation of any Requirement
------------
of Law or Contractual Obligation.
4.9 Litigation. No material litigation, investigation or proceeding of
----------
any Governmental Authority is pending or, to the knowledge of such Guarantor,
threatened against any Guarantor, except as disclosed to Bank in Schedule 3.13
-------------
to the Loan Agreement or otherwise.
5. FURTHER ASSURANCES; FINANCIAL INFORMATION. Each Guarantor agrees that it
-----------------------------------------
will, at its expense, upon the written request of Bank, from time to time,
promptly execute and deliver to Bank any additional Instruments or documents
reasonably considered necessary by Bank to cause this Guaranty to be, become, or
remain valid and effective in accordance with its terms. Each Guarantor will
provide Bank in writing such financial and other information with respect to its
assets and liabilities as Bank shall reasonably request from time to time, in
form satisfactory to Bank.
6. PAYMENTS FREE AND CLEAR OF TAXES. Any and all payments by or on behalf of
--------------------------------
any Guarantor shall be made, in accordance with this Section 6, free and clear
---------
of and without deduction for any and all present or future taxes. If any
Guarantor shall be required by law to deduct any taxes from or in respect of any
sum payable hereunder to Bank, (a) the sum payable shall be increased as may be
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 6), Bank receives an
---------
amount equal to the sum it would have received had no such deductions been made,
(b) such Guarantor shall make such deductions and (c) such Guarantor shall pay
the full amount deducted to the relevant taxing or other authority in accordance
with applicable law. Upon request by Bank, each Guarantor shall furnish to Bank
a receipt for any taxes paid by such Guarantor pursuant to this Section 6 or
---------
other document evidencing payment thereof or, if no taxes are payable with
respect to any payments required to be made by such Guarantor hereunder, either
a certificate from each appropriate taxing authority or an opinion of counsel
acceptable to Bank, in either case stating that such payment is exempt from or
not subject to taxes. If taxes are paid by Bank as a result of payments under
this Guaranty, then each Guarantor will, upon demand of Bank, and whether or not
such taxes shall be correctly or legally asserted, indemnify Bank for such
payments in accordance with the terms of the Loan Agreement, together with any
interest, penalties, and expenses in connection therewith plus interest thereon
at the rate specified in the Loan Documents that is then applicable to the Loan
Agreement (calculated as if such payments constituted overdue amounts of
principal as of the date of the making of such payments).
7. REINSTATEMENT. This Guaranty shall remain in full force and effect and
-------------
continue to be effective, as the case may be, if at any time payment or
performance of the Obligations or the Guaranty Obligations, or any part thereof,
is, pursuant to applicable law, avoided, rescinded or reduced in amount, or must
otherwise be restored or returned by Bank or any other obligee of the
Obligations or the Guaranty Obligations, whether as a "voidable preference,"
"fraudulent conveyance," or otherwise, all as though such payment or performance
had not been made. In the event that any payment, or any part thereof, is
avoided, rescinded, reduced, restored, or returned, the Obligations or the
Guaranty Obligations, as the case may be, shall be reinstated and deemed reduced
only by such amount paid and not so avoided, rescinded, reduced, restored, or
returned.
8. DEFAULTS AND REMEDIES. Upon the occurrence and during the continuance of
---------------------
an Event of Default, Bank may declare all of the Guaranty Obligations,
immediately and without demand, notice, or legal process of any kind, to be, and
such Guaranty Obligations shall immediately become, due and
10
<PAGE>
payable, and then, or at any subsequent time, Bank may exercise any or all of
its rights and remedies under this Guaranty, the Loan Agreement, and any other
Loan Documents and under applicable law, and may, in addition, make demand upon
any Guarantor for the payment of the Guaranty Obligations; provided, that upon
--------
the occurrence of an Event of Default specified in Sections 7.1(f) or (g) of the
--------------
Loan Agreement, the Guaranty Obligations shall become immediately due and
payable without declaration, notice, or demand by Bank.
9. APPLICATION OF PAYMENTS. Any payment made by any Guarantor under this
-----------------------
Guaranty shall be applied by Bank first, to the satisfaction of Guarantors'
indemnification liabilities pursuant to Section 10, and then, in the order of
----------
priorities set forth in Section 1.12 of the Loan Agreement.
------------
10. INDEMNIFICATION. Each Guarantor agrees to indemnify and hold Bank harmless
---------------
from and against any taxes, liabilities, claims, and damages, including
reasonable costs, attorneys' fees, and disbursements, and other expenses
incurred or arising by reason of the taking or the failure to take action by
Bank, in good faith, in respect of any transaction effected under this Guaranty,
including any action to enforce payment of the Guaranty Obligations, or in
connection with the Lien upon the Collateral, including any taxes payable in
connection with the delivery of any of the Collateral as provided herein;
provided, that no Guarantor shall be required to (a) indemnify Bank for an act
- --------
or omission by Bank that is finally determined by a referee or a court of
competent jurisdiction to have resulted from Bank's gross negligence or willful
misconduct or (b) reimburse Bank for any fees or expenses of Bank incurred in
connection with any action (i) between such Guarantor and Bank on this Guaranty
or any other Loan Document pending before a referee or a court of competent
jurisdiction, (ii) that has not been voluntarily dismissed by Borrower or
dismissed pursuant to a settlement thereof, and (iii) in which a final, non-
appealable judgment or order shall have been entered in favor of such Guarantor
containing a determination that such Guarantor is the prevailing party. The
liabilities of each Guarantor under this Section 10 shall survive the
----------
termination of this Guaranty.
11. NOTICES. Except as otherwise provided herein, whenever it is provided
-------
herein that any notice, demand, request, consent, approval, declaration, or
other communication shall or may be given to or served upon any of the parties
by any other parties, or whenever any of the parties desires to give or serve
upon any other parties any communication with respect to this Guaranty, each
such notice, demand, request, consent, approval, declaration, or other
communication shall be in writing and shall be deemed to have been validly
served, given, or delivered (a) upon the earlier of actual receipt and three
Business Days after deposit in the United States Mail, registered or certified
mail, return receipt requested, with proper postage prepaid, (b) upon
transmission, when sent by telecopy or other similar facsimile transmission
(with such telecopy or facsimile promptly confirmed by delivery of a copy by
personal delivery or United States Mail as otherwise provided in this
Section 11), (c) one Business Day after deposit with a reputable overnight
- ----------
courier with all charges prepaid, or (d) when delivered, if hand-delivered by
messenger, all of which shall be addressed to the party to be notified and sent
to the address or facsimile number indicated below such party's signature to
this Guaranty or to such other address (or facsimile number) as may be
substituted by notice given as herein provided. The giving of any notice
required hereunder may be waived in writing by the party entitled to receive
such notice.
12. MISCELLANEOUS
-------------
12.1 Entire Agreement; Amendments. This Guaranty, together with the other
----------------------------
Loan Documents, (a) constitutes the entire agreement between the parties with
respect to the subject matter hereof, and (b) may not be amended or supplemented
except by a writing signed by Bank and each Guarantor.
11
<PAGE>
12.2 Section Titles. The section titles contained in this Guaranty are and
--------------
shall be without substantive meaning or content of any kind whatsoever and are
not a part of the agreement between the parties hereto.
12.3 Recitals. The recitals hereto shall be construed as a part of this
--------
Guaranty.
12.4 Severability. In the event that any one or more of the provisions
------------
contained in this Guaranty shall be determined to be invalid, illegal, or
unenforceable in any respect for any reason, the validity, legality, and
enforceability of any such provision or provisions in every other respect, and
the remaining provisions of this Guaranty, shall not be in any way impaired.
12.5 Conflict of Terms. The Loan Documents, other than this Guaranty, are
-----------------
incorporated in this Guaranty by this reference. Except as otherwise provided
in this Guaranty and except as otherwise provided in the Loan Documents other
than this Guaranty, by specific reference to the applicable provision of this
Guaranty, if any provision contained in this Guaranty is in conflict with, or
inconsistent with, any provision in the Loan Documents other than this Guaranty,
the provisions contained in the Loan Agreement shall govern and control.
12.6 Non-Waiver. None of the liabilities of any Guarantor, and no right or
----------
remedy of Bank under this Guaranty, shall be deemed to have been suspended or
waived by Bank, nor shall Bank be estopped from asserting any such right or
remedy, by Bank's conduct or oral statements, but any such suspension or waiver
of any such right or remedy by Bank must be in writing and signed by Bank. Any
suspension or waiver by Bank of any of its rights or remedies under this
Guaranty shall not suspend or waive any prior or subsequent right or remedy,
whether of the same or of a different type. No delay in the exercise of any
right or remedy of Bank under this Guaranty shall operate as a waiver thereof.
12.7 Guaranty Termination Date. This Guaranty is a continuing Guaranty
-------------------------
that shall remain in full force and effect until the Guaranty Termination Date,
at which time this Guaranty shall terminate and be of no further force and
effect, subject to the reinstatement provisions of Section 7.
---------
12.8 Limitation of Liability. None of Bank, or any of its officers,
-----------------------
directors, employees, agents, or counsel shall be liable for any action lawfully
taken or omitted to be taken by it or them hereunder or in connection herewith,
except for its or their own respective gross negligence or willful misconduct.
13. KNOWING AND EXPLICIT WAIVERS. EACH GUARANTOR REPRESENTS AND WARRANTS THAT
----------------------------
(a) IT IS FULLY AWARE OF THE SPECIFIC PROVISIONS OF DIVISION THREE, PART 4,
TITLE 13 OF THE CALIFORNIA CIVIL CODE, INCLUDING SECTIONS 2787 THROUGH 2855, AND
OF SECTIONS 580a, 580b, AND 580d OF THE CCP, (b) ITS WAIVERS HEREIN OF ALL
RIGHTS, BENEFITS, PROTECTIONS, AND DEFENSES THAT MAY BE AVAILABLE THEREUNDER AND
ALL OTHER WAIVERS HEREIN ARE EXPLICIT, KNOWING WAIVERS, (c) IT HAS EITHER
OBTAINED THE ADVICE OF COUNSEL OR HAS HAD THE OPPORTUNITY TO OBTAIN SUCH ADVICE
IN CONNECTION WITH THE TERMS AND PROVISIONS OF THIS GUARANTY, (d) BY EXECUTING
THIS GUARANTY, IT IS WAIVING CERTAIN RIGHTS AS OTHERWISE SET FORTH HEREIN TO
WHICH IT MAY OTHERWISE BE ENTITLED BY LAW, AND (e) IT IS NOT RELYING UPON ANY
STATEMENTS OR REPRESENTATIONS OF BANK NOT CONTAINED IN THIS GUARANTY AND THAT
SUCH STATEMENTS OR REPRESENTATIONS, IF ANY, ARE OF NO FORCE OR EFFECT AND ARE
FULLY SUPERSEDED BY THIS GUARANTY. THIS GUARANTY CONTAINS THE COMPLETE
12
<PAGE>
UNDERSTANDING OF THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREIN.
14. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. EXCEPT AS OTHERWISE
------------------------------------------------
EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL
MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS GUARANTY AND THE
OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS
MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF
REGARDING CONFLICT OF LAWS AND ANY APPLICABLE LAWS OF THE UNITED STATES OF
AMERICA. EACH PARTY HERETO HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL
COURTS LOCATED IN LOS ANGELES, CALIFORNIA SHALL HAVE EXCLUSIVE JURISDICTION TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES PERTAINING TO THIS GUARANTY OR ANY OF
THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS
GUARANTY OR ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED, THAT EACH PARTY HERETO
--------
ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT
LOCATED OUTSIDE OF LOS ANGELES, CALIFORNIA; PROVIDED FURTHER, THAT NOTHING IN
----------------
THIS GUARANTY SHALL BE DEEMED OR OPERATE TO PRECLUDE BANK FROM BRINGING SUIT OR
TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE COLLATERAL
OR ANY OTHER SECURITY FOR THE OBLIGATIONS OR THE GUARANTY OBLIGATIONS, OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF BANK. EACH PARTY HERETO
EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR
SUIT COMMENCED IN ANY SUCH COURT, AND EACH PARTY HERETO HEREBY WAIVES ANY
OBJECTION THAT SUCH PERSON MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF
--------------------
SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. EACH
PARTY HERETO HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT, AND OTHER
PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINT, AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL ADDRESSED TO SUCH PARTY HERETO AT THE ADDRESS SET FORTH BELOW SUCH PARTY'S
SIGNATURE HERETO AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE
EARLIER OF SUCH PARTY'S ACTUAL RECEIPT THEREOF OR THREE DAYS AFTER DEPOSIT IN
THE UNITED STATES MAILS, PROPER POSTAGE PREPAID.
15. WAIVER OF JURY TRIAL. AS SET FORTH IN THE ALTERNATIVE DISPUTE RESOLUTION
--------------------
AGREEMENT BETWEEN EACH GUARANTOR AND BANK OF EVEN DATE HEREWITH, EACH PARTY TO
THIS AGREEMENT WAIVES ITS RIGHT TO A TRIAL BY JURY AND AGREES TO HAVE ANY
DISPUTE BETWEEN IT AND ANY OTHER PARTY TO THIS AGREEMENT RESOLVED PURSUANT TO
THE TERMS OF SUCH ALTERNATIVE DISPUTE RESOLUTION AGREEMENT.
13
<PAGE>
IN WITNESS WHEREOF, each Guarantor has executed and delivered this
Continuing Guaranty as of the date first above written.
"Guarantors"
OVERHILL L.C. VENTURES, INC.
By:___________________________
Name:_________________________
Title:________________________
Address: 5730 Uplander Way, Suite 201
Culver City, California 90230-6617
Attention: Mr. James Rudis
Telephone: (310) 641-3680
Facsimile: (310) 645-3914
POLYPHASE CORPORATION
By:__________________________
Name:________________________
Title:_______________________
Address: 4800 Broadway
Dallas, Texas 75248
Attention: Mr. James Rudis
Telephone: (972) 386-0101
Facsimile: (972) 386-8008
Agreed To and Accepted By:
"Bank"
UNION BANK OF CALIFORNIA, N.A.
By:__________________________
Name:________________________
Title:_______________________
Address: 445 South Figueroa Street, 15/th/ Floor
Los Angeles, California 90071-1602
Attn.: Commercial Finance Division
Telephone: (213) 236-5336
Facsimile: (213) 236-6089
14
<PAGE>
EXHIBIT 10.4
PLEDGE AGREEMENT
----------------
THIS PLEDGE AGREEMENT (as the same may be amended, restated,
supplemented or otherwise modified from time to time, the "Agreement") dated as
---------
of November 24, 1999, is made by each of the persons named in Schedule I hereto
----------
(such persons being referred to collectively as "Pledgors" and each individually
--------
as a "Pledgor"), in favor of UNION BANK OF CALIFORNIA, N.A. ("Bank").
------- ----
RECITALS
--------
A. Pursuant to that certain Loan and Security Agreement of even date
herewith by and among Overhill Farms, Inc. ("Borrower"), Overhill L.C. Ventures,
--------
Inc. ("Overhill Ventures"), and Bank (including all annexes, exhibits and
-----------------
schedules thereto, as the same may be amended, restated, supplemented or
otherwise modified from time to time, the "Loan Agreement"), Bank has agreed to
--------------
make Loans to and incur Letter of Credit Obligations (each as defined in the
Loan Agreement) for the direct or indirect benefit of Borrower.
B. Each Pledgor is the record and beneficial owner of the shares of
Stock listed as owned by it in Part A of Schedule I hereto and the owner of the
----------
promissory notes and other Instruments and the beneficiary of the letters of
credit listed as held by it in Part B of Schedule I hereto.
----------
C. Each Pledgor is either a direct or indirect beneficiary of the
credit facilities made available to Borrower under the Loan Agreement.
D. In order to induce Bank to make the Loans and to incur the Letter
of Credit Obligations as provided for in the Loan Agreement, each Pledgor has
agreed to pledge the Pledged Collateral to Bank in accordance herewith. These
recitals shall be construed as part of this Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained and to induce the Bank to make Loans and to incur Letter
of Credit Obligations under the Loan Agreement, it is agreed as follows:
1. Definitions. Unless otherwise defined herein, capitalized terms or matters
-----------
of construction defined or established in Schedule A to the Loan Agreement
----------
shall be applied herein as defined or established therein, and the
following terms shall have (unless otherwise provided elsewhere in this
Agreement) the following respective meanings (such meanings being equally
applicable to both the singular and plural form of the terms defined):
"Bankruptcy Code" means title 11, United States Code, as amended
---------------
from time to time, and any successor statute thereto.
"Pledged Collateral" shall have the meaning assigned to it in
------------------
Section 2.
"Pledged Entity" shall mean an issuer of Pledged Stock or Pledged
--------------
Indebtedness.
"Pledged Indebtedness" shall mean the Indebtedness evidenced by
--------------------
the promissory notes, instruments and letters of credit listed on Part B of
Schedule I.
----------
<PAGE>
"Pledged Stock" shall mean those shares listed in Part A of
-------------
Schedule I.
----------
"Secured Obligations" shall have the meaning assigned to it in
-------------------
Section 3.
2. Pledge. Each Pledgor hereby pledges to Bank a first priority Lien
------
on all of the following (collectively, the "Pledged Collateral"):
------------------
(a) the Pledged Stock owned by it and the certificates
representing such Pledged Stock, and all dividends,
distributions, cash, instruments and other property or
Proceeds from time to time received, receivable or
otherwise distributed in respect of or in exchange for
any or all of such Pledged Stock;
(b) any additional shares of Stock of a Pledged Entity
from time to time acquired by such Pledgor in any
manner (which shares shall be deemed to be part of the
Pledged Stock owned by such Pledgor), and the
certificates representing such additional shares, and
all dividends, distributions, cash, instruments and
other property or Proceeds from time to time received,
receivable or otherwise distributed in respect of or in
exchange for any or all of such Stock;
(c) the Pledged Indebtedness held by it and the
promissory notes, instruments and letters of credit
evidencing such Pledged Indebtedness, and all interest,
cash, instruments and other property and assets from
time to time received, receivable or otherwise
distributed in respect of such Pledged Indebtedness;
and
(d) all additional Indebtedness arising after the date
hereof and owing to such Pledgor (other than Polyphase)
and evidenced by promissory notes, instruments or
letters of credit, together with such promissory notes,
instruments and letters of credit, and all interest,
cash, Instruments and other property and assets from
time to time received, receivable or otherwise
distributed in respect of such Pledged Indebtedness.
3. Security for Obligations. This Agreement secures, and the Pledged
------------------------
Collateral is security for, the prompt payment and performance in full when
due, whether at stated maturity, by acceleration or otherwise, of all
Obligations of any kind under or in connection with the Loan Agreement, the
Guaranty, and the other Loan Documents and all obligations of each Pledgor
now or hereafter existing under this Agreement, the Guaranty, or any other
Loan Document to which such Pledgor is a party, including all reasonable
fees, costs and expenses incurred in connection with collection actions
hereunder or thereunder (collectively, the "Secured Obligations").
-------------------
4. Delivery of Pledged Collateral. All certificates and all promissory
------------------------------
notes, Instruments and letters of credit evidencing the Pledged Collateral
shall be delivered to and held by or on behalf of Bank pursuant hereto. All
Pledged Stock shall be accompanied by duly executed instruments of transfer
or assignment in blank, all in form and substance satisfactory to Bank and
all promissory notes or other instruments evidencing the Pledged
Indebtedness shall be endorsed by the Pledgor pledging such Pledged
Indebtedness.
2
<PAGE>
5. Representations and Warranties. Each Pledgor represents and warrants
------------------------------
to Bank that:
(a) (i) Such Pledgor is, and at the time of delivery
of the Pledged Stock owned by it to Bank will be, the
sole holder of record and the sole beneficial owner of
such Pledged Collateral pledged by it free and clear of
any Lien thereon or affecting the title thereto, except
for any Lien created by this Agreement and the other
Loan Documents or the Subordinated Debt Documents, and
(ii) such Pledgor is, and at the time of delivery of
the Pledged Indebtedness held by it to Bank will be,
the sole owner and holder of such Pledged Collateral
free and clear of any Lien thereon or affecting title
thereto, except for (A) any Lien created by this
Agreement or the other Loan Documents and (B) Liens
granted pursuant to the Subordinated Debt Documents.
(b) (i) All of the Pledged Stock owned by such Pledgor
have been duly authorized, validly issued and are fully
paid and nonassessable, and (ii) the Pledged
Indebtedness held by such Pledgor has been duly
authorized, authenticated or issued and delivered by,
and constitutes the legal, valid and binding obligation
of, each Pledged Entity issuing same, and no such
Pledged Entity is in default thereunder.
(c) Such Pledgor has the right and requisite authority
to pledge, assign, transfer, deliver, deposit and set
over the Pledged Collateral pledged by such Pledgor to
Bank as provided herein.
(d) None of the Pledged Stock or Pledged Indebtedness
owned or held by such Pledgor has been issued or
transferred in violation of the securities
registration, securities disclosure or similar laws of
any jurisdiction to which such issuance or transfer may
be subject.
(e) Such Pledgor is the sole owner of the Pledged
Stock pledged by it hereunder and such Pledged Stock is
presently represented by the certificates listed in
Part A of Schedule I. As of the date hereof, there are
----------
no existing options, warrants, calls or commitments of
any character whatsoever relating to the Pledged Stock
pledged by such Pledgor hereunder other than those set
forth on Schedule III, and upon exercise of any such
------------
option, warrant, call or commitment set forth on
Schedule III, Bank agrees to deliver the Pledged Stock
------------
to such Pledgor and release its Lien on such Pledged
Stock to effectuate such exercise.
(f) No consent, approval, authorization or other order
or other action by, and no notice to or filing with,
any Governmental Authority or any other Person that has
not been obtained prior to the Closing Date is required
(i) for the pledge by such Pledgor of the Pledged
Collateral owned or held by it pursuant to this
Agreement or for the execution, delivery or performance
of this Agreement by such Pledgor, or (ii) for the
exercise by Bank of the
3
<PAGE>
voting or other rights provided for in this Agreement
or the remedies in respect of such Pledged Collateral
pursuant to this Agreement, except as may be required
in connection with such disposition by laws affecting
the offering and sale of securities generally.
(g) The pledge, assignment and delivery of the Pledged
Collateral owned or held by it pursuant to this
Agreement will create a valid first priority Lien in
favor of Bank upon such Pledged Collateral and the
Proceeds thereof, securing the payment of the Secured
Obligations, subject to no other Lien other than Liens
granted pursuant to the Subordinated Debt Documents.
(h) This Agreement has been duly authorized, executed and
delivered by such Pledgor and constitutes a legal, valid and binding obligation
of such Pledgor enforceable against such Pledgor in accordance with its terms.
(i) The Pledged Stock constitutes that percentage of the issued
and outstanding shares of Stock of each Pledged Entity set forth on Schedule I,
----------
which Stock is subject to the existing options, warrants, calls or commitments
set forth on Schedule III.
------------
(j) Except as disclosed in Part B of Schedule I, none of the
----------
Pledged Indebtedness held by such Pledgor is subordinated in right of payment to
other Indebtedness (except for the Secured Obligations) or subject to the terms
of an indenture.
The representations and warranties set forth in this Section 5 shall
survive the execution and delivery of this Agreement.
6. Covenants. Each Pledgor covenants and agrees that until the
---------
Termination Date:
(a) Without the prior written consent of Bank, such
Pledgor will not sell, assign, transfer, pledge, or
otherwise encumber any of its rights in or to any
Pledged Collateral owned or held by it, or any unpaid
dividends, interest or other distributions or payments
with respect to such Pledged Collateral, or grant a
Lien on such Pledged Collateral, except (i) that
Overhill Ventures may issue to Kings Hawaiian up to 10%
of the shares of its common Stock on a fully diluted
basis pursuant to the proposal being negotiated with
Kings Hawaiian as of the Closing Date and (ii) as
otherwise expressly permitted by the Loan Agreement or
this Agreement.
(b) Such Pledgor will, at its expense, promptly
execute, acknowledge and deliver all such instruments
and deliver letters of credit and take all such actions
as Bank from time to time may request in order to
ensure to Bank the benefits of the Liens upon the
Pledged Collateral owned or held by it intended to be
created by this Agreement, including the filing of any
necessary UCC financing statements, that may be filed
by Bank with or (to the extent permitted by law)
without the signature of such Pledgor, and will
cooperate with Bank, at such Pledgor's expense, in
obtaining all necessary approvals and making all
necessary filings
4
<PAGE>
under federal, state, local or foreign law in
connection with such Liens or any sale or transfer of
such Pledged Collateral.
(c) Such Pledgor has and will defend the title to the
Pledged Collateral owned or held by it and the Liens of
Bank on such Pledged Collateral against the claim of
any Person and will maintain and preserve such Liens.
(d) Such Pledgor will, upon obtaining ownership of any
additional Stock, promissory notes or other instruments of a Pledged Entity, or
Stock, promissory notes or other instruments otherwise required to be pledged to
Bank pursuant to any of the Loan Documents that does not already constitute
Pledged Collateral hereunder, promptly (and in any event within three Business
Days after it acquires any such additional Stock, notes or other instruments)
deliver to Bank a Pledge Amendment, duly executed by such Pledgor, in
substantially the form of Schedule II (each, a "Pledge Amendment"), in respect
-----------
of any such additional Stock, notes or other instruments, pursuant to which such
Pledgor shall pledge to Bank all of such additional Stock, notes and other
Instruments. Such Pledgor hereby authorizes Lender to attach each such Pledge
Amendment to this Agreement and agrees that all Pledged Stock and Pledged
Indebtedness listed in any such Pledge Amendment delivered to Bank shall for all
purposes hereunder be considered Pledged Collateral.
7. Pledgor's Rights. So long as no Default or Event of Default shall
----------------
have occurred and be continuing and until written notice shall be given to
any Pledgor in accordance with Section 8(a):
(a) Each Pledgor shall have the right to vote and give
consents with respect to the Pledged Collateral pledged
by it hereunder or any part thereof for all purposes
not inconsistent with the provisions of this Agreement,
the Loan Agreement or any other Loan Document;
provided, that no vote shall be cast, and no consent
--------
shall be given or action taken, that would have the
effect of impairing the position or interest of Bank in
respect of the Pledged Collateral or that would
authorize, effect or consent to (unless and to the
extent expressly permitted by the Loan Agreement or
consented to by Bank):
(i) the dissolution or liquidation, in whole or
in part, of a Pledged Entity;
(ii) the consolidation or merger of a Pledged
Entity with any other Person;
(iii) the sale, disposition or encumbrance of all
or substantially all of the assets of a Pledged
Entity, except for Liens in favor of Bank;
(iv) any change in the authorized number of
shares, the stated capital or the authorized
share capital of a Pledged Entity or the issuance
of any additional shares of its Stock; or
(v) the alteration of the voting rights with
respect to the Stock of a Pledged Entity.
5
<PAGE>
(b) Each Pledgor shall be entitled, from time to time,
to collect and receive for its own use all cash
dividends and interest paid in respect of the Pledged
Stock and Pledged Indebtedness pledged by it hereunder
to the extent not in violation of the Loan Agreement,
except for any and all: (i) dividends and interest paid
or payable other than in cash in respect of any such
Pledged Collateral, instruments and other property
received, receivable or otherwise distributed in
respect of, or in exchange for, any such Pledged
Collateral; (ii) dividends and other distributions paid
or payable in cash in respect of any such Pledged Stock
in connection with a partial or total liquidation or
dissolution or in connection with a reduction of
capital, capital surplus or paid-in capital of a
Pledged Entity; and (iii) cash paid, payable or
otherwise distributed in respect of principal of, or in
redemption of, or in exchange for, any such Pledged
Collateral; provided, that until actually paid all
--------
rights to such distributions shall remain subject to
the Lien in favor of Bank created by this Agreement and
the other Loan Documents.
(c) All dividends and interest (other than such cash
dividends and interest as are permitted to be paid to
each Pledgor in accordance with Section 7(b) above) and
all other distributions in respect of any of the
Pledged Stock or Pledged Indebtedness, whenever paid or
made, shall be delivered to Bank to hold as Pledged
Collateral and shall, if received by such Pledgor, be
received in trust for the benefit of Bank, be
segregated from the other property or funds of such
Pledgor, and be forthwith delivered to Bank as Pledged
Collateral in the same form as so received (with any
necessary indorsements).
8. Defaults and Remedies; Proxy.
----------------------------
(a) Upon the occurrence and during the continuation of
any Event of Default, Bank (personally or through an
agent) is hereby authorized and empowered to transfer
and register in its name or in the name of its nominee
the whole or any part of the Pledged Collateral pledged
by such Pledgor hereunder, to exchange certificates or
instruments representing or evidencing such Pledged
Collateral for certificates or instruments of smaller
or larger denominations, to exercise the voting and all
other rights as a holder with respect thereto, to
collect and receive all cash dividends, interest,
principal and other distributions made thereon, to sell
in one or more sales after five days' notice of the
time and place of any public sale or of the time at
which a private sale is to take place (which notice
such Pledgor agrees is commercially reasonable) the
whole or any part of such Pledged Collateral and to
otherwise act with respect to such Pledged Collateral
as though Bank were the outright owner thereof. Any
sale shall be made at a public or private sale at
Bank's place of business, or at any place in Los
Angeles County, California to be named in the notice
6
<PAGE>
of sale, either for cash or upon credit or for future
delivery at such price as Bank may deem fair, and Bank
may be the purchaser of the whole or any part of such
Pledged Collateral so sold and hold the same thereafter
in its own right free from any claim of any Pledgor or
any right of redemption. Each sale shall be made to the
highest bidder, but Bank reserves the right to reject
any and all bids at such sale that, in its discretion,
it shall deem inadequate. Demands of performance,
except as otherwise herein specifically provided for,
notices of sale, advertisements and the presence of
property at sale are hereby waived and any sale
hereunder may be conducted by an auctioneer or any
officer or agent of Bank. UPON THE OCCURRENCE AND
DURING THE CONTINUATION OF AN EVENT OF DEFAULT, EACH
PLEDGOR HEREBY IRREVOCABLY CONSTITUTES AND APPOINTS
BANK AS THE PROXY AND ATTORNEY-IN-FACT OF SUCH PLEDGOR
WITH RESPECT TO THE PLEDGED COLLATERAL PLEDGED BY SUCH
PLEDGOR HEREUNDER, INCLUDING THE RIGHT TO VOTE THE
PLEDGED STOCK OF SUCH PLEDGOR, WITH FULL POWER OF
SUBSTITUTION TO DO SO. THE APPOINTMENT OF BANK AS PROXY
AND ATTORNEY-IN-FACT IS COUPLED WITH AN INTEREST AND
SHALL BE IRREVOCABLE UNTIL THE TERMINATION DATE. IN
ADDITION TO THE RIGHT TO VOTE THE PLEDGED STOCK OF SUCH
PLEDGOR, THE APPOINTMENT OF BANK AS PROXY AND ATTORNEY-
IN-FACT SHALL INCLUDE THE RIGHT TO EXERCISE ALL OTHER
RIGHTS, POWERS, PRIVILEGES AND REMEDIES TO WHICH A
HOLDER OF SUCH PLEDGED STOCK WOULD BE ENTITLED
(INCLUDING GIVING OR WITHHOLDING WRITTEN CONSENTS OF
SHAREHOLDERS, CALLING SPECIAL MEETINGS OF SHAREHOLDERS
AND VOTING AT SUCH MEETINGS). SUCH PROXY SHALL BE
EFFECTIVE, AUTOMATICALLY AND WITHOUT THE NECESSITY OF
ANY ACTION (INCLUDING ANY TRANSFER OF SUCH PLEDGED
STOCK ON THE RECORD BOOKS OF THE ISSUER THEREOF) BY ANY
PERSON (INCLUDING THE ISSUER OF SUCH PLEDGED STOCK OR
ANY OFFICER OR AGENT THEREOF), UPON THE OCCURRENCE AND
DURING THE CONTINUATION OF AN EVENT OF DEFAULT.
NOTWITHSTANDING THE FOREGOING, BANK SHALL NOT HAVE ANY
DUTY TO EXERCISE ANY SUCH RIGHT OR TO PRESERVE THE SAME
AND SHALL NOT BE LIABLE FOR ANY FAILURE TO DO SO OR FOR
ANY DELAY IN DOING SO.
(b) If, at the original time or times appointed for
the sale of the whole or any part of the Pledged
Collateral pledged by any Pledgor hereunder, (i) the
highest bid, if there is but one sale, shall be
inadequate to discharge in full all the Secured
7
<PAGE>
Obligations, or (ii) such Pledged Collateral is offered
for sale in lots, the highest bid for the lot offered
for sale at any of such sales would indicate to Bank,
in its discretion, that the proceeds of the sales of
the whole of such Pledged Collateral would be unlikely
to be sufficient to discharge all the Secured
Obligations, then Bank may, on one or more occasions
and in its discretion, postpone any of said sales by
public announcement at the time of sale or the time of
previous postponement of sale, and no other notice of
such postponement or postponements of sale need be
given, any other notice being hereby waived; provided,
--------
that any sale or sales made after such postponement
shall be after ten days' notice to such Pledgor.
(c) If, following the occurrence and during the
continuance of an Event of Default, Bank in its sole
discretion determines that, in connection with any
actual or contemplated exercise of its rights (when
permitted under this Section 8) to sell the whole or
any part of the Pledged Collateral hereunder, it is
necessary or advisable to effect a public registration
of all or part of the Pledged Collateral pursuant to
the Securities Act of 1933 (or any similar statute then
in effect, the "Act"), then each Pledgor shall, in an
---
expeditious manner, cause the Pledged Entity that
issued Pledged Collateral owned or held by it to:
(i) Prepare and file with the Securities and
Exchange Commission (the "Commission") a
----------
registration statement with respect to the
Pledged Stock owned by it and in good faith use
commercially reasonable efforts to cause such
registration statement to become and remain
effective;
(ii) Prepare and file with the Commission such
amendments and supplements to such registration
statement and the prospectus used in connection
therewith as may be necessary to keep such
registration statement effective and to comply
with the provisions of the Act with respect to
the sale or other disposition of the Pledged
Stock covered by such registration statement
whenever Bank shall desire to sell or otherwise
dispose of such Pledged Stock;
(iii) Furnish to Bank such numbers of copies of a
prospectus and a preliminary prospectus, in
conformity with the requirements of the Act, and
such other documents as Bank may request in order
to facilitate the public sale or other
disposition by Bank of the Pledged Stock owned by
it;
(iv) Use commercially reasonable efforts to
register or qualify the Pledged Stock covered by
such registration statement under such other
securities or blue sky laws of such jurisdictions
within the United States and Puerto
8
<PAGE>
Rico as Bank shall request, and do such other
reasonable acts and things as may be required of
it to enable Bank to consummate the public sale or
other disposition by Bank in such jurisdictions of
such Pledged Stock by Bank;
(v) Furnish, at the request of Bank, on the date
that Pledged Stock owned or held by it are
delivered to the underwriters for sale pursuant to
such registration or, if the security is not being
sold through underwriters, on the date that the
registration statement with respect to such
Pledged Stock becomes effective, (A) an opinion,
dated such date, of the independent counsel
representing such registrant for the purposes of
such registration, addressed to the underwriters,
if any, and in the event such Pledged Stock is not
being sold through underwriters, then to Bank, in
customary form and covering matters of the type
customarily covered in such legal opinions; and
(B) a comfort letter, dated such date, from the
independent certified public accountants of such
registrant, addressed to the underwriters, if any,
and in the event such Pledged Stock is not being
sold through underwriters, then to Bank, in a
customary form and covering matters of the type
customarily covered by such comfort letters and as
the underwriters or Bank shall reasonably request.
The opinion of counsel referred to above shall
additionally cover such other legal matters with
respect to the registration in respect of which
such opinion is being given as Bank may reasonably
request. The comfort letter referred to above from
the independent certified public accountants shall
additionally cover such other financial matters
(including information as to the period ending not
more than five Business Days prior to the date of
such letter) with respect to the registration in
respect of which such letter is being given as
Bank may reasonably request; and
(vi) Otherwise use commercially reasonable efforts
to comply with all applicable rules and
regulations of the Commission, and make available
to its security holders, as soon as reasonably
practicable but not later than 18 months after the
effective date of such registration statement, an
earnings statement covering the period of at least
12 months beginning with the first full month
after the effective date of such registration
statement, which earnings statement shall satisfy
the provisions of Section 11(a) of the Act.
(d) All expenses incurred in complying with Section
8(c), including all registration and filing fees
(including all expenses incident to filing with the
National Association of Securities Dealers, Inc.),
printing expenses, fees and disbursements of
9
<PAGE>
counsel for the registrant, the fees and expenses of
counsel for Bank, expenses of the independent certified
public accountants (including any special audits
incident to or required by any such registration) and
expenses of complying with the securities or blue sky
laws of any jurisdictions, shall be paid by Pledgors.
(e) If, at any time when Bank shall determine to
exercise its right to sell the whole or any part of the
Pledged Collateral hereunder, such Pledged Collateral
or the part thereof to be sold shall not, for any
reason whatsoever, be effectively registered under the
Act (or any similar statute), then Bank may, in its
discretion (subject only to applicable requirements of
law), sell such Pledged Collateral or part thereof by
private sale in such manner and under such
circumstances as Bank may deem necessary or advisable,
but subject to the other requirements of this Section
8, and shall not be required to effect such
registration or to cause the same to be effected.
Without limiting the generality of the foregoing, in
any such event, Bank in its discretion may (i) in
accordance with applicable securities laws proceed to
make such private sale notwithstanding that a
registration statement for the purpose of registering
such Pledged Collateral or part thereof could be or
shall have been filed under the Act (or similar
statute), (ii) approach and negotiate with a single
possible purchaser to effect such sale, and (iii)
restrict such sale to a purchaser who is an accredited
investor under the Act and who will represent and agree
that such purchaser is purchasing for its own account,
for investment and not with a view to the distribution
or sale of such Pledged Collateral or any part thereof.
In addition to a private sale as provided above in this
Section 8, if any of the Pledged Collateral shall not
be freely distributable to the public without
registration under the Act (or similar statute) at the
time of any proposed sale pursuant to this Section 8,
then Bank shall not be required to effect such
registration or cause the same to be effected but, in
its discretion (subject only to applicable requirements
of law), may require that any sale hereunder (including
a sale at auction) be conducted subject to
restrictions:
(i) as to the financial sophistication and
ability of any Person permitted to bid or
purchase at any such sale;
(ii) as to the content of legends to be placed
upon any certificates representing the Pledged
Collateral sold in such sale, including
restrictions on future transfer thereof;
(iii) as to the representations required to be made
by each Person bidding or purchasing at such sale
relating to such Person's access to financial
information about such Pledgor and such Person's
intentions as to the holding of the Pledged
Collateral so sold for investment for its own
10
<PAGE>
account and not with a view to the distribution
thereof; and
(iv) as to such other matters as Bank may, in its
discretion, deem necessary or appropriate in
order that such sale (notwithstanding any failure
so to register) may be effected in compliance
with the Bankruptcy Code and other laws affecting
the enforcement of creditors' rights and the Act
and all applicable state securities laws.
(f) Each Pledgor recognizes that Bank may be unable to
effect a public sale of any or all the Pledged
Collateral and may be compelled to resort to one or
more private sales thereof in accordance with Section
8(e) above. Each Pledgor also acknowledges that any
such private sale may result in prices and other terms
less favorable to the seller than if such sale were a
public sale and, notwithstanding such circumstances,
agrees that any such private sale shall not be deemed
to have been made in a commercially unreasonable manner
solely by virtue of such sale being private. Bank shall
be under no obligation to delay a sale of any of the
Pledged Collateral for the period of time necessary to
permit the applicable Pledged Entity to register such
securities for public sale under the Act, or under
applicable state securities laws, even if the Pledgor
owning or holding such Pledged Collateral and the
Pledged Entity would agree to do so.
(g) Each Pledgor agrees to the maximum extent
permitted by applicable law that following the
occurrence and during the continuance of an Event of
Default it will not at any time plead, claim or take
the benefit of any appraisal, valuation, stay,
extension, moratorium or redemption law now or
hereafter in force in order to prevent or delay the
enforcement of this Agreement, or the absolute sale of
the whole or any part of the Pledged Collateral or the
possession thereof by any purchaser at any sale
hereunder, and each Pledgor waives the benefit of all
such laws to the extent it lawfully may do so. Each
Pledgor agrees that it will not interfere with any
right, power or remedy of Bank provided for in this
Agreement or now or hereafter existing at law or in
equity or by statute or otherwise, or the exercise or
beginning of the exercise by Bank of any one or more of
such rights, powers or remedies. No failure or delay on
the part of Bank to exercise any such right, power or
remedy and no notice or demand that may be given to or
made upon any Pledgor by Bank with respect to any such
remedies shall operate as a waiver thereof, or limit or
impair Bank's right to take any action or to exercise
any power or remedy hereunder, without notice or
demand, or prejudice its rights as against any Pledgor
in any respect.
(h) Each Pledgor further agrees that a breach of any
of the covenants contained in this Section 8 will cause
irreparable injury
11
<PAGE>
to Bank, that Bank shall have no adequate remedy at law
in respect of such breach and, as a consequence, agrees
that each and every covenant contained in this Section
8 shall be specifically enforceable against such
Pledgor, and each Pledgor hereby waives and agrees not
to assert any defenses against an action for specific
performance of such covenants except for a defense
that: (i) no Event of Default has occurred under the
Loan Agreement and (ii) Bank is in breach of its
obligations under this Agreement or the other Loan
Documents.
(i) Until the occurrence of an Event of Default,
Bank may not (i) repledge the Pledged Collateral to any
other party, (ii) sell, assign, transfer, exchange or
otherwise dispose of, or grant any option with respect
to, the Pledged Collateral, or (iii) create, incur or
permit the existence of any Lien or option with respect
to the Pledged Collateral (except as contemplated by
this Agreement).
9. Waiver. No delay on Bank's part in exercising any power of sale, Lien,
------
option or other right hereunder, and no notice or demand that may be given
to or made upon any Pledgor by Bank with respect to any power of sale,
Lien, option or other right hereunder, shall constitute a waiver thereof,
or limit or impair Bank's right to take any action or to exercise any
power of sale, Lien, option, or any other right hereunder, without notice
or demand, or prejudice Bank's rights as against any Pledgor in any
respect.
10. Assignment. Bank may assign, indorse or transfer any instrument
----------
evidencing all or any part of the Secured Obligations as provided in, and
in accordance with, the Loan Agreement, and the holder of such instrument
shall be bound by and entitled to the benefits of this Agreement.
11. Termination. Immediately following the Termination Date, Bank shall
-----------
deliver to each Pledgor (as the case may be) the Pledged Collateral pledged
by such Pledgor at the time subject to this Agreement and all instruments
of assignment executed in connection therewith, free and clear of the Liens
created in favor of Bank under this Agreement and the other Loan Documents
and, except as otherwise provided herein, all of such Pledgor's obligations
hereunder shall at such time terminate. Upon payment in full in cash of
any Indebtedness evidenced by a promissory note or other instrument, Bank
will return such instrument to the Pledgor that is the obligee under such
instrument.
12. Lien Absolute. All rights of Bank hereunder, and all obligations of
-------------
each Pledgor hereunder, shall be absolute and unconditional irrespective
of:
(a) any lack of validity or enforceability of the Loan
Agreement, any other Loan Document or any other
agreement or instrument governing or evidencing any
Secured Obligations;
(b) any change in the time, manner or place of payment
of, or in any other term of, all or any part of the
Secured Obligations, or any other amendment or waiver
of or any consent to any departure from the Loan
Agreement, any other Loan Document or any other
agreement or instrument governing or evidencing any
Secured Obligations;
12
<PAGE>
(c) any exchange, release or non-perfection of any
other Collateral or any release or amendment or waiver
of, or consent to departure from any guaranty for, all
or any of the Secured Obligations;
(d) the insolvency of Borrower or any Guarantor or any
other guarantor of the obligations; or
(e) any other circumstance that might otherwise
constitute a defense available to, or a discharge of,
such Pledgor.
13. Release. Each Pledgor (other than Borrower) consents and agrees that
-------
Bank may at any time, or from time to time, in its discretion:
(a) renew, extend or change the time of payment of, or
the manner, place or terms of payment of, all or any
part of the Secured Obligations; and
(b) exchange, release or surrender all or any of the
Collateral (including the Pledged Collateral), or any
part thereof, by whomsoever deposited, that is now or
may hereafter be held by or on behalf of Bank in
connection with all or any of the Secured Obligations;
all in such manner and upon such terms as Bank may deem
proper, and without notice to or further assent from
such Pledgor, it being hereby agreed that such Pledgor
shall be and remain bound by this Agreement
irrespective of the value or condition of any of the
Collateral and notwithstanding any such change,
exchange, settlement, compromise, surrender, release,
renewal or extension, and notwithstanding also that the
Secured Obligations may, at any time, exceed the
aggregate principal amount thereof set forth in the
Loan Agreement or any other agreement governing any
Secured Obligations. Each Pledgor hereby waives notice
of acceptance of this Agreement, presentment, demand,
protest and notice of dishonor of any and all of the
Secured Obligations, and any delay by Bank in
commencing suit against any party hereto or Person
liable hereon, and in giving any notice to or of making
any claim or demand hereunder upon such Pledgor. No
act or omission of any kind on Bank's part (other than
an act or omission that is finally determined by a
referee or a court of competent jurisdiction to have
resulted solely from Bank's gross negligence or willful
misconduct) shall in any event affect or impair this
Agreement.
14. Reinstatement. This Agreement shall remain in full force and effect
-------------
and continue to be effective should any petition be filed by or against any
Pledgor or any Pledged Entity for liquidation or reorganization, should any
Pledgor or any Pledged Entity become insolvent or make an assignment for
the benefit of creditors or should a receiver or trustee be appointed for
all or any significant part of any Pledgor's or Pledged Entity's assets,
and shall continue to be effective or be reinstated, as the case may be, if
at any time payment and performance of the Secured Obligations, or any part
thereof, is, pursuant to applicable law, rescinded or reduced in amount, or
must otherwise be restored or returned by any obligee of the Secured
Obligations, whether as a "voidable
13
<PAGE>
preference," "fraudulent transfer," or otherwise, all as though such
payment or performance had not been made. In the event that any payment, or
any part thereof, is rescinded, reduced, restored or returned, the Secured
Obligations shall be reinstated and deemed reduced only by such amount paid
and not so rescinded, reduced, restored or returned.
15. Miscellaneous.
-------------
(a) Bank may execute any of its duties hereunder by or
through agents or employees and shall be entitled to
advice of counsel concerning all matters pertaining to
its duties hereunder.
(b) Each Pledgor agrees to promptly reimburse Bank for
actual out-of-pocket expenses, including reasonable
attorneys' fees, incurred by Bank in connection with
the enforcement of its rights and remedies under this
Agreement.
(c) Neither Bank nor any of its officers, directors,
employees, agents or counsel shall be liable for any
action lawfully taken or omitted to be taken by it or
them hereunder or in connection herewith, except for
its or their own gross negligence or willful misconduct
as finally determined by a referee or a court of
competent jurisdiction.
(d) THIS AGREEMENT SHALL BE BINDING UPON EACH PLEDGOR
AND ITS SUCCESSORS AND ASSIGNS (INCLUDING A TRUSTEE OR
DEBTOR-IN-POSSESSION ON BEHALF OF SUCH PLEDGOR), AND
SHALL INURE TO THE BENEFIT OF, AND BE ENFORCEABLE BY
AND BINDING UPON, BANK AND ITS SUCCESSORS AND ASSIGNS,
AND SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA
APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THAT
STATE, AND NONE OF THE TERMS OR PROVISIONS OF THIS
AGREEMENT MAY BE WAIVED, ALTERED, MODIFIED OR AMENDED
EXCEPT IN WRITING DULY SIGNED FOR AND ON BEHALF OF BANK
AND EACH PLEDGOR.
16. Severability. If for any reason any provision or provisions hereof are
------------
determined to be invalid and contrary to any existing or future law, such
invalidity shall not impair the operation of or affect those portions of
this Agreement that are valid.
17. Notices. Except as otherwise provided herein, whenever it is provided
-------
herein that any notice, demand, request, consent, approval, declaration or
other communication shall or may be given to or served upon any of the
parties by any other party, or whenever any of the parties desires to give
or serve upon any other party any communication with respect to this
Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and shall be given
in the manner, and deemed received, as provided for in the Loan Agreement.
14
<PAGE>
18. Section Titles. The section titles contained in this Agreement are and
--------------
shall be without substantive meaning or content of any kind whatsoever and
are not a part of the agreement between the parties hereto.
19. Counterparts. This Agreement may be executed in any number of
------------
counterparts, which shall, collectively and separately, constitute one
agreement.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Pledge
Agreement to be duly executed as of the date first written above.
"Pledgors" "Bank"
OVERHILL FARMS, INC. UNION BANK OF CALIFORNIA, N.A.
By:______________________________________ By:_______________________________
James Rudis
President and Chief Executive Title:____________________________
Officer
By:______________________________________
Richard A. Horvath
Vice President and Chief Financial
Officer
POLYPHASE CORPORATION
By:______________________________________
James Rudis
President and Chief Executive
Officer
By:______________________________________
William E. Shatley
Senior Vice President and
Chief Financial Officer
OVERHILL L.C. VENTURES, INC.
By:______________________________________
James Rudis
President and Chief Executive
Officer
By:______________________________________
Richard A. Horvath
Vice President and Chief Financial
Officer
16
<PAGE>
SCHEDULE I
----------
PART A
------
Pledged Stock
-------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Class Certificate Number Percentage of
Name of Pledgor of Stock Number(s) of Shares Outstanding Shares
---------------------- -------------------------- -------------- --------- -------------------
<S> <C> <C> <C> <C>
---------------------- -------------------------- -------------- --------- -------------------
Overhill Farms Common Stock of Overhill
L.C. Ventures 1000 100%
- ----------------------- -------------------------- -------------- -------- -------------------
- ----------------------- -------------------------- -------------- -------- -------------------
Polyphase Corporation Common Stock of Overhill
Farms 775 100%
- ----------------------- -------------------------- -------------- -------- -------------------
- ----------------------- -------------------------- -------------- -------- -------------------
- ----------------------- -------------------------- -------------- -------- -------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
PART B
------
Pledged Indebtedness
--------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Initial
Pledged Entity Principal Amount Issue Date Maturity Date Interest Rate
- ------------------------ ---------------- ------------------ ------------------ --------------
<S> <C> <C> <C> <C>
Overhill Farms
- ------------------------ ---------------- ------------------ ------------------ --------------
- ------------------------ ---------------- ------------------ ------------------ --------------
Overhill L.C. Ventures $14,000 October 22, 1999 October 1, 2000 10%
- ------------------------ ---------------- ------------------ ------------------ -------------
- ------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
SCHEDULE II
-----------
PLEDGE AMENDMENT
This Pledge Amendment, dated as of __________ ___, ___ is delivered
pursuant to Section 6(d) of the Pledge Agreement referred to below. All defined
terms herein shall have the meanings assigned thereto or incorporated by
reference in the Pledge Agreement. The undersigned hereby certifies that the
representations and warranties in Section 5 of the Pledge Agreement are and
continue to be true and correct, both as to the promissory notes, other
Instruments and shares pledged prior to this Pledge Amendment and as to the
promissory notes, other Instruments and shares pledged pursuant to this Pledge
Amendment. The undersigned further agrees that this Pledge Amendment may be
attached to that certain Pledge Agreement dated as of November 24, 1999 (the
"Pledge Agreement"), by and among the "Pledgors" named therein and Union Bank of
- -----------------
California, N.A. and that the Pledged Stock and Pledged Indebtedness listed in
this Pledge Amendment shall be and become a part of the Pledged Collateral
referred to in the Pledge Agreement and shall secure all Secured Obligations
referred to in the Pledge Agreement. The undersigned acknowledges that any
promissory notes, other Instruments or shares not included in the Pledged
Collateral at the discretion of Bank may not otherwise be pledged by Pledgor to
any other Person or otherwise be used as security for any obligations other than
the Secured Obligations.
"Pledgor"
_________________________________
By:______________________________
Name:____________________________
Title:___________________________
Pledged Stock
-------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Name and Class Certificate Number
Address of Pledgor Pledged Entity of Stock Number(s) of Shares
- -------------------- -------------- -------- -------------- ---------
<S> <C> <C> <C> <C>
- -------------------- -------------- -------- -------------- ---------
- -------------------- -------------- -------- -------------- ---------
- -------------------------------------------------------------------------
</TABLE>
Pledged Indebtedness
--------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Interest
Pledged Entity Initial Principal Amount Issue Date Maturity Date Rate
- ---------------- ------------------------ ---------- -------------- --------
<S> <C> <C> <C> <C>
- ---------------- ------------------------ ---------- -------------- --------
- -------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
SCHEDULE III
------------
OUTSTANDING OPTIONS, WARRANTS, CALLS AND COMMITMENTS
19
<PAGE>
Exhibit 10.5
INTERCREDITOR AND SUBORDINATION AGREEMENT
-----------------------------------------
THIS INTERCREDITOR AND SUBORDINATION AGREEMENT ("Agreement") is
---------
entered into as of November 24, 1999, by and between LEVINE LEICHTMAN CAPITAL
PARTNERS II, L.P., a California limited partnership ("Subordinated Lender"), and
-------------------
UNION BANK OF CALIFORNIA, N.A. ("Senior Lender").
-------------
RECITALS
--------
A. Concurrently with the execution of this Agreement, Subordinated Lender
is purchasing from Overhill Farms, Inc., a Nevada corporation ("Debtor"), a
------
Secured Senior Subordinated Note dated as of even date herewith in the aggregate
principal amount of $28,000,000 (the "Senior Subordinated Note") pursuant to a
------------------------
Securities Purchase Agreement (the "Securities Purchase Agreement") among
-----------------------------
Subordinated Lender, Debtor, Polyphase Corporation, a Nevada corporation
("Parent"), and Overhill L.C. Ventures, Inc., a California corporation ("LCV"),
------- ---
and a warrant to purchase 166.04 shares of common stock of Debtor (the
"Warrant").
-------
B. In addition, concurrently with the execution of this Agreement, Senior
Lender is providing to Debtor a senior, secured revolving credit facility in the
amount of up to $16,000,000 pursuant to that certain Loan and Security Agreement
dated as of even date herewith among Senior Lender, Debtor and LCV (the "Senior
------
Loan Agreement").
- --------------
C. Concurrently with the execution of this Agreement, Parent, the holder
of 100% of the capital stock of Debtor, is guaranteeing the obligations under
the Senior Subordinated Note and the obligations under the Senior Loan Agreement
and is pledging such capital stock to Subordinated Lender and Senior Lender to
secure such guaranty obligations.
D. Senior Lender is unwilling to provide such revolving credit facility
unless Subordinated Lender subordinates its claims and security interests in the
manner set forth in this Agreement. Subordinated Lender is unwilling to purchase
the Senior Subordinated Note unless Senior Lender agrees to the terms of this
Agreement set forth below.
E. Subordinated Lender hereby acknowledges and affirms that Senior
Lender's financial accommodations to Debtor constitute valuable consideration to
Subordinated Lender. Senior Lender hereby acknowledges and affirms that
Subordinated Lender's financial accommodations to Debtor constitute valuable
consideration to Senior Lender.
AGREEMENT
---------
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and to induce Senior Lender to
provide its revolving credit facility to Debtor and to induce Subordinated
Lender to purchase the Senior Subordinated Note from Debtor, the parties hereto
agree as follows:
<PAGE>
1. Definitions. Unless otherwise defined in this Agreement, capitalized terms
-----------
and matters of construction defined or established in Schedule A to the Senior
----------
Loan Agreement shall be applied herein as defined or established therein. As
used in this Agreement the following terms shall have the following respective
meanings:
"Allowed Payments" shall mean (a) regularly scheduled payments of
----------------
interest (including default interest payable to Subordinated Lender pursuant to
the Subordinated Loan Documents) when due under the Senior Subordinated Note,
(b) payments of principal pursuant to Section 5(b) of the Senior Subordinated
Note, (c) reimbursements of reasonable out-of-pocket expenses of Subordinated
Lender pursuant to Section 15 of the Senior Subordinated Note, (d) regularly
scheduled payments of the Consulting Fee pursuant to Section 1.5 of the Investor
Rights Agreement by among Debtor, Parent and Subordinated Lender dated November
24, 1999, (e) payment of the outstanding principal amount of the Senior
Subordinated Note on the Maturity Date (as defined in the Senior Subordinated
Note), (f) repayment of the outstanding amount of the Subordinated Debt upon a
Permitted Subordinated Note Refinancing, and (g) payment of closing fees to
Subordinated Lender that have been consented to by Senior Lender; provided, that
--------
prepayments of the Subordinated Indebtedness or payments resulting from either
the breach of any covenant or warranty contained in the Subordinated Loan
Documents or the acceleration of any amounts due thereunder shall not constitute
Allowed Payments.
"Blockage Period" shall mean a period of 180 days (or 90 days as
---------------
expressly provided in Section 7(c) of this Agreement) commencing on the date on
------------
which Subordinated Lender receives a Payment Blockage Notice from Senior Lender.
"Collateral" shall mean all property of Debtor, real or personal,
----------
tangible or intangible, now existing or hereafter acquired, that is or may at
any time be or become subject to a lien in favor of Senior Lender to secure the
Senior Indebtedness.
"Equity-Related Agreements" shall mean the Warrant, the
-------------------------
Registration Rights Agreement between Debtor and Subordinated Lender dated as of
November 24, 1999, and the Investor Rights Agreement among Debtor, Parent and
Subordinated Lender dated as of November 24, 1999.
"Equity-Related Rights" shall mean Subordinated Lender's (a)
---------------------
rights under the Equity-Related Agreements and (b) rights (other than those
relating to the Senior Subordinated Note) under the Securities Purchase
Agreement.
"Insolvency Proceeding" shall mean any liquidation, bankruptcy,
---------------------
receivership, assignment for the benefit of creditors, or any other judicial,
equitable, or administrative action or proceeding commenced by or against a
Person or any of its assets or property under federal or state law and involving
the adjustment, restructuring, or liquidation of any or all of the assets,
obligations, business, or property of such Person.
"Lien" means, with respect to any property, any security deed,
----
mortgage, deed to secure debt, deed of trust, lien, pledge, assignment, charge,
security interest, title retention agreement, negative pledge, levy, execution,
seizure, attachment, garnishment, or other encumbrance of any kind in respect of
such property, whether or not choate, vested, or perfected.
2
<PAGE>
"Payment Blockage Notice" shall mean written notice delivered
-----------------------
prior to any Allowed Payment in accordance with Section 7(b) or Section 7(c) of
------------ ------------
this Agreement by Senior Lender to Subordinated Lender containing in all capital
letters the following text: "THIS IS A PAYMENT BLOCKAGE NOTICE UNDER THE TERMS
OF THE INTERCREDITOR AND SUBORDINATION AGREEMENT DATED NOVEMBER 24, 1999."
"Permitted Equity Payments" shall mean the obligations by Debtor,
-------------------------
Parent or LCV to make payments to Subordinated Lender under (a) Section 3.3 of
the Warrant or (b) Section 3.3 or Article 4 of the Registration Rights Agreement
between Debtor and Subordinated Lender.
"Person" shall mean any individual, partnership, joint venture,
------
trust, unincorporated organization, association, corporation, limited liability
company, limited liability partnership, or governmental (whether federal, state,
local, foreign, or otherwise, including any instrumentality, division, agency,
body or department thereof) or other entity.
"Senior Default" shall mean a "Default" under and as defined in
--------------
the Senior Loan Agreement.
"Senior Event of Default" shall mean an "Event of Default" under
-----------------------
and as defined in the Senior Loan Agreement.
"Senior Indebtedness" shall mean (a) all indebtedness,
-------------------
liabilities and other obligations of Debtor, Parent, or any other guarantor, now
existing or hereafter arising under the Senior Loan Agreement and the other
Senior Loan Documents, as each may from time to time be amended, supplemented,
extended, renewed, modified or restated, whether for principal, premium,
interest (including all interest accruing after the initiation of any Insolvency
Proceeding of Debtor, whether or not such interest is allowed), fees, expenses,
indemnities or otherwise; and (b) all other indebtedness for credit extended by
Senior Lender to Debtor, whether for principal, premium, interest (including all
interest accruing after the initiation of any Insolvency Proceeding of Debtor,
whether or not such interest is allowed), fees, expenses, indemnities or
otherwise; provided, however, that the aggregate amount of principal that
-------- -------
constitutes Senior Indebtedness shall not exceed $17,600,000 without the prior
written consent of Subordinated Lender, which consent may be granted or withheld
by Subordinated Lender in its sole discretion.
"Senior Loan Documents" shall mean (a) the Senior Loan Agreement,
---------------------
(b) the Continuing Guaranty dated as of November 24, 1999, executed by each of
Parent and LCV in favor of Senior Lender, (c) the Stock Pledge Agreement dated
as of November 24, 1999, executed by each of Parent and Debtor in favor of
Senior Lender, and (d) all other agreements, security agreements, pledge
agreements, guaranties, instruments, and documents executed and delivered to, or
in favor of, Senior Lender in connection therewith.
"Standstill Period" shall mean a period of 180 days (or such
-----------------
lesser period as expressly provided in the next sentence) following the date
Senior Lender receives written notice from Subordinated Lender that an event of
default under the Subordinated Loan Documents has occurred if such event of
default has not then been cured or waived; provided, that such written notice of
--------
the occurrence of any event of default under Section 10.1(e) of the Securities
Purchase
3
<PAGE>
Agreement shall be deemed to have occurred (without any requirement of notice
being provided by Subordinated Lender to Senior Lender) as of the date that
Subordinated Lender receives notice of such event of default from Senior Lender.
The 180-day period in the preceding sentence shall be reduced as follows:
(a) to 60 days in the case of an event of default resulting from
a breach of clauses (iv) or (v) of the definition of "Change in Control" in
------------ ---
the Securities Purchase Agreement;
(b) to 90 days in the case of an event of default resulting from
a breach of clauses (ii), (vi) or (vii) of the definition of "Change in
------------ ---- -----
Control" in the Securities Purchase Agreement; and
(c) to 30 days in the case of an event of default resulting from
a breach of clauses (i) or (iii) of the definition of "Change in Control"
----------- -----
in the Securities Purchase Agreement; provided, that, in the case of this
--------
clause (c), if Senior Lender has commenced and is continuing the process of
----------
an orderly liquidation of the Collateral as of the end of such initial 30-
day period, then such initial 30-day period shall be extended by an
additional 60 days, and during such additional 60-day period Subordinated
Lender may commence, prosecute or participate in any action, whether
private, judicial, equitable or otherwise, against Debtor, LCV or Parent
(other than participating in the commencement of an Insolvency Proceeding)
but, so long as Senior Lender is continuing the process of an orderly
liquidation of the Collateral, Subordinated Lender shall not have any right
to participate in the commencement of an Insolvency Proceeding against
Debtor, LCV or Parent or to obtain a writ of possession against, foreclose
or enforce any Liens in, levy or execute upon, or attach, any Collateral,
whether by private, judicial or equitable action or otherwise.
"Subordinated Indebtedness" shall mean all indebtedness,
-------------------------
liabilities and other obligations of Debtor, Parent, LCV, or any other guarantor
(including any obligations to make payments under any Equity Related Agreement
to Subordinated Lender by Debtor, Parent or LCV, except that the Permitted
Equity Payments will not be deemed to be Subordinated Indebtedness), now
existing or hereafter arising under the Senior Subordinated Note, the other
Subordinated Loan Documents and the Equity Related Agreements, as each may from
time to time be amended, supplemented, extended, renewed, modified or restated,
whether for principal, redemption, put obligations, call obligations, premium,
interest (including all interest accruing after the initiation of any Insolvency
Proceeding of Debtor, whether or not such interest is allowed), guaranty claims,
fees, expenses, indemnities or otherwise. Notwithstanding the foregoing, the
Equity Related Rights that do not relate to payments to be made to Subordinated
Lender by Debtor, Parent or LCV shall not constitute Subordinated Indebtedness,
and the Equity Related Rights (other than the Permitted Equity Payments)
relating to payments to be made to Subordinated Lender by Debtor, Parent or LCV
shall constitute Subordinated Indebtedness.
"Subordinated Loan Documents" shall mean (a) the Senior
---------------------------
Subordinated Note, (b) the Security Agreement of even date herewith between
Debtor and Subordinated Lender, (c) the Securities Purchase Agreement, (d) the
Patent, Trademark and Copyright Security Agreement of even date herewith between
Debtor and Subordinated Lender, (e) the Stock Pledge
4
<PAGE>
Agreement of even date herewith between Parent and Subordinated Lender, (f) the
Stock Pledge Agreement of even date herewith between Debtor and Subordinated
Lender, (g) the Security Agreement of even date herewith between LCV and
Subordinated Lender, and (h) the Suretyship Agreement of even date herewith
among Parent, LCV and Subordinated Lender.
2. Subordination of Claims. Except to the extent otherwise provided
-----------------------
in Sections 6 and 7 of this Agreement, unless and until all Senior Indebtedness
---------- -
has been fully and finally paid and satisfied in cash, Subordinated Lender shall
not receive or accept from Debtor, Parent, LCV, or any other guarantor, by
setoff or in any other manner, any payment on behalf of the Subordinated
Indebtedness, and all amounts payable with respect to the Subordinated
Indebtedness are expressly made subordinate in priority to the Senior
Indebtedness. Failure by Debtor to make any payment on account of the
Subordinated Indebtedness under paragraph 5(a) of the Senior Subordinated Note
or paragraph 3.2(c) of the Warrant, shall not constitute an event of default
under the Subordinated Loan Documents.
3. Subordination of Security Interests. Notwithstanding the timing,
-----------------------------------
order or manner of the grant or perfection of any of their respective Liens, the
Liens now or hereafter held by Senior Lender in any Collateral to secure the
Senior Indebtedness shall be senior and prior to any Liens now or hereafter held
by or for the benefit of Subordinated Lender in or to any of the Collateral.
The priorities set forth in this Agreement shall be effective notwithstanding
anything to the contrary contained in the Senior Loan Documents, the
Subordinated Loan Documents, or any plan of reorganization or similar document
filed by or on behalf of Debtor or any affiliate of Debtor under any Insolvency
Proceeding of Debtor, Parent, or LCV, as the case may be, including any prior
perfection of a Lien under the provisions of the Uniform Commercial Code or any
other applicable law of any jurisdiction, or the existence of any present or
future filing of financing statements under the Uniform Commercial Code or other
applicable law of any jurisdiction in which such filing has been made, or any
other recordation or filing of any document.
4. Standstill. Unless and until all of the Senior Indebtedness
----------
shall have been fully and finally paid and satisfied in cash, Subordinated
Lender shall not (a) commence, prosecute or participate in any action, whether
private, judicial, equitable, administrative or otherwise, including any
Insolvency Proceeding, against Debtor, Parent or LCV or any of their respective
assets or (b) have any right either to possess, enforce any Liens in, foreclose,
levy or execute upon, or collect or attach any Collateral, whether by private or
judicial action or otherwise, except as permitted in the following sentence.
Upon the earliest to occur of:
(i) the expiration of the Standstill Period;
(ii) the initiation of an Insolvency Proceeding; provided, that if
--------
such Insolvency Proceeding is dismissed, then the corresponding prohibition
against Subordinated Lender taking any of the actions described in clauses
-------
(a) and (b) of this Section 4 shall be immediately reinstated as of the
--- --- ---------
date of dismissal as if such Insolvency Proceeding had not been initiated;
(iii) acceleration of the Senior Indebtedness; provided, that if
--------
acceleration of the Senior Indebtedness is rescinded, then any of the
actions described in clauses (a) and (b)
----------- ---
5
<PAGE>
of this Section 4 taken by Subordinated Lender shall likewise be rescinded
---------
if such action is based solely on an acceleration of the Senior
Indebtedness; and
(iv) the expiration of a period of three Business Days following the
date that each of Debtor and Subordinated Lender receives notice from
Senior Lender that Senior Lender has terminated or suspended its obligation
to make further Loans or incur further Letter of Credit Obligations;
provided, that if such termination or suspension is rescinded, then any of
--------
the actions described in clauses (a) and (b) of this Section 4 taken by
----------- --- ---------
Subordinated Lender shall likewise be rescinded if such action is based
solely on such termination or suspension,
Subordinated Lender may, upon five Business Days' prior written notice to Senior
Lender take the actions described in clauses (a) and (b) of this Section 4 so
----------- --- ---------
long as such action is not inconsistent with or in contravention of, and does
not interfere with, the enforcement actions taken by the Senior Lender and the
provisions of this Agreement. Notwithstanding the foregoing, but subject to
Section 11(c) of this Agreement, Subordinated Lender may file a proof of claim
- -------------
in an Insolvency Proceeding involving Debtor, Parent or LCV, which proof of
claim shall indicate Subordinated Lender's subordination hereunder.
5. Consent to Liens. Senior Lender hereby consents to the Liens on
----------------
the Collateral created in favor of Subordinated Lender under the Subordinated
Loan Documents and agrees that the grant, perfection or existence of such Liens
does not and shall not constitute a default or an event of default under the
Senior Loan Documents. Subordinated Lender hereby consents to the Liens on the
Collateral created in favor of Senior Lender, under the Senior Loan Documents,
and agrees that the grant or existence of such Liens does not and shall not
constitute a default or an event of default under and as defined in or a breach
of any covenant under the Subordinated Loan Documents.
6. Allowed Payments. Subject to Section 11 of this Agreement,
---------------- ----------
Debtor may pay to Subordinated Lender, and Subordinated Lender may accept or
receive and shall not be required to hold in trust for the benefit of Senior
Lender, Allowed Payments, unless and until (a) Subordinated Lender receives a
Payment Blockage Notice and for so long as the resulting Blockage Period is in
effect or Subordinated Lender is prohibited from receiving payments under
Section 7(d), or (b) an Insolvency Proceeding is commenced by or against Debtor.
- ------------
7. Payment Blockages.
-----------------
(a) If Subordinated Lender receives a Payment Blockage Notice
pursuant to Section 6 of this Agreement, and if (i) the Senior Event of Default
---------
referenced therein is a default in payment of any portion of the Senior
Indebtedness, or (ii) such Payment Blockage Notice includes notice of an
acceleration or demand for immediate payment of the Senior Indebtedness, then
Subordinated Lender shall not take or receive any payment on the Subordinated
Indebtedness until the earlier to occur of (x) receipt by Subordinated Lender of
written notice by Senior Lender of the cure, or Senior Lender's waiver, of such
Senior Event of Default, or (y) full and final payment, in cash, to Senior
Lender of the Senior Indebtedness.
6
<PAGE>
(b) If Subordinated Lender receives a Payment Blockage Notice
pursuant to Section 6 of this Agreement, and if each of the following conditions
---------
are met:
(i) the Senior Event of Default referenced therein is not (A) a
default in payment of any portion of the Senior Indebtedness or (B) a
default solely arising under Section 7.1(c)(ii) of the Senior Loan
------------------
Agreement;
(ii) such Payment Blockage Notice does not include notice of an
acceleration or demand for immediate payment of the Senior Indebtedness;
and
(iii) Debtor has Net Borrowing Availability at the time of any
proposed payment of less than $1,000,000, both before and after giving
effect to such proposed payment,
then Subordinated Lender shall not take or receive such payment on the
Subordinated Indebtedness until the earliest to occur of (x) receipt by
Subordinated Lender of written notice by Senior Lender of the cure, or Senior
Lender's waiver, of such Senior Event of Default, (y) full and final payment, in
cash, to Senior Lender of the Senior Indebtedness, or (z) expiration of a period
of 180 days from the date Subordinated Lender receives such Payment Blockage
Notice.
(c) If Subordinated Lender receives a Payment Blockage Notice
pursuant to Section 6 of this Agreement, and if each of the following conditions
---------
are met:
(i) the Senior Event of Default referenced therein is a default
solely arising under Section 7.1(c)(ii) of the Senior Loan Agreement;
------------------
(ii) at the time of any proposed payment, Subordinated Lender
has accelerated or demanded immediate payment of the Subordinated
Indebtedness; and
(iii) Debtor has Net Borrowing Availability at the time of any
proposed payment of less than $750,000, both before and after giving effect
to such proposed payment,
then Subordinated Lender shall not take or receive such payment on the
Subordinated Indebtedness until the earliest to occur of (x) receipt by
Subordinated Lender of written notice by Senior Lender of the cure, or Senior
Lender's waiver, of such Senior Event of Default, (y) full and final payment, in
cash, to Senior Lender of the Senior Indebtedness, or (z) expiration of a period
of 90 days from the date Subordinated Lender receives such Payment Blockage
Notice.
(d) If, as a result of any payment blockage instituted pursuant
to the provisions of this Section 7, one or more Allowed Payments are blocked
---------
prior to the termination of any such payment blockage (each such blocked Allowed
Payment, a "Blocked Payment" and collectively, the "Blocked Payments"), then, in
--------------- ----------------
the event of a termination of any such payment blockage effected pursuant to
this Section 7, so long as a subsequent Payment Blockage Notice is not then
---------
delivered, Debtor may pay, and Subordinated Lender shall be authorized to accept
payment of and shall not be required to hold in trust for the benefit of Senior
Lender, the Blocked
7
<PAGE>
Payments at such time as Debtor shall have Net Borrowing Availability of not
less than $750,000, both before and after giving effect to such proposed
payment.
(e) Notwithstanding anything herein to the contrary, (i) the
Senior Subordinated Note shall continue to accrue interest at all times
regardless of whether a Payment Blockage Notice is in effect and interest so
accrued may be paid to Subordinated Lender at such time as Debtor has satisfied
the conditions set forth in this Section 7, and (ii) Senior Lender shall not
block payment of Allowed Payments under Section 7(b) or Section 7(c) more than
------------ ------------
twice during any 360-day period.
8. Amendment of Documents. Subordinated Lender shall not amend or
----------------------
modify the Subordinated Loan Documents without Senior Lender's prior written
consent other than (a) waivers of any default or event of default under the
Subordinated Loan Documents, (b) increases in the interest rate or default
interest rate, each as set forth in the Subordinated Loan Documents as of the
Closing Date, with respect to the Subordinated Indebtedness by up to two
percentage points (2%), (c) any release of Lien (by application of law or
otherwise), (d) any release of Debtor or any guarantor, and (e) any other
amendment or modification that does not increase the aggregate principal amount
of the Subordinated Indebtedness and is on terms that are no less favorable to
the interests of Debtor or Senior Lender. Subordinated Lender shall not amend or
modify the Equity Related Agreements so as to provide for payments to be made
thereunder by Debtor, Parent or LCV to Subordinated Lender. Senior Lender shall
have the right, without notice to Subordinated Lender, to amend, supplement,
modify or grant waivers or consents with respect to the Senior Indebtedness, in
any manner whatsoever, including (a) any extension or reduction of the time of
payments (even if such reduction causes any Senior Indebtedness to be due on
demand or otherwise), (b) any revision of any amortization schedule with respect
thereto, (c) any increase in the amount of the Senior Indebtedness, (d) any
substitution of Collateral, (e) any release of Lien (by application of law or
otherwise), and (f) any release of Debtor or any guarantor. Debtor shall deliver
to Subordinated Lender copies of any amendment, extension, supplement or
modification of the Senior Loan Documents; provided, that Senior Lender shall
--------
not (i) increase the aggregate amount of principal that constitutes Senior
Indebtedness to an amount greater than $17,600,000, (ii) increase the interest
rate with respect to the Senior Indebtedness by more than two percentage points
in excess of Default Rate set forth in the Senior Loan Agreement as of the
Closing Date, or (iii) extend the Commitment Maturity Date beyond November 24,
2002, in each case without the prior written consent of Subordinated Lender,
which consent may be granted or withheld by Subordinated Lender in its sole
discretion.
9. Subordinated Indebtedness Owed Only to Subordinated Lender.
----------------------------------------------------------
Subordinated Lender represents and warrants that as of the date hereof it has
not previously assigned any interest in the Senior Subordinated Note or any
other Subordinated Loan Document, that no other party owns an interest in any of
the Subordinated Indebtedness (whether as joint holders, participants or
otherwise), and that the entire Subordinated Indebtedness is owing only to
Subordinated Lender. Subordinated Lender covenants and agrees that the entire
Subordinated Indebtedness shall continue to be owing only to it; provided, that
--------
Subordinated Lender may assign some or all of its interest in the Subordinated
Indebtedness owing to it after the assignee has executed and delivered to Senior
Lender an agreement in the form of Exhibit A or otherwise in form and substance
---------
satisfactory to Senior Lender confirming that such assignee, and all
Subordinated Indebtedness held or to be held by such assignee, shall be subject
in all respects to
8
<PAGE>
the terms and conditions of this Agreement. Any purported assignment,
hypothecation, or other conveyance by Subordinated Lender without the prior
execution and delivery to Senior Lender of such agreement shall be void.
10. Payments Received by Subordinated Lender. Except as provided in
----------------------------------------
Section 6 of this Agreement, if any payment, distribution or any proceeds of
- ---------
Collateral is received by Subordinated Lender from Debtor with respect to the
Subordinated Indebtedness prior to the final satisfaction in full of all the
Senior Indebtedness in cash, such Subordinated Lender shall receive and hold
such payment, distribution or proceeds in trust as trustee for the benefit of
Senior Lender and shall forthwith deliver such assets to Senior Lender in
precisely the form received (except for an endorsement or assignment by
Subordinated Lender where necessary), for application to any of the Senior
Indebtedness, whether due or not due. In the event of the failure of
Subordinated Lender to make any such endorsement or assignment to Senior Lender,
Senior Lender and any of its officers or agents are hereby irrevocably
authorized to make such endorsement or assignment either in its own name or in
the name of and on behalf of Subordinated Lender.
11. Insolvency Proceedings. In the event of any Insolvency
----------------------
Proceeding of Debtor, then, and irrespective of the treatment, validity or
priority of the Senior Indebtedness or the Subordinated Indebtedness:
(a) Senior Lender shall be entitled to receive payment in full
in cash of all amounts due on or in respect of the Senior Indebtedness before
Subordinated Lender is entitled to receive any payment or distribution on or in
respect of the Subordinated Obligations.
(b) Any payment or distribution of assets of Debtor of any kind
or character, whether in cash, property or securities, by setoff or otherwise,
to which Subordinated Lender would be entitled (including any payment or
distribution in respect of the Subordinated Indebtedness by reason of any other
indebtedness of Debtor being subordinated to the Subordinated Indebtedness) but
for the provisions of this Section 11, shall be paid by Debtor or any other
----------
Person making such payment or distribution, whether a debtor in possession,
trustee in bankruptcy, receiver, custodian, conservator, or otherwise, directly
to Senior Lender, to the extent necessary to make payment in full, in cash, of
the Senior Indebtedness remaining unpaid, after giving effect to any concurrent
payment or distribution to or for the benefit of Senior Lender, and Senior
Lender shall be entitled to demand, sue for, collect and receive every such
payment or distribution. Subordinated Lender irrevocably authorizes, empowers
and directs all trustees, receivers, custodians, conservators or any other
Persons having authority over the property to effect all such payments and
deliveries to Senior Lender.
(c) Subordinated Lender shall file all claims it may have
against Debtor, and shall direct the debtor in possession or trustee in
bankruptcy, as appropriate, to pay over to Senior Lender all amounts due to
Subordinated Lender on account of the Subordinated Indebtedness owed to it until
the Senior Indebtedness has been fully and finally paid and satisfied in cash.
If Subordinated Lender fails to file such claims by the date that is 15 Business
Days prior to the last day on which such claims may be timely filed, then Senior
Lender may file such claims in the name of and on behalf of such Subordinated
Lender (but only if Senior Lender has given Subordinated Lender five Business
Days' written notice thereof and Subordinated Lender does
9
<PAGE>
not make such filings prior to the end of such five Business Day period).
Subordinated Lender may vote its claims with respect to the Subordinated
Indebtedness in connection with any plan of reorganization or composition in any
Insolvency Proceeding of Debtor. If Subordinated Lender fails to vote its claims
with respect to the Subordinated Indebtedness in connection with any plan of
reorganization or composition in any Insolvency Proceeding of Debtor within 15
Business Days before the expiration of the time to vote such claims, then Senior
Lender shall have the right to vote such claims of Subordinated Lender.
12. Subrogation. Until the payment in full in cash of all Senior
-----------
Indebtedness, Subordinated Lender shall not assert any claim of subrogation with
respect to Senior Lender and the Senior Indebtedness. Upon the payment in full
in cash of all Senior Indebtedness, Subordinated Lender shall be subrogated to
the rights of Senior Lender to receive payments or distributions of cash or
property applicable to the Senior Indebtedness until all Subordinated
Indebtedness shall be paid in full and, as between Debtor and its creditors
other than Senior Lender and Subordinated Lender, no such payment or
distribution made to Senior Lender by virtue of this Agreement which otherwise
would have been made to Subordinated Lender shall be deemed to be a payment by
Debtor on account of Senior Indebtedness, it being understood that the
provisions of this Agreement are intended solely for the purpose of defining the
relative rights of Subordinated Lender, on the one hand, and Senior Lender, on
the other hand. If Subordinated Lender has been subrogated to the rights of the
Senior Lender due to the operation of this Section 12, then Debtor and Parent
----------
will take all actions requested by Subordinated Lender in order to enable
Subordinated Lender to obtain payments from Debtor and Parent with respect to
such subrogation rights as soon as possible.
13. Perfection of Subordinated Security Interest in Pledged Stock;
--------------------------------------------------------------
Enforcement of Senior Security Interests. Senior Lender shall hold (a) the
- ----------------------------------------
capital stock of (i) Debtor pledged by Parent and (ii) LCV pledged by Debtor
(collectively, the "Pledged Stock"), and (b) the Indebtedness of Debtor and LCV
-------------
that is evidenced by promissory notes, instruments and letters of credit
(collectively, the "Pledged Indebtedness"), in each case for itself and as
--------------------
bailee for Subordinated Lender, and, upon full and final payment, in cash, of
the Senior Indebtedness, shall deliver to Subordinated Lender the certificates
representing the Pledged Stock and the promissory notes, instruments and letters
of credit evidencing the Pledged Indebtedness, or as otherwise directed by
Subordinated Lender or order of any court. Senior Lender shall have no duties
to Subordinated Lender in connection with its possession of the Pledged Stock or
the Pledged Indebtedness prior to any foreclosure of Senior Lender's security
interest in such Pledged Stock or Pledged Indebtedness, other than the duty to
take reasonable care to preserve rights in such Pledged Stock or Pledged
Indebtedness. Any collection, sale, or other disposition of any Collateral by
Senior Lender after a Senior Event of Default shall be conclusively presumed to
be commercially reasonable if Senior Lender conducts such collection, sale, or
other disposition in a manner consistent with its normal and customary business
practices.
14. Reinstatement. The provisions of this Agreement shall continue
-------------
to be effective or be reinstated, and the Senior Indebtedness shall not be
deemed to be paid in full, as the case may be, if at any time any payment of any
of the Senior Indebtedness is rescinded or avoided, or must otherwise be
returned by Senior Lender pursuant to any Insolvency Proceeding or otherwise,
all as though such payment had not been made.
10
<PAGE>
15. Nonimpairment. No right of Senior Lender to enforce the
-------------
subordination provisions hereof shall at any time in any way be prejudiced or
impaired by any act or failure to act by Subordinated Lender, Senior Lender or
Debtor, or any noncompliance by Debtor or by Subordinated Lender with the terms
and provisions and covenants herein contained, regardless of any knowledge
thereof that Senior Lender may have or with which Senior Lender may otherwise be
charged.
16. Instrument Legends. Subordinated Lender shall forthwith inscribe
------------------
the face of the Senior Subordinated Note and any other instrument evidencing the
Subordinated Indebtedness or any portion thereof with a legend conspicuously
indicating that payment thereon is subordinated to the claims of Senior Lender
pursuant to the terms of this Agreement, and shall forthwith deliver copies
thereof to Senior Lender. Subordinated Lender shall further inscribe, on the
date thereof, any other instrument evidencing any of the Subordinated
Indebtedness or any portion thereof with the aforementioned legend, and shall
deliver copies thereof to Senior Lender on the date of its execution or within
five days thereafter.
17. Additional Remedies. If Subordinated Lender violates any of the
-------------------
terms of this Agreement, in addition to any remedies in law, at equity or
otherwise, Senior Lender may restrain such violation in any court of law or
equity and may interpose this Agreement as a defense in any action by
Subordinated Lender.
18. Certain Waivers. All of the Senior Indebtedness and Subordinated
---------------
Indebtedness shall be deemed to have been made or incurred in reliance upon this
Agreement. Subordinated Lender waives all notice of the acceptance by Senior
Lender of the subordination and other provisions of this Agreement and agrees
that Senior Lender has made no representations or warranties with respect to the
legality, validity, enforceability, collectability or perfection of the Senior
Indebtedness or any liens held by it in connection therewith. Senior Lender
agrees that Subordinated Lender has made no representations or warranties with
respect to the legality, validity, enforceability, collectability or perfection
of the Subordinated Indebtedness or any liens held by it in connection
therewith. Subordinated Lender agrees that Senior Lender shall be entitled to
manage and supervise its loans to Debtor in accordance with applicable law and
its normal business practices, modified from time to time as it deems
appropriate under the circumstances, without regard to the existence of any
rights that Subordinated Lender may now or hereafter have in or to any
Collateral, except that Senior Lender shall comply with the terms of this
Agreement. Senior Lender shall have no liability to Subordinated Lender as a
result of any and all lawful actions not in breach of this Agreement that Senior
Lender takes or omits to take (including actions with respect to the creation,
perfection or continuation of its liens, actions with respect to the occurrence
of a default or event of default under the Senior Loan Documents, actions with
respect to the foreclosure, sale, release or failure to realize upon, any
Collateral (except that Senior Lender must use care in accordance with its
normal and customary business practices to ensure the safe custody of the
Collateral in its possession), and actions with respect to the collection of any
claim for all or any part of the Senior Indebtedness from any account debtor of
Debtor or any other Person), regardless of whether any such actions or omissions
may affect Senior Lender's rights to a deficiency or Subordinated Lender's
rights of subrogation or reimbursement. Without limiting the generality of the
foregoing, Subordinated Lender waives any otherwise valid legal or equitable
right (a) to require Senior Lender to marshal any portion of the Collateral or
otherwise to seek satisfaction
11
<PAGE>
from any particular property of Debtor or from any other Person, (b) to oppose
any motion or application by Senior Lender or Debtor for Senior Lender to
provide debtor-in-possession financing, allow use of cash collateral, provide
adequate protection of Senior Lender's interest in the Collateral, or grant
relief from the automatic stay to permit Senior Lender to enforce its rights and
remedies with respect to the Collateral, or (c) otherwise to prohibit, delay,
control, or limit in any manner the sale or other disposition by Senior Lender
of any portion of the Collateral.
19. Waivers. No waiver shall be deemed to be made by Senior Lender
-------
or Subordinated Lender of any of their respective rights hereunder unless it is
in writing signed by the waiving party. Each such waiver shall be a waiver only
with respect to the specific instance involved and shall in no way impair the
rights of the waiving party or the obligations of the other party to the waiving
party in any other respect at any other time.
20. Information Concerning Financial Condition. Each of Senior
------------------------------------------
Lender and Subordinated Lender hereby acknowledges that the other has no
obligation to keep it informed of the financial condition of Debtor or of other
circumstances bearing upon the risk of nonpayment of the Senior Indebtedness or
Subordinated Indebtedness. Each of Senior Lender and Subordinated Lender hereby
agree that the other shall have no duty to advise it of information known to it
regarding such condition or any such circumstances. In the event Senior Lender
or Subordinated Lender (the "providing party"), in its sole discretion,
---------------
undertakes, at any time or from time to time, to provide any such information to
the other (the "receiving party"), the providing party shall be under no
---------------
obligation to (a) provide any such information to the receiving party on any
subsequent occasion, (b) undertake any investigation not a part of its regular
business routine, or (c) disclose any information that, pursuant to its
commercial finance practices, the providing party wishes to maintain as
confidential. Notwithstanding the foregoing, this Section 20 is subject to the
----------
notices required by Section 22 of this Agreement.
----------
21. Third Party Beneficiaries. This Agreement is solely for the
-------------------------
benefit of Senior Lender, Subordinated Lender and their respective successors
and permitted assigns, and neither Debtor nor any other Person is intended to be
a third party beneficiary hereunder or to have any right, benefit, priority or
interest under, or because of the existence of, or to have any right to enforce,
this Agreement. This Agreement is intended solely for the purpose of defining
the relative rights of Senior Lender and Subordinated Lender and is not intended
to or will impair, as between Debtor, Parent and their respective creditors
other than Senior Lender and Subordinated Lender, the respective obligations,
which are absolute and unconditional, of Debtor and Parent to Senior Lender or
Subordinated Lender. Each of Senior Lender and Subordinated Lender shall have
the right to modify or terminate this Agreement at any time without notice to or
approval of Debtor or any other Person; provided, that Subordinated Lender may
--------
not terminate this Agreement unless and until (a) the Senior Indebtedness has
been fully and finally paid and satisfied in cash, or (b) Senior Lender has
otherwise consented thereto in writing; and provided, further, that Debtor has a
--- -------- -------
right to approve any modification of this Agreement that increases its duties
under this Agreement with respect to notices or additional duties.
Notwithstanding any of the foregoing, if any third party satisfies the Senior
Indebtedness owing to Senior Lender, Senior Lender may assign its rights and
remedies hereunder to such third party, and such third party shall be deemed to
be Senior Lender for all purposes of this Agreement.
22. Notices.
-------
12
<PAGE>
(a) Debtor and Parent shall each give prompt written notice to
Subordinated Lender of any fact known to it which would prohibit the making of
any payment to Subordinated Lender in respect of the Senior Subordinated Note.
Senior Lender shall, within three Business Days after its knowledge of such
occurrence, (i) provide a copy to Subordinated Lender of any Payment Blockage
Notice, (ii) give written notice of the occurrence of a Senior Event of Default
and (iii) give written notice to Subordinated Lender of the expiration of any
payment blockage effected pursuant to Section 7. Subordinated Lender shall have
---------
the right, but not the obligation, to cure any Senior Default susceptible to
cure under the Senior Loan Documents that, after notice or lapse of time or
both, would become a Senior Event of Default at any time prior to such Senior
Default becoming a Senior Event of Default. Debtor and Parent shall give
written notice to Subordinated Lender within 48 hours time at which a Senior
Event of Default described in a Payment Blockage Notice is cured, no longer
continuing or waived by Senior Lender.
(b) Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration or other communication shall or may be
given to or served upon any of the parties by any other parties, or whenever any
of the parties desires to give or serve upon any other parties any communication
with respect to this Agreement, each such notice, demand, request, consent,
approval, declaration or other communication shall be in writing and shall be
deemed to have been validly served, given or delivered (a) upon the earlier of
actual receipt and three Business Days after deposit in the United States Mail,
registered or certified mail, return receipt requested, with proper postage
prepaid, (b) upon transmission, when sent by telecopy or other similar facsimile
transmission (with such telecopy or facsimile promptly confirmed by delivery of
a copy by personal delivery or United States Mail as otherwise provided in this
Section 21), (c) one Business Day after deposit with a reputable overnight
- ----------
courier with all charges prepaid, or (d) when delivered, if hand-delivered by
messenger, all of which shall be addressed to the party to be notified and sent
to the address or facsimile number indicated beneath its signature line hereto
or to such other address (or facsimile number) as may be substituted by notice
given as herein provided. The giving of any notice required hereunder may be
waived in writing by the party entitled to receive such notice. Failure or
delay in delivering copies of any notice, demand, request, consent, approval,
declaration or other communication to any Person (other than Debtor or Senior
Lender) designated to receive copies herein shall in no way adversely affect the
effectiveness of such notice, demand, request, consent, approval, declaration or
other communication.
23. Costs and Attorneys' Fees. If any action or proceeding is
-------------------------
commenced by or between any of the parties hereto in connection with this
Agreement, the prevailing party or parties therein shall be entitled to recover
from the other party or parties their reasonable costs and attorneys' fees.
24. Successors and Assigns. This Agreement shall be binding on and
----------------------
shall inure to the benefit of the parties hereto and their respective successors
and permitted assigns (including, in the case of any Insolvency Proceeding, any
receiver, assignee for the benefit of creditors, trustee or debtor in possession
on behalf of such Person), except as otherwise provided herein.
13
<PAGE>
25. Integrated Agreement. This Agreement sets forth the entire
--------------------
understanding of the parties hereto with respect to the matters set forth herein
and may not be modified or amended except in a writing signed by all parties.
26. Interpretation. No provision of this Agreement shall be
--------------
construed against or interpreted to the disadvantage of any party hereto by any
court or other governmental or judicial authority by reason of such party's
having or being deemed to have structured, drafted or dictated such provision.
27. Authority. Each of the signatories hereto certifies that such
---------
party has all necessary authority to execute this Agreement.
28. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each one of which when so executed shall be deemed to be an
original, and all of which taken together shall constitute one and the same
agreement.
29. GOVERNING LAW. IN ALL RESPECTS, INCLUDING ALL MATTERS OF
-------------
CONSTRUCTION, VALIDITY, AND PERFORMANCE, THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THAT STATE (WITHOUT
REGARD TO THE CONFLICT OF LAW PROVISIONS THEREOF) AND ANY APPLICABLE LAWS OF THE
UNITED STATES OF AMERICA.
30. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION
--------------------
WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED
BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND
FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT
THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE,
TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT,
TORT, OR OTHERWISE, BETWEEN SENIOR LENDER AND SUBORDINATED LENDER ARISING OUT
OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED
BETWEEN THEM IN CONNECTION WITH, THIS AGREEMENT OR THE TRANSACTIONS RELATED
THERETO.
IN WITNESS WHEREOF, this Intercreditor and Subordination Agreement has
been duly executed as of the date first written above.
"Subordinated Lender"
LEVINE LEICHTMAN CAPITAL PARTNERS, INC.,
a California corporation
14
<PAGE>
On behalf of LEVINE LEICHTMAN CAPITAL
PARTNERS II, L.P., a California limited
partnership
By:_______________________________________
Lauren B. Leichtman
Chief Executive Officer
Address: 335 North Maple Drive, Suite 240
Beverly Hills, CA 90210
Attn: Arthur E. Levine, President
Facsimile: (310) 275-1441
with a copy to:
Riordan & McKinzie
300 South Grand Avenue, 29/th/ Floor
Los Angeles, CA 90071-3109
Attn: Mitchell S. Cohen, Esq.
[SIGNATURES CONTINUED] Facsimile: (213) 229-8550
"Senior Lender"
UNION BANK OF CALIFORNIA, N.A.
By:_______________________________
Name:_____________________________
Title:____________________________
Address: Union Bank of California, N.A.
Commercial Finance Division
445 South Figueroa Street
Los Angeles, CA 90071-1602
Attn: Commercial Finance Division
Manager
Facsimile: (213) 236-6089
with a copy to:
Murphy Sheneman Julian & Rogers
2049 Century Park East, Suite 2100
Los Angeles, CA 90067
Attn: Gary B. Rosenbaum, Esq.
Facsimile: (310) 788-3777
15
<PAGE>
ACKNOWLEDGEMENT
---------------
Each of the undersigned hereby acknowledges and consents to the
foregoing Intercreditor and Subordination Agreement ("Intercreditor Agreement")
-----------------------
and agrees to cooperate with the parties thereto to insure enforcement of the
priorities and other provisions specified therein, and not to make any payments
to Subordinated Lender that are not expressly permitted under Sections 6 and 7
of the Intercreditor Agreement.
Dated as of November 24, 1999.
"Debtor"
OVERHILL FARMS, INC.
By:____________________________
James Rudis
President and Chief Executive Officer
By:____________________________
Richard A. Horvath
Vice President and Chief Financial Officer
Address: Overhill Farms, Inc.
5730 Uplander Way, Suite 201
Culver City, CA 90230-6617
Attn: Mr. James Rudis, President
Facsimile: (310) 645-3914
"Parent"
POLYPHASE CORPORATION
By:____________________________
James Rudis
President and Chief Executive Officer
By:____________________________
William E. Shatley
Senior Vice President and Chief Financial
Officer
Address: Polyphase Corporation
4800 Broadway
Dallas, TX 75248
Attn: Mr. James Rudis, President
Facsimile: (972) 386-8008
16
<PAGE>
[SIGNATURES CONTINUED]
"LCV"
OVERHILL L.C. VENTURES, INC.
By:__________________________
James Rudis
President and Chief Executive Officer
By:__________________________
Richard A. Horvath
Vice President and Chief Financial Officer
Address: Overhill L.C. Ventures, Inc.
5730 Uplander Way, Suite 201
Culver City, CA 90230-6617
Attn: Mr. James Rudis, President
Facsimile: (310) 645-3914
17
<PAGE>
EXHIBIT A
---------
The undersigned, as assignee of the holder of that certain Secured
Senior Subordinated Note dated as of November 24, 1999, in the original
aggregate principal amount of $26,000,000 executed by Overhill Farms, Inc. (the
"Senior Subordinated Note") originally in favor of LEVINE LEICHTMAN CAPITAL
------------------------
PARTNERS II, L.P., a California limited partnership ("LLCP"), hereby
----
acknowledges and agrees as follows:
(a) the undersigned shall be bound by and to the terms of that
certain Intercreditor and Subordination Agreement dated as of November 24, 1999,
by and between UNION BANK OF CALIFORNIA, N.A. ("Bank"), as senior lender, and
----
LLCP, as subordinated lender (the "Intercreditor Agreement");
-----------------------
(b) the undersigned represents and warrants to Bank that the
undersigned is legally authorized to enter this assignment and to become a party
to the Intercreditor Agreement;
(c) the undersigned has received a copy of, and has fully and
completely read the terms of, the Intercreditor Agreement and is familiar with
the terms thereof;
(d) the undersigned shall perform all of the obligations, in
accordance with their terms, which by the terms of the Intercreditor Agreement
are required to be performed by the undersigned as Subordinated Lender;
(e) the undersigned acknowledges that the transfer of, payment
on, and remedial action with respect to the Senior Subordinated Note are
restricted by the Intercreditor Agreement, which Intercreditor Agreement is on
file at the offices of the maker of the Note; and
(f) the undersigned specifies as its address for notices the
office set forth below.
This Agreement is effective as of [_______ __, ____]
[ASSIGNEE PARTY]
By:___________________
Name:_________________
Title:________________
Consented to as of [_______ __, ____] by:
UNION BANK OF CALIFORNIA, N.A.
By:__________________
Name:________________
Title:_______________
18
<PAGE>
EXHIBIT 10.6
================================================================================
SECURITIES PURCHASE AGREEMENT
by and among
OVERHILL FARMS, INC.,
as Issuer,
POLYPHASE CORPORATION
and
OVERHILL L. C. VENTURES, INC.,
as Guarantors,
and
LEVINE LEICHTMAN CAPITAL PARTNERS II, L.P.,
as Purchaser
Dated as of November 24, 1999
_________________________________________
Secured Senior Subordinated Note Due 2004
Warrant to Purchase Common Stock
_________________________________________
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. DEFINITIONS; ACCOUNTING TERMS......................................... 2
1.1 Definitions..................................................... 2
1.2 Accounting Terms and Computations............................... 24
1.3 Independence of Covenants....................................... 25
1.4 Captions; Construction and Interpretation....................... 25
1.5 Determinations.................................................. 25
1.6 Knowledge of the Company........................................ 25
1.7 Exclusion of Texas Timberjack................................... 25
2. PURCHASE AND SALE OF THE SECURITIES................................... 26
2.1 Authorization................................................... 26
2.2 Purchase of the Securities; Issue Price......................... 26
2.3 Closing......................................................... 26
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................... 26
3.1 Organization and Qualification.................................. 27
3.2 Corporate or Other Power........................................ 27
3.3 Authorization; Binding Obligations.............................. 27
3.4 Subsidiaries.................................................... 27
3.5 Conflict with Other Instruments; Existing Defaults; Ranking..... 28
3.6 Governmental and Other Third Party Consents..................... 28
3.7 Capitalization.................................................. 29
3.8 Validity and Issuance of Warrant Shares......................... 31
3.9 Corporate Separateness.......................................... 31
3.10 Parent SEC Documents............................................ 32
3.11 Financial Statements............................................ 33
3.12 Existing Indebtedness; Existing Liens; Investments; Etc......... 34
3.13 Absence of Certain Changes...................................... 35
3.14 Material Contracts.............................................. 37
3.15 [Intentionally Omitted]......................................... 39
3.16 Accounts Receivable............................................. 39
3.17 Labor Relations................................................. 40
3.18 Employee Benefit Plans; ERISA................................... 40
3.19 Taxes........................................................... 43
3.20 Litigation...................................................... 44
3.21 Transactions with Affiliates.................................... 44
3.22 Investment Company Act; Margin Stock............................ 46
3.23 Compliance with Laws; Licenses and Permits...................... 46
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.24 Title to Property............................................... 46
3.25 Real Property................................................... 47
3.26 Environmental Matters........................................... 48
3.27 Intellectual Property........................................... 48
3.28 Nature of Business.............................................. 49
3.29 Powers of Attorney.............................................. 50
3.30 Listing of Parent Common Stock.................................. 50
3.31 Insurance....................................................... 50
3.32 Customers....................................................... 50
3.33 Suppliers....................................................... 50
3.34 Business Relationships.......................................... 50
3.35 Personal Property Leases........................................ 51
3.36 Employment Agreements........................................... 51
3.37 Solvency........................................................ 51
3.38 Use of Proceeds................................................. 52
3.39 Public Utility Holding Company Act.............................. 52
3.40 Depository and Other Accounts................................... 52
3.41 Books and Records............................................... 52
3.42 Burdensome Obligations; Future Expenditures..................... 52
3.43 Brokers; Certain Expenses....................................... 53
3.44 Due Diligence Response.......................................... 53
3.45 Disclosure...................................................... 53
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER....................... 54
4.1 Organization.................................................... 54
4.2 Authorization................................................... 54
4.3 Due Execution and Delivery; Binding Obligations................. 54
4.4 No Violation.................................................... 54
4.5 Investment Intent............................................... 54
4.6 Accredited Investor Status...................................... 54
4.7 Governmental Consents........................................... 55
5. CONDUCT PRIOR TO CLOSING.............................................. 55
5.1 Conduct of Business Prior to Closing............................ 55
5.2 Access to Information and Documents............................. 56
5.3 Non-Solicitation................................................ 56
5.4 Covenant to Close............................................... 57
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
6. CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER........................ 57
6.1 Closing Date.................................................... 57
6.2 Representations and Warranties; No Default...................... 57
6.3 Closing Fees and Expenses....................................... 58
6.4 Purchase Permitted By Applicable Laws........................... 58
6.5 No Material Adverse Changes..................................... 58
6.6 California Permit............................................... 58
6.7 No Injunction or Order.......................................... 58
6.8 Opinions of Counsel............................................. 59
6.9 Delivery of Certain Closing Documents........................... 59
6.10 Collateral Documents............................................ 59
6.11 Amendment to Charter............................................ 61
6.12 Senior Credit Facility.......................................... 61
6.13 Delivery of Corporate Documents................................. 61
6.14 Repayment of Certain Indebtedness; Termination Statements....... 62
6.15 Employment Agreements; Non-Competition and Confidentiality
Agreements...................................................... 62
6.16 Matters Relating to LHF......................................... 62
6.17 Capital Lease Obligations; Termination of UCC Filings........... 63
6.18 Capital Structure............................................... 63
6.19 Insurance Matters............................................... 63
6.20 Completion of Due Diligence Review.............................. 63
6.21 Delivery of Financial Projections............................... 63
6.22 Compliance Certificate.......................................... 63
6.23 LLCP Representative............................................. 64
6.24 Third Party Consents............................................ 64
6.25 Proceedings Satisfactory........................................ 64
7. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY.......................... 64
7.1 Representations and Warranties.................................. 64
7.2 Purchase Permitted By Applicable Laws........................... 65
7.3 No Injunction or Order.......................................... 65
7.4 Payment for Securities.......................................... 65
8. INDEMNIFICATION; FEES AND EXPENSES.................................... 65
8.1 Transfer Taxes.................................................. 65
8.2 Losses.......................................................... 65
8.3 Indemnification Procedures...................................... 66
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.4 Contribution.................................................... 67
8.5 Deal-Related Costs and Expenses................................. 67
8.6 Costs of Collection............................................. 67
9. GUARANTY.............................................................. 68
9.1 Unconditional Guaranty.......................................... 68
9.2 Continuing and Irrevocable Guaranty............................. 69
9.3 Nature of Guaranty.............................................. 69
9.4 Authorization................................................... 70
9.5 Certain Waivers................................................. 71
9.6 Subrogation; Certain Agreements................................. 72
9.7 Bankruptcy No Discharge......................................... 73
9.8 Subordination................................................... 74
9.9 Maximum Liability of Guarantors................................. 75
9.10 Financial Benefit............................................... 75
9.11 Review of Documents; Understanding with Respect to Waivers...... 75
9.12 Corporate Existence; Properties................................. 75
9.13 Guarantor Acknowledgment........................................ 75
10. DEFAULTS AND REMEDIES................................................. 76
10.1 Events of Default............................................... 76
10.2 Acceleration.................................................... 79
10.3 Other Remedies.................................................. 79
10.4 Appointment of Receiver......................................... 80
10.5 Waiver of Past Defaults......................................... 80
11. TERMINATION........................................................... 80
11.1 Termination..................................................... 80
11.2 Effect of Termination........................................... 81
11.3 Waiver.......................................................... 81
11.4 Alternative Transaction Fee..................................... 81
12. MISCELLANEOUS......................................................... 82
12.1 Survival of Representations and Warranties...................... 82
12.2 Consent to Amendments........................................... 82
12.3 Entire Agreement................................................ 82
12.4 Severability.................................................... 82
12.5 Successors and Assigns; Assignments............................. 82
</TABLE>
iv
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
12.6 Notices........................................................ 83
12.7 Counterparts................................................... 84
12.8 Governing Law.................................................. 84
12.9 Publicity...................................................... 84
12.10 Due Diligence Investigation.................................... 85
12.11 WAIVER OF JURY TRIAL........................................... 85
</TABLE>
v
<PAGE>
EXHIBITS
Exhibit A - Form of Note
Exhibit B - Form of Warrant
Exhibit C - Form of Amended and Restated Articles of Incorporation
Exhibit D - Form of Compliance Certificate
Exhibit E - Form of Excess Cash Flow Calculation Certificate
DISCLOSURE SCHEDULES
Schedule 3.4 - Subsidiaries
Schedule 3.5(b) - Existing Defaults
Schedule 3.6 - Consents
Schedule 3.7(a) - Capitalization (Company)
Schedule 3.7(b) - Capitalization (Parent)
Schedule 3.10 - Parent SEC Documents
Schedule 3.11(c) - Closing Balance Sheet
Schedule 3.12 - Existing Indebtedness
Schedule 3.13(a) - Absence of Certain Changes
Schedule 3.13(g) - Capital Expenditures Budget
Schedule 3.14 - Material Contracts
Schedule 3.17 - Labor Relations
Schedule 3.18 - ERISA Matters
Schedule 3.19 - Taxes
Schedule 3.20 - Litigation
Schedule 3.21 - Transactions with Affiliates
Schedule 3.23 - Compliance with Laws
Schedule 3.25 - Real Property
Schedule 3.26 - Environmental Conditions
Schedule 3.27 - Intellectual Property
Schedule 3.31 - Insurance
Schedule 3.32 - Customers
Schedule 3.33 - Suppliers
Schedule 3.35 - Personal Property Leases
Schedule 3.36 - Employment Agreements
Schedule 3.38 - Use of Proceeds
Schedule 3.40 - Depository and Other Accounts
vi
<PAGE>
ANNEX A
Covenants
---------
Section 1.A -- Affirmative Covenants
Section 1.1A -- Payment of Note
Section 1.2A -- Performance of Investment Documents
Section 1.3A -- Information Reporting Requirements
Section 1.4A -- Parent SEC Documents
Section 1.5A -- Compliance with Laws
Section 1.6A -- Legal Existence
Section 1.7A -- Books and Records; Inspections
Section 1.8A -- Maintenance of Properties
Section 1.9A -- Insurance
Section 1.10A -- Taxes
Section 1.11A -- ERISA Matters
Section 1.12A -- Communication with Accountants
Section 1.13A -- Compliance with Material Contracts
Section 1.14A -- Fiscal Year End
Section 1.15A -- Environmental Matters
Section 1.16A -- Additional Subsidiary Guaranties
Section 1.17A -- Corporate Separateness
Section 1.18A -- Year 2000 Compatibility
Section 1.19A -- AMEX Listing
Section 1.20A -- Future Information
Section 1.21A -- Further Assurances
Section 1.22A -- Appointment of Independent Director
Section 1.23A -- Tax Sharing Accounting Treatment
Section 1.24A -- Survival of Certain Affirmative Covenants
Section 2.A -- Negative Covenants
Section 2.1A -- Limitations on Indebtedness
Section 2.2A -- Limitations on Liens
Section 2.3A -- Limitations on Investments
Section 2.4A -- Limitation on Restricted Payments
Section 2.5A -- Change in Business
Section 2.6A -- Sales of Receivables
vii
<PAGE>
Section 2.7A -- [Intentionally Omitted]
Section 2.8A -- Transactions with Affiliates
Section 2.9A -- Fundamental Changes
Section 1.22A -- Survival of Certain Negative Covenants
Section 2.10A -- Agreements Affecting Capital Stock and Indebtedness;
Amendments to Material Contracts
Section 2.11A -- Conditional Sales
Section 2.12A -- Payment Restrictions Affecting Certain Subsidiaries
Section 2.13A -- Parent Covenants
Section 2.14A -- Removal of Independent Director
Section 2.15A -- Margin Stock
Section 2.16A -- Survival of Certain Negative Covenants
Section 3.A -- Financial Covenants
Section 3.1A -- Minimum EBITDA
Section 3.2A -- Minimum Fixed Charge Coverage Ratio
Section 3.3A -- Maximum Leverage Ratio
Section 3.4A -- Maximum Capital Expenditures
Section 3.5A -- Minimum Tangible Net Worth
Section 3.6A -- Maximum Over 90-Day Receivables
viii
<PAGE>
OVERHILL FARMS, INC.
SECURITIES PURCHASE AGREEMENT
-----------------------------
THIS SECURITIES PURCHASE AGREEMENT is entered into as of the 24th day of
November 1999 (this "Agreement"), by and among OVERHILL FARMS, INC., a Nevada
---------
corporation (the "Company"), LEVINE LEICHTMAN CAPITAL PARTNERS II, L.P., a
-------
California limited partnership (the "Purchaser"), POLYPHASE CORPORATION, a
---------
Nevada corporation ("Parent"), and OVERHILL L. C. VENTURES, INC., a California
------
corporation ("Overhill Ventures").
-----------------
R E C I T A L S
- - - - - - - -
A. The Company has authorized the issuance and sale to the Purchaser, and
the Purchaser is willing to purchase from the Company, a Secured Senior
Subordinated Note Due 2004 in the principal amount of $28,000,000, on the terms
and subject to the conditions set forth herein.
B. As an inducement to the Purchaser to purchase the Secured Senior
Subordinated Note Due 2004 being sold to the Purchaser hereunder, the Company is
willing to sell to the Purchaser a Warrant to Purchase 166.04 Shares of Common
Stock of the Company representing 17.50% of the Common Stock of the Company on a
Fully Diluted Basis (as such term is defined herein) immediately after the
closing of the transactions contemplated hereby, on the terms and subject to the
conditions set forth therein.
C. As a further inducement to the Purchaser to purchase the Secured
Senior Subordinated Note Due 2004 being sold to the Purchaser hereunder, the
Company and certain of its Affiliates (as such term is defined herein) are
willing to enter into this Agreement and the other Investment Documents (as such
term is defined herein), including, without limitation, an Investor Rights
Agreement under which the Company will grant to the Purchaser or one of its
Affiliates certain investment monitoring and other rights in connection with the
transactions contemplated by this Agreement.
D. As a further inducement to the Purchaser to purchase the Secured
Senior Subordinated Note Due 2004 being sold to the Purchaser hereunder, and in
consideration therefor, the Guarantors (as such term is defined herein) have
agreed, at the request of the Company, to guaranty absolutely and
unconditionally the Guarantied Obligations (as such term is defined herein).
<PAGE>
E. It is the intention of the parties that, as a result of the
consummation of the transactions contemplated by this Agreement, the Company be
treated as a "bankruptcy remote entity."
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. DEFINITIONS; ACCOUNTING TERMS.
-----------------------------
1.1 Definitions. For purposes of this Agreement, the following terms
-----------
shall have the following meanings (such meanings to be equally applicable to the
singular and the plural forms thereof):
"Affiliate" shall mean, with respect to any specified Person, (i) any
---------
other Person that, directly or indirectly, owns or controls, or has the
right to acquire, whether beneficially or of record, or as a trustee,
guardian or other fiduciary (other than a commercial bank or trust
company), five percent (5%) or more of the Capital Stock of such specified
Person, (ii) any other Person that, directly or indirectly, controls, is
controlled by, is under direct or indirect common control with, or is
included in the Immediate Family of, such specified Person or any Affiliate
of such specified Person, or (iii) any Executive Officer, director, partner
or member of such specified Person, or any Person included in the Immediate
Family of any of the foregoing. For the purposes of this definition, the
term "control," when used with respect to any specified Person, shall mean
-------
the power to direct or cause the direction of management or policies of
such Person, directly or indirectly, whether through the ownership of
voting securities, by contract or otherwise; and the terms "controlling"
-----------
and "controlled" have meanings correlative of the foregoing.
----------
Notwithstanding anything to the contrary, for the purposes of this
Agreement and the other Investment Documents, neither the Purchaser nor any
of its Affiliates, officers, directors, partners or employees shall be
deemed to be an Affiliate of the Company.
"Agreement" shall mean this Agreement, together with the Exhibits, the
---------
Disclosure Schedules and Annex A, in each case as amended, restated,
supplemented or otherwise modified from time to time in accordance with the
terms hereof.
"Alternative Transaction" shall have the meaning set forth in Section
----------------------- -------
5.3.
---
"Alternative Transaction Fee" shall have the meaning set forth in
---------------------------
Section 11.4.
------------
2
<PAGE>
"Amended Charter" shall mean an Amended and Restated Articles of
---------------
Incorporation of the Company, in substantially the form of Exhibit C, duly
---------
authorized, executed and filed with the Secretary of State of the State of
Nevada.
"AMEX" shall mean American Stock Exchange LLC.
----
"Applicable Laws" shall mean all applicable provisions of all (i)
---------------
constitutions, treaties, statutes, laws, rules, regulations and ordinances
of any Governmental Authority, (ii) any Consent of any Governmental
Authority and (iii) any orders, decisions, rulings, judgments or decrees of
any Governmental Authority.
"Asset Sale" shall mean any sale, lease, transfer or other disposition
----------
(or series of related sales, leases, transfers or other dispositions) by
the Company or any of its Subsidiaries to any Person of any asset of the
Company or any such Subsidiary (other than sales, leases, transfers or
other dispositions of inventory in the ordinary course of business).
"Assignee" shall have the meaning set forth in Section 12.5.
-------- ------------
"Assignment" shall mean an assignment or other transfer of the Note
----------
pursuant to Section 11 of the Note.
----------
"Bankruptcy Law" shall mean Title 11 of the United States Code (11
--------------
U.S.C. Section 101 et seq.) or any similar federal or state law for the
-- ---
relief of debtors, as amended from time to time.
"Beneficiary" shall have the meaning set forth in Section 9.1.
----------- -----------
"Benefit Plan" shall have the meaning set forth in Section 3.18.
------------ ------------
"Board of Directors" shall mean, with respect to any Person, the board
------------------
of directors (or similar governing body) of such Person.
"Business Day" shall mean any day that is not a Saturday, a Sunday or,
------------
in the City of New York, New York or in Los Angeles, California, a day on
which banking institutions are authorized or required by law to close.
"California Permit" shall mean a Permit dated November 8, 1999, as
-----------------
amended by a post-effective amendment dated November 23, 1999, issued by
the California Department of Corporations under Section 25130 of the
California Corporate Securities Law of 1968, as amended, and qualifying
without any restrictions or conditions the
3
<PAGE>
issuance and sale by the Company to the Purchaser of the Securities and the
Warrant Shares.
"Capital Expenditures" shall mean, for any period, the aggregate of
--------------------
all expenditures of the Company and its Subsidiaries (whether paid in cash
or accrued or financed by the incurrence of Indebtedness) during such
period, including all Capital Leases, for any property, plant, equipment or
other fixed assets, or for improvements thereto, or for replacements,
substitutions or additions thereto, that have a useful life of more than
one (1) year or are required to be capitalized on the consolidated balance
sheet of the Company and its Subsidiaries in accordance with GAAP.
"Capital Lease" shall mean any lease or agreement of the Company or
-------------
its Subsidiaries for property (whether real, personal or mixed) which has
been or is required to be capitalized on the consolidated balance sheet of
the Company and its Subsidiaries in accordance with GAAP.
"Capital Lease Obligations" shall mean all liabilities or other
-------------------------
obligations for the payment of rent for any property (whether real,
personal or mixed) which has been or is required to be capitalized on the
consolidated balance sheet of the Company and its Subsidiaries in
accordance with GAAP with respect to a Capital Lease.
"Capital Stock" shall mean, with respect to any Person, (i) if such
-------------
Person is a corporation, any and all shares, interests, participations in
profits or other equivalents (however designated) of capital stock or other
equity interests of such Person, (ii) if such Person is a limited liability
company, any and all membership units or interests, or (iii) if such Person
is a partnership, any and all partnership units or interests.
"Cash Interest Expense" shall mean, for any period, without
---------------------
duplication and only to the extent deducted in determining Net Income
(Loss), calculated without regard to any limitation on the payment thereof
and determined in accordance with GAAP, (i) total consolidated interest
expense of the Company and its Subsidiaries (including, without limitation,
interest paid to Affiliates and the portion of any Capitalized Lease
Obligations allocable to interest expense), whether paid or accrued, minus
-----
(ii) to the extent included in total consolidated interest expense, any
non-cash interest expense, including, without limitation, any payment-in-
kind interest, amortization of original issue discount, non-cash losses on
hedging agreements and amortization of capitalized up-front costs.
"Change in Control" shall mean the occurrence of one or more of the
-----------------
following events:
4
<PAGE>
(i) any transaction (or series of transactions) or other event by
virtue of which James Rudis shall cease to beneficially own and control
directly at least 500,000 shares of Parent Common Stock (without giving
effect to any stock splits, reverse stock splits, dividends or like events
after the date hereof);
(ii) any transaction (or series of transactions) or other event by
virtue of which Parent ceases to own in the aggregate, directly or
indirectly, more than ninety-nine percent (99.0%) of the Common Stock on a
Fully Diluted Basis (after giving effect to the repurchase by the Company
of the LHF Warrant as contemplated herein but without giving effect to the
issuance of the Warrant to the Purchaser as contemplated herein);
(iii) James Rudis either (A) ceases to be the President and Chief
Executive Officer of the Company or (B) ceases to be the chief executive
officer of the Company, with general and active management of the business
of the Company and responsibility for overseeing that all orders and
resolutions of the Board of Directors of the Company are carried into
effect;
(iv) Richard A. Horvath either (A) ceases to be a Senior Vice
President and the Chief Financial Officer of the Company or (B) ceases to
have significant daily senior management responsibilities, provided that
--------
the Company does not replace Mr. Horvath with an individual who is
reasonably acceptable to the Purchaser within ninety (90) days of Mr.
Horvath's effective resignation or termination date;
(v) William E. Shatley either (A) ceases to be the Chief Financial
Officer of Parent or (B) ceases to have significant daily senior management
responsibilities at Parent, provided that Parent does not replace Mr.
--------
Shatley with an individual who is reasonably acceptable to the Purchaser
within ninety (90) days of Mr. Shatley's effective resignation or
termination date;
(vi) the sale of all or substantially all of the assets of the
Company or of a material Subsidiary of the Company, or the sale of a
material Subsidiary of the Company;
(vii) (A) the Company enters into any merger, consolidation,
reorganization or other transaction having a similar legal effect with
Parent, any other Subsidiary of Parent or any other Person and, as a result
thereof, any Person who is not an Affiliate of the Company as of the date
hereof acquires "control" (as such term is used in the definition of
Affiliate) of the Company, or (B) Parent enters into any merger,
consolidation, reorganization or other transaction having a similar legal
effect with any other Person; or
5
<PAGE>
(viii) (A) the institution by the Company or any Guarantor of a
voluntary case under the Bankruptcy Law or any similar proceeding under any
other Applicable Laws, (B) the commencement against the Company or any
Guarantor of an involuntary case seeking liquidation or reorganization
under the Bankruptcy Law or any similar proceeding under any other
Applicable Laws, or the commencement of an involuntary case or proceeding
seeking the appointment of a custodian or to take possession of all or a
substantial portion of its property or to operate all or a substantial
portion of its business, and either (w) the Company or such Guarantor
consents to such involuntary case or proceeding, (x) the petition
commencing such involuntary case or proceeding is not timely controverted,
(y) the petition commencing such involuntary case or proceeding remains
undismissed and unstayed for a period of sixty (60) days or (z) an order
for relief shall have been issued or entered therein, or (C) the
liquidation, winding up or insolvency of the Company or any Guarantor.
"Closing" shall have the meaning specified in Section 2.3.
------- -----------
"Closing Balance Sheet" shall have the meaning specified in Section
--------------------- -------
3.11(c).
-------
"Closing Date" shall have the meaning specified in Section 2.3.
------------ -----------
"COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act
-----
of 1985, as amended, as set forth in Section 4980B of the Code and Part 6
of Title I of ERISA.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
----
any successor statute, and the treasury regulations promulgated thereunder.
"Collateral" shall mean the collateral under the Collateral Documents,
----------
however defined.
"Collateral Documents" shall mean the Intercreditor Agreement, the
--------------------
Security Agreement (Company), the Security Agreement (Subsidiary), the
Company Pledge Agreement, the PTC Security Agreement, the Parent Pledge
Agreement, the landlord waivers and consents, the notices of security
interest in deposit accounts, the UCC financing statements and all other
agreements, instruments and documents delivered from time to time in
connection therewith or otherwise to secure the Obligations to Purchaser or
any other obligations of the Company, any Guarantor or any other Person
under this Agreement, the Note or any other Investment Document, in each
case as amended, restated, supplemental or otherwise modified from time to
time.
"Commission" shall mean the Securities and Exchange Commission, or any
----------
successor agency.
6
<PAGE>
"Common Stock" shall mean the common stock, $.01 par value per share,
------------
of the Company.
"Company" shall have the meaning set forth in the preamble.
-------
"Company Pledge Agreement" shall mean a Company Pledge Agreement, in
------------------------
form and substance satisfactory to the Purchaser, executed by the Company
in favor of the Purchaser.
"Compliance Reports" shall mean, individually or collectively, any and
-----------------
all forms, reports or other documents (or any successor forms, reports or
other documents) used or issued by any Governmental Authority (including,
without limitation, the USDA Food Safety and Inspection Service, the FDA,
the State of California -- Health and Human Services Agency or any
successor Governmental Authorities) with respect to food safety and/or
health inspections of the Company's or any of its Subsidiaries' facilities
and/or compliance with or violations of Applicable Laws, including, without
limitation, the following: Application for Federal Meat, Poultry, or
Import Inspection (FSIS Form 5200-2), Grant of Inspection (FSIS Form 5200-
1), Process Deficiency Record (FSIS Form 8820-2), Non-Compliance Record
(FSIS Form 5400-4), Form FDA 483 and Report of Observations (EH 62 A).
"Consent" shall mean any consent, approval, authorization, waiver,
-------
permit, grant, franchise, license, exemption or order of, any registration,
certificate, qualification, declaration or filing with, or any notice to,
any Person, including, without limitation, any Government Authority.
"Contingent Obligations" shall mean, with respect to any Person, any
----------------------
obligation, direct or indirect, contingent or otherwise, of such Person (i)
with respect to any Indebtedness or other obligation of another Person,
including, without limitation, any direct or indirect guarantee of such
Indebtedness (other than any endorsement for collection or deposit in the
ordinary course of business) or any other direct or indirect obligation, by
agreement or otherwise, to purchase or repurchase any such Indebtedness or
obligation or any security therefor, or to provide funds for the payment or
discharge of any such Indebtedness or obligation (whether in the form of
loans, advances, stock purchases, capital contributions, dividends or
otherwise), letters of credit and reimbursement obligations for letters of
credit, (ii) to provide funds to maintain the financial condition of any
other Person, or (iii) otherwise to indemnify or hold harmless the holders
of Indebtedness or other obligations of another Person against loss in
respect thereof. The amount of any Contingent Obligation under clauses (i)
and (ii) above shall be the maximum amount guaranteed or otherwise
supported by the Contingent Obligation.
7
<PAGE>
"Convertible Securities" means, with respect to any Person, any
----------------------
securities or other obligations issued or issuable by such Person or any
other Person that are exercisable or exchangeable for, or convertible into,
any Capital Stock of such Person.
"Default" shall mean any event or condition which, with the giving of
-------
notice or the lapse of time or both, becomes an Event of Default.
"Disclosure Schedules" shall have the meaning specified in the
--------------------
introductory paragraph of Section 3.
---------
"EBITDA" shall mean, for any period, without duplication and
------
determined on a consolidated basis and in accordance with GAAP:
(i) the sum of (A) Net Income (Loss), (B) interest expense
deducted in determining Net Income (Loss) (including, without
limitation, cash interest, payment-in-kind interest and amortization
of original issue discount), (C) the amount of Taxes deducted in
determining Net Income (Loss), (D) the amount of depreciation and
amortization expense deducted in determining Net Income (Loss), (E)
any extraordinary or unusual non-cash losses (provided that such
extraordinary or unusual non-cash losses do not result in any cash
outlay at any time after the Closing Date) and (F) any Withdrawn
Demand Registration Expenses incurred by the Company, in each case for
such period; minus
-----
(ii) any extraordinary or unusual income or gains for such
period.
"Environmental Conditions" shall mean any Release of any Hazardous
------------------------
Materials (whether or not such Release constituted at the time thereof a
violation of any Environmental Laws) or any violation of any Environmental
Law as a result of which any Environmental Person has or may become liable
to any Person or by reason of which the business, condition or operations
of such Environmental Person or any of its assets or properties may suffer
or be subjected to any Lien or liability.
"Environmental Laws" shall mean all Applicable Laws relating to
------------------
Hazardous Materials or the protection of human health or the environment,
including all requirements pertaining to reporting, permitting,
investigating or remediating Releases or threatened Releases of Hazardous
Materials into the environment, or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials. Without limiting the generality of the foregoing, the
term "Environmental Laws" shall include the Comprehensive Environmental
------------------
Response, Compensation and Liability Act (42 U.S.C. (S)9601 et seq.)
------
("CERCLA"), the Hazardous Materials Transportation Act (49 U.S.C. (S)1801
--------
et seq.), the Resource Conservation and Recovery Act (42 U.S.C. (S)6901 et
------ --
seq.) ("RCRA"), the Federal
8
<PAGE>
Clean Water Act (33 U.S.C. (S)1251 et seq.), the Clean Air Act (42 U.S.C.
-- ---
(S)7401 et seq.), the Toxic Substances Control Act (15 U.S.C. (S)2601 et
-- --- --
seq.) and the Occupational Safety and Health Act (29 U.S.C. (S)651 et
--- --
seq.), as such laws may be amended from time to time, and any other present
---
or future federal, state, local or foreign statute, ordinance, rule,
regulation, order, judgment, decree, permit, license or other binding
determination of any Governmental Authority imposing liability or
establishing standards of conduct for the protection of human health or the
environment.
"Environmental Persons" shall mean, collectively, (i) the Company, any
---------------------
Guarantor and any of their respective Subsidiaries or other Affiliates,
(ii) any other Person in which any of the Persons listed in clause (i)
above was at any time, or is, a partner, joint venturer, member or other
participant, and (iii) any predecessor or former partnership, joint
venture, trust, association, corporation, limited liability company or
other Person, whether in existence as of the date hereof or at any time
prior to the date hereof, the assets, properties, liabilities or
obligations of which have been acquired or assumed by any of the Persons
listed in clause (i) above or to which any of the Persons listed in clause
(i) above has succeeded.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended, and any successor statute, including the rules and
regulations promulgated thereunder, in each case as amended from time to
time.
"Estimated FYE 1999 Financial Statements" shall have the meaning set
---------------------------------------
forth Section 3.11(a).
---------------
"Event of Default" shall have the meaning specified in Section 10.1.
---------------- ------------
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended from time to time, and the rules and regulations promulgated
thereunder.
"Executive Officer" shall mean, with respect to any Person, the
-----------------
president of such Person, any vice president of such Person in charge of a
principal business unit or division, any other officer who performs a
policy making function.
"Existing Indebtedness" shall have the meaning set forth in Section
--------------------- -------
3.12.
----
"Existing LHF Equity Documents" shall mean the LHF Registration Rights
-----------------------------
Agreement, the LHF Voting Rights Agreement, the LHF Warrant and any other
agreements, instruments or documents evidencing an equity or other interest
in the Company owned or held by LHF, other than the LHF Equity Rights
Agreement.
"Existing Liens" shall have the meaning set forth in Section 3.12.
-------------- ------------
9
<PAGE>
"Existing Stock Plans" shall mean, collectively, (i) the 1994 Employee
--------------------
Stock Option Plan of Parent, as adopted by the Board of Directors of Parent
on March 3, 1994 (the "Parent Stock Option Plan"); (ii) the Stock Option
------------------------
Agreement for James Rudis dated July 1993 (the "Rudis Stock Option Plan");
-----------------------
and (iii) the Stock Option Agreement for William E. Shatley dated July 1993
(together with the Rudis Stock Plan, the "Executive Stock Option Plans").
----------------------------
"Financial Statements" shall have the meaning specified in Section
-------------------- -------
3.11(a).
-------
"Finova" shall mean Finova Capital Corporation, an existing lender to
------
the Company.
"Fiscal Quarter" shall mean (i) the thirteen (13) week period ending
--------------
on the last Sunday of December, March, June and September of any Fiscal
Year, except that in the event that a Fiscal Year ends on the first day of
October, then "Fiscal Quarter" shall mean the fourteen (14) week period
--------------
ending on the first Sunday of January of such Fiscal Year and on the last
Sunday of each of the three (3) thirteen (13) week periods thereafter, or
(ii) such other period as the Company may designate in writing and the
Purchaser may approve in writing.
"Fiscal Year" shall mean the fiscal year of the Company, which shall
-----------
be (i) the twelve (12) month period ending on (a) the last Sunday of
September in each calendar year, if September 30 does not fall on a
Saturday, or (b) October 1, if September 30 falls on a Saturday, or (ii)
such other period as the Company may designate in writing and the Purchaser
may approve in writing.
"Fixed Charge Coverage Ratio" shall mean, with respect to any period,
---------------------------
the ratio of (i) EBITDA for such period to (ii) Fixed Charges for such
period.
"Fixed Charges" shall mean, for any period and without duplication,
-------------
the sum of (i) Cash Interest Expense; (ii) scheduled payments of principal
on any Indebtedness of the Company and its Subsidiaries; (iii) scheduled
Capitalized Lease Obligations of the Company or any of its Subsidiaries for
such period representing principal; (iv) Taxes estimated to be paid by the
Company and its Subsidiaries, after giving effect to the net operating loss
carryforward of Parent, if any; (v) cash dividends or distributions, if
any, paid by the Company or any of its Subsidiaries; (vi) Capital
Expenditures and (vii) all Tax Sharing Cash Payments, in each case for such
period.
"Fully Diluted Basis" shall mean a basis that includes all issued and
-------------------
outstanding shares of Capital Stock of the Company and all additional
shares of Capital Stock of the Company which would be issued upon the
conversion or exercise of all Option Rights of the Company then
outstanding.
10
<PAGE>
"GAAP" shall mean generally accepted accounting principles and
----
practices set forth in the opinions and pronouncements of the Accounting
Principles Board and the American Institute of Certified Public Accountants
and statements and pronouncements of the Financial Accounting Standards
Board or in such other statements by such other entity as may be approved
by a significant segment of the accounting profession, all as of the date
hereof, applied on a basis consistent with past practices.
"Governmental Authority" shall mean any nation or government, and any
----------------------
state or political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government (including, without limitation, the Commission,
the United States Food and Drug Administration ("FDA"), the United States
---
Department of Agriculture ("USDA") and the United States Environmental
----
Protection Agency ("EPA")), and any tribunal or arbitrator(s) of competent
---
jurisdiction, and any self-regulatory organization.
"Guarantied Obligations" shall have the meaning set forth in Section
---------------------- -------
9.1.
---
"Guarantor Subordinated Debt" shall have the meaning set forth in
---------------------------
Section 9.8.
-----------
"Guarantors" shall mean, individually or collectively, Parent,
----------
Overhill Ventures and any other Person that guarantees, pursuant to Section
-------
1.16A of Annex A, all or any part of the Obligations to Purchaser.
----- -------
"Guaranty" shall mean the guaranty made by the Guarantors in favor of
--------
the Beneficiary in respect of the Guarantied Obligations, as provided in
Section 9.
---------
"Hazardous Materials" shall mean any substance (i) the presence of
-------------------
which requires investigation or remediation under any Applicable Laws; (ii)
that is defined or becomes defined as a "hazardous waste" or "hazardous
substance" under any Applicable Laws (including, without limitation, CERCLA
or RCRA); (iii) that is toxic, explosive, corrosive, inflammable,
infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and
is or become regulated by any Governmental Authority; (iv) the presence of
which on any real property causes or threatens to cause a nuisance upon the
real property or to adjacent properties or poses or threatens to pose a
hazard to any real property or to the health or safety of Persons on or
about any real property; or (v) without limitation, that contains gasoline
or other petroleum hydrocarbons, polychlorinated biphenyls or asbestos.
"Hazardous Materials Claim" shall have the meaning set forth in
-------------------------
Section 1.15A of Annex A.
------------- -------
11
<PAGE>
"Holder" shall mean any Person (including, without limitation, the
------
initial Purchaser) in whose name the Note is registered in the register
maintained by the Company pursuant to Section 11 of the Note.
----------
"Immediate Family" of a Person includes such Person's spouse, and the
----------------
parents, children and siblings of such Person or his or her spouse and
their spouses and other Persons related to the foregoing by blood, adoption
or marriage within the second degree of kinship, and, with respect to any
officer or director of the Company, shall also include any Person who is
primarily a personal friend rather than a business associate.
"Indebtedness" shall mean, with respect to any Person, without
------------
duplication, (i) any indebtedness and other obligations, contingent or
otherwise, for borrowed money; (ii) all obligations evidenced by bonds,
notes, debentures or similar instruments; (iii) all obligations to pay the
deferred purchase price of property or services (excluding trade accounts
payable arising in the ordinary course of business that are less than sixty
(60) days from their due dates and that are not being contested in good
faith in a commercially reasonable manner) and any installment payment non-
compete agreements; (iv) all Capital Lease Obligations; (v) all obligations
of others secured by a Lien to which any property or assets owned by such
Person is subject, whether or not the obligations secured thereby have been
assumed by such Person; (vi) all obligations of such Person, contingent or
otherwise, in respect of any letters of credit or bankers' acceptances;
(vii) all obligations under facilities for the discount or sale of
receivables; (viii) the maximum fixed repurchase price of any redeemable
stock of such Person; (ix) all Contingent Obligations; and (x) all
obligations which are required to be classified on the balance sheet of
such Person as long-term liabilities under GAAP.
"Indemnified Environmental Costs" shall mean all actual or threatened
-------------------------------
liabilities, claims, actions, causes of action, judgments, orders, damages
(including foreseeable and unforeseeable consequential damages), costs,
expenses, fines, penalties and losses (including sums paid in settlement of
claims and all reasonable consultant, expert and legal fees and reasonable
expenses of counsel) incurred in connection with any Hazardous Materials
Claim, any investigation of Site conditions or any clean-up, Remedial Work
or other remedial, removal or restoration work (whether of any Real
Property or any other real property), or any resulting damages, harm or
injuries to the Person or property of any third parties or to any natural
resources.
"Indemnified Parties" shall have the meaning specified in Section 8.2.
------------------- -----------
"Independent" shall mean, with respect to any individual who has been
-----------
or will be duly appointed or elected as a member of the Board of Directors
of the Company, that such individual (i) shall not have been, at the time
of any such appointment or election or at any time during the immediately
preceding three (3) years, (a) a direct or
12
<PAGE>
indirect legal or beneficial owner of the Capital Stock of the Company or
any of its Affiliates, (b) a creditor, supplier, employee, officer,
director, manager or contractor of the Company or any of its Affiliates, or
a member of the Immediate Family of any of the foregoing, or (c) a Person
who controls (within the meaning of such term in the definition of
Affiliate) the Company or any of its Affiliates or any creditor, supplier,
employee, officer, director, manager or contractor of the Company or any of
its Affiliates, and (ii) in the view of the Purchaser, is free of any
relationship with respect to the Company or any of its Affiliates that
would interfere with the exercise of independent business judgment.
"Independent Director" shall mean any individual who has been duly
--------------------
appointed or elected as a member of the Board of Directors of the Company
and is Independent.
"Instruments" shall have the same meaning as given to that term in the
-----------
Code, and shall include all negotiable instruments, notes secured by
mortgages or trust deeds, and any other writing which evidences a right to
the payment of money and is not itself a security agreement or lease, and
is of a type which is, in the ordinary course of business, transferred by
delivery with any necessary endorsement or assignment.
"Insurance Coverage Letter" shall mean a letter dated as of the
-------------------------
Closing Date, from the Purchaser to the Company, advising the Company of
the insurance coverages required to be maintained by the Company and its
Subsidiaries as provided therein.
"Intangible Assets" shall mean the book value of all intangible assets
-----------------
(as defined under GAAP) shown on the consolidated balance sheet of the
Company and its Subsidiaries, including, without limitation, organization
costs, securities issuance costs, goodwill (including any amounts, however
designated on such balance sheet, representing the excess of the purchase
price paid for assets or stock acquired over the value assigned thereto on
the books of the Company and its Subsidiaries), covenants not to compete,
patents, trademarks, copyrights, trade secrets, customer lists, know-how,
licenses, contracts, franchises, software costs, research and development
costs, investments in and monies from Affiliates and any other intangible
assets.
"Intellectual Property" shall mean all (i) patents, patent
---------------------
registrations, patent applications, patent disclosures and any related
continuation, continuation-in-part, divisional, reissue, reexamination,
utility, model and certificate of invention; (ii) trademarks, service
marks, trade dress, logos, trade names and corporate names, and any
registrations and applications for registration thereof; (iii) copyrights
and registrations and applications for copyrights; (iv) computer software,
data and documentation; (v) trade secrets, know-how, processes, techniques,
research and development, works, financial, marketing and business data,
pricing and cost information, business and marketing plans, customer and
supplier lists and any other
13
<PAGE>
confidential information, including, without limitation, the Company's
proprietary food recipes, if any; (vi) all proprietary rights relating to
any of the foregoing; and (vii) copies and tangible embodiments thereof.
"Intercreditor Agreement" shall mean an Intercreditor and
-----------------------
Subordination Agreement, in form and substance satisfactory to the
Purchaser, between the Senior Lender and the Purchaser, and acknowledged by
the Company, Parent and Overhill Ventures.
"Investment Documents" shall mean, collectively, this Agreement, the
--------------------
Note, the Warrant, the Registration Rights Agreement, the Investor Rights
Agreement, the Suretyship Agreement, the Intercreditor Agreement and the
other Collateral Documents, the Amended Charter, the Insurance Coverage
Letter and all other agreements, instruments, letters and other documents
executed and/or delivered in connection herewith or therewith, in each case
as amended, restated, supplemented or otherwise modified from time to time.
"Investments" shall mean, as applied to any Person, (i) any direct or
-----------
indirect acquisition by such Person of Capital Stock, other securities or
other interests of, or investments in, any other Person, or all or any
substantial part of the business or assets of any other Person, and (ii)
any direct or indirect loan, advance or capital contribution by such Person
to any other Person (including, without limitation, any Affiliate, officer,
director or employee of the Company), including, without limitation, the
incurrence or sufferance of any Indebtedness or accounts receivable of any
other Person that are not classified as current assets under GAAP or do not
arise from sales to such other Person in the ordinary course of business.
"Investor Rights Agreement" shall mean an Investor Rights Agreement,
-------------------------
in form and substance satisfactory to the Purchaser, among the Company,
Parent and the Purchaser.
"Leverage Ratio" shall mean, with respect to any period, the ratio of
--------------
(i) the sum of (A) total Indebtedness of the Company and its Subsidiaries
at the end of such period and (B) all Capital Leases existing at the end of
such period, to (ii) EBITDA for the four (4) consecutive Fiscal Quarters
ending as of the end of such period.
"LHF" shall mean The Long Horizons Fund, L.P., a New York limited
---
partnership, or Ableco Finance LLC, a Delaware limited liability company,
as assignee of The Long Horizons Fund, L.P., as the case may be, and any
other assignees of The Long Horizons Fund, L.P. or any assignees of Ableco
Finance LLC.
14
<PAGE>
"LHF Equity Rights Agreement" the Equity Rights Agreement dated of
---------------------------
even date herewith among Parent, LHF and the Company, in form and substance
satisfactory to the Purchaser.
"LHF Registration Rights Agreement" shall mean the Registration Rights
---------------------------------
Agreement dated as of December 4, 1997, between the Company and LHF, which
Registration Rights Agreement shall be terminated, in form and substance
satisfactory to the Purchaser, prior to or simultaneously with the Closing.
"LHF Voting Rights Agreement" shall mean the Voting Rights Agreement,
---------------------------
dated as of December 4, 1997, among Parent, LHF and the Company, which
Voting Rights Agreement shall be terminated, in form and substance
satisfactory to the Purchaser, prior to or simultaneously with the Closing.
"LHF Warrant" shall mean the Common Stock Purchase Warrant No. W-1
-----------
dated December 4, 1997, as amended, restated, supplemented or otherwise
modified from time to time, entitling LHF to purchase 232.5 shares of
Common Stock immediately prior to the Closing, which Common Stock Purchase
Warrant shall be terminated, in form and substance satisfactory to the
Purchaser, prior to or simultaneously with the Closing.
"Licenses and Permits" shall mean, collectively, all licenses,
--------------------
franchises, permits, consents, approvals, registrations, certificates and
authorizations of all Governmental Authorities necessary or advisable to
the conduct of the businesses of the Company, any Guarantor or any of their
respective Subsidiaries.
"Lien" shall mean any lien, pledge, mortgage, security interest,
----
charge or encumbrance of any kind (including, without limitation, the
interest of a lessor under a Capital Lease having substantially the same
economic effect), any agreement to give or refrain from giving any lien,
pledge, mortgage, security interest, charge or other encumbrance of any
kind, any conditional sale or other title retention agreement, any lease in
the nature thereof and the filing of any financing statement or other
similar form of notice under the laws of any jurisdiction.
"Losses" shall have the meaning specified in Section 8.2.
------ -----------
"Margin Regulations" shall mean Regulations T, U and X of the Board of
------------------
Governors of the Federal Reserve System, or any successor thereto (the
"Federal Reserve Board"), as amended from time to time.
----------------------
"Margin Stock" shall mean "margin stock" as defined in the Margin
------------
Regulations.
15
<PAGE>
"Material Adverse Effect" or "Material Adverse Change" shall mean a
----------------------- -----------------------
material adverse effect on or adverse change in, as the case may be, (i)
the business, assets, condition (financial or otherwise), properties
(whether real, personal or otherwise), results of operations or prospects
of the Company, Parent and any of its Subsidiaries, individually or taken
as a whole, or (ii) the ability of the Company or any Guarantor to perform
its or their obligations under this Agreement or any other Investment
Document.
"Material Contracts" shall have the meaning set forth in Section 3.14.
------------------ ------------
"Merrill Indenture" shall have the meaning set forth in Section 3.12.
----------------- ------------
"Nasdaq" means The Nasdaq National Market System or The Nasdaq
------
SmallCap Market, as the case may be, or any successor reporting system
thereof.
"Net Cash Proceeds" shall mean, with respect to any Asset Sale, the
-----------------
sum of: (i) the net amount of cash and cash equivalent proceeds received by
or for the account of the Company or any of its Subsidiaries from such
Asset Sale, and (ii) the net amount of cash and cash equivalents received
by or for the account of the Company or any Subsidiaries upon the sale,
conversion, collection or other liquidation of any non-cash proceeds
(including notes, debt securities, other rights to payment, Capital Stock
or other consideration received from any Asset Sale) from such Asset Sale.
For this purpose, the term "net" means net of (a) the principal amount of
---
any Indebtedness secured by a Permitted Lien on the assets subject to and
required to be prepaid, and actually prepaid, upon such Asset Sale, (b) any
transfer taxes payable as a result of such Asset Sale, and any reasonable
professional fees and expenses, reasonable broker's commissions and other
reasonable out-of-pocket expenses of sale paid to any Person attributable
to such Asset Sale, and (c) any income taxes reasonably estimated by the
Company to be payable in respect of such Asset Sale.
"Net Income (Loss)" shall mean, for any period, net income (loss)
-----------------
after Taxes of the Company and its Subsidiaries on a consolidated basis for
such period taken as a single accounting period, all computed in accordance
with GAAP.
"90-Day Receivables" shall mean, at any time, the total consolidated
------------------
trade receivables of the Company and its Subsidiaries, determined in
accordance with GAAP, that are then outstanding ninety (90) days past the
invoice date.
"Note" shall have the meaning set forth in Section 2.1, and shall also
---- -----------
include, where applicable, any additional note or notes issued by the
Company in connection with any Assignments.
16
<PAGE>
"Obligations to Purchaser" shall mean any and all present and future
------------------------
loans, advances, Indebtedness, claims, guarantees, liabilities or
obligations of the Company or any Guarantor owing to the Purchaser, any
Affiliate of the Purchaser or any Indemnified Party (or any assignee or
transferee of the Purchaser, such Affiliate or such Indemnified Party), of
whatever nature, character or description, arising under or in connection
with this Agreement, the Note, the Warrant, the Registration Rights
Agreement, the Investor Rights Agreement (including, without limitation,
the consulting fees payable thereunder), the Collateral Documents and any
other Investment Documents or otherwise, any and all agreements,
instruments or other documents heretofore or hereafter executed or
delivered in connection with any of the foregoing, in each case whether due
or not due, direct or indirect, joint and/or several, absolute or
contingent, voluntary or involuntary, liquidated or unliquidated,
determined or undetermined, now or hereafter existing, amended, renewed,
extended, exchanged, restated, refinanced, refunded or restructured,
whether or not from time to time decreased or extinguished and later
increased, created or incurred, whether for principal, interest, premiums,
fees, costs, expenses (including, without limitation, attorneys' fees) or
other amounts incurred for administration, collection, enforcement or
otherwise, whether or not arising after the commencement of any proceeding
under the Bankruptcy Law (including, without limitation, post-petition
interest) and whether or not allowed or allowable as a claim in any such
proceeding, and whether or not recovery of any such obligation or liability
may be barred by any statute of limitations or such Indebtedness, claim,
liability or obligation may otherwise be unenforceable.
"Obligor" shall have the meaning set forth in Section 9.2.
------- -----------
"Option Rights" shall mean, with respect to any Person, any
-------------
Convertible Securities of such Person, or any warrants, options or other
rights to subscribe for or purchase, or obligations to issue, any Capital
Stock of such Person, including, without limitation, any options or similar
rights issued or issuable under any employee stock option plan, pension
plan or other employee benefit plan of such Person.
"Overhill Ventures" shall have the meaning set forth in the preamble.
-----------------
"Parent" shall have the meaning set forth in the preamble.
------
"Parent Common Stock" shall have the meaning set forth in Section
------------------- -------
3.7(b).
------
"Parent Pledge Agreement" shall mean a Parent Pledge Agreement, in
-----------------------
form and substance satisfactory to the Purchaser, executed by Parent in
favor of the Purchaser.
"Parent SEC Documents" shall mean all registration statements,
--------------------
prospectuses, reports, schedules, forms, proxy or other statements and
other documents (including all
17
<PAGE>
exhibits, schedules and other information included or incorporated by
reference therein) which are filed or required to be filed by Parent with
the Commission under the Securities Act, the Exchange Act or the rules and
regulations promulgated thereunder, and all filings, reports and other
documents which are filed or required to be filed by Parent with AMEX.
"PBGC" shall mean the Pension Benefit Guaranty Corporation, as defined
----
in Title IV of ERISA.
"Permitted Affiliate Transaction" shall mean any one or more of the
-------------------------------
following transactions:
(i) the payment by the Company of the salary and other
compensation of James Rudis in his capacity as the President and Chief
Executive Officer of Parent, which salary and other compensation shall
be determined annually by the Boards of Directors of Parent and the
Company (or the compensation committees thereof, if any);
(ii) the existence of the intercompany accounts receivable owing
from Parent to the Company and reflected on the consolidated balance
sheet of the Company and its Subsidiaries as of September 26, 1999, in
an amount not to exceed $11,038,000; provided, however, that the
-------- -------
amount of such intercompany accounts receivable may be increased by
the one-time payment permitted under clause (iv) of this definition;
and provided further, however, that, from and after the Closing Date,
---------------- -------
the Company complies with the accounting adjustments and other
procedures set forth in Section 1.23A of Annex A with respect to such
------------- -------
intercompany accounts receivable;
(iii) Tax Sharing Cash Payments made by the Company to Parent
during each calendar quarter of each Fiscal Year set forth below not
to exceed the amount set forth opposite each such Fiscal Year:
Each Calendar Quarter Maximum Quarterly Tax
in Fiscal Year Ending in: Sharing Cash Payment
------------------------ ---------------------
September 2000............ $125,000
September 2001............ $150,000
September 2002............ $150,000
September 2003............ $150,000
18
<PAGE>
September 2004........... $150,000
(iv) a one-time payment by the Company to Parent at or
immediately following the Closing of an amount not to exceed
$1,250,000 in the aggregate;
(v) the loan evidenced by the Serrano Note, provided that the
--------
amount of indebtedness outstanding under the Serrano Note (excluding
accrued and unpaid interest) does not exceed $14,000 in the aggregate
at any time;
(vi) any other loans or advances made by the Company to its
employees which in no event shall exceed $10,000 to any one employee
and $100,000 in the aggregate at any time outstanding; and
(vii) the payment by the Company to Parent of an amount not to
exceed an aggregate of $200,000 in each of the Fiscal Years ending
October 1, 2000 and September 29, 2001, solely to reimburse Parent for
attorneys' fees and expenses actually and reasonably incurred by
Parent with respect to litigation to which Parent is a party, provided
--------
that such payment may be made only if (A) the Company has complied
with the amounts set forth in Column (B) of each of Sections 3.1A
(Minimum EBITDA), 3.2A (Minimum Fixed Charge Coverage Ratio) and 3.3A
(Maximum Leverage Ratio) of Annex A for the Fiscal Year in which any
-------
such payments are proposed to be made and (B) the Purchaser has
approved in advance the fiscal budget of Parent with respect to the
Fiscal Year in which such attorneys' fees and expenses were incurred.
"Permitted Investments" shall mean (i) any direct obligations of the
---------------------
United States of America (including obligations issued or held in book-
entry form on the books of the Department of the Treasury of the United
States of America) or obligations the timely payment of the principal of
and interest on which are fully guaranteed by the United States of America,
all of which mature within three (3) months from the date of acquisition
thereof; (ii) interest-bearing demand or time deposits that mature no more
than thirty (30) days from the date of creation thereof and that are either
(a) insured by the Federal Deposit Insurance Corporation or (b) held in any
United States commercial bank having general obligations rated at least
"AA" or equivalent by Standard & Poor's Rating Group Corporation or Moody's
Investors Service, Inc. and having capital and surplus of at least
$500,000,000 or the equivalent; or (iii) certificates of deposit that
mature no more than thirty (30) days from the date of creation thereof and
that are either (a) insured by the Federal Deposit Insurance Corporation or
(b) held in any United States commercial bank having general obligations
rated at least "AA" or equivalent by Standard & Poor's Corporation Rating
Group or Moody's Investors Service, Inc. and having capital and surplus of
at least $500,000,000 or the equivalent.
19
<PAGE>
"Permitted Liens" shall mean, collectively, Liens of the Company or
---------------
any Guarantor arising by reason of (i) any attachment, judgment, decree or
order of any Governmental Authority, so long as such Lien is being
contested in good faith within thirty (30) days of such Person's knowledge
thereof and is either adequately bonded or execution thereon has been
stayed pending appeal or review, and any appropriate legal proceedings
which may have been duly initiated for the review of such attachment,
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired; (ii) Taxes, assessments or other governmental charges that are not
yet delinquent or that are being contested in good faith; (iii) security
for payment of workers' compensation or other insurance; (iv) reasonable
security for the performance of real property leases; (v) deposits to
secure public or statutory obligations or in lieu of surety or appeal bonds
entered into in the ordinary course of business; (vi) operation of law in
favor of carriers, warehouse owners, landlords, storage facilities or
mechanics incurred in the ordinary course of business for sums that are not
yet delinquent or are being contested in good faith by negotiation or by
appropriate proceedings that suspend the collection thereof and, if
required by GAAP, are appropriately reserved for on the books of such
Person; and (vii) easements, rights-of-way, zoning and similar covenants
and restrictions and other similar encumbrances or title defects that, in
the aggregate, are not material in amount; provided, however, that each of
-------- -------
the Liens described in the foregoing clauses (i) through (vii) inclusive
shall only constitute a Permitted Lien so long as such Lien individually
does not, or so long as all such Liens do not, materially interfere with
the conduct of such Person's business or creates a Material Adverse Change.
"Person" shall mean any individual, trustee, sole proprietorship,
------
partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, limited liability
partnership and other entity or any Governmental Authority.
"PTC Security Agreement" shall mean a Patent, Trademark and Copyright
----------------------
Security Agreement, in form and substance satisfactory to the Purchaser,
among the Company, Overhill Ventures and the Purchaser.
"Purchase Price" shall have the meaning specified in Section 2.2.
-------------- -----------
"Purchaser" shall have the meaning set forth in the preamble.
---------
"Registration Rights Agreement" shall mean a Registration Rights
-----------------------------
Agreement, in form and substance satisfactory to the Purchaser, between the
Company and the Purchaser.
20
<PAGE>
"Release" shall mean any release (whether threatened or actual),
-------
migration, spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, seeping, leaching, dumping or disposing
into the environment or the workplace of any Hazardous Materials, and
otherwise as defined in any Environmental Laws.
"Remedial Work" shall have the meaning set forth in Section 1.15A of
------------- -------------
Annex A.
-------
"Restricted Payment" shall mean any one or more of the following:
------------------
(i) any dividend or other distribution or payment, direct or
indirect, on account of any Capital Stock or other securities of the
Company or any Subsidiary now or hereafter outstanding;
(ii) any redemption, retirement, sinking fund or similar
payment, purchase or other acquisition for value, direct or indirect, of
any shares of any Capital Stock of the Company or any Subsidiary now or
hereafter outstanding;
(iii) any payment or prepayment of principal of, premium, if
any, or interest, fees or other charges on or with respect to, or any
redemption, purchase or other acquisition for value, retirement,
defeasance, sinking fund or similar payment with respect to, any
Indebtedness that is subordinated in any respect to the Obligations to
Purchaser;
(iv) any management, consulting or similar fees payable by the
Company or any of its Subsidiaries to Parent or any other Affiliate of the
Company;
(v) any loans or advances by the Company or any Guarantor to
any employees, directors, officers or stockholders of the Company or any
Guarantor, as the case may be, except for advances to employees for moving
or traveling expenses made in the ordinary course of business; and
(vi) any other type of payment by the Company and any of its
Subsidiaries to Parent (including, without limitation, Tax sharing
payments).
"Securities" shall have the meaning specified in Section 2.1.
---------- -----------
"Securities Act" shall mean the Securities Act of 1933, as amended,
--------------
and the rules and regulations promulgated thereunder, all as the same shall
be in effect at the time.
21
<PAGE>
"Security Agreement (Company)" shall mean a Security Agreement, in
----------------------------
form and substance satisfactory to the Purchaser, between the Company and
the Purchaser.
"Security Agreement (Subsidiary)" shall mean a Security Agreement, in
-------------------------------
form and substance satisfactory to the Purchaser, between Overhill Ventures
and the Purchaser.
"Senior Availability" shall mean, at any time, the "Net Borrowing
-------------------
Availability" (as such term is defined in the Senior Credit Agreement) at
such time.
"Senior Collateral Documents" shall mean the "Collateral Documents" as
---------------------------
such term is defined in the Senior Credit Agreement.
"Senior Credit Agreement" shall mean the Loan and Security Agreement
-----------------------
dated of even date herewith among the Company, Overhill Ventures and the
Senior Lender, as amended, restated, supplemented or otherwise modified
from time to time.
"Senior Credit Documents" shall mean the "Loan Documents" as such term
-----------------------
is defined in the Senior Credit Agreement.
"Senior Indebtedness" shall mean, collectively, the Indebtedness of
-------------------
the Company outstanding from time to time under the Senior Credit
Documents.
"Senior Lender" shall mean Union Bank of California, N.A., as "Bank"
-------------
under the Senior Credit Agreement.
"Serrano Note" means the Promissory Note dated October 22, 1999, made
------------
by Walter Serrano in favor of Overhill Ventures in the original principal
amount of $14,000.
"Site" shall mean any real property previously, currently or hereafter
----
owned, leased or operated by any Environmental Person.
"60-Day Payables" shall mean, at any time, the total consolidated
---------------
trade payables and accrued expenses of the Company and its Subsidiaries,
determined in accordance with GAAP, that are then outstanding sixty (60)
days past the invoice date.
"Solvent" shall mean, with respect to any Person, that on the date of
-------
determination: (i) the present fair saleable value of the assets of such
Person will exceed the amount that will be required to pay the probable
liability on the existing debts (whether matured or unmatured, liquidated
or unliquidated, absolute, fixed or contingent) of such Person as they
become absolute and matured; (ii) the sum of the
22
<PAGE>
debts (whether matured or unmatured, liquidated or unliquidated, absolute,
fixed or contingent) of such Person will not exceed all of the property of
such Person at a fair valuation; and (iii) the capital of such Person will
not be unreasonably small for such Person to carry on its businesses.
"Subsidiary" and "Subsidiaries" shall mean, with respect to any
---------- ------------
Person, any other Person of which more than thirty percent (30.0%) of the
total voting power of Capital Stock entitled to vote (without regard to the
occurrence of any contingency) in the election of directors (or other
Persons performing similar functions) are at the time directly or
indirectly owned by such first Person. Unless otherwise indicated, the
term "Subsidiary" refers to a Subsidiary of the Company.
----------
"Suretyship Agreement" shall mean a Suretyship Agreement, in form and
--------------------
substance satisfactory to the Purchaser, among the Company, the Debtors (as
such term is defined therein) and the Purchaser.
"Tangible Net Worth" shall mean, with respect to the Company and its
------------------
Subsidiaries on any date and without duplication, (i) the sum of (a) the
excess of the book value of assets over liabilities at such time,
determined on a consolidated basis in accordance with GAAP, (b) the amount
shown for redeemable warrants on the consolidated balance sheet of the
Company and its Subsidiaries at such time and (c) the Tax Sharing Payable
determined at such time, minus (ii) Intangible Assets at such time.
-----
"Tax" or "Taxes" shall mean any present and future income, excise,
--- -----
sales, use, stamp or franchise taxes and any other taxes, fees, duties,
levies, withholdings or other charges of any nature whatsoever imposed by
any taxing authority, whether federal, state, local or foreign, together
with any interest and penalties and additions to tax.
"Tax Sharing Cash Payments" shall mean, for any period, all cash
-------------------------
payments actually made by the Company to Parent during such period on
account of the Tax Sharing Payable.
"Tax Sharing Payable" shall mean, at any time, the total amount owed
-------------------
by the Company to Parent at such time arising from accrued payments of all
income or franchise Taxes that the Company would have incurred if the
Company had filed its income or franchise Tax returns on a stand-alone
basis.
"Tax Sharing Payable Liability Account" shall mean a liability account
-------------------------------------
shown on the consolidated balance sheet of the Company and its Subsidiaries
in respect of the Tax Sharing Payable.
23
<PAGE>
"Texas Timberjack" shall mean Texas Timberjack, Inc., a Texas
----------------
corporation and a wholly owned Subsidiary of Parent.
"Third Party Intellectual Property Rights" shall have the meaning
----------------------------------------
specified in Section 3.26.
------------
"Total Payables" shall mean, at any time, the total consolidated trade
--------------
payables and accrued expenses of the Company and its Subsidiaries at such
time, determined in accordance with GAAP.
"Total Receivables" shall mean, at any time, the total consolidated
-----------------
trade receivables of the Company and its Subsidiaries at such time,
determined in accordance with GAAP.
"UCC" shall mean the Uniform Commercial Code, as adopted and in force
---
in the State of California as from time to time in effect, and the Uniform
Commercial Code of any other jurisdiction as required under Division 9103
of the California Commercial Code.
"Warrant" shall have the meaning set forth in Section 2.1.
------- -----------
"Warrant Shares" shall have the meaning set forth in the Warrant.
--------------
"Withdrawn Demand Registration Expenses" shall mean all costs or
--------------------------------------
expenses incurred by the Company in connection with a Demand Registration
(as such term is defined in the Registration Rights Agreement) that is
withdrawn by the Demanding Holders (as such term is defined in the
Registration Rights Agreement) solely as a result of the occurrence of any
adverse market conditions of the type that is customarily found in
underwriting or similar purchase agreements relating to public offerings
and which may be relied upon by underwriters or purchasers to terminate
such underwriting or purchase agreement.
1.2 Accounting Terms and Computations. For purposes of this Agreement,
---------------------------------
(a) all accounting terms used in this Agreement that are not expressly defined
herein have the meanings given to them under GAAP, (b) all computations made
pursuant to this Agreement or any other Investment Document shall be made in
accordance with GAAP and (c) all financial statements and other financial
information required to be delivered by the Company or any Guarantor hereunder
or under any other Investment Document shall, except as otherwise expressly
provided in this Agreement, be prepared in accordance with GAAP in the ordinary
course of business consistent with past practices, except that any such
financial statements or other financial information (a) which are unaudited may
be subject to year-end audit adjustments and may omit footnotes and (b) may be
qualified only with respect to the
24
<PAGE>
characterization or re-characterization of the intercompany receivable owing
from the Parent to the Company and referred to in clause (ii) of the definition
of Permitted Affiliate Transaction as a dividend as opposed to an intercompany
loan.
1.3 Independence of Covenants. All covenants under this Agreement shall
-------------------------
each be given independent effect so that if a particular action or condition is
not permitted by any such covenant, the fact that it would be permitted by
another covenant, by an exception thereto, or be otherwise within the
limitations thereof, shall not avoid the occurrence of a Default or an Event of
Default if such action is taken or condition exists.
1.4 Captions; Construction and Interpretation. The captions in this
-----------------------------------------
Agreement are for convenience of reference only, do not constitute a part of
this Agreement and are not to be considered in construing or interpreting this
Agreement. All section, preamble, recital, exhibit, schedule, disclosure
schedule, annex, clause and party references are to this Agreement unless
otherwise stated. No party, nor its counsel, shall be deemed the drafter of
this Agreement for purposes of construing the provisions of this Agreement, and
all provisions of this Agreement shall be construed in accordance with their
fair meaning, and not strictly for or against any party.
1.5 Determinations. Any determination or calculation contemplated by this
--------------
Agreement or any other Investment Document that is made by the Purchaser shall
be final and conclusive and binding upon the Company and the Guarantors in the
absence of manifest error.
1.6 Knowledge of the Company. Whenever the term "knowledge of the
------------------------
Company" or "best knowledge of the Company and the Guarantors" or words of
similar import are used in this Agreement or any other Investment Document with
respect to the existence or absence of any fact, it shall mean that any one or
more of the following Persons knows or should have known, based upon the
reasonable inquiry of such Person, of the existence or absence of such fact:
James Rudis, Richard A. Horvath and William E. Shatley.
1.7 Exclusion of Texas Timberjack. Whenever the phrase "Parent and its
-----------------------------
Subsidiaries (other than Texas Timberjack)," "the Company, Parent and their
respective Subsidiaries (other than Texas Timberjack)" or words of similar
import are used in any representation or warranty made by the Company and/or the
Guarantors in this Agreement, it shall mean that the Company and/or the
Guarantors are not making any representation or warranty as to Texas Timberjack
to the extent that any breach of such representation or warranty resulting from
the inclusion of Texas Timberjack would not adversely affect the business,
assets, condition (financial or otherwise), properties, results of operations or
prospects of the Company or any Guarantor or the transactions contemplated by
this Agreement or any other Investment Document.
25
<PAGE>
2. PURCHASE AND SALE OF THE SECURITIES.
-----------------------------------
2.1 Authorization. The Company has authorized the issuance and sale to
-------------
the Purchaser of (a) a Secured Senior Subordinated Note Due 2004 in the
aggregate principal amount of $28,000,000, in substantially the form of Exhibit
-------
A (as the same may be amended, restated, supplemented, modified, renewed,
- -
refinanced or restructured from time to time, the "Note"), and (b) a Warrant to
----
Purchase 166.04 Shares of Common Stock of the Company, in substantially the form
of Exhibit B (as the same may be amended, restated, supplemented or otherwise
---------
modified from time to time, the "Warrant"). The Note and the Warrant are
-------
collectively referred to herein as the "Securities."
----------
2.2 Purchase of the Securities; Issue Price. Subject to the terms and
---------------------------------------
conditions contained herein and in the other Investment Documents, and in
reliance upon the representations, warranties, covenants and agreements
contained herein, at the Closing, the Company shall issue and sell to the
Purchaser, and the Purchaser shall purchase from the Company, the Securities.
In consideration for the Securities, at the Closing, the Purchaser shall pay to
the Company the aggregate purchase price of $28,000,000 (the "Purchase Price")
--------------
as provided in Section 2.3. The Company and the Purchaser agree that, for
-----------
purposes of Section 1271 et seq. of the Code, the original issue price of the
------
Note will be 91.5357% of its principal amount and the original issue price of
the Warrant will be $2,370,000, and that this agreement is intended to
constitute an agreement as to the issue prices of the Securities for all
federal, state and local income tax purposes.
2.3 Closing. The closing of the issuance and sale of the Securities under
-------
this Agreement (the "Closing") shall take place at the offices of Riordan &
-------
McKinzie, 300 South Grand Avenue, Suite 2900, Los Angeles, California 90071 (or
at such other location as may be expressly agreed upon by the Purchaser), on the
date hereof or as soon as practicable thereafter immediately following the
satisfaction or waiver of the conditions precedent set forth in Section 6 and
---------
Section 7 (such date being referred to as the "Closing Date"). At the Closing,
- --------- ------------
the Company shall deliver to the Purchaser, among other things, the Securities,
duly executed by the Company, against delivery by the Purchaser of the Purchase
Price (net of amounts permitted to be withheld pursuant to Sections 6.3 and
------------
8.5) by wire transfer in immediately available funds to such bank as the Company
- ---
may request in writing (which written request shall be made at least one (1)
Business Day prior to the Closing Date) for credit to an account designated by
the Company in such request, provided, however, that such request shall be
-------- -------
consistent with the purposes set forth in Schedule 3.38.
-------------
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. To induce the Purchaser to
---------------------------------------------
purchase the Securities under this Agreement, the Company and the Guarantors
jointly and severally represent and warrant to the Purchaser that, except as
expressly set forth in the Disclosure Schedules (the "Disclosure Schedules"):
--------------------
26
<PAGE>
3.1 Organization and Qualification. Each of the Company and Parent is a
------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Nevada. Overhill Ventures is a corporation duly organized,
validly existing and in good standing under the laws of the State of California.
Each of the Company and the Guarantors has all requisite power and authority to
own or lease and operate its properties and assets and to carry on its business
as now conducted and as proposed to be conducted, and is duly qualified or
licensed to do business in, to the extent applicable, the States of California,
Illinois, Pennsylvania, Texas, Washington and each other jurisdiction in which
the character of the properties or assets owned, leased or operated or the
nature of the activities conducted makes such qualification or licensing
necessary, except where the failure to be so qualified or licensed in such other
jurisdictions could not have, individually or in the aggregate, a Material
Adverse Effect.
3.2 Corporate or Other Power. Each of the Company and the Guarantors has
------------------------
the requisite power and authority to execute, deliver, carry out and perform its
obligations under this Agreement and all other Investment Documents to which it
is party, including, without limitation, the power and authority to issue, sell
and deliver the Securities to be issued by it hereunder.
3.3 Authorization; Binding Obligations. The execution, delivery and
----------------------------------
performance of this Agreement and each of the other Investment Documents to
which the Company or any Guarantor is a party, the issuance, sale and delivery
by the Company of the Securities, the grant of the Liens under the Collateral
Documents and the consummation of the other transactions contemplated hereby and
thereby have been duly authorized by all requisite action on the part of the
Company and each Guarantor, as applicable. This Agreement has been duly
executed and delivered by the Company and each Guarantor and, at the Closing,
the other Investment Documents will be duly executed and delivered by the
Company and each Guarantor, respectively. This Agreement is, and at the time of
the Closing this Agreement and each of the other Investment Documents will be, a
legal, valid and binding obligation of the Company and each Guarantor,
respectively, enforceable against the Company and each Guarantor, respectively,
in accordance with its terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or
conveyance or similar laws relating to or limiting creditors' rights generally
or by equitable principles relating to enforceability and except as rights of
indemnity or contribution may be limited by federal or state securities or other
laws or the public policy underlying such laws.
3.4 Subsidiaries. Schedule 3.4 sets forth a true, complete and correct
------------ ------------
list of all (a) Subsidiaries of Parent and of the Company and (b) Subsidiaries
of Subsidiaries of Parent and the Company. Except as set forth on such
Schedule, none of the Company or any Guarantor holds or owns any Capital Stock
of any other Person.
27
<PAGE>
3.5 Conflict with Other Instruments; Existing Defaults; Ranking.
-----------------------------------------------------------
(a) The execution, delivery and performance of this Agreement and each
of the other Investment Documents to which the Company or any Guarantor is a
party, the issuance, sale and delivery by the Company of the Securities, the
grant of the Liens in the Collateral under the Collateral Documents and the
consummation of the other transactions contemplated hereby and thereby
(including, without limitation, the closing of the transactions contemplated by
the Senior Credit Agreement), do not and will not violate (i) the charter or
bylaws of the Company or any Guarantor, in each case as in effect on the date
hereof, (ii) any term of any lease, credit agreement, indenture, note, mortgage,
instrument or other agreement to which the Company or any Guarantor is a party
or by which any of its or their properties or assets are bound (including,
without limitation, any Material Contracts) or (iii) any Applicable Laws.
(b) Except as set forth on Schedule 3.5(b), none of the Company or any
---------------
Guarantor is in default, breach or violation of (i) its charter or bylaws, as in
effect on the date hereof, (ii) any term of any lease, credit agreement,
indenture, note, mortgage, instrument or other material agreement to which it is
a party or by which any of its properties or assets are bound (including,
without limitation, any Material Contracts) or (iii) any Applicable Laws.
Without limiting the generality of the foregoing, there does not exist any
"Event of Default" (as defined in the Senior Credit Agreement) or any default or
event of default under any other credit or financing agreement to which the
Company or any Guarantor is a party or by which any of its properties or assets
are bound.
(c) Other than as provided in the LHF Voting Rights Agreement (which
shall be terminated prior to or simultaneously with the Closing), there are no
restrictions which prohibit the issuance or sale of the Securities, prohibit or
restrict any merger, sale of assets or other event which could cause a Change in
Control, or otherwise prohibit any other financings by the Company, including,
without limitation, any public or private debt or equity financings.
(d) As of the Closing Date, no Indebtedness of the Company ranks pari
----
passu with any Indebtedness evidenced by the Note or with any other Obligations
- -----
to Purchaser, and payment of principal of, premium, if any, and interest on the
Indebtedness evidenced by the Note is subordinate only to the Senior
Indebtedness.
3.6 Governmental and Other Third Party Consents. Except for the Consents
-------------------------------------------
listed in Schedule 3.6 and those that have already been obtained or made
------------
(including, without limitation, the California Permit), none of the Company, any
Guarantor or any of their Affiliates is required to obtain any Consent from, or
is required to make any declaration or filing with, any Governmental Authority
or any other Person in connection with the execution, delivery and performance
of this Agreement or any other Investment Document, including, without
limitation, the issuance, sale and delivery of the Securities or the grant of
the Liens under the
28
<PAGE>
Collateral Documents, or for the purpose of maintaining in full force and effect
any Licenses and Permits. Each of the Consents which have been obtained or made
in connection with the execution, delivery and performance of this Agreement or
any other Investment Document is in full force and effect. The California Permit
has been duly and validly issued, without any qualification or other condition,
and is in full force and effect, and no stop order or similar order has been
issued which postpones, suspends or revokes its effectiveness or otherwise
changes any of the original terms thereof. The time within which any
administrative or judicial appeal, reconsideration, rehearing or other review of
any such Consent may be taken or instituted has lapsed, and no such appeal,
reconsideration or rehearing or other review has been taken or instituted.
3.7 Capitalization.
--------------
(a) The authorized capital stock of the Company consists solely of
1,000,000 shares of Common Stock, of which 775 shares are issued and outstanding
as of the date hereof and are owned beneficially and of record by Parent. All
of the issued and outstanding shares of Capital Stock of the Company have been
duly authorized and are validly issued, fully paid and non-assessable, and are
free and clear of any Liens and other restrictions (including any restrictions
on the right to vote, sell or otherwise dispose of such Capital Stock) and of
any preemptive or other similar rights to subscribe for or to purchase any such
Capital Stock. Schedule 3.7(b) sets forth true, correct and complete tables of
---------------
the capital structure of the Company immediately prior to and after the Closing
on a Fully Diluted Basis. Except as set forth on Schedule 3.7(a) (which
---------------
Schedule sets forth, immediately prior to and after the Closing, a true, correct
and complete description of, with respect to each security, title, name of the
holder, number of shares of Common Stock underlying such security, exercise
price, expiration date and percentage of shares of such Common Stock on a Fully
Diluted Basis), there are: (i) no outstanding Option Rights of the Company; (ii)
no voting trusts or other agreements or undertakings with respect to the voting
of the Capital Stock of the Company; (iii) no obligations or rights (whether
fixed or contingent) on the part of the Company, Parent or any other Person to
purchase, repurchase, redeem or "put" any outstanding shares of the Capital
Stock of the Company or Option Rights of the Company; and (iv) no agreements
granting any Person any rights of first offer or first refusal, registration
rights or "drag-along," "tag-along" or similar rights with respect to any
transfer of any Capital Stock or Option Rights of the Company or any of its
Subsidiaries. All shares of Capital Stock and Option Rights of the Company that
have been issued by the Company have been issued and offered in compliance with
all applicable federal and state securities laws. No additional shares of
Capital Stock of the Company will become issuable to any Person pursuant to any
"anti-dilution" provisions of any such issued and outstanding securities of the
Company on account of the issuance of the Securities, the exercise of the
Warrant or the application of the "anti-dilution" provisions contained in the
Warrant. No later than the Closing, the Existing LHF Equity Documents shall be
terminated and of no further force or effect.
29
<PAGE>
(b) (i) The authorized capital stock of Parent consists of
100,000,000 shares of common stock, $.01 par value per share ("Parent
------
Common Stock"), of which 17,812,464 shares are issued and outstanding, and
------------
50,000,000 shares of preferred stock, $.01 par value per share. Schedule
--------
3.7(b) sets forth a true, correct and complete list of each designated
------
series of preferred stock of Parent and the number of shares of each such
series that are authorized, issued and outstanding. As of the date hereof:
(A) 1,750,000 shares of Parent Common Stock are reserved for issuance under
the Parent Stock Option Plan, of which options to purchase 900,000 shares
are available for future grants, options to purchase 465,000 shares have
been exercised, options to purchase 385,000 shares are exercisable and
outstanding; (B) options to purchase an aggregate of 146,500 shares of
Parent Common Stock are reserved for issuance under each of the Executive
Stock Option Plans, all of which are exercisable; and (C) an aggregate of
710,000 shares have been reserved for issuance upon exercise of the other
options, warrants and rights set forth in Schedule 3.7(b).
---------------
(ii) All of the issued and outstanding shares of Capital Stock of
Parent have been duly authorized and are validly issued, fully paid and
non-assessable, and are free and clear of any Liens and other restrictions
(including any restrictions on the right to vote, sell or otherwise dispose
of such Capital Stock) created or imposed by Parent and of any preemptive
or other similar rights to subscribe for or to purchase any such Capital
Stock granted by Parent. Except as set forth in Schedule 3.7(b) (which
---------------
Schedule sets forth, with respect to each security, title, name of the
holder, issue date, exercise price and expiration date), there are: (i) no
outstanding Option Rights of Parent; (ii) no voting trusts or other
agreements or undertakings with respect to the voting of the Capital Stock
of Parent; (iii) no obligations or rights (whether fixed or contingent) on
the part of Parent or any other Person to purchase, repurchase, redeem or
"put" any outstanding shares of Capital Stock or Option Rights of Parent;
and (iv) no agreements granting any Person any rights of first offer or
first refusal, registration rights or "drag-along," "tag-along" or similar
rights with respect to any transfer of any Capital Stock of Parent or
Option Rights issued by Parent. All shares of Capital Stock of Parent and
Option Rights of Parent that have been issued by Parent have been issued
and offered in compliance with all applicable federal and state securities
laws. Except as disclosed in Schedule 3.7(b), no additional shares of
---------------
Capital Stock of Parent will become issuable to any Person pursuant to any
"anti-dilution" provisions of any such issued and outstanding securities of
the Company on account of the issuance of the Securities, the exercise of
the Warrant or the application of the "anti-dilution" provisions contained
in the Warrant.
(c) The authorized capital stock of Overhill Ventures consists solely
of 10,000 shares of capital stock, of which 1,000 shares are issued and
outstanding as of the date hereof. The Company beneficially owns, directly or
indirectly, all of the outstanding Capital Stock of Overhill Ventures. All of
the outstanding shares of Capital Stock of Overhill Ventures
30
<PAGE>
have been duly authorized and are validly issued, fully paid and nonassessable,
and are free and clear of any Liens and other restrictions (including any
restrictions on the right to vote, sell or otherwise dispose of such Capital
Stock) and of any preemptive or other similar rights to subscribe for or to
purchase any such Capital Stock. There are: (i) no outstanding Option Rights of
Overhill Ventures; (ii) no voting trusts or other agreements or undertakings
with respect to the voting of the capital stock of Overhill Ventures; (iii) no
obligations or rights (whether fixed or contingent) on the part of Overhill
Ventures to purchase, repurchase, redeem or put any outstanding shares of its
Capital Stock or Option Rights of Overhill Ventures; and (iv) no agreements
granting any Person any rights of first offer or first refusal, registration
rights or "drag-along," "tag-along" or similar rights with respect to any
transfer of any Capital Stock of Overhill Ventures or Option Rights issued by
Overhill Ventures. All of the shares of Capital Stock of Overhill Ventures and
Option Rights of Overhill Ventures have been issued and offered in compliance
with all applicable federal and state securities laws. No additional shares of
Capital Stock of Overhill Ventures will become issuable to any Person pursuant
to any "anti-dilution" provisions of any such issued and outstanding securities
of the Company or of any Subsidiary on account of the issuance of the
Securities, the exercise of the Warrant or the application of the "anti-
dilution" provisions contained in the Warrant.
3.8 Validity and Issuance of Warrant Shares. The Warrant Shares have been
---------------------------------------
duly authorized and reserved and, when issued, delivered and paid for pursuant
to the terms of the Warrant, will be duly and validly issued, fully paid and
non-assessable.
3.9 Corporate Separateness.
----------------------
(a) Customary formalities regarding the corporate existence of the
Company have at all times since its formation been, and such customary
formalities will continue to be, observed.
(b) The Company has at all times since its formation accurately
maintained in all material respects, and will continue to accurately maintain,
its financial statements, accounting records and other corporate documents
separate from those of Parent and the other Subsidiaries of Parent and any other
Person. The Company has not at any time since its formation commingled, and
will not commingle, its assets with those of Parent or any other Subsidiary of
Parent, any of its other Affiliates or any other Person. The Company has at all
times since its formation accurately maintained in all material respects, and
will continue to accurately maintain, its own bank accounts and separate books
of account. Parent has not at any time, and will not, commingle any of its
assets with those of the Company or any other entity.
(c) The Company has at all times since its formation paid, and will
continue to pay, its own liabilities from its own separate assets. Parent has
at all times since its formation paid, and will continue to pay, its own
liabilities from its own separate assets (it
31
<PAGE>
being understood that to the extent any funds in any material amount were
previously loaned or advanced by the Company to Parent, such funds were properly
recorded on the books of Parent as an asset of Parent and on the books of the
Company as an intercompany receivable owing from Parent).
(d) The Company has at all times since its formation identified
itself, and will continue to identify itself, in all dealings with the public
under its own corporate or trade names and as a separate and distinct entity.
The Company has not at any time since its formation identified itself, and will
not identify itself, as being a division or a part of Parent (other than as a
Subsidiary of Parent) or of any other Person. Parent has not at any time
identified the Company, and will not identify the Company, as being a division
or part of Parent (other than as a Subsidiary of Parent) or any of other Person
but only as a separate and distinct entity.
(e) To the best knowledge of the Company and the Guarantors, the
Company has at all times since its formation been adequately capitalized in
light of the nature of its business. The Company will continue to be adequately
capitalized in light of the nature of its business.
(f) The Company has not at any time since its formation assumed or
guaranteed any liabilities of Parent (or any predecessor entity) or any other
Person. The Company has not at any time since its formation acquired any
securities or other obligations of Parent (or any predecessor entity).
3.10 Parent SEC Documents.
--------------------
(a) Except as set forth on Schedule 3.10, Parent has timely filed
-------------
with the Commission all Parent SEC Documents which were required to be filed by
it with the Commission and AMEX since September 29, 1996. Schedule 3.10 sets
-------------
forth a true, complete and correct list of all Parent SEC Documents filed by the
Company since September 29, 1996, and the respective dates they were filed.
(b) Each Parent SEC Document previously filed by Parent complies with
all applicable requirements of the Securities Act, the Exchange Act or the AMEX
rules, as the case may be, and, when filed with the SEC, did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. The financial
statements of Parent and its Subsidiaries included in each Parent SEC Document
filed by Parent complied as to form, as of the dates of its filing with the
Commission, with applicable accounting requirements and the published rules and
regulations of the Commission with respect thereto, were prepared in accordance
with GAAP (except, in the case of unaudited statements, as permitted by the
Commission) and fairly present the consolidated financial
32
<PAGE>
position of Parent and its subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments consistent with past practices and consistently applied).
(c) All material information regarding the "Year 2000" issue is fully
and adequately disclosed in the Parent SEC Documents with respect to Parent and
its Subsidiaries.
3.11 Financial Statements.
--------------------
(a) The Company has delivered to the Purchaser, and Purchaser hereby
acknowledges receipt of, copies of (i) audited consolidated balance sheets of
the Company and its Subsidiaries as of September 29, 1996, September 28, 1997
and September 27, 1998, and audited consolidated statements of operations,
shareholders' equity and changes in financial position or cash flows for each of
the three (3) years then ended, together with a report and a qualified opinion
of Ernst & Young LLP, the Company's independent accountants, and (ii) unaudited
financial statements of the Company and its Subsidiaries (the "Estimated FYE
-------------
1999 Financial Statements") consisting of a balance sheet as of September 26,
- -------------------------
1999 and a statement of operations and cash flows for the twelve (12)-month
period ended September 26, 1999 (the financial statements referred to in clauses
(i) and (ii) being collectively referred to as the "Financial Statements"). The
--------------------
Financial Statements (including, in each case, the related schedules and notes)
fairly present the consolidated financial position of the Company and its
Subsidiaries as of the respective dates of such balance sheets and the results
of operations of the Company and its Subsidiaries for the respective periods
covered by such statements of operations, shareholders' equity and changes in
financial position or cash flows, as the case may be, and have been prepared in
accordance with GAAP. Since September 27, 1998, there has not been any Material
Adverse Change.
(b) None of the Company, any Guarantor, any of their respective
Subsidiaries or other Affiliates or any of their respective officers or
directors (i) is contemplating the filing of a petition under the Bankruptcy Law
or the liquidation of all or any major portion of its assets or properties or
(ii) is aware of any Person contemplating the filing of any petition against it
under the Bankruptcy Law. Neither the Company nor any Guarantor is
contemplating changing its business, as such business is being conducted on the
date hereof.
(c) The Company has furnished to the Purchaser a consolidated balance
sheet of the Company and its Subsidiaries as of September 26, 1999, as adjusted
to give pro forma effect to the consummation of the transactions contemplated by
---------
this Agreement and the Senior Credit Agreement (the "Closing Balance Sheet").
---------------------
Schedule 3.11(c) sets forth true, correct and complete copies of the Closing
- ----------------
Balance Sheet, together with a list of the pro forma adjustments and the
---------
assumptions underlying the Closing Balance Sheet. The Closing Balance Sheet
presents fully and fairly in all material respects the pro forma consolidated
--- -----
financial position of the
33
<PAGE>
Company and its Subsidiaries as of September 26, 1999, and properly gives effect
to the application of the pro forma adjustments described therein and
--- -----
contemplated herein. All assumptions underlying the Closing Balance Sheet were
made in good faith and are reasonable under the circumstances.
3.12 Existing Indebtedness; Existing Liens; Investments; Etc.
-------------------------------------------------------
(a) Schedule 3.12 sets forth a true, correct and complete list, and
-------------
describes, as of the date or dates indicated therein, as applicable:
(i) all Indebtedness of the Company, Parent and their
respective Subsidiaries on a consolidated and consolidating basis
(collectively,"Existing Indebtedness") as of the end of their respective
---------------------
Fiscal Years ended in September 1999;
(ii) all Liens as of the date hereof in respect of any property
or assets of the Company and/or any Guarantor (collectively, "Existing
--------
Liens"), showing, as to each Lien, the name of the grantor and secured
-----
party, the Indebtedness secured thereby, the name of the debtor (if
different from the grantor) and the assets or other property covered by
such Lien;
(iii) all Investments of the Company and the Guarantors as of
the date hereof;
(iv) all Contingent Obligations of the Company and the
Guarantors existing as of the date hereof;
(v) all UCC financing statements existing as of the date hereof
naming the Company, Parent or any of their respective Subsidiaries as
debtor; and
(vi) a payables aging schedule for the Company and its
Subsidiaries as of a recent practicable date.
(b) Except as set forth on Schedule 3.12, neither the Company nor any
-------------
of its Subsidiaries has any Indebtedness, liabilities or other obligations as of
the date hereof, whether accrued, absolute, contingent or otherwise, that are
required to be reflected on a balance sheet prepared in accordance with GAAP and
that are not reflected on the balance sheet of the Company included in the
Estimated FYE 1999 Financial Statements.
(c) Immediately following the Closing, neither the Company nor any of
its Subsidiaries will have any Indebtedness, whether accrued, absolute,
contingent or otherwise (whether individually or in the aggregate), except for
(i) Revolving Credit Loans (as such term
34
<PAGE>
defined in the Senior Credit Agreement) and (ii) Indebtedness under the Note. As
of the Closing, Senior Availability will not be less than $1,750,000.
(d) All Indebtedness and other amounts of Parent and its Subsidiaries
issued under the Indenture dated as of July 5, 1994, among Parent and IBJ
Schroder Bank & Trust Company (as amended, restated, supplemented or otherwise
modified, the "Merrill Indenture") has been fully and indefeasibly paid in full.
-----------------
The Merrill Indenture has been effectively terminated and is of no further force
and effect.
3.13 Absence of Certain Changes. Except as set forth on Schedule 3.13(a)
-------------------------- ----------------
and, with respect to Parent only, previously disclosed in the Parent SEC
Documents, since September 27, 1998, there has not been:
(a) Any transaction outside of the ordinary course of business (i)
involving the Company or Overhill Ventures or (ii) involving Parent which is in
excess of $10,000 and has not been previously disclosed in the Parent SEC
Documents;
(b) Any declaration, setting aside or payment of any dividend or
other distribution or payment (whether in cash, stock or property) with respect
to the Capital Stock of the Company or Parent, or any redemption, purchase or
other acquisition of securities of the Company or Parent (including, without
limitation, the repurchase of the LHF Warrant), or any payment to any
stockholder of the Company or to Parent not in its capacity as a stockholder;
(c) Any damage, destruction or loss, whether or not covered by
insurance, to any material assets or properties of the Company;
(d) Any material adverse change in the assets, liabilities, condition
(financial or otherwise), operations or prospects of the Company or any
Guarantor;
(e) Any loan or advance made by the Company or Overhill Ventures to
any Person (including, without limitation, Parent or any other Affiliate of the
Company), except travel advances or other reasonable business expense advances
made in the ordinary course of business to any employee of the Company;
(f) Any Indebtedness for borrowed money incurred by the Company or
Parent or any commitment to incur Indebtedness for borrowed money entered into
by the Company or any Guarantor (except as contemplated by this Agreement);
(g) Any capital expenditures or commitments to make capital
expenditures materially in excess of the amount reflected in the final budgets
for the Fiscal Years ended September 26, 1999 and ending October 1, 2000, a copy
of which final budget for the Fiscal Year ending October 1, 2000 is attached as
Schedule 3.13(g);
- ----------------
35
<PAGE>
(h) Any indemnity or other claims made by or against the Company,
Parent or any of their respective Subsidiaries with respect to or in connection
with any acquisition or sale or other disposition, whether direct or indirect,
of the Capital Stock or assets of any other Person;
(i) Any amendment or other modification to the charter or bylaws of
Parent, the Company or any of their respective Subsidiaries;
(j) The formation of any Subsidiary of the Company or Parent (other
than the formation of Overhill Ventures by the Company);
(k) Any waiver by the Company or Parent of a valuable right or of
material Indebtedness owed to it;
(l) Any payment, satisfaction, discharge or cancellation of any debts
or claims of the Company or Parent other than in the ordinary course of business
consistent with past practices;
(m) Any amendment, modification or termination of any Material
Contract or any material agreement to which the Company or any Guarantor is a
party or by which the Company or Parent or any of their assets or properties may
be bound or subject or of any employment or consulting agreement;
(n) Any change in the Contingent Obligations of the Company or
Parent, by way of guarantees or otherwise;
(o) Any mortgage, pledge or subject to Lien of any of the assets or
properties of the Company or Parent, or any assumption of, or taking any assets
or properties subject to, any liability;
(p) Any resignation or termination of the employment of any director,
officer or management employee of the Company or Parent;
(q) Any Investment by the Company or any Guarantor in the Capital
Stock of any Person (other than the Investment by the Company in the Capital
Stock of Overhill Ventures);
(r) Any payment of management or other fees by the Company to Parent
or any other Affiliate of the Company;
(s) Any offer, issuance or sale of any shares of Capital Stock or
Option Rights of the Company or of any Guarantor;
36
<PAGE>
(t) Any alteration or change in the Company's credit guidelines and
policies, charge-off policies or accounting methods, quality control procedures
or policies or manner of preparing its financial statements or maintaining its
books of account;
(u) any increase in, or commitment to increase, the salaries, wages,
bonuses or other compensation payable or to become payable to any officer or
other employee of the Company, other than (i) increases in salaries and wages in
the ordinary course of business consistent with past practices and not in excess
of fifteen percent (15.0%) for any one officer or other employee or (ii) bonuses
payable by the Company to its employees with respect to the 1999 Fiscal Year in
the aggregate amount of $135,000;
(v) Any adoption by the Company or Parent of any new Benefit Plan or
amendment to any Benefit Plan to provide any new or additional plans, programs,
contracts, benefits or arrangements involving direct or indirect compensation to
any officer, director, employee, former employee, or their dependents or
beneficiaries, of the Company or Parent;
(w) Any settlement of any litigation, entry of a consent decree or
entry of any judgment against the Company or any Guarantor with a value of
$10,000 or more;
(x) Any revaluation by the Company of any of its assets, including
without limitation, any write-offs, increases in any reserves except in the
ordinary course of business consistent with past practice or any write-up or
write-down of the value of inventory, property, plant, equipment or any other
asset; or
(y) The occurrence of any other event or the development of any other
condition which has had or could have a Material Adverse Effect.
3.14 Material Contracts.
------------------
(a) Schedule 3.14 sets forth a true, correct and complete list of all
-------------
contracts, commitments, licenses, agreements, obligations or arrangements,
whether oral or written, formal or informal, to which the Company or any
Guarantor is a party (or intend to become a party) or to which any of its assets
or properties is bound:
(i) under which the Company or any Guarantor is indemnified for
or against any liability in excess of $250,000 or under which the Company
or any Guarantor is or could be obligated to indemnify any Person in excess
of $100,000;
(ii) under which the Company or any Guarantor leases personal
property from or to third parties;
37
<PAGE>
(iii) for the purchase or sale of products or other personal
property or for the furnishing or receipt of services by the Company or any
Guarantor (A) which calls for performance over a period of more than one
(1) year, (B) which involves payments of more than the $50,000 in the
aggregate or (C) in which the Company or any Guarantor has agreed to
purchase a minimum quantity of goods or services or has agreed to purchase
goods or services exclusively from any Person;
(iv) (A) granting representation, marketing or distribution
rights or (B) relating to Intellectual Property;
(v) regarding the financing of its business or any part of its
business or operations;
(vi) establishing any partnership, joint venture or strategic
alliance;
(vii) under which the Company or any Guarantor has created,
incurred, assumed or guaranteed (or may create, incur, assume or guarantee)
Indebtedness (including, without limitation, Capital Lease Obligations) or
under which there is imposed (or may be imposed) a security interest on any
of its assets, tangible or intangible;
(viii) concerning any confidentiality obligations entered into
outside of the ordinary course of business or any covenants or agreements
restricting it from carrying on any business or from competing in any line
of business or with any Person;
(ix) with officers, directors, employees, consultants or
independent contractors of the Company or any Guarantor;
(x) resulting in the creation of any Lien (including any lease
notifications);
(xi) involving any Affiliates of the Company or any Guarantor
(other than contracts, commitments, licenses, agreements, obligations or
arrangements involving Texas Timberjack or any of their respective
Subsidiaries, on the one hand, and any Person who is not an Affiliate of
the Company, on the other hand);
(xii) under which the consequences of a default or termination
could have a Material Adverse Effect on the Company or any Guarantor,
whether individually or in the aggregate;
(xiii) under which the Company or any Guarantor will (A) receive
aggregate payments from customers, (B) make aggregate payments to vendors
or other
38
<PAGE>
suppliers or (C) make or receive aggregate payments to or from any other
Persons, in each case in excess of $500,000 per annum; and
(xiv) not entered into in the ordinary course of business and
described in response to any of the foregoing clauses.
All of the contracts, commitments, licenses, agreements, obligations
or arrangements described in clauses (i) through (xiv) above, together with the
real property leases and other interests described in Section 3.25, whether
------------
entered into prior to, on or after the Closing Date, are collectively referred
to herein as the "Material Contracts." Prior to the date hereof, the Company
------------------
has provided a true, correct and complete copy of each of the written Material
Contracts, and a written summary of each of the oral Material Contracts,
including all amendments, supplements or other modifications thereto.
(b) Each Material Contract existing as of the date hereof is (i) a
legal, valid and binding obligation of the Company and/or any Guarantor, as the
case may be, on the one hand, enforceable against it or them in accordance with
its terms (assuming the enforceability of such Material Contract against the
other parties thereto), (ii) to the best knowledge of the Company and the
Guarantors, a legal, valid and binding obligation of the other parties thereto,
enforceable against such other parties in accordance with its terms (assuming
the enforceability of such Material Contract against the Company and/or any
Guarantor party thereto) and (iii) in full force and effect. The Company and/or
any Guarantor, on the one hand, and, to the best knowledge of the Company and
the Guarantors, all other parties to the existing Material Contracts, on the
other hand, are in substantial compliance with the terms thereof, and no default
or event of default by the Company and/or any Guarantor, as the case may be, or,
to the best knowledge of the Company and the Guarantors, any other party thereto
exists thereunder.
(c) Neither the Company nor any of its Subsidiaries is a party to any
contract, commitment, license, agreement, obligation or arrangement that
restricts it from carrying on its business or any part thereof, or from
competing in any line of business or with any Person.
3.15 [Intentionally Omitted].
---------------------
3.16 Accounts Receivable. All accounts receivable of the Company and its
-------------------
Subsidiaries (a) to the best knowledge of the Company and the Guarantors, are
legal, valid and binding obligations of the Persons shown on the books of the
Company or such Subsidiary as the respective account debtors with respect
thereto, (b) arose out of bona fide sales actually made or services actually
performed on or prior to such date in the ordinary course of business, (c) are
not subject to any discount, rebate, offset, return privilege or claim outside
of the ordinary course of business (and are reflected in the reserves
established on the books of the Company or such Subsidiary, as the case may be,
in accordance with GAAP) and (d) to the best
39
<PAGE>
knowledge of the Company and the Guarantors, are valid and collectible in the
ordinary course of business. To the best knowledge of the Company and the
Guarantors, no customer has indicated an unwillingness or an inability to pay
any amount included in the accounts receivables of the Company or any of its
Subsidiaries.
3.17 Labor Relations. Each of the Company and the Guarantors is in full
---------------
compliance with the Fair Labor Standards Act (29 U.S.C. (S)201 et seq.), all
------
state wage and hour laws and all worker's compensation laws and is not engaged
in any unfair labor practice which has had or could have a Material Adverse
Effect. Except as disclosed on Schedule 3.17:
-------------
(a) There is no labor strike, slowdown, work stoppage or charge of
unfair labor practice, and there are no material labor disputes, grievances,
complaints or arbitration proceedings, pending or affecting the Company, Parent
or any of their respective Subsidiaries nor, to the best knowledge of the
Company and the Guarantors, is there any basis therefor or threat thereof;
(b) None of the Company or any Guarantor is bound by or subject to
any written or oral, express or implied, contract, commitment or arrangement
with any labor union or other employee organization, and no labor union or other
employee organization has requested or sought to represent any of the employees,
representatives or agents of the Company or any such Subsidiaries;
(c) Neither the Company nor any Guarantor is aware of any labor union
or other employee organization activity involving the employees of the Company
or any of its Subsidiaries, or of any officer or key employee, or any group of
officers or key employees, that intends to terminate his or her employment with
the Company or any such Subsidiaries;
(d) To the best knowledge of the Company and the Guarantors, there
are no petitions pending before the National Labor Relations Board in connection
with any pending claim for union representation; and
(e) To the best knowledge of the Company and the Guarantors, there is
no fact or circumstance which could, with the passage of time or otherwise,
cause this representation and warranty to be no longer true and correct.
3.18 Employee Benefit Plans; ERISA. For purposes of Sections 3.18(a)
----------------------------- ----------------
through (j), the term "Company" shall include any Person (including, without
---
limitation, Parent) that is or would be aggregated with the Company under
Section 414(b), (c), (m), or (o) of the Code. However, this Section 3.18 will
------------
not apply to a "Multiemployer Plan" (as defined in Section 4001(a)(3) of ERISA),
except as expressly referred to herein.
40
<PAGE>
(a) Schedule 3.18 sets forth a true, correct and complete list of:
-------------
(i) Each individual employment, termination, or severance
agreement since September 28, 1999, between the Company or any Guarantor,
on the one hand, and each employee whose annual compensation is or was at a
base rate equal to or exceeding $100,000, on the other hand;
(ii) All employee benefit plans, as defined in ERISA Section
3(3); and
(iii) All other profit-sharing, bonus, stock option, stock
purchase, stock bonus, restricted stock, stock appreciation right, phantom
stock, vacation pay, holiday pay, tuition reimbursement, scholarship,
severance, dependent care assistance, excess benefit, incentive
compensation, salary continuation, supplemental retirement, employee loan
or loan guarantee program, split dollar, cafeteria plan and other
compensation arrangements;
in each case maintained or contributed to by the Company or any Guarantor for
the benefit of its or their employees (or former employees) and/or their
beneficiaries. All of these types of arrangements shall be collectively
referred to as "Benefit Plans." An arrangement will not fail to be a Benefit
-------------
Plan simply because it only covers one individual, or because the Company's or
any Guarantor's obligations under the plan arise by reason of its being a
"successor employer" under Applicable Laws. Furthermore, a Voluntary Employees'
Beneficiary Association under Section 501(c)(9) of the Code will be considered a
Benefit Plan for this purpose.
(b) The Company has delivered to Buyer a true and complete copy of
the following documents, to the extent that they are applicable:
(i) Each Benefit Plan and any related funding agreements (e.g.,
----
trust agreements or insurance contracts), including all amendments (and
Schedule 3.18 includes a description of any such amendment that is not in
-------------
writing);
(ii) The current draft of the Summary Plan Description and all
subsequent Summaries of Material Modifications of each Benefit Plan;
(iii) The most recent Internal Revenue Service determination
letter for each Benefit Plan that is intended to qualify for favorable
income tax treatment under Section 401(a) or 501(c)(9) of the Code, which
determination letter reflects all amendments that have been made to the
plan (except as set forth in Schedule 3.18); and
-------------
(iv) The two (2) most recent Form 5500s (including all
applicable Schedules and the opinions of the independent accountants) that
were filed on behalf of the Benefit Plan.
41
<PAGE>
(c) All costs of administering and contributions required to be made
to each Benefit Plan under the terms of that Benefit Plan, ERISA, the Code, or
any other applicable law have been timely made, and are fully deductible in the
year for which they were paid. All other amounts that should be accrued to date
as liabilities of the Company or Parent under or with respect to each Benefit
Plan (including administrative expenses and incurred but not reported claims)
for the current plan year of the plan have been recorded on the books of the
Company and Parent. There will be no liability of the Company or Parent (i) with
respect to any Benefit Plan that has previously been terminated or (ii) under
any insurance policy or similar arrangement procured in connection with any
Benefit Plan in the nature of a retroactive rate adjustment, loss sharing
arrangement, or other liability arising wholly or partially out of events
occurring before the Closing.
(d) Each Benefit Plan at all times has been operated in accordance
with its terms, and complies currently, and has complied in the past, both in
form and in operation, with all Applicable Laws, including ERISA and the Code.
The Internal Revenue Service has issued a favorable determination letter with
respect to each Benefit Plan that is intended to qualify under Section 401(a) or
501(c)(9) of the Code, and no event has occurred (either before or after the
date of the letter) that would disqualify the plan.
(e) None of the Company or any Guarantor maintains any plan that
provides (or will provide) medical or death benefits to one or more former
employees or independent contractors (including retirees), other than benefits
that are required to be provided under COBRA and any state law continuation
coverage or conversion rights. Each of the Company and Parent have complied in
all material respects with the continuation coverage requirements of COBRA.
(f) None of the Company or any Guarantor maintains any plan
(including any Multiemployer Plan) that is subject to Section 412 of the Code.
(g) There are no investigations, proceedings, lawsuits or claims
pending or, to the best knowledge of the Company and the Guarantors, threatened
relating to any Benefit Plan.
(h) None of the Company or any Guarantor has any intention or
commitment, whether legally binding or not, to create any additional Benefit
Plan, or to modify any existing Benefit Plan so as to increase benefits to
participants or the cost of maintaining the plan. The benefits under all Benefit
Plans are as represented, and have not been, and will not be increased
subsequent to the date documents are provided to the Purchaser. No statement,
either oral or written, has been made by the Company (or any agent of the
Company) to any Person regarding any Benefit Plan that is not in accordance with
the Plan that could have adverse economic consequences to the Purchaser.
42
<PAGE>
(i) None of the persons performing services for the Company have been
improperly classified as being independent contractors, leased employees, or as
being exempt from the payment of wages for overtime.
(j) None of the Benefit Plans provide any benefits that (i) become
payable or become vested solely as a result of the consummation of this
transaction or (ii) would result in excess parachute payments (within the
meaning of Section 280G of the Code), either (A) solely as a result of the
consummation of this transaction or (B) as a result of the consummation of this
transaction and any actions taken by the Purchaser after the Closing Date.
Furthermore, the consummation of this transaction will not require the funding
(whether formal or informal) of the benefits under any Benefit Plan (e.g.,
----
contributions to a "rabbi trust").
3.19 Taxes.
-----
(a) The Company, Parent and each of their respective Subsidiaries
have filed within the required time periods (after giving effect to any
permitted extensions) all federal, state and other Tax returns required to have
been filed by it or them and has paid all Taxes which were due and payable prior
to the date hereof, other than Taxes that are being contested in good faith and
for which reserves have been properly established on the Closing Balance Sheet.
(b) The Company, Parent and each of their respective Subsidiaries
have withheld and paid all Taxes required to be withheld and paid by it or them
in connection with amounts paid or owing to any employee, creditor, shareholder
or other third party.
(c) Except as set forth in Schedule 3.19, (i) none of the Company,
-------------
Parent or any of their respective Subsidiaries has been advised that any Tax
returns have been or are being audited by any Governmental Authority, (ii) there
are no agreements, waivers or other arrangements providing for an extension of
time with respect to the assessment of any Taxes or deficiency against the
Company, Parent or any of their respective Subsidiaries, (iii) there are no
actions, suits, proceedings or claims now pending by or against the Company,
Parent or any of their respective Subsidiaries in respect of any Taxes or
assessments, and (iv) there is no pending or, to the best knowledge of the
Company and the Guarantors, threatened audit or investigation of the Company,
Parent or any of their respective Subsidiaries by any Governmental Authority
relating to any Taxes or assessments, or any claims for additional taxes or
assessments asserted by any Governmental Authority.
(d) Except as provided in clause (iii) of the definition of Permitted
Affiliate Transactions and as may be required or permitted under the Code with
respect to the filing of consolidated Tax returns, none of the Company, Parent
or any of their respective Subsidiaries is a party to or bound by any tax
sharing, tax indemnity or tax allocation agreement or other similar arrangement.
43
<PAGE>
3.20 Litigation. Schedule 3.20 sets forth a true, complete and correct
---------- -------------
list of all actions, suits, arbitration proceedings, investigations, inquiries
or other proceedings, whether governmental or non-governmental, before any
Governmental Authority pending or threatened on the date hereof, or at any time
during the past three (3) years, against, relating to or affecting the Company,
Parent or any of their respective Subsidiaries, or any officer, director or
employee thereof in his or her capacity as such, or any of its or their
respective assets, properties or businesses. Such Schedule sets forth, as to
each matter identified therein, the names of the parties thereto, the forum for
such matter, a summary of the details of the matter, the settlement or other
disposition of the matter (including the monetary value of such settlement or
other disposition) or, if such matter is still pending, a statement to that
effect; provided, however, that such Schedule need only include a summary of the
-------- -------
current status of any such actions, suits, arbitration proceedings,
investigations, inquiries or other proceedings pending or threatened against
Parent only to the extent that such matter has been previously disclosed in the
Parent SEC Documents. Except as set forth on Schedule 3.20:
-------------
(a) There is not in effect any order, judgment, decree, injunction or
ruling of any Governmental Authority against, relating to or affecting the
Company, Parent or any of their respective Subsidiaries, or any officer,
director or employee thereof in his or her capacity as such, enjoining, barring,
suspending, prohibiting or otherwise limiting the same from conducting or
engaging in any aspect of the Company's or Parent's business, or requiring the
Company, Parent, any such Subsidiary or any such officer, director or employee
to take certain action with respect to any aspect of the Company's business;
(b) None of the Company, Parent or any of their respective
Subsidiaries is in default under any order, judgment, decree, injunction or
ruling of any Governmental Authority, or is subject to or a party to any order,
judgment, decree or ruling arising out of any action, suit or proceeding under
any Applicable Laws, respecting antitrust, monopoly, restraint of trade, unfair
competition or similar matters; and
(c) There is no action, suit, arbitration or other proceeding,
investigation or inquiry pending or threatened before any Governmental Authority
which questions the validity of this Agreement, the Note, the Warrant or any
other Investment Document or any actions taken or to be taken pursuant hereto or
thereto, or which could, individually or in the aggregate, have a Material
Adverse Effect.
(d) The Company has furnished true, correct and complete copies of
all Compliance Reports issued by any Governmental Authority since January 1,
1997.
3.21 Transactions with Affiliates
----------------------------
(a) Except for the inter-company account receivable described in
clause (ii) of the definition of Permitted Affiliate Transaction, there is no
Indebtedness owing by the
44
<PAGE>
Company or any of its Subsidiaries to Parent or any other Affiliate of the
Company and its Subsidiaries, or by Parent or any other Affiliate of the Company
and its Subsidiaries to the Company or any of its Subsidiaries.
(b) Except as set forth on Schedule 3.21, immediately following the
-------------
Closing Date:
(i) none of the Company, Parent or any of their respective
Subsidiaries (other than Texas Timberjack) will be indebted, directly or
indirectly, to any of its own officers, directors or employees, or any
members of the Immediate Families of such officers, directors or employees,
except for compensation payable to its own officers, directors or employees
and reasonable travel expenses accrued in the ordinary course of business;
(ii) none of the Company, Parent or any of their respective
Subsidiaries will be indebted, directly or indirectly, to any officer,
director or employee of any of its Affiliates, or any members of the
Immediate Families of such officers, directors or employees; and
(iii) none of the officers or directors of the Company, any
Guarantor or any of their respective Subsidiaries, or any members of the
Immediate Families of such officers or directors, will (A) be indebted to
the Company or any Guarantor in any amount whatsoever or (B) to the best
knowledge of the Company and the Guarantors, have any direct or indirect
ownership interests in any Person which, directly or indirectly, competes
with the Company or any Guarantor.
(c) Other than as contemplated by this Agreement, no Executive
Officer, director or direct shareholder of the Company or any of its
Subsidiaries, or any member of his or her Immediate Families, has any direct or
indirect interest in any contract, commitment, license, agreement, obligation or
arrangement to which the Company, any Guarantor or any of their respective
Subsidiaries is a party. No Executive Officer, director or, to the best
knowledge of the Company and the Guarantors, shareholder of Parent, or any
member of his or her Immediate Families, has any direct or indirect interest in
any contract, commitment, license, agreement, obligation or arrangement to which
the Company, any Guarantor or any of their respective Subsidiaries is a party.
(d) None of the Company, Parent or any of their respective
Subsidiaries is a party to any agreement relating to the voting or disposition
of the Capital Stock of the Company, Parent or any of their respective
Subsidiaries other than, with respect to the Company, the LHF Voting Rights
Agreement which shall be terminated prior to or simultaneously with the Closing.
45
<PAGE>
(e) Except as set forth in Schedule 3.21 or as previously disclosed
-------------
in the Parent SEC Documents filed with the Commission, since January 1, 1996, no
shareholder, employee, officer, director or Affiliate of the Company or any
Guarantor, and no member of the Immediate Family of any such Person, has engaged
in any transaction or commercial relationship with the Company or any Guarantor,
other than the payment of compensation to its own officers and employees and
reasonable travel expenses accrued in the ordinary course of business.
(f) Except as set forth in Schedule 3.21, none of the Company, Parent
-------------
or any of their respective Subsidiaries (other than Texas Timberjack) has loaned
or advanced funds to any of its Affiliates, officers, directors, employees or
shareholders or to any member of the Immediate Families of any of the foregoing,
except for travel advances to its own employees made in the ordinary course of
business.
3.22 Investment Company Act; Margin Stock. Neither the Company, Parent nor
------------------------------------
any of their respective Subsidiaries is an "investment company" registered or
required to be registered under the Investment Company Act of 1940, as amended,
and neither the Company nor any of its Subsidiaries is controlled by such a
company. Neither the Company, Parent nor any of their respective Subsidiaries is
engaged in extending credit for the purposes of purchasing or carrying Margin
Stock. None of the Company, Parent or any of their respective Subsidiaries
(other than Texas Timberjack) has any Margin Stock, as determined in accordance
with the Margin Regulations.
3.23 Compliance with Laws; Licenses and Permits. The Company, Parent and
------------------------------------------
each of their respective Subsidiaries are in compliance with all Applicable Laws
(including, without limitation, the rules and regulations of the FDA and the
USDA). Schedule 3.23 sets forth a true, correct and complete list of all
-------------
Licenses and Permits held by the Company and its Subsidiaries in connection with
the ownership of their assets or the conduct of their businesses (which
Schedules shall set forth, with respect to each License or Permit, its name, the
issuing Person, the date it was issued and the date of expiration), and such
Licenses and Permits constitute all of the Licenses and Permits required under
Applicable Laws to own their respective assets or conduct their respective
businesses as now conducted and as proposed to be conducted. All of Licenses
and Permits are validly issued and in full force and effect, and the Company and
its Subsidiaries have fulfilled and performed all of their obligations with
respect thereto and have full power and authority to operate thereunder.
3.24 Title to Property; Liens. The Company, Parent and each of their
------------------------
respective Subsidiaries (other than, with respect to Parent, Texas Timberjack)
have good and marketable title to their respective real properties (or valid
leasehold interests in real property) and good and merchantable title to their
other respective properties, and none of such properties is subject to any Liens
except for Liens in favor of the Senior Lender and the Purchaser and Permitted
Liens. The Company, Parent and each of their respective Subsidiaries enjoys
quiet possession
46
<PAGE>
under all leases to which they are parties as lessees, and all of such leases
are valid, subsisting and in full force and effect. None of such leases contains
any provision restricting the incurrence of indebtedness by the lessee or any
unusual or burdensome provision adversely affecting the current and proposed
operations of the Company, Parent or their respective Subsidiaries.
3.25 Real Property.
-------------
(a) The Company owns no fee interest in any real property.
(b) Schedule 3.25 sets forth a true, correct and complete list of all
-------------
real property leases, subleases or licenses pursuant to which the Company or any
of its Subsidiaries is a lessor, lessee, sublessor, sublessee, licensor or
licensee of real property, in each case as amended through the date hereof,
which list includes the street address, the identity of the lessors, lessees,
sublessors, sublessees, licensors or licensees, the term thereof (referencing
applicable extension or renewal periods), the rent payment terms and the current
use). The Company has delivered to the Purchaser true, correct and complete
copies of each such lease, sublease or license. The Purchaser hereby
acknowledges receipt of each lease, sublease or license listed on such Schedule.
The real property interests described or listed on Schedule 3.25 constitutes all
-------------
of the leasehold interests in real property leased or otherwise held for use by
the Company and its Subsidiaries. With respect to each such lease, sublease and
license, except as set forth on Schedule 3.25:
-------------
(i) such lease, sublease and license is legal, valid, binding
and enforceable against the parties thereto and is in full force and
effect;
(ii) no party thereto is in breach or default, and no event has
occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(iii) there are no disputes, oral agreements or forbearance
programs in effect as to any such lease, sublease or license; and
(iv) neither the Company nor any of its Subsidiaries has
assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered
any interest therein.
(c) No Consent of any party to any lease, sublease or license is
required in connection with the consummation of the transactions contemplated by
this Agreement, the Note, the Warrant or the other Investment Documents,
including, without limitation, the issuance and sale of the Securities, and the
exercise of any remedies under any of the Collateral Documents, and no such
event shall be prohibited by, or shall constitute a default under, any such
lease, sublease or license.
47
<PAGE>
(d) All parking lots located on any real property subject thereto are
in compliance with Applicable Laws, including, without limitation, zoning
requirements, and are adequate for the employees and business operations of the
Company.
3.26 Environmental Matters. Except as set forth in Schedule 3.26:
--------------------- -------------
(a) Each Environmental Person and each Site is in compliance with
all, and no Environmental Person has any liability under, any Environmental
Laws.
(b) No Release has occurred at any Site, and there are no present or
past Environmental Conditions in any way relating to any Environmental Person,
any Site or the business or operations of any Environmental Person.
(c) The Company has delivered to the Purchaser true, correct and
complete copies of all environmental site assessments, audits, studies or
reports relating to any Environmental Condition or relating to the business,
condition or operations of all Environmental Persons.
(d) No Environmental Person is a "potentially responsible party"
within the meaning of CERCLA with respect to any federal, state, local or
foreign environmental clean-up site or with respect to investigations or
corrective actions under any Environmental Laws.
(e) No Environmental Person has received notice of any alleged,
actual or potential responsibility, inquiry, investigation or administrative or
judicial proceeding regarding (i) any Release by any Environmental Person at any
Site or other location or (ii) any violation of or non-compliance by any
Environmental Person with the conditions of any License or Permit required under
any Environmental Laws or the provisions of any Environmental Laws. No
Environmental Person has received notice of any other claim, demand or action by
any Person alleging any actual or threatened injury or damage to any Person,
property, natural resources or the environment arising from or relating to any
Release, transportation or disposal of any Hazardous Materials.
(f) Each Environmental Person has furnished all notices and warnings,
made all reports and has kept and maintained all records required by, and in
compliance with, all Environmental Laws, including, without limitation, any
notices and Consents required under any Environmental Laws in connection with
the consummation of the transactions contemplated by the Investment Documents.
3.27 Intellectual Property.
---------------------
(a) Except as set forth on Schedule 3.27, the Company and each of
-------------
its Subsidiaries owns, or is licensed or otherwise possesses legally enforceable
rights to use, all
48
<PAGE>
Intellectual Property that is used in the conduct of its business as
currently conducted and as proposed to be conducted. Schedule 3.27 lists (i) all
-------------
patents, patent applications, trademarks, servicemarks, trademark and
servicemark applications, copyrights and trade names owned or held by the
Company or any of its Subsidiaries and used in the conduct of its or their
businesses, including the jurisdictions in which each such Intellectual Property
right has been issued or registered or in which any such application for such
issuance or registration has been filed; (ii) all material written licenses,
sublicenses and other agreements to which the Company or any of its Subsidiaries
is a party and pursuant to which any Person (other than employees of the Company
in the course of their employment) is authorized to use any such Intellectual
Property rights; and (iii) all material written licenses, sublicenses and other
agreements to which the Company or any of its Subsidiaries is a party and
pursuant to which the Company or any of its Subsidiaries is authorized to use
any third party patents, trademarks or copyrights, including computer software
("Third Party Intellectual Property Rights") which are used in the businesses of
----------------------------------------
the Company or the Subsidiaries or which form a part of any product or service
of the Company or its Subsidiaries, all of which are in full force and effect.
The Company has delivered to the Purchaser correct and complete copies of all
such patents, registrations, applications, licenses and agreements and related
documentation, all as amended to date. Neither the Company, Parent nor any of
their respective Subsidiaries has agreed to indemnify any Person for or against
any infringement, misappropriation or other conflict with respect to any item of
Intellectual Property that the Company owns or uses. Except as set forth on
Schedule 3.27, neither the Company nor any of its Subsidiaries is a party to any
- -------------
oral license, sublicense or agreement which, if reduced to written form, would
be required to be listed in Schedule 3.27 under the terms of this Section 3.27.
------------- ------------
(b) Neither the Company nor any of its Subsidiaries will be, as a
result of the execution and delivery of this Agreement or the performance of the
Company's obligations under this Agreement, in breach of any license, sublicense
or other agreement relating to its Intellectual Property or Third Party
Intellectual Property Rights.
(c) Neither the Company, Parent nor any of their respective
Subsidiaries has been named in any suit, action or other proceeding which
involves a claim of infringement of any Intellectual Property rights of any
third party. The performance of the services offered by the Company and its
Subsidiaries do not infringe on any Intellectual Property rights of any other
Person, and to the best knowledge of the Company and the Guarantors, the
Intellectual Property rights of the Company and its Subsidiaries are not being
infringed by activities, products or services of any third party.
3.28 Nature of Business. The Company is not engaged in any business other
------------------
than the manufacture, distribution and sale of frozen food products and any
activities ancillary or related thereto.
49
<PAGE>
3.29 Powers of Attorney. There are no outstanding powers of attorney
------------------
executed by or on behalf of the Company or any of its Subsidiaries.
3.30 Listing of Parent Common Stock. The shares of Parent Common Stock are
------------------------------
listed for trading solely on AMEX. No Capital Stock of the Company or Overhill
Ventures is listed on any securities exchange or on Nasdaq.
3.31 Insurance. Schedule 3.31 sets forth a true and complete list of all
--------- -------------
liability and other insurance policies insuring the Company and its Subsidiaries
against losses arising out of or related to the businesses of the Company and
its Subsidiaries (which list accurately describes the coverage carried and the
expiration dates of such policies). The Company and each of its Subsidiaries is
covered by insurance in scope and amount customary and reasonable for the
businesses in which it is engaged and will be so covered after consummation of
the transactions contemplated hereby. The insurance policies listed on Schedule
--------
3.31 constitute insurance protection against all liability, claims and risks
- ----
occurring in the ordinary course of business customarily included within
comprehensive liability coverage and at amounts and levels customarily
maintained for a business of this type. Schedule 3.31 also sets forth all
-------------
claims made by the Company or any of its Subsidiaries under such policies during
the past three (3) years. All such policies are in full force and effect.
3.32 Customers. Schedule 3.32 lists the names and addresses of the ten
--------- -------------
(10) most significant customers (by revenue) of the Company during each of the
Fiscal Years ended September 28, 1997 and September 27, 1998, and the twelve
(12) month period ended September 26, 1999, and the amount of revenues accounted
for by each such customer during each such period. No customer of the Company
accounts for more than twenty-five percent (25.0%) of the total revenues of the
Company in the twelve (12) month period ended September 26, 1999. The Company
has not received any notice, nor has the Company any reason to believe, that any
significant customer of the Company has ceased, or will cease, to use the
products or services of the Company, or has reduced, or will reduce, the use of
such products or services at any time.
3.33 Suppliers. Schedule 3.33 lists the ten (10) largest suppliers of any
--------- -------------
products or services to the Company during the twelve (12) month period ended
September 26, 1999, and the amount of purchases made by the Company from each
during such period. No material purchase order or commitment of the Company is
in excess of normal requirements, nor are prices provided therein in excess of
current market prices for the products or services to be provided thereunder.
3.34 Business Relationships. There exists no actual or threatened
----------------------
termination, cancellation or limitation of, or any modification or change in,
the business relationship between the Company or any Guarantor, on the one hand,
and any customer or group of customers whose purchases, individually or in the
aggregate, are material to the business of the
50
<PAGE>
Company or such Guarantor, as the case may be, or with any material suppliers,
on the other hand, and there exists no present condition or state of facts or
circumstances which could materially and adversely affect the Company or any
Guarantor or prevent the Company or Parent from conducting such business after
the consummation of the transactions contemplated by this Agreement in
substantially the same manner in which it has been heretofore been conducted.
3.35 Personal Property Leases. Schedule 3.35 sets forth a true and
------------------------ -------------
complete list and description of all agreements (or group of related agreements)
for the lease of personal property, including the name of the lessor, the type
of lease (whether operating, capital or otherwise), a description of the
property and the monthly rental payments due. Neither the Company nor its
Subsidiaries has breached any agreement pertaining to, is in default with
respect to, or is overdue in payment of, any amounts owing under any lease
agreement disclosed on Schedule 3.35. No such lease agreement contains any
-------------
provisions which restrict or prohibit (a) the issuance or sale of the Securities
as contemplated herein, (b) any other financings by the Company or any
Subsidiaries, including, without limitation, any public or private debt or
equity financings or (c) other than ordinary restrictions on assignment, any
merger, sale of assets or other event which could cause a Change in Control.
3.36 Employment Agreements. Schedule 3.36 sets forth a true, correct and
--------------------- -------------
complete list of all employment, agency, independent contractor and sales
representative agreements, golden parachute agreements and employee-related non-
competition and non-solicitation agreements to which the Company or any of its
Subsidiaries is a party. The Company has previously delivered true, correct and
complete copies of all such agreements, including all amendments thereto. Each
such agreement is in writing, is a valid and binding agreement enforceable
against the respective parties thereto in accordance with its terms, and no
party to any such agreement is in breach of, or in default with respect to, any
of its obligations thereunder, nor is the Company or any of its Subsidiaries
aware of any facts or circumstances which might give rise to any breach or
default thereunder.
3.37 Solvency. Each of the Company, the Guarantors and their respective
--------
Subsidiaries is, and immediately following the consummation of the transactions
contemplated by this Agreement each of the Company, the Guarantors and their
respective Subsidiaries will be, Solvent. None of the Company, any Guarantor or
any of their respective Subsidiaries will, by virtue of the consummation of the
transactions contemplated hereby and by the other Investment Documents, incur
debts that will be beyond its ability to pay as they mature. No transfer of
property is being made and no obligation is being incurred in connection with
the transactions contemplated by this Agreement and the other Investment
Documents with the intent to hinder, delay or defraud either present or future
creditors of the Company, any Guarantors or any of their respective
Subsidiaries.
51
<PAGE>
3.38 Use of Proceeds. The proceeds to be received by the Company from the
---------------
issuance and sale of the Securities shall be used solely for the purposes set
forth in Schedule 3.38 and applied in accordance with the uses described
-------------
therein.
3.39 Public Utility Holding Company Act. Neither the Company, Parent nor
----------------------------------
any of their respective Subsidiaries is a "holding company" or a "subsidiary
company" of a "holding company", or an "affiliate" of a "holding company" or of
a "subsidiary company" of a "holding company", as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended.
3.40 Depository and Other Accounts. Schedule 3.40 sets forth a true and
----------------------------- -------------
complete list of all banks and other financial institutions and depositories at
which the Company and its Subsidiaries maintains (or has caused to be
maintained) or will maintain deposit accounts, spread accounts, yield supplement
reserve accounts, operating accounts, trust accounts, trust receivable accounts
or other accounts of any kind or nature into which funds of the Company
(including funds in which the Company maintains a contingent or residual
interest) or any such Subsidiary are deposited from time to time. Such Schedule
--------
3.40 correctly identifies the name and address of each depository, the name in
- ----
which each account is held, the purpose of the account, the account number, the
contact person at such depository and his or her telephone number. The Company
will notify the Purchaser and supplement Schedule 3.40 as new accounts are
-------------
established within two (2) Business Days thereof.
3.41 Books and Records. The minute books and similar records of the
-----------------
Company, the Guarantors and their respective Subsidiaries (other than, with
respect to Parent, Texas Timberjack) contain true and complete records of all
actions taken at any meetings of the Company's, the Guarantor's or such
Subsidiary's shareholders, Board of Directors or any committees thereof, as the
case may be, and of all written consents executed in lieu of the holding of any
such meeting. The books and records of the Company, the Guarantors and their
respective Subsidiaries (other than Texas Timberjack) accurately reflect in all
respects the assets, liabilities, business, financial condition and results of
operations of the Company, the Guarantors or their Subsidiaries (other than
Texas Timberjack), as the case may be, and have been maintained in accordance
with good business, accounting and bookkeeping practices.
3.42 Burdensome Obligations; Future Expenditures. None of the Company or
-------------------------------------------
any Guarantor is a party to or bound by any agreement, instrument, deed, lease
or other document, or is subject to any charter, bylaw or other restriction,
commitment or requirement, which, in the opinion of its management, is so
unusual or burdensome that in the foreseeable future it could have a Material
Adverse Effect. None of the Company, any Guarantor or any of their respective
Subsidiaries (other than Texas Timberjack) anticipates that future expenditures,
if any, by the Company, such Guarantor or such Subsidiaries, as the case may be,
needed to meet the provisions of any Applicable Laws will be so burdensome as to
have or cause, or create a material risk of having or causing, a Material
Adverse Effect.
52
<PAGE>
3.43 Brokers; Certain Expenses. None of the Company, Parent or any of
-------------------------
their respective Subsidiaries or Affiliates has paid or is obligated to pay any
fee or commission to any broker, finder, investment banker or other intermediary
in connection with this Agreement, any other Investment Document or any of the
transactions contemplated hereby or thereby. None of the Company, Parent or any
of their respective Subsidiaries or Affiliates is bound by any agreement or
commitment for the provision of investment banking or financial advisory
services with respect to any recapitalization, issuance of debt or equity
securities or other capital or financing transactions involving the Company or
any Guarantor.
3.44 Due Diligence Response. The Company and Parent have delivered to the
----------------------
Purchaser true, correct and complete copies of each of the documents and other
materials requested in the Due Diligence Checklist which was furnished to the
Company on or about August 5, 1999, to the extent such documents or other
materials exist with respect to the Company or any Guarantor. Without in any way
limiting the generality of the foregoing, (a) there have been no material
communications between AMEX and Parent since October 1, 1995; (b) there are no
management letters issued by the Company's (or, with respect to the Company,
Parent's) independent certified public accountants, other than the letter dated
December 18, 1998, from Ernst & Young to the audit committee of Parent; (c)
neither Parent nor any of its Subsidiaries or other Affiliates is required to
make any payments or is otherwise indebted to David R. Weinreb or any of his
Affiliates, other than as provided in the Summary Judgment dated June 26, 1998,
as modified by a letter agreement dated November 2, 1998, between Parent and
David R. Weinreb, and a letter agreement dated November 4, 1998, between David
R. Weinreb and Parent; and (d) the Company has furnished true, correct and
complete copies of all credit, loan or other financing agreements to which the
Company, Parent or any of their respective Subsidiaries is a party or by which
any of them is bound.
3.45 Disclosure. After due inquiry of the directors, officers and
----------
employees of the Company and the Guarantors having knowledge of the matters
represented, warranted or stated herein, neither this Agreement, the Disclosure
Schedules nor any other Investment Document, nor any certificate, report,
questionnaire, statement or document furnished by or on behalf of the Company,
Parent or any of their respective Subsidiaries, whether included in any
materials provided to the Purchaser prior to the date hereof or included in this
Agreement or any other Investment Document or in any Exhibit or Disclosure
Schedule or in any other document or instrument delivered at any time prior to
the Closing, is, or will be, untrue with respect to any material fact or omits,
or will omit, to state a material fact necessary in order to make the statement
made herein or therein, in light of the circumstances in which such statement
was made, not misleading. To the best knowledge of the Company and the
Guarantors, there are not facts or circumstances existing which could have a
Material Adverse Effect, either individually or in the aggregate. The
information contained in each of the management questionnaires completed by
certain officers, directors and employees of the Company and Parent and the
corporate questionnaire dated August 23, 1999, prepared by the Company and
delivered to the Purchaser prior to the date of this Agreement is true and
correct.
53
<PAGE>
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby
-----------------------------------------------
represents and warrants to the Company as follows:
4.1 Organization. The Purchaser is a limited partnership formed and
------------
validly existing under the laws of the State of California, and has all
requisite power and authority to enter into this Agreement and each other
Investment Document to which it is a party and to consummate the transactions
contemplated hereby.
4.2 Authorization. The execution, delivery and performance of this
-------------
Agreement and of each of the other Investment Documents to which the Purchaser
is a party, and the consummation of the transactions contemplated hereby and
thereby, have been duly authorized by all necessary action on the part of the
Purchaser.
4.3 Due Execution and Delivery; Binding Obligations. This Agreement has
-----------------------------------------------
been duly executed and delivered by the Purchaser. This Agreement is, and at the
time of the Closing each of the other Investment Documents to which the
Purchaser is a party will be, a legal, valid and binding obligation of the
Purchaser, enforceable against the Purchaser in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or conveyance or similar laws relating to or
limiting creditors' rights generally or by equitable principles relating to
enforceability and except as rights of indemnity or contribution may be limited
by federal or state securities or other laws or the public policy underlying
such laws.
4.4 No Violation. The execution, delivery and performance by the
------------
Purchaser of this Agreement and each of the other Investment Documents to which
the Purchaser is a party, and the consummation of the transactions contemplated
hereby, do not violate (a) the limited partnership agreement of the Purchaser as
in effect on the date hereof, (b) any law, statute, rule or regulation
applicable to the Purchaser, (c) any order, ruling, judgment or decree of any
Governmental Authority binding on the Purchaser or (d) any term of any material
indenture, mortgage, lease, agreement or instrument to which the Purchaser is a
party.
4.5 Investment Intent. The Purchaser is acquiring the Securities for its
-----------------
own account, for investment purposes, and not with a view to or for sale in
connection with any distribution thereof. The Purchaser understands that the
Securities have not been registered under the Securities Act or registered or
qualified under any state securities law in reliance upon specific exemptions
therefrom, which exemptions may depend upon, among other things, the bona fide
nature of the Purchaser's investment intent as expressed herein.
4.6 Accredited Investor Status. The Purchaser is an "accredited investor"
--------------------------
(as such term is defined in Rule 501 of Regulation D promulgated under the
Securities Act). By reason of its business and financial experience, the
Purchaser has such knowledge, sophistication and experience in business and
financial matters so as to be capable of evaluating the merits and
54
<PAGE>
risks of the investment in the Securities, has the capacity to protect its own
interests and is able to bear the economic risk of such investment. The
Purchaser has had an opportunity to review the books and records of the Company
and to ask questions of representatives of the Company concerning the terms and
conditions of the transactions contemplated by this Agreement.
4.7 Governmental Consents. The execution and delivery by the Purchaser of
---------------------
this Agreement and each of the other Investment Documents to which it is a
party, and the consummation by the Purchaser of the transactions contemplated
hereby, do not and will not require any Consent of any Governmental Authority,
other than the California Permit.
5. CONDUCT PRIOR TO CLOSING.
------------------------
5.1 Conduct of Business Prior to Closing. Without the prior written
------------------------------------
consent of the Purchaser, from and after the date of this Agreement until the
Closing, the Company and Parent shall, and shall cause each of their respective
Subsidiaries to, conduct its business in the ordinary course. Notwithstanding
the foregoing and except as contemplated hereby, neither the Company nor any
Guarantor shall, nor shall they permit any of their respective Subsidiaries to:
(a) waive or release any material right or benefit or any
indebtedness owed to it;
(b) amend or otherwise modify any Material Contract on terms less
favorable than those that exist on the date hereof;
(c) change or amend its charter or bylaws;
(d) effect any act or omission which could have a Material Adverse
Effect;
(e) create any Contingent Obligation, by way of guarantees or
otherwise;
(f) declare or pay any dividend or other distribution or payment in
cash, stock or property in respect of shares of its Capital Stock, or adopt or
consider any plan or arrangement with respect thereto or make any direct or
indirect redemption, retirement, purchase or other acquisition of any of its
Capital Stock or split, combine or reclassify its outstanding shares of Capital
Stock;
(g) issue any shares of Capital Stock or any Option Rights of the
Company or Overhill Ventures (other than (i) shares of Common Stock issued upon
the exercise of Option Rights set forth on Schedule 3.7(a)) and (ii) Parent
---------------
Common Stock issued in settlement of litigation identified on Schedule 3.20
-------------
consistent with past practices);
55
<PAGE>
(h) (i) increase the compensation of any officer or key employee,
except as otherwise permitted under Section 3.13(u); (ii) amend any existing
---------------
Benefit Plan or adopt any new Benefit Plan; or (iii) enter into any new
employment or consulting agreement;
(i) (i) incur any Indebtedness; (ii) transfer, lease, license, sell,
mortgage, pledge, dispose of, or encumber any asset of the Company with a value
exceeding $10,000 individually and $50,000 in the aggregate; (iii) purchase or
acquire any business or any securities or assets of any business; (iv) enter
into any partnership, joint venture or strategic alliance; (v) settle any
material litigation in an amount in excess of $50,000; or (vi) accelerate
payment on any Indebtedness;
(j) make any Capital Expenditures in excess of $100,000 in the
aggregate;
(k) fail to preserve intact the business organization of the Company
and each of its Subsidiaries, fail to keep available the services of their
operating personnel, or fail to preserve the goodwill of those having business
relationships with the Company or its Subsidiaries, including, without
limitation, customers;
(l) fail to maintain its books and records in accordance with past
practices and in conformity with GAAP;
(m) take any action enumerated in Section 3.13 or which would be
------------
prohibited by any other Investment Document determined as if the transactions
contemplated by this Agreement had been consummated; or
(n) take, or fail to take, any action so that any of the
representations or warranties by the Company or any Guarantor contained in this
Agreement ceases to be true and correct in all respects.
The Company shall notify the Purchaser in writing of the occurrence of any
Material Adverse Effect or breach of the representations and warranties of the
Company under this Agreement within one (1) day following the occurrence
thereof.
5.2 Access to Information and Documents. From and after the date of this
-----------------------------------
Agreement and until the Closing, the Company and each of its Subsidiaries shall
give the Purchaser and its representatives and agents, upon one (1) Business
Day's prior notice, full access during normal business hours to the properties,
documents, books and records of the Company and each of its Subsidiaries, and
shall furnish the Purchaser with such information concerning the Company and
each of its Subsidiaries as the Purchaser may request.
5.3 Non-Solicitation. In consideration of the capital and other resources
----------------
(human or otherwise) committed to the Purchaser's due diligence investigation of
the Company, Parent
56
<PAGE>
and their respective Subsidiaries and other Affiliates and the preparation and
negotiation of this Agreement and the other Investment Documents, the Company
and Parent shall not, nor will they permit their respective Affiliates,
Subsidiaries, shareholders, directors, officers, employees, attorneys,
accountants, investment bankers, representatives or agents to, directly or
indirectly, initiate contact with, make, solicit or encourage any inquiries or
proposals from, furnish any information regarding the Company or its businesses
or assets to, or engage or participate in any discussions or negotiations with
any Person with respect to any proposal pursuant to which the Company or Parent
would (i) obtain any debt or equity financing (other than (A) with respect to
Parent and Texas Timberjack, any debt or equity financing; provided, however,
-------- -------
that the proceeds of any such financing are not, directly or indirectly,
invested in or used to fund the Company or to defease any indebtedness,
obligation or any other security of the Company or (B) with respect to the
Company, a senior asset-based working capital facility) or (ii) enter into an
agreement to be acquired by, sold to, merged into or combined with any such
person or entity (other than with respect to Texas Timberjack; provided,
--------
however, that the proceeds of any such transaction are not, directly or
- -------
indirectly, invested in or used to fund the Company or to defease any
indebtedness, obligation or any other security of the Company). Any transaction
referred to in clauses (i) or (ii) above is referred to as an "Alternative
-----------
Transaction." The Company will promptly communicate to the Purchaser in writing
- -----------
the fact that it has received any proposal or inquiry regarding any Alternative
Transaction.
5.4 Covenant to Close. Each of the Company, the Guarantors and the
-----------------
Purchaser shall use its best efforts to satisfy the conditions precedent
applicable to it to consummate the transactions contemplated by this Agreement
in accordance with the terms, and subject to the conditions of, this Agreement.
Without limiting the generality of the foregoing, the Company and the Guarantors
shall use its reasonable best efforts to obtain all Consents from third parties
which are required to be obtained in connection with the consummation of each of
the transactions contemplated by this Agreement, including, without limitation,
any Consents of the holders of any Indebtedness of the Company or the Guarantors
for the purpose of ensuring the incurrence by the Company of the Indebtedness
evidenced by the Note.
6. CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER. The obligations of the
----------------------------------------------
Purchaser to consummate the transactions contemplated hereby, including, without
limitation, the obligation to purchase the Note as provided herein, is subject
to the satisfaction, prior to or at the Closing, of the conditions set forth in
this Section 6; provided, however, that any or all of such conditions may be
--------- -------- -------
waived, in whole or in part, by the Purchaser in its sole and absolute
discretion:
6.1 Closing Date. The Closing Date shall occur on or before November 24,
------------
1999.
6.2 Representations and Warranties; No Default. Each of the
------------------------------------------
representations and warranties made by the Company and the Guarantors contained
in this Agreement shall be true and correct in all respects as of the date made,
and shall be true and correct in all respects as of
57
<PAGE>
the Closing Date, with the same effect as if made on and as of the Closing Date;
each of the covenants, agreements and obligations of the Company and the
Guarantors under this Agreement to be performed or satisfied by it or them on or
prior to the Closing Date have been performed or satisfied by it or them on or
before the date hereof; and no Default or Event of Default shall exist or result
from the issuance and sale of the Securities or the other transactions
contemplated by this Agreement. The Company and the Guarantors shall have
delivered to the Purchaser an officers' certificate, signed by the President and
Chief Executive Officer and the Chief Financial Officer of each of the Company
and the Guarantors, dated as of the Closing Date, to such effect and to the
effect that each of the other conditions set forth in this Section 6 has been
---------
satisfied and fulfilled.
6.3 Closing Fees and Expenses. The Company shall have paid to the
-------------------------
Purchaser, in immediately available funds to a bank account designated by the
Purchaser, a non-refundable, non-accountable closing fee of $1,120,000.00 (which
closing fee may be withheld by the Purchaser from the proceeds to be delivered
by the Purchaser at the Closing and which withholding shall constitute payment
in full of the Company's obligation to pay such closing fee), and the Company
shall have paid all costs and expenses (or the Purchaser shall have withheld the
same from the proceeds of the Securities) as provided for in Section 8.5.
-----------
6.4 Purchase Permitted By Applicable Laws. The consummation of the
-------------------------------------
transactions contemplated by this Agreement shall not be prohibited by or
violate any Applicable Laws and shall not subject any party to any Tax, penalty
or liability, under or pursuant to any Applicable Laws, and shall not be
enjoined (temporarily or permanently) under, or prohibited by or contrary to,
any injunction, order, decree or ruling. Without limiting the generality of the
foregoing, the consummation of the transactions contemplated hereby shall
otherwise comply with all applicable requirements of federal securities and
state securities or "blue sky" laws.
6.5 No Material Adverse Changes. No Material Adverse Change shall have
---------------------------
occurred since September 27, 1998, and the Company and the Guarantors shall have
delivered to the Purchaser an officers' certificate, signed by the President and
Chief Executive Officer and the Chief Financial Officer of each of the Company
and the Guarantors, dated as of the Closing Date, to such effect.
6.6 California Permit. The Company shall have obtained and delivered to
-----------------
the Purchaser the California Permit which shall continue in full force and
effect.
6.7 No Injunction or Order. There shall not have been issued any
----------------------
injunction, order, decree or ruling that prohibits or limits any of the
transactions contemplated by this Agreement or the other Investment Documents,
and there shall not be any action, suit, proceeding or investigation pending or,
to the best knowledge of the Company and the Guarantors, threatened against the
Company or any of its Subsidiaries that (a) draws into question the validity,
legality or enforceability of this Agreement or the other Investment Documents
or the consummation of
58
<PAGE>
the transactions contemplated hereby or thereby or (b) might result, in the
judgment of the Purchaser, in the imposition of a penalty if the Securities were
delivered as contemplated hereunder or in any Material Adverse Change.
6.8 Opinions of Counsel. The Purchaser shall have received (a) an opinion
-------------------
letter of Freeman, Freeman & Smiley LLP, counsel to the Company and the
Guarantors, dated as of the Closing Date and addressed to the Purchaser, in form
and substance satisfactory to the Purchaser and its counsel, (b) an opinion
letter of Jones Vargas, Nevada counsel to the Company and Parent, dated as of
the Closing Date and addressed to the Purchaser, in form and substance
satisfactory to the Purchaser and its counsel, and (c) an opinion letter of
Albert B. Greco, Jr., Texas counsel to Parent, dated as of the Closing Date and
addressed to the Purchaser, in form and substance satisfactory to the Purchaser
and its counsel.
6.9 Delivery of Certain Closing Documents. The Company shall have
-------------------------------------
delivered to the Purchaser the following closing documents, each dated as of the
Closing Date:
(a) This Agreement, duly executed by the Company and the Guarantors,
together with the Exhibits, Disclosure Schedules and Annex A;
-------
(b) The Note, duly executed by the Company;
(c) The Warrant, duly executed by the Company;
(d) The Registration Rights Agreement, duly executed by the Company;
(e) The Investor Rights Agreement, duly executed by the Company and
Parent;
(f) The Suretyship Agreement, duly executed by the Company and the
Guarantors;
(g) A side letter, in form and substance satisfactory to the
Purchaser, duly executed by Parent, the Company and Overhill Ventures.
6.1 Collateral Documents. The Company shall have delivered to the
--------------------
Purchaser the following Collateral Documents, each dated as of the Closing Date:
(a) The Intercreditor Agreement, duly executed by the Senior Lender
and acknowledged by the Company and the Guarantors;
(b) The Security Agreement (Company), duly executed by the Company;
59
<PAGE>
(c) The PTC Security Agreement, duly executed by the Company and
Overhill Ventures;
(d) UCC-1 Financing Statements, in form and substance satisfactory of
the Purchaser, duly executed by the Company, as debtor, to be filed with the
Secretary of State of the State of California, the County Recorder's Office of
the County of Los Angeles and such other states and counties as the Purchaser
may reasonably request;
(e) The Parent Pledge Agreement, duly executed by Parent;
(f) UCC-1 Financing Statement, in form and substance satisfactory of
the Purchaser, duly executed by Parent, as debtor, to be filed with the
Secretary of State of the State of Texas;
(g) Original stock certificate representing the shares of Capital
Stock of the Company to be pledged under the Parent Pledge Agreement, together
with stock powers duly executed in blank;
(h) The Company Pledge Agreement, duly executed by the Company;
(i) Original stock certificate representing the shares of Capital
Stock of Overhill Ventures to be pledged under the Company Pledge Agreement,
together with stock powers duly executed in blank;
(j) The Security Agreement (Subsidiary), duly executed by Overhill
Ventures;
(k) UCC-1 Financing Statement, in form and substance satisfactory of
the Purchaser, duly executed by Overhill Ventures, as debtor, to be filed with
the Secretary of State of the State of California and the County Recorder's
Office of the County of Los Angeles;
(l) Notices of Security Interests in Deposit Accounts, in form and
substance satisfactory to the Purchaser and with respect to the deposit accounts
selected by the Purchaser, duly executed by the Company and the respective banks
or other financial institutions;
(m) Landlord Consents and Waivers, in form and substance satisfactory
to the Purchaser, duly executed by the Company and the respective
landlords/lessors designated by the Purchaser; and
(n) Letters notifying the Company's insurance companies of the
collateral assignment of the Company's insurance policies, in form and substance
satisfactory to the Purchaser, duly executed by the Company; and
60
<PAGE>
(o) Warehouse Bailment Agreements, in form and substance
satisfactory to the Purchaser, duly executed by the Company, the Senior Lender
and the respective bailees designated by the Purchaser.
6.11 Amendment to Charter and Bylaws.
-------------------------------
(a) On or prior to the Closing Date, the Company shall have duly and
validly amended and restated its existing Articles of Incorporation, in
substantially the form of the Amended Charter, and filed the Amended Charter
with the Secretary of State of the State of Nevada in accordance with the
General Corporation Law of the State of Nevada.
(b) On or prior to the Closing Date, the Company shall have duly and
validly amended its Bylaws, in form and substance satisfactory to the Purchaser.
6.12 Senior Credit Facility. The Company shall have delivered copies of
----------------------
all of the Senior Credit Documents, certified by the Assistant Secretary of the
Company, in form acceptable to the Purchaser.
6.13 Delivery of Corporate Documents. The Company shall have delivered to
-------------------------------
the Purchaser the following for each of the Company and the Guarantors:
(a) Certified copies of its charter or similar organizational
document, together with a good standing certificate and a good standing tax
certificate, if available, from the Secretary of State of its state of
incorporation or organization and the Franchise Tax Board of the State of
California or similar state taxing authority, and good standing certificates
from each jurisdiction in which it is required to be qualified to transact
business as a foreign corporation or other entity (including, without
limitation, with respect to the Company, California, Illinois, Pennsylvania,
Texas and Washington), in each case dated as of a recent practicable date prior
to the Closing Date;
(b) Copies of its bylaws or similar governing document as in effect
on the Closing Date, certified by its Secretary as being in full force and
effect as of the Closing Date;
(c) Resolutions of the Board of Directors (or similar governing
body) approving and authorizing the execution, delivery and performance of this
Agreement, the Note, the Warrant and the other Investment Documents to which it
is a party, and, in the case of the Company, approving and authorizing the
execution, issuance, sale and delivery of the Securities, certified by its
Secretary as being in full force and effect through the Closing Date;
(d) With respect to the Company only, resolutions of the
shareholders of the Company authorizing and approving the Amended Charter, the
filing thereof with the Secretary of State of the State of Nevada and the
amendments to the Bylaws of the Company;
61
<PAGE>
(e) Signature and incumbency certificates of its officers executing
the documents referred to in clause (c) above and any other agreements,
instruments, certificate or other documents required to be executed by it in
connection herewith; and
(f) Such other documents as the Purchaser may request.
6.14 Repayment of Certain Indebtedness; Termination Statements. Prior to
---------------------------------------------------------
or simultaneously with the Closing, the Company shall have paid in full all
liabilities and other obligations owing to Finova, LHF and any affiliates or
assignees thereof, and the Company shall have delivered to the Purchaser
originally executed UCC termination statements (or evidence satisfactory to the
Purchaser that such UCC termination statements have been executed and will be
delivered to the Purchaser within one (1) day following the Closing) releasing
any and all Liens securing such liabilities and obligations.
6.15 Employment Agreements; Non-Competition and Confidentiality
----------------------------------------------------------
Agreements.
-----------
The Company shall have delivered to the Purchaser the following:
(a) (i) An Employment Agreement, in form and substance satisfactory
to the Purchaser, duly executed by Parent, the Company and James Rudis, and (ii)
a Non-Competition and Confidentiality Agreement, in form and substance
satisfactory to the Purchaser, duly executed by Parent, the Company and Mr.
Rudis;
(b) (i) An Employment Agreement, in form and substance satisfactory
to the Purchaser, duly executed by Parent, the Company and William E. Shatley,
and (ii) a Non-Competition and Confidentiality Agreement, in form and substance
satisfactory to the Purchaser, duly executed by Parent, the Company and Mr.
Shatley;
(c) An Employment Agreement, in form and substance satisfactory to
the Purchaser, duly executed by the Company and Richard A. Horvath, and (ii) a
Non-Competition and Confidentiality Agreement, in form and substance
satisfactory to the Purchaser, duly executed by the Company and Mr. Horvath.
6.16 Matters Relating to LHF.
-----------------------
(a) The Company shall have delivered to the Purchaser documentation,
in form and substance satisfactory to the Purchaser, duly executed by the
Company, Parent and LHF (including, without limitation, any assignees of LHF),
fully and effectively terminating the Existing LHF Equity Documents prior to or
simultaneously with the Closing, with no actual, threatened or potential legal
challenges thereto.
(b) The LHF representative on the Board of Directors of the Company
shall have resigned, effective prior to or simultaneously with the Closing.
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6.17 Capital Lease Obligations; Termination of UCC Filings.
-----------------------------------------------------
(a) The Company shall have delivered to the Purchaser at or prior to
the Closing written evidence, in form and substance satisfactory to the
Purchaser, that all Capital Lease Obligations, if any, have been paid in full.
(b) The Company shall have delivered to the Purchaser at or prior to
the Closing termination statements with respect to the UCC-1 financing
statements designated by the Purchaser for termination.
6.18 Capital Structure. The Purchaser shall have approved the form and
-----------------
substance of the capital structure of the Company and its Subsidiaries as of the
Closing Date.
6.19 Insurance Matters. The Company shall delivered to the Purchaser (a)
-----------------
the Insurance Coverage Letter, in form and substance satisfactory to the
Purchaser, duly executed by the Company and acknowledged by Parent and Overhill
Ventures, and (b) certificates or insurance and policies or binders of insurance
covering the Company and its Subsidiaries which are required to be maintained by
the Company and its Subsidiaries as of the Closing Date, together with
additional insured and lender's loss payable endorsements in favor of the
Purchaser, all in form and substance satisfactory to the Purchaser.
6.20 Completion of Due Diligence Review. The Purchaser shall have
----------------------------------
completed its due diligence review of the matters set forth in items (1), (3)
and (7) of Schedule A of the notification letter dated September 13, 1999, all
to the sole satisfaction of the Purchaser and its legal counsel.
6.21 Delivery of Financial Projections. Prior to the Closing Date, the
---------------------------------
Company shall have finalized and delivered to the Purchaser, and the Purchaser
shall have approved, the financial projections of the Company and its
Subsidiaries for the three (3) Fiscal Years ending in September 2002. Such
financial projections shall specify the assumptions on which they are based and
shall be made in good faith. The financial projections shall be accompanied by
an Officer's Certificate, in form and substance satisfactory to the Purchaser,
duly executed by the Chief Financial Officer of the Company, specifying, among
other things, the assumptions on which such financial projections are based.
6.22 Compliance Certificate. The Company shall have prepared and delivered
----------------------
to the Purchaser at the Closing a Compliance Certificate, in substantially the
form of Exhibit D, signed by the President and Chief Executive Officer and the
---------
Chief Financial Officer of the Company, stating that each of them has reviewed
this Agreement and the other Investment Documents and the financial condition
and results of operations of the Company and its Subsidiaries for purposes of
delivering such Compliance Certificate and certifying (i) as to the accuracy and
completeness of the financial covenant calculations set forth therein, which
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financial covenant calculations shall be made as of the Closing Date and shall
give effect to the transactions contemplated by this Agreement, the other
Investment Documents and the Senior Loan Documents, and (ii) whether any
Defaults or Events of Default, or any "Events of Default" (as such term is
defined in the Senior Loan Agreement), have occurred or are continuing or will
occur as a result of such transactions.
6.23 LLCP Representative. The Board of Directors and the shareholders of
-------------------
the Company shall have taken all requisite action (corporate or otherwise) to
have caused a representative of the Purchaser, who shall be designated by the
Purchaser at its sole discretion, to have been duly elected or appointed as a
member of the Board of Directors of the Company, effective as of the Closing.
6.24 Third Party Consents. The Company and each Guarantor shall have
--------------------
obtained all other Consents required to be obtained from any Governmental
Authorities and other Persons in connection with the transactions contemplated
by this Agreement (including, without limitation, the Consents listed on
Schedule 3.6), and the Purchaser shall have approved the terms and conditions
- ------------
thereof.
6.25 Proceedings Satisfactory. All proceedings taken prior to or at the
------------------------
Closing in connection with the issuance and sale of the Securities and the
consummation of the other transactions contemplated hereby, and all papers and
other documents relating thereto, shall be in form and substance satisfactory to
the Purchaser and its counsel, and the Purchaser shall have received copies of
such documents and papers, all in form and substance satisfactory to the
Purchaser and its counsel, all such documents, where appropriate, to be
counterpart originals and/ or certified by proper authorities, corporate
officials and other Persons. Without limiting the generality of the foregoing,
the Company shall have made such arrangements as may be requested by the
Purchaser to ensure that the proceeds from the issuance and sale of the
Securities are applied in the manner set forth in Schedule 3.38, including,
-------------
without limitation, provision for the direct payment of the obligations of the
Company to be paid from such proceeds as provided in Section 8.5, the
-----------
withholding of fees payable to the Purchaser as provided in Section 8.5 and the
-----------
segregation of funds to be paid to third parties concurrent with or following
the Closing.
7. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations of the
--------------------------------------------
Company to consummate the transactions contemplated hereby is subject to the
satisfaction, prior to the Closing, of the conditions set forth in this Section
-------
7; provided, however, that any or all of such conditions may be waived, in whole
- - -------- -------
or in part, by the Company in its sole and absolute discretion:
7.1 Representations and Warranties. The representations and warranties of
------------------------------
the Purchaser contained in this Agreement shall be true and correct in all
material respects at and as of the Closing Date after giving effect to the
transactions contemplated by this Agreement, as if
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made on and as of such date, and the Purchaser shall have performed or satisfied
all of its covenants and agreements hereunder to be performed or satisfied on or
prior to the Closing Date.
7.2 Purchase Permitted By Applicable Laws. The consummation of the
-------------------------------------
transactions contemplated by this Agreement shall not be prohibited by or
violate any Applicable Laws and shall not subject any party to any Tax, penalty
or liability, under or pursuant to any Applicable Laws, and shall not be
enjoined (temporarily or permanently) under, or prohibited by or contrary to,
any injunction, order, decree or ruling. Without limiting the generality of the
foregoing, the consummation of the transactions contemplated hereby shall
otherwise comply with all applicable requirements of federal and state
securities laws.
7.3 No Injunction or Order. There shall not have been issued any
----------------------
injunction, order, decree or ruling that prohibits or limits any of the
transactions contemplated by this Agreement or the other Investment Documents.
7.4 Payment for Securities. The Purchaser shall have delivered to the
----------------------
Company the Purchase Price required to be paid by Section 2.3, less the amounts
----------- ----
provided for in Section 6.3.
-----------
8. INDEMNIFICATION; FEES AND EXPENSES.
----------------------------------
8.1 Transfer Taxes. The Company shall pay all stamp, transfer and other
--------------
similar Taxes (together in each case with interest and penalties, if any)
payable or determined to be payable in connection with the execution and
delivery of this Agreement or the issuance and sale of the Securities and shall
hold harmless the Purchaser from and against any and all liabilities with
respect to or resulting from any delay in paying, or omission to pay, such
Taxes.
8.2 Losses. Whether or not the transactions contemplated by this
------
Agreement are consummated, the Company shall indemnify and hold harmless the
Purchaser, its successors and assigns, and its Affiliates, employees, partners,
officers, directors, representatives, agents, attorneys, successors and assigns
(the "Indemnified Parties"), from and against any and all losses, claims,
-------------------
damages, liabilities, judgments, Indemnified Environmental Costs, expenses and
costs, including, without limitation, attorneys' fees and other fees and
expenses incurred in, and the costs of preparing for, investigating or defending
any matter (collectively, "Losses"), incurred by such Indemnified Party in
------
connection with or arising from (a) any breach of any warranty or the inaccuracy
of any representation made by the Company or any Guarantor, (b) the failure of
the Company or any Guarantor to fulfill any of its covenants, agreements or
undertakings under this Agreement or any other Investment Document (or any other
document or instrument executed herewith or pursuant hereto), or (c) any third
party actions, suits, proceedings or claims brought against any Indemnified
Party with respect to (i) any other matters arising out of or in connection with
the transactions contemplated by this Agreement or any other Investment Document
or (ii) the business, operations or affairs of the Company, any
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Guarantor or any of their respective Subsidiaries. The Company shall either pay
directly all Losses which it is required to pay hereunder or reimburse any
Indemnified Party within ten (10) days after any request for such payment. The
obligations of the Company to the Indemnified Parties under this Section 8 shall
---------
be separate obligations to each Indemnified Party, and the liability of the
Company to such Indemnified Parties hereunder shall not be extinguished solely
because any Indemnified Party is not entitled to indemnity hereunder. In
addition, notwithstanding anything in this Agreement or any other Investment
Document to the contrary, in the event of a breach of the representation and
warranty set forth in Section 3.7(a) (including, without limitation, Schedule
-------------- --------
3.7(a)), to the extent that the number of Warrant Shares evidenced by the
- -------
Warrant immediately after the Closing represent, as calculated therein, a
percentage of the outstanding shares of Common Stock on a Fully Diluted Basis
that is less than 17.500%, then the Company shall immediately issue to the
Purchaser, at no cost to the Purchaser, an additional warrant, in form and
substance satisfactory to the Purchaser, representing an additional number of
Warrant Shares such that, if such additional Warrant Shares had been included in
the Warrant immediately after the Closing, such representation and warranty
would have been true and accurate in all respects when made.
The obligations of the Company to the Indemnified Parties under this
Section 8 shall survive (A) the payment of the Note (whether at maturity, by
- ---------
prepayment or acceleration or otherwise), (B) any transfer of the Note or any
interest therein, (C) the termination of this Agreement or any other Investment
Document and (D) the issuance, exercise and/or sale of the Warrant (or any
interest therein) or the sale of the Warrant Shares.
8.3 Indemnification Procedures. Any Person entitled to indemnification
--------------------------
under this Section 8 shall (a) give prompt written notice to the Company of any
---------
claim with respect to which it seeks indemnification and (b) permit the Company
to assume the defense of such claim with counsel selected by the Company and
reasonably acceptable to such Person; provided, however, that any Person
-------- -------
entitled to indemnification hereunder shall first have the right to employ
separate counsel and to participate in the defense of such claim, but the fees
and expenses of such counsel shall be at the expense of such Person unless (i)
the Company has agreed to pay such fees or expenses of such counsel; (ii) the
Company has failed to notify such Person in writing within ten (10) days of its
receipt of such written notice of claim that it will assume the defense of such
claim and employ counsel reasonably satisfactory to such Person; or (iii) in the
judgment of any such Person, based upon the advice of counsel, a conflict of
interest may exist between such Person and the Company with respect to such
claims (in which case, if the Person notifies the Company in writing that such
Person elects to employ separate counsel at the expense of the Company, the
Company shall not have the right to assume the defense of such claim on behalf
of such Person). The Company will not be subject to any liability for any
settlement made without its consent (but such consent may not be unreasonably
withheld). No Indemnified Party may, without the consent of the Company (which
consent will not be unreasonably withheld), consent to entry of any judgment or
enter into any settlement which
66
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does not include as an unconditional term thereof the giving by the claimant or
plaintiff to the Company of a release from all liability in respect of such
claim or litigation.
8.4 Contribution. If the indemnification provided for in this Section 8
------------ ---------
is unavailable to the Purchaser or any other Indemnified Party in respect of any
Losses, then the Company, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by the Indemnified Party as a result of
such Losses, in such proportion as is appropriate to reflect the relative fault
of the Company, on the one hand, and such Indemnified Party on the other hand,
in connection with the actions, statements or omissions which resulted in such
Losses, as well as any other relevant equitable considerations. The relative
fault of the Company, on the one hand, and such Indemnified Party on the other
hand, shall be determined by reference to, among other things, whether any
action in question, including any untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact, has been
taken by, or relates to information supplied by, either the Company or such
Indemnified Party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent any such action, statement or
omission. The parties agree that it would not be just and equitable if
contribution pursuant to this Section 8.4 were determined by pro rata allocation
----------- --- ----
or by any other method of allocation which does not take account of the
equitable considerations referred to above. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
8.5 Deal-Related Costs and Expenses. The Company shall be responsible
-------------------------------
for, and shall pay, all out-of-pocket costs and expenses of every type and
nature (including, without limitation, all fees and expenses of counsel,
accounting fees and expenses and other deal-related costs and expenses) incurred
by or on behalf of the Purchaser, in an aggregate amount not to exceed $350,000,
in connection with the Purchaser's due diligence investigation of the Company,
the Guarantors and their respective Affiliates and the preparation, negotiation,
execution and delivery of this Agreement, the Note, the Warrant and the other
Investment Documents and the consummation of the transactions contemplated
hereby and thereby (which costs and expenses may be withheld by the Purchaser
from the proceeds to be delivered by the Purchaser at the Closing) and, at the
Purchaser's request and direction, the Company shall reimburse third party
providers directly for all of such costs and expenses (which withholding and, as
the case may be, such direct reimbursement, shall constitute payment in full of
the Company's obligation with respect to such costs and expenses).
8.6 Costs of Collection. The Company and the Guarantors jointly and
-------------------
severally agree to pay all costs and expenses, including the fees and expenses
of all attorneys, accountants and other experts retained by the Purchaser, which
are expended or incurred by or on behalf of the Purchaser in connection with (a)
the collection and enforcement of the Obligations to Purchaser, whether or not
any action, suit or other proceeding is commenced; (b) any actions for
declaratory relief in any way related to the Obligations to Purchaser; (c) the
protection or
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<PAGE>
preservation of any rights or remedies of the Purchaser under this Agreement or
any other Investment Document; (d) any actions taken by the Purchaser in
negotiating any amendment, waiver, consent or release of or under this
Agreement, the Note or any other Investment Document; (e) any actions taken in
reviewing the Company's, Parent's or any of their respective Subsidiaries'
financial affairs if any Event of Default has occurred or the Purchaser has
determined in good faith that an Event of Default may likely occur, which
actions shall include, but not be limited to the following: (i) inspect the
facilities of the Company, Parent and any of their respective Subsidiaries or
conduct audits or appraisals of the financial condition of the Company, Parent
and any of their respective Subsidiaries; (ii) have an accounting or other firm
selected by the Purchaser review the books and records of the Company, Parent
and any of their respective Subsidiaries (other than Texas Timerjack) and
perform a thorough and complete examination thereof; (iii) interview the
Company's, Parent's and any of their respective Subsidiaries' employees,
attorneys, accountants, customers and any other Persons related to the Company,
Parent or such Subsidiaries which the Purchaser believes may have relevant
information concerning the business, condition (financial or otherwise), results
of operations or prospects of the Company, Parent and such Subsidiaries; and
(iv) undertake any other action which the Purchaser believes is necessary to
assess accurately the financial condition and prospects of the Company, Parent
and any of their respective Subsidiaries; (f) any refinancing, restructuring
(whether in the nature of a "work out" or otherwise), bankruptcy or insolvency
proceeding involving the Company, Parent or any of their respective Subsidiaries
or other Affiliates, including, without limitation, any refinancing or
restructuring of this Agreement, the Note or any other Investment Documents; (g)
any actions taken to verify, maintain, perfect and protect any Lien granted to
the Purchaser by the Company or any Guarantor or other Person under the
Investment Documents; or (h) any effort by the Purchaser to protect, assemble,
complete, collect, sell, liquidate or otherwise dispose of any Collateral,
including in connection with any case under Bankruptcy Law. The Company and the
Guarantors hereby consent to the taking of the foregoing actions by the
Purchaser (provided, however, that, with respect to clause (e)(iii) above,
-------- -------
neither the Company nor any Guarantor will be required to produce any document
or disclose material to the Purchaser which would otherwise be expressly
protected from production or disclosure by any attorney-client or accountant-
client privilege existing under Applicable Law, unless waived by the Company or
such Guarantor).
9. GUARANTY.
--------
9.1 Unconditional Guaranty.
----------------------
(a) The Guarantors hereby absolutely, unconditionally and irrevocably
guaranty and promise to pay to the order of the Purchaser and its successors and
assigns (collectively, the "Beneficiary"), on demand, in lawful money of the
-----------
United States of America, any and all Obligations to Purchaser from time to time
owed by the Company and any other Person to the Beneficiary (collectively, the
"Guarantied Obligations"). All of the Guarantied
----------------------
68
<PAGE>
Obligations shall be conclusively presumed to have been created in reliance of
this Guaranty. In addition, the Guarantors hereby agree to pay any and all costs
and expenses (including, without limitation, attorneys' fees and expenses)
incurred by the Beneficiary in connection with (a) the collection of all sums
guaranteed hereunder and (b) the exercise or enforcement of any rights, powers
or remedies of the Beneficiary under this Guaranty or Applicable Laws.
(b) All payments under this Guaranty shall be made free and clear of
any and all deductions, withholdings and setoffs, including withholding on
account of Taxes. If any deduction or withholding shall be required by
Applicable Laws, each Guarantor shall be required to pay such additional amounts
as may be required so that the net amount received by the Beneficiary, after
such deduction or withholding (including with respect to such additional
amounts), shall be equal to the amount otherwise required to be paid under this
Guaranty.
9.2 Continuing and Irrevocable Guaranty. This Guaranty is a continuing
-----------------------------------
guaranty of the Guarantied Obligations and may not be revoked and shall not
otherwise terminate unless and until all Guarantied Obligations have been
indefeasibly paid and performed in full. If, notwithstanding the foregoing, any
Guarantor shall have any right under Applicable Laws to terminate this Guaranty
prior to indefeasible payment in full of the Guarantied Obligations, no such
termination shall be effective until noon the next Business Day after the
Beneficiary shall receive written notice thereof, signed by such Guarantor. Any
such termination shall not affect this Guaranty in relation to (a) any
Guarantied Obligation that was incurred or arose prior to the effective time of
such notice, (b) any Guarantied Obligation incurred or arising after such
effective time where such Guarantied Obligation is incurred or arises either
pursuant to commitments existing at such effective time or incurred for the
purpose of protecting or enforcing rights against the Company, any Guarantor or
other guarantor of or other Person directly or indirectly liable on the
Guarantied Obligations or any portion thereof (each of the Company, the
Guarantors and any such other guarantor or Person is referred to herein as an
"Obligor") or any Collateral given for the Guarantied Obligations or any other
- --------
guaranties of the Guarantied Obligations or any portion thereof, (c) any
renewals, extensions, readvances, modifications or rearrangements of any of the
foregoing or (d) the liability of any other Guarantor hereunder.
9.3 Nature of Guaranty. The liability of each Guarantor hereunder is
------------------
independent of and not in consideration of or contingent upon the liability of
the Company or any other Obligor, and a separate action or actions may be
brought or prosecuted against any Guarantor, whether or not any action is
brought or prosecuted against the Company or any other Obligor or whether the
Company or any other Obligor is joined in any such action or actions. This
Guaranty shall be construed as a continuing, absolute and unconditional guaranty
of payment (and not merely of collection), and the liability of each Guarantor
under this Guaranty shall be irrevocable, absolute and unconditional, without
regard to (and each Guarantor irrevocably waives):
69
<PAGE>
(a) the legality, validity or enforceability of this Agreement, the
Note or any other Investment Document, any of the Guarantied Obligations, any
Lien or any Collateral;
(b) any defense (other than payment), set-off or counterclaim that may
at any time be available to the Company or any other Obligor against, and any
right of setoff at any time held by, the Beneficiary;
(c) any acts of commission or omission of any kind (other than gross
negligence) at any time on the part of the Beneficiary with respect to any
matter whatsoever;
(d) the liquidation or dissolution of the Company or any other
Obligor, any bankruptcy, insolvency, reorganization, arrangement, assignment for
the benefit of creditors, receivership or similar event or proceeding with
respect to the Company or any other Obligor, or any action taken by any trustee
or receiver of the Company or any other Obligor or by any court or any
proceeding with respect to the Company or any other Obligor;
(e) any change of ownership of the Capital Stock of the Company or any
other Obligor, or any change in the relationship between any Guarantor and the
Company (including, without limitation, the termination of such relationship);
or
(f) any other circumstance whatsoever (with or without notice to or
knowledge of any Guarantor or any other Obligor), whether or not similar to any
of the foregoing, that constitutes, or might be construed to constitute, an
equitable or legal discharge of the Company or any other Obligor, in bankruptcy
or in any other instance.
Any payment by any Obligor or other circumstance that operates to toll
any statue of limitations applicable to such Obligor shall also operate to toll
the statute of limitations applicable to each Guarantor. When making any demand
hereunder (including by commencement or continuance of any legal proceeding),
the Beneficiary may, but shall be under no obligation to, make a similar demand
on all or any of the other Obligors, and any failure by the Beneficiary to make
any such demand shall not relieve any Guarantor of its obligations hereunder.
9.4 Authorization. Each Guarantor authorizes the Beneficiary, without
-------------
notice to or further assent by such Guarantor, and without affecting such
Guarantor's liability hereunder (regardless of whether any subrogation or
similar right that such Guarantor may have or any other right or remedy of such
Guarantor is extinguished or impaired), from time to time to:
(a) permit the Company to increase or create Guarantied Obligations,
or terminate, release, compromise, subordinate, extend, accelerate or otherwise
change the amount or time, manner or place of payment of, or rescind any demand
for payment or acceleration of,
70
<PAGE>
the Guarantied Obligations or any part thereof, or otherwise amend the terms and
conditions of this Agreement, the Note or any other Investment Document or any
provision thereof;
(b) take and hold Collateral from the Company or any other Person,
perfect or refrain from perfecting a Lien on such Collateral, and exchange,
enforce, subordinate, release (whether intentionally or unintentionally), or
take or fail to take any other action in respect of, any such Collateral or Lien
or any part thereof;
(c) exercise in such manner and order as it elects in its sole
discretion (including any judicial or non-judicial foreclosure of any real
estate Collateral), fail to exercise, waive, suspend, terminate or suffer
expiration of, any of the remedies or rights of the Beneficiary against the
Company or any other Obligor in respect of any Guarantied Obligations or any
Collateral;
(d) release, add or settle with any other Obligor in respect of this
Guaranty, this Agreement, the Note, the other Investment Documents or the
Guarantied Obligations;
(e) accept partial payments on the Guarantied Obligations and apply
any and all payments or recoveries from any Obligor or Collateral to such of the
Guarantied Obligations as the Beneficiary may elect in its sole discretion,
whether or not such Guarantied Obligations are secured or guaranteed;
(f) refund at any time, at the Beneficiary's sole discretion, any
payments or recoveries received by the Beneficiary in respect of any Guarantied
Obligations or any Collateral; and
(g) otherwise deal with the Company, any other Obligor and any
Collateral as the Beneficiary may elect in its sole discretion.
9.5 Certain Waivers. Each Guarantor waives:
---------------
(a) the right to require the Beneficiary to proceed against the
Company or any other Obligor, to proceed against or exhaust any Collateral or to
pursue any other remedy in the Beneficiary's power whatsoever, and the right to
have the property of the Company or any other Obligor first applied to the
discharge of the Guarantied Obligations;
(b) all rights and benefits under Section 2809 of the California Civil
Code and any other Applicable Laws purporting to reduce a guarantor's
obligations in proportion to the obligation of the principal or providing that
the obligation of a surety or guarantor must neither be larger nor in other
respects more burdensome than that of the principal;
71
<PAGE>
(c) the benefit of any statute of limitations affecting the Guarantied
Obligations or such Guarantor's liability hereunder and under Section 359.5 of
the California Code of Civil Procedure;
(d) any requirement of marshaling or any other principle of election
of remedies and all rights and defenses arising out of an election of remedies
by the Beneficiary, even though that election of remedies, such as non-judicial
foreclosure with respect to the security for a guarantied obligation, has
destroyed such Guarantor's rights of subrogation and reimbursement against the
Company;
(e) any right to assert against the Beneficiary any defense (legal or
equitable), set-off, counterclaim and other right that any Guarantor may now or
any time hereafter have against the Company or any other Obligor;
(f) presentment, demand for payment or performance (including
diligence in making demands hereunder), notice of dishonor or nonperformance,
protest, acceptance and notice of acceptance of this Guaranty, and all other
notices of any kind;
(g) any rights, defenses and other benefits that any Guarantor may
have by reason of any failure of the Beneficiary to hold a commercially
reasonable public or private foreclosure sale or otherwise to comply with
Applicable Laws in connection with a disposition of Collateral;
(h) all defenses that at any time may be available to any Guarantor by
virtue of any valuation, stay, moratorium or other law now or hereafter in
effect, and ALL RIGHTS AND DEFENSES THAT ARE OR MAY BECOME AVAILABLE TO SUCH
GUARANTOR BY REASON OF SECTIONS 2787 TO 2855, INCLUSIVE, AND SECTION 3433 OF THE
CALIFORNIA CIVIL CODE OR OTHER SIMILAR APPLICABLE LAW; or
(i) any failure, omission, delay or lack of diligence on the part of
the Beneficiary to enforce, assert or exercise any right, power or remedy
conferred on the Beneficiary in respect of the Guarantied Obligations.
9.6 Subrogation; Certain Agreements.
-------------------------------
(a) No Guarantor will exercise any rights that it may now or hereafter
have against the Company or any other Guarantor that arise from the existence,
payment, performance or enforcement of any Guarantor's obligations under this
Guaranty, including, without limitation, any right of subrogation,
reimbursement, exoneration, contribution or indemnification and any right to
participate in any claim or remedy of the Beneficiary against the Company or any
other Guarantor or any Collateral, whether or not such claim, remedy or right
arises in equity or under contract, statute or common law, including, without
limitation,
72
<PAGE>
the right to take or receive from the Company or any other Guarantor, directly
or indirectly, in cash or other property or by set-off or in any other manner,
payment or security solely on account of such claim, remedy or right, unless and
until all of the Guarantied Obligations and all other amounts payable under this
Guaranty shall have been paid in full in cash. If any amount shall be paid to
any Guarantor in violation of the immediately preceding sentence at any time
prior to the payment in full in cash of the Guarantied Obligations and all other
amounts payable under this Guaranty, such amount shall be held in trust for the
benefit of the Beneficiary and shall forthwith be paid to the Beneficiary to be
credited and applied to the Guarantied Obligations and all other amounts payable
under this Guaranty, whether matured or unmatured, in accordance with the terms
of this Agreement, or to be held as collateral for any Guarantied Obligations or
other amounts payable under this Guaranty thereafter arising. If (i) any
Guarantor shall make a payment to the Beneficiary of all of the Guarantied
Obligations or (ii) all of the Guarantied Obligations and all other amounts
payable under this Guaranty shall be paid in full in cash, the Beneficiary will,
at the Guarantor's request and expense, execute and deliver to the Guarantor
appropriate documents, without recourse and without representation or warranty,
necessary to evidence the transfer by subrogation to the Guarantor of an
interest in the Guarantied Obligations resulting from such payment by the
Guarantor.
(b) Each Guarantor assumes the responsibility for being and keeping
itself informed of the financial condition of the Company and each other Obligor
and of all other circumstances bearing upon the risk of non-payment of the
Guarantied Obligations that diligent inquiry would reveal, and agrees that the
Beneficiary shall have no duty to advise any Guarantor of information regarding
such condition or any such circumstances.
9.7 Bankruptcy No Discharge.
-----------------------
(a) Without limiting Section 9.3, this Guaranty shall not be
-----------
discharged or otherwise affected by any bankruptcy, reorganization, liquidation,
dissolution or similar proceeding commenced by or against the Company or any
other Obligor, including (i) any discharge of, or bar or stay against
collecting, all or any part of the Guarantied Obligations in or as a result of
any such proceeding, whether or not assented to by the Beneficiary, and (ii) any
disallowance of all or any portion of the Beneficiary's claim for repayment of
the Guarantied Obligations. Each Guarantor understands and acknowledges that by
virtue of this Guaranty, it has specifically assumed any and all risks of any
such proceeding with respect to the Company and each other Obligor.
(b) Any Event of Default under Section 10.1(h) or Section 10.1 (i)
-------------- ----------------
that has not been cured or waived shall render all Guarantied Obligations
automatically due and payable for purposes of this Guaranty, notwithstanding any
stay of the right of the Beneficiary to accelerate the Guarantied Obligations.
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(c) Notwithstanding anything to the contrary herein contained, this
Guaranty (and any Lien on the Collateral securing this Guaranty or the
Guarantied Obligations) shall continue to be effective or be reinstated, as the
case may be, if at any time any payment, or any part thereof, of any or all of
the Guarantied Obligations is rescinded, invalidated, declared to be fraudulent
or voidable as a preference or otherwise required to be restored or returned by
the Beneficiary in connection with any bankruptcy, reorganization, liquidation,
dissolution or similar proceeding involving the Company, any other Obligor or
otherwise, if the proceeds of any Collateral are required to be returned by the
Beneficiary under any such circumstances, or if the Beneficiary elects to return
any such payment or proceeds or any part thereof in its sole discretion, all as
though such payment had not been made or such proceeds not been received.
9.8 Subordination.
-------------
(a) Except as expressly provided for herein, each Guarantor hereby
absolutely subordinates, both in right of payment and in time of payment, any
and all present or future obligations and liabilities of the Company and each
other Obligor to such Guarantor ("Guarantor Subordinated Debt"), to the prior
---------------------------
payment in full in cash of the Guarantied Obligations, whether or not such
Guarantor Subordinated Debt constitutes or arises out of any subrogation,
reimbursement, contribution, indemnity or similar right attributable to this
Guaranty. Without limitation, no payment or distribution of assets of any
Obligor of any kind or character, whether in cash, securities or other property,
shall be made on or with respect to the Guarantor Subordinated Debt prior to the
payment in full in cash of the Guarantied Obligations. If, whether or not at
the Beneficiary's request, any Guarantor shall receive, prior to payment in full
in cash of all Guarantied Obligations, payment of any sum from the Company or
any other Obligor upon any Guarantor Subordinated Debt, any such sum shall be
received by such Guarantor as trustee for the Beneficiary and shall forthwith be
paid over to the Beneficiary on account of the Guarantied Obligations, without
reducing or affecting in any manner the liability of any Guarantor under this
Guaranty.
(b) Each Guarantor shall file in any bankruptcy or reorganization or
similar proceeding in which the filing of claims is required by Applicable Laws,
all claims that such Guarantor may have against the Company or other Obligor (or
its nominee) relating to any Guarantor Subordinated Debt. If the Guarantor does
not file any such claim, the Beneficiary (or its nominee) as attorney-in-fact
for the Guarantor is hereby authorized to do so in the name of such Guarantor.
Each Guarantor agrees that, in connection with any such proceeding, it shall not
contest or oppose the treatment of claims of the Beneficiary in any plan of
reorganization or otherwise and it shall vote any claims that exist by virtue of
this Guaranty or the Guarantor Subordinated Debt in connection with any plans of
reorganization or otherwise, as may be requested by the Beneficiary.
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<PAGE>
(c) Each Guarantor hereby grants the Beneficiary a power of attorney
for the purposes set forth in this Section 9.8. Such power of attorney is
-----------
coupled with an interest and cannot be revoked.
9.9 Maximum Liability of Guarantors. If the obligations of any Guarantor
-------------------------------
hereunder otherwise would be subject to avoidance under Section 548 of the
Bankruptcy Law or any applicable state law relating to fraudulent conveyances or
fraudulent transfers, taking into consideration such Guarantor's (a) rights of
reimbursement and indemnity from the Company with respect to amounts paid by
such Guarantor, (b) rights of subrogation to the rights of the Beneficiary and
(c) rights of contribution from each other Obligor, then such obligations hereby
are reduced to the largest amount that would make them not subject to such
avoidance. Any Person asserting that such Guarantor's obligations are so
avoidable shall have the burden (including the burden of production and of
persuasion) of proving (i) that, without giving effect to this Section 9.9, such
-----------
Guarantor's obligations hereunder would be avoidable and (ii) the extent to
which such obligations are reduced by operation of this Section 9.9.
-----------
9.10 Financial Benefit. Each Guarantor hereby acknowledges and warrants it
-----------------
has derived or expects to derive substantial economic benefits, directly and
indirectly, from the consummation of the transactions contemplated by this
Agreement and the other Investment Documents.
9.11 Review of Documents; Understanding with Respect to Waivers. Each
----------------------------------------------------------
Guarantor hereby acknowledges that it has copies of and is fully familiar with
this Agreement and each of the other Investment Documents executed and delivered
(or to be executed and delivered) to the Company in connection herewith. Each
Guarantor warrants and agrees that each waiver set forth in this Section 9 is
made with such Guarantor's full knowledge of its significance and consequences
and after opportunity to consult with counsel of its own choosing and that,
under the circumstances, each such waiver is reasonable and should not be found
contrary to public policy or law.
9.12 Corporate Existence; Properties. Each Guarantor covenants that it
-------------------------------
will at all times preserve and maintain its corporate existence and any rights
and franchises material to its business and maintain in good repair, working
order and condition (ordinary wear and tear excepted), all of the material
properties useful or necessary to its business, and from time to time such
Guarantor will make or cause to be made all appropriate repairs, renewals and
replacements thereto.
9.13 Guarantor Acknowledgment. Each Guarantor hereby acknowledges that the
------------------------
Purchaser would not have entered into this Agreement or any other Investment
Documents or agreed to consummate the transactions contemplated hereby and
thereby but for the delivery by the Guarantors of this Guaranty and other
covenants and agreements set forth in this Section 9.
---------
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<PAGE>
10. DEFAULTS AND REMEDIES.
---------------------
10. Events of Default. An "Event of Default" occurs if:
-----------------
(a) The Company shall (i) fail to pay as and when due (whether at
stated maturity, upon acceleration or required prepayment or otherwise) any
principal on the Note, or (ii) fail to pay any interest, premium, if any, fees,
costs, expenses or other amounts payable under this Agreement, the Note or any
other Investment Document on the due date hereunder or thereunder; or
(b) (i) The Company or any Guarantor shall breach or fail to perform,
comply with or observe any agreement, covenant or obligation required to be
performed by it under (A) Sections 1.3A (Information Reporting
Requirements), 1.4A (Parent SEC Documents), 1.9A (Insurance), 1.10A
(Taxes), 1.11A (ERISA Matters), 1.15A (Environmental Matters), 1.17A
(Corporate Separateness), 1.18A (Year 2000 Compatibility) and 1.22A
(Appointment of Independent Director) of Section 1.A of Annex A or (B)
----------- -------
Sections 2.1A (Limitations on Indebtedness), 2.3A (Limitations on
Investments), 2.4A (Limitations on Restricted Payments), 2.5A (Change in
Business), 2.8A (Transactions with Affiliates), 2.9A (Fundamental Changes),
2.13A (Parent Covenant) and 2.14A (Removal of Independent Director) of
Section 2.A of Annex A; or
----------- -------
(ii) The Company shall fail to achieve (w) the minimum EBITDA
amount set forth in Column (C) of Section 3.1A of Annex A for the
------------ -------
corresponding four (4) consecutive Fiscal Quarter period, (x) the minimum
Fixed Charge Coverage Ratio set forth in Column (C) of Section 3.2A of
------------
Annex A for the corresponding four (4) consecutive Fiscal Quarter period,
-------
(y) the maximum Leverage Ratio set forth in Column (C) of Section 3.3A as
------------
of the last day of the corresponding Fiscal Quarter of Annex A or (z) any
-------
other covenant set forth in Section 3.A of Annex A; or
----------- -------
(c) The Company or any Guarantor shall breach or fail to perform,
comply with or observe any agreement, covenant or obligation required to be
performed by it under this Agreement or any other Investment Document (other
than the agreements, covenants and other obligations covered by Section 10.1(a)
---------------
and Section 10.1(b)) and, if such breach or failure may be cured, such breach or
---------------
failure shall not have been remedied within ten (10) Business Days after any
officer of the Company or any of its Subsidiaries becomes aware or should have
become aware of such failure or breach; or
(d) Any representation or warranty made by the Company or any
Guarantor under, relating to or in connection with this Agreement or any other
Investment Document shall be false or misleading when made; or
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<PAGE>
(e) Any "Event of Default" (as defined in the Senior Credit
Agreement) shall have occurred and be continuing;
(f) The Company or any Guarantor (i) shall default in the payment
(whether at stated maturity, upon acceleration or required prepayment or
otherwise), beyond any period of grace provided therefor, of any principal of or
interest on any other Indebtedness with a principal amount in excess of
$100,000, or (ii) shall commit any breach of or default under any term of any
agreement, indenture or instrument evidencing or governing any other
Indebtedness, if the effect of such breach or default is to cause, or to permit
the holder or holders of such other Indebtedness to cause (upon the giving of
notice or the passage of time or both), such other Indebtedness to become or be
declared due and payable, or required to be prepaid, redeemed, purchased or
defeased (or an offer of prepayment, redemption, purchase or defeasance is made)
prior to its stated maturity, unless such breach or default has been waived
within ten (10) days following such breach or default by the Person or Persons
entitled to give such waiver; or
(g) Any Investment Document, or any material provision thereof, shall
cease to be of full force and effect for any reason, or the Company or any
Guarantor shall contest or purport to repudiate or disavow any of its
obligations under or the validity or enforceability of any Investment Document
or any material provision thereof, including by operation of law; or
(h) There shall be commenced against the Company, Parent or any of
their respective Subsidiaries an involuntary case seeking the liquidation or
reorganization of such Person under the Bankruptcy Law or any similar proceeding
under any other Applicable Laws or an involuntary case or proceeding seeking the
appointment of a custodian or to take possession of all or a substantial portion
of its property or to operate all or a substantial portion of its business, and
any of the following events occur: (i) any such Person consents to such
involuntary case or proceeding; (ii) the petition commencing the involuntary
case or proceeding is not timely controverted; (iii) the petition commencing the
involuntary case or proceeding remains undismissed and unstayed for a period of
sixty (60) days; or (iv) an order for relief shall have been issued or entered
therein; or
(i) The Company, Parent or any of their respective Subsidiaries shall
institute a voluntary case seeking liquidation or reorganization under the
Bankruptcy Law or any similar proceeding under any other Applicable Laws, or
shall consent thereto; or shall consent to the conversion of an involuntary case
to a voluntary case; or shall file a petition, answer a complaint or otherwise
institute any proceeding seeking, or shall consent or acquiesce to the
appointment of, a custodian or to take possession of all or a substantial
portion of its property or to operate all or a substantial portion of its
business; or shall make a general assignment for the benefit of creditors; or
shall generally not pay its debts as they become due; or the Board of Directors
of any such Person (or any committee thereof) adopts any resolution or otherwise
authorizes action to approve any of the foregoing; or
77
<PAGE>
(j) The Company, any Guarantor or any of their respective
Subsidiaries (other than Texas Timberjack) shall suffer any money judgment,
writ, warrant of attachment or other order that involves an amount or value in
excess of the sum of (i) $250,000, plus (ii) the amount of any applicable
deductible under any insurance policies insuring the Company, any Guarantor or
any such Subsidiary against such money judgment, writ, warrant or other order,
provided that (A) such excess amount or value shall not be fully covered by
- --------
insurance (and, if requested by the Purchaser, the Company shall cause a letter
to be furnished to the Purchaser from the relevant insurance company confirming
that such excess amount or value is fully covered by insurance) and (B) such
judgment, writ, warrant or other order shall continue unsatisfied and unstayed
for a period of thirty (30) days; or
(k) There shall occur any Material Adverse Change; or
(l) There shall occur any Change in Control; or
(m) The LLCP Representative (as such term is defined in the Investor
Rights Agreement) shall be removed from the Board of Directors of the Company,
or the LLCP Representative shall not be elected or appointed to such Board at
any future election of directors, and, in each such case, the Company shall not
have caused any other individual designed by the Purchaser as the LLCP
Representative to have been elected or appointed as a member of such Board
within five (5) days after the Purchaser shall have designated such other LLCP
Representative (provided, however, that the removal by the Purchaser of the LLCP
-------- -------
Representative shall not be deemed to constitute an Event of Default under this
clause (m)); or
(n) (i) The shareholders of the Company shall not have caused an
individual who is Independent to have been duly elected or appointed to the
Board of Directors of the Company within thirty (30) days after the resignation
or death of the then current Independent Director, or (ii) any individual who is
Independent shall not have been duly elected or appointed to the Board of
Directors of the Company at any future election of directors, or (iii) any
individual who is Independent shall not have been duly elected or appointed to
the Board of Directors of the Company on or within five (5) days following the
effective date of the removal of the then current Independent Director.
The foregoing Events of Default shall be deemed to have occurred,
respectively, and any adjustments in the interest rate under the Note or other
remedies available to the Purchaser hereunder or thereunder shall begin to
apply, at the following times: (i) in the case of the clause (a) above, as of
12:00 p.m. (noon) (Los Angeles time) on the day on which such payment is due but
has not been paid; (ii) in the case of clause (b) above, immediately upon the
occurrence of such breach or failure; (iii) in the case of clause (c) above, as
of the close of business on such tenth (10th) Business Day, if such breach or
failure shall not have been cured, or as of the close of business on the day on
which such breach or violation occurs, if such breach or failure cannot be
cured; (iv) in the case of clause (d) above, as of the close of business on the
day on
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<PAGE>
which the Company first became aware, or should have become aware, that such
representation or warranty was false or misleading when made; (v) in the case of
clause (e) above, as of the occurrence of such "Event of Default"; (vi) in the
case of clause (f)(i) above, as of the close of business on the day on which
such payment of principal or interest is due, or in the case of clause (f)(ii),
as of the close of business on the tenth (10th) day following such breach or
default if such breach or default has not been waived by the Person or Persons
entitled to give such waiver; (vii) in the case of clause (g) above, as of the
close of business on the day such provision ceases to be enforceable or is
repudiated, revoked, renounced or terminated; (viii) in the case of clause (j)
above, as of the close of business on the last day of such thirty (30) day
period if such judgment, writ, warrant or other order remains unsatisfied or
unstayed; (ix) in the case of clauses (h) and (i) above, immediately prior to
the occurrence of any of the events enumerated therein; (x) in the case of
clause (k) above, immediately upon the occurrence of the Material Adverse
Change; (xi) in the case of clause (l) above, immediately upon the occurrence of
the Change in Control; (xii) in the case of clause (m) above, as of the close of
business on the last day of such five (5) day period if the Board of Directors
of the Company shall not have duly elected or appointed such other LLCP
Representative to such Board; and (xiii) in the case of clause (n)(i) above, as
of the close of business on the thirtieth day if the shareholders of the Company
shall not have duly elected or appointed such individual as the Independent
Director, or in the case of clause (n)(ii) above, immediately after any such
future election of directors, or in the case of clause (n)(iii) above, as of the
close of business on the fifth day following the effective date of the removal
of the then current Independent Director.
10.2 Acceleration. If any Event of Default (other than an Event of Default
------------
specified in clause (h) or (i) of Section 10.1) occurs and is continuing, the
------------
Purchaser may, by written notice to the Company, declare all outstanding
principal of, premium, if any, accrued and unpaid interest on, and all other
amounts under the Note, and all other Obligations to Purchaser, to be due and
payable. Upon any such declaration of acceleration, such principal, premium, if
any, interest and other amounts shall become immediately due and payable. If an
Event of Default specified in clause (h) or (i) of Section 10.1 occurs, all
------------
outstanding principal of, premium, if any, accrued and unpaid interest on, and
all other amounts under the Note, and all other Obligations to Purchaser, shall
become immediately due and payable without any declaration or other act on the
part of the Purchaser. The Company hereby waives all presentment for payment,
demand, protest, notice of protest and notice of dishonor, and all other notices
of any kind to which it may be entitled under Applicable Laws or otherwise.
10.3 Other Remedies. If any Default or Event of Default shall occur and be
--------------
continuing, the Purchaser may proceed to protect and enforce its rights and
remedies under this Agreement and any other Investment Document by exercising
all rights and remedies available under this Agreement, any other Investment
Document or Applicable Laws (including, without limitation, the Code), either by
suit in equity or by action at law, or both, whether for the collection of
principal of or interest on the Note, to enforce the specific performance of any
covenant or other term contained in this Agreement or any other Investment
Document. No
79
<PAGE>
remedy conferred in this Agreement upon the Purchaser is intended
to be exclusive of any other remedy, and each and every such remedy shall be
cumulative and shall be in addition to every other remedy conferred herein or
now or hereafter existing at law or in equity or by statute or otherwise.
10.4 Appointment of Receiver. In addition to all other rights, powers and
-----------------------
remedies that the Purchaser has under this Agreement, any other Investment
Document or Applicable Laws, the Purchaser shall, upon the occurrence of an
Event of Default, be entitled to, and the Company and the Guarantors hereby
consent in advance to, the appointment of a receiver by any court of competent
jurisdiction to take possession of the Collateral and to take control of the
Company for the purpose of operating and thereafter selling the Company to
satisfy its obligations to its creditors, including the Purchaser.
10.5 Waiver of Past Defaults. The Purchaser may, by written notice to the
-----------------------
Company, waive any Default or Event of Default and its consequences with respect
to this Agreement, the Note or any other Investment Document; provided, however,
-------- -------
that no such waiver will extend to any subsequent or other Default or Event of
Default or impair any rights of the Purchaser which may arise as a result of
such Default or Event of Default.
11. TERMINATION.
-----------
11.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Closing:
(a) By the Purchaser if, between the date hereof and the Closing
Date: (i) any event or condition occurs that has resulted in or would result in
a Material Adverse Change; (ii) any representation or warranty of the Company
and the Guarantors contained in this Agreement shall have been breached such
that the conditions set forth in Section 6 would not or could not be satisfied
---------
on the earlier of (A) the Closing Date and (B) December 3, 1999; (iii) the
Company or any Guarantor shall not have complied with any covenant or other
agreement to be complied with by it and contained in this Agreement; or (iv) the
Company or any Guarantor makes a general assignment for the benefit of
creditors, or any proceeding shall be instituted by or against the Company or
any Guarantor seeking to adjudicate any of them a bankrupt or insolvent, or
seeking liquidation, winding up or reorganization, arrangement, adjustment,
protection, relief or composition of its debts under any Applicable Laws
relating to bankruptcy, insolvency or reorganization;
(b) By the Purchaser, on the one hand, or the Company or any
Guarantor, on the other hand, if the Closing Date shall not have occurred on or
before December 3, 1999; provided, however, that the right to terminate this
-------- -------
Agreement under this Section 11.1(b) shall not be available to any party whose
---------------
failure to fulfill any obligation under this Agreement shall
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<PAGE>
have been the cause of, or shall have resulted in, the failure of the Closing
Date to occur on or prior to such date;
(c) By the Purchaser, on the one hand, or the Company or any
Guarantor, on the other hand, if there shall have been issued any injunction,
order, decree or ruling that prohibits or limits any of the transactions
contemplated by this Agreement or the other Investment Documents and such
injunction, order, decree or ruling shall have become final and non-appealable;
or
(d) By the mutual written consent of the Company and the Guarantors.
11.2 Effect of Termination. In the event of termination of this Agreement
---------------------
as provided in Section 11.1, this Agreement shall forthwith become void and
------------
there shall be no liability on the part of any party, except (a) for Sections 1,
-----------
8, 11 and 12 and any other Sections or provisions which survive the termination
- ------------
of this Agreement by their terms and (b) that nothing herein shall relieve any
party from liability for any breach or violation of this Agreement or payment of
any obligations hereunder.
11.3 Waiver. The Purchaser may (a) extend the time for the performance of
------
any of the obligations or other acts of the Company or any Guarantor, (b) waive
any inaccuracies in the representations or warranties of the Company or any
Guarantor or (c) waive compliance with any of the conditions, covenants or
agreements of the Company or any Guarantor contained herein. Any such extension
or waiver shall be valid only if set forth in an instrument signed by the
Purchaser. Any waiver of the breach of any term or condition shall not be
construed as a waiver of any other breach or subsequent waiver of the same term
or condition, or a waiver of any other term or condition of this Agreement. The
failure of by the Purchaser to assert any of its rights hereunder shall not
constitute a waiver of any such rights.
11.4 Alternative Transaction Fee. If the transactions contemplated by this
---------------------------
Agreement are not consummated for any reason and this Agreement is terminated,
and, within six (6) months after such termination, the Company enters into any
agreement, transaction or understanding with any other Person relating to an
Alternative Transaction, then, in addition to any damages due to the Purchaser
for breach or violation of this Agreement or any other Investment Document by
the Company or any Guarantor, the Company shall pay to the Purchaser the amount
of $300,000 (the "Alternative Transaction Fee"), which Alternative Transaction
---------------------------
Fee shall compensate the Purchaser for the loss of opportunity in connection
with the transactions contemplated by this Agreement and shall be due and
payable to the Purchaser immediately upon the entering into of such agreement,
transaction or understanding.
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12. MISCELLANEOUS.
-------------
12.1 Survival of Representations and Warranties. All representations,
------------------------------------------
warranties, covenants and agreements contained herein, or made in writing by or
on behalf of the Company pursuant to or in connection herewith, shall survive
the execution and delivery of this Agreement, the issuance, sale and delivery of
the Securities, the repayment of the Note and the exercise of the Warrant, and
any due diligence or other investigation made by or on behalf of the Purchaser.
12.2 Consent to Amendments. No amendment, supplement or other modification
---------------------
to this Agreement or any other Investment Document shall be effective unless the
same shall be in writing and signed by the Purchaser, and the Company may take
any action herein prohibited, or omit to perform any act herein required to be
performed by it, if, and only if, the Company shall have obtained the prior
written consent of the Purchaser to such action or omission. No course of
dealing between the Company, Parent or their respective Subsidiaries, on the one
hand, and the Purchaser (or any other Holder), on the other hand, nor any delay
in exercising any rights hereunder or under the Note or any other Investment
Document shall operate as a waiver of any rights of the Purchaser (or any other
Holder).
12.3 Entire Agreement. This Agreement, together with the Exhibits,
----------------
Disclosure Schedules and Annex A which are all incorporated herein by this
-------
reference and are an integral part of this Agreement, the Note, the Warrant and
the other Investment Document constitute the full and entire agreement and
understanding between the Purchaser and the Company relating to the subject
matter hereof and thereof, and supersede all prior oral and written, and all
contemporaneous oral, agreements and understandings relating to the subject
matter hereof, including, without limitation, the investment proposal letter
agreement dated July 21, 1999, as amended by a letter agreement dated November
2, 1999, the notification letter dated September 13, 1999, and the
Confidentiality and Non-Disclosure Agreement dated April 28, 1999, among the
Company, the Senior Lender and an Affiliate of the Purchaser.
12.4 Severability. Any provision of this Agreement which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or un enforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provisions in any other jurisdiction.
12.5 Successors and Assigns; Assignments. This Agreement shall inure to
-----------------------------------
the benefit of, and be binding upon, the parties and their respective successors
and permitted assigns. The Purchaser may, without the consent of the Company or
any Guarantor, sell, assign or delegate to one or more Persons (each an
"Assignee") all, or any part, of the Obligations to Purchaser and the other
--------
rights and obligations of the Purchaser under this Agreement and the other
Investment Documents; provided, however, that the Company and the Guarantors may
-------- -------
continue to deal solely and directly with the Purchaser in connection with the
interest so assigned to the
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Assignee until written notice of such assignment, together with payment
instructions, addresses and related information with respect to the Assignee
shall have been given to the Company. If the Purchaser assigns to any Assignee a
fifty percent (50.0%) or lesser interest in and to the then outstanding
principal amount of the Note, any decisions that the Purchaser is entitled to
make under this Agreement, the Note and the other Investment Documents shall be
made by the Purchaser, and the Company may continue to deal solely and directly
with respect to the Purchaser in connection with the interests so assigned to
the Assignee. If the Purchaser assigns to any Assignee more than a fifty percent
(50.0%) interest in and to the then outstanding principal amount of the Note,
any decisions that the Purchaser is entitled to make under this Agreement, the
Note and the other Investment Documents shall be made by the Holders of a
majority of the principal amount of the Note outstanding at the time such
decision is made.
12.6 Notices. All notices, requests, demands and other communications
-------
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given if transmitted by telecopier with
receipt acknowledged, or upon delivery, if delivered personally or by recognized
commercial courier with receipt acknowledged, or upon the expiration of 72 hours
after mailing, if mailed by registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
(i) If to the Purchaser, to:
Levine Leichtman Capital Partners II, L.P.
c/o Levine Leichtman Capital Partners, Inc.
335 North Maple Drive, Suite 240
Beverly Hills, CA 90210
Attention: Arthur E. Levine, President
Telephone: (310) 275-5335
Telecopier: (310) 275-1441
with a copy to:
--------------
Riordan & McKinzie
300 South Grand Avenue, Suite 2900
Los Angeles, CA 90071
Attention: Richard J. Welch, Esq.
Telephone: (213) 629-4824
Telecopier: (213) 629-8550
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(ii) If to the Company or Overhill Ventures, at:
Overhill Farms, Inc.
5730 Uplander Way, Suite 201
Culver City, CA 90230
Attention: James Rudis
Telephone: (310) 641-3680
Telecopier: (310) 645-3914
with a copy to:
--------------
Freeman, Freeman & Smiley, LLP
3415 Sepulveda Blvd. Suite 1200
Los Angeles, CA 90034
Attention: Ross Arbiter, Esq.
Telephone: (310) 255-6100
Telecopier: (310) 391-4042
(ii) If to Parent, at:
Polyphase Corporation
4800 Broadway
Addison, Texas 75248
Attention: James Rudis
Telephone: (972) 386-0101
Telecopier: (972) 386-8008
or at such other address or addresses as the Purchaser or the Company, as the
case may be, may specify by written notice given in accordance with this Section
-------
12.6.
- ----
12.7 Counterparts. This Agreement may be executed in two or more
------------
counterparts and by facsimile, each of which shall be deemed an original, but
all of which together shall constitute one instrument.
12.8 Governing Law. In all respects, including all matters of
-------------
construction, validity and performance, this Agreement and the rights and
obligations arising hereunder shall be governed by, and construed and enforced
in accordance with, the laws of the State of California applicable to contracts
made and performed in such state, without regard to the choice of law or
conflicts of law principles thereof.
12.9 Publicity. The Company and the Guarantors (including their
---------
Affiliates), on the one hand, and the Purchaser (including its Affiliates), on
the other hand, will consult with the
84
<PAGE>
other before issuing, and provide each other the opportunity to review, comment
upon and concur with and use reasonable efforts to agree on, any press release
or other public statement with respect to the transactions contemplated by this
Agreement, and shall not issue any such press release or make such other public
announcement prior to such consultation, except as required under Applicable
Laws. The parties agree that the initial press release to be issued with respect
to the transactions contemplated by this Agreement shall be in the form
heretofore agreed to by the parties. Notwithstanding anything to the contrary,
the Company hereby consents to the preparation and publication by the Purchaser
of an advertisement "tombstone" publicly disclosing the closing of the
transactions contemplated by this Agreement.
12.10 Due Diligence Investigation. The Company and the Guarantors hereby
---------------------------
acknowledge and agree that neither the Purchaser's review of the books and
records or condition (financial or otherwise) of the Company or any Guarantor
nor any other due diligence investigation conducted by or on behalf of the
Purchaser shall be deemed to constitute knowledge by the Purchaser of any facts
or other matters so as so reduce the Purchaser's right to rely on the accuracy
of the representations and warranties of the Company and the Guarantors under
this Agreement or any other Investment Document.
12.11 WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
--------------------
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE LAWS TO APPLY
(RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE
RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE
BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, AND
UNDERSTANDING THEY ARE WAIVING A CONSTITUTIONAL RIGHT, THE PARTIES WAIVE ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY
DISPUTE, WHETHER IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED
WITH, RELATED TO, OR INCIDENTAL TO, THIS SECURITIES PURCHASE AGREEMENT, ANY
OTHER INVESTMENT DOCUMENT OR THE TRANSACTIONS COMPLETED HEREBY OR THEREBY.
85
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their duly authorized representatives as of the date first
written above.
COMPANY PARENT
- ------- ------
OVERHILL FARMS, INC., a Nevada POLYPHASE CORPORATION, a Nevada
corporation corporation
By:_______________________________ By:__________________________________
James Rudis James Rudis
President and Chief Executive President and Chief Executive
Officer Officer
By:__________________________________
By:________________________________ William E. Shatley
Richard A. Horvath Senior Vice President and
Vice President and Chief Financial Chief Financial Officer
Officer
OVERHILL VENTURES PURCHASER
- ----------------- ---------
OVERHILL L. C. VENTURES, INC., a LEVINE LEICHTMAN CAPITAL
California corporation PARTNERS, INC., a California corporation
On behalf of LEVINE LEICHTMAN
By:______________________________ CAPITAL PARTNERS II, L.P., a
James Rudis California limited partnership
President and Chief Executive
Officer
By:__________________________
By:______________________________ Lauren B. Leichtman
Richard A. Horvath Chief Executive Officer
Vice President and Chief Financial
Officer
86
<PAGE>
Exhibit 10.7
EXECUTION COPY
--------------
SECURED SENIOR SUBORDINATED NOTE DUE 2004
-----------------------------------------
THE SECURITY REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAW AND
MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT
IN COMPLIANCE WITH THE REGISTRATION REQUIREMENTS OF SUCH ACT AND THE
QUALIFICATION REQUIREMENTS OF SUCH STATE SECURITIES LAWS OR PURSUANT TO AN
EXEMPTION FROM SUCH REGISTRATION AND QUALIFICATION.
PAYMENT OF THE INDEBTEDNESS EVIDENCED BY THIS SECURITY, INCLUDING PRINCIPAL,
PREMIUM, IF ANY, AND INTEREST, AND THE RIGHTS OF ANY HOLDER OF THIS SECURITY ARE
SUBJECT TO THE TERMS AND CONDITIONS OF AN INTERCREDITOR AND SUBORDINATION
AGREEMENT DATED OF EVEN DATE HEREWITH AMONG THE ISSUER, LEVINE LEICHTMAN CAPITAL
PARTNERS II, L.P., AS THE INITIAL HOLDER OF THIS SECURITY, AND UNION BANK OF
CALIFORNIA, N.A. A COPY OF SUCH INTERCREDITOR AND SUBORDINATION AGREEMENT MAY BE
OBTAINED FROM THE ISSUER UPON REQUEST.
THIS SECURITY HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT (OID). PURSUANT TO
TREASURY REGULATION (S)1.1275-3(b)(1), RICHARD A. HORVATH, A REPRESENTATIVE OF
THE ISSUER, WILL, BEGINNING TEN DAYS AFTER THE ISSUE DATE OF THIS SECURITY,
PROMPTLY MAKE AVAILABLE TO THE HOLDER UPON REQUEST THE INFORMATION DESCRIBED IN
TREASURY REGULATION (S)1.1275-3(b)(1)(i). MR. HORVATH MAY BE REACHED AT
TELEPHONE NUMBER (310) 341-3680.
OVERHILL FARMS, INC.
SECURED SENIOR SUBORDINATED NOTE DUE 2004
$28,000,000.00 November 24, 1999
FOR VALUE RECEIVED, OVERHILL FARMS, INC., a Nevada corporation (the
"Borrower" or the "Company"), hereby promises to pay to the order of Levine
-------- -------
Leichtman Capital Partners II, L.P., a California limited partnership (the
"Purchaser"), or any registered assigns (together with the Purchaser, the
---------
"Holder"), the sum of Twenty-Eight Million Dollars ($28,000,000.00) in
------
immediately available funds and in lawful money of the United States of America,
all as provided in this Secured Senior Subordinated Note Due 2004 (this "Note").
----
This Note is being issued in connection with the consummation of the
transactions
<PAGE>
contemplated by the Securities Purchase Agreement dated of even date herewith
among the Company, Polyphase Corporation, a Nevada corporation ("Parent"),
------
Overhill L. C. Ventures, Inc., a California corporation, and the Purchaser (as
it may be amended, supplemented or otherwise modified and in effect from time to
time, the "Securities Purchase Agreement").
-----------------------------
1. Definitions. Unless otherwise indicated, all capitalized terms used
-----------
and not otherwise defined herein shall have the meanings set forth in the
Securities Purchase Agreement.
2. Payment of Interest; Default Rate. So long as no Default or Event of
---------------------------------
Default shall have occurred and be continuing, the Borrower shall pay interest
on the unpaid principal balance of this Note from the date hereof until fully
paid at a rate per annum (the "Base Rate") equal to the following:
---------
(a) For the period commencing on the date hereof and ending on
December 31, 1999, the Base Rate shall equal twelve percent (12.0%);
(b) If, for any Fiscal Quarter ending on or after December 31, 1999,
the Company meets (i) the minimum EBITDA amount set forth in Column (A) of
Section 3.1A of Annex A for the four (4) consecutive Fiscal Quarters ending with
- ------------ -------
such Fiscal Quarter, (ii) the minimum Fixed Charge Coverage Ratio set forth in
Column (A) of Section 3.2A of Annex A for the four (4) consecutive Fiscal
------------ -------
Quarters ending with such Fiscal Quarter and (iii) the maximum Leverage Ratio
set forth in Column (A) of Section 3.3A of Annex A as of the last day of such
------------ -------
Fiscal Quarter, the Base Rate shall equal twelve percent (12.0%) during the
Fiscal Quarter immediately succeeding such Fiscal Quarter;
(c) If, for any Fiscal Quarter ending on or after December 31, 1999,
the Company fails to meet (i) the minimum EBITDA amount set forth in Column (A)
(but meets the amount set forth in Column (B)) of Section 3.1A of Annex A for
------------ -------
the four (4) consecutive Fiscal Quarters ending with such Fiscal Quarter, (ii)
the minimum Fixed Charge Coverage Ratio set forth in Column (A) (but meets the
ratio set forth in Column (B)) of Section 3.2A of Annex A for the four (4)
------------ -------
consecutive Fiscal Quarters ending with such Fiscal Quarter or (iii) the maximum
Leverage Ratio set forth in Column (A) (but meets the ratio set forth in Column
(B)) of Section 3.3A of Annex A as of the last day of such Fiscal Quarter, the
------------ -------
Base Rate shall equal twelve and one-quarter percent (12.25%) during the Fiscal
Quarter immediately succeeding such Fiscal Quarter; and
(d) If, for any Fiscal Quarter ending on or after December 31, 1999,
the Company fails to meet (i) the minimum EBITDA amount set forth in Column (B)
(but meets the amount set forth in Column (C)) of Section 3.1A of Annex A for
------------ -------
the four (4) consecutive Fiscal Quarters ending with such Fiscal Quarter, (ii)
the minimum Fixed Charge Coverage Ratio set forth in Column (B) (but meets the
ratio set forth in Column (C)) of Section 3.2A of Annex A for the four (4)
------------ -------
consecutive Fiscal Quarters ending with such Fiscal Quarter or
2
<PAGE>
(iii) the maximum Leverage Ratio set forth in Column (B) (but meets the amount
set forth in Column (C)) of Section 3.3A of Annex A as of the last day of such
------------ -------
Fiscal Quarter, the Base Rate shall equal twelve and one-half percent (12.50%)
during the Fiscal Quarter immediately succeeding such Fiscal Quarter.
Interest shall be payable monthly in arrears on the last Business Day of each
calendar month (or portion thereof), commencing on November 30, 1999 (each an
"Interest Payment Date"). Interest shall be computed on the basis of the actual
---------------------
number of days elapsed over a 360-day year, including the first and the last
day. If the Borrower makes any interest payment at any time in any Fiscal
Quarter that is less than the payment that should have been made at such time
after giving effect to the provisions of clauses (c) and (d) of this Section 2,
----------- --- ---------
the Borrower shall pay to the Borrower, within one (1) day after written demand
therefor from the Holder, an amount equal to the deficiency.
If any Default or Event of Default shall occur and be continuing,
then, in addition to the rights and remedies available to the Holder under the
Securities Purchase Agreement, this Note (including, without limitation,
Sections 2(a) through (d)), the other Investment Documents and Applicable Law,
- ------------- ---
the Borrower shall pay interest on the unpaid principal balance of, premium, if
any, and accrued and unpaid interest on, and other amounts owing under, this
Note at a rate per annum (the "Default Rate") equal to fourteen percent (14.0%)
------------
during the first two (2) months (or portions thereof) that such Default or Event
of Default shall remain uncured or unwaived and, thereafter, such rate shall
increase by one percent (1.0%) per annum over the prior month's rate for each
additional month (or portion thereof) that such Default or Event of Default
remains uncured or unwaived, provided, however, that the Default Rate shall not
-------- -------
exceed eighteen percent (18.0%) per annum. The Default Rate shall begin to
accrue on the date on which such Default or Event of Default shall be deemed to
have occurred (as provided in the last paragraph of Section 10.1 of the
------------
Securities Purchase Agreement) and shall continue until such Default or Event of
Default shall have been cured or waived.
3. Payment of Principal. The Borrower shall pay in full the entire
--------------------
outstanding principal balance of this Note and all premium, if any, accrued and
unpaid interest and other unpaid amounts owing under this Note on October 31,
2004 (the "Maturity Date").
-------------
4. Optional Prepayments.
--------------------
(a) The Borrower may not make any prepayments of the principal
balance of this Note at any time prior to November 1, 2001. Thereafter, the
Company may voluntarily prepay this Note, in whole or in part, as follows:
(i) at 104.0% of the principal balance being prepaid at any time
on or before October 31, 2002;
3
<PAGE>
(ii) at 102.0% of the principal balance being prepaid at any
time after October 31, 2002 and on or before October 31, 2003; and
(iii) at 100.0% of the principal balance being prepaid at any
time after October 31, 2003 and on or before October 31, 2004.
Each percentage set forth above is referred to herein as the "Prepayment
----------
Percentage" applicable to any prepayment. Any prepayment of this Note made
- ----------
under this Section 4 shall also include all accrued and unpaid interest on the
---------
then outstanding principal balance of this Note, through the date of prepayment.
(b) If the Borrower elects to prepay all or any portion of this Note,
the Borrower shall furnish written notice to the Holder with respect to each
voluntary prepayment not less than fourteen (14) days prior to the date of
prepayment. Such notice shall specify the principal amount of this Note to be
prepaid on such date and shall be irrevocable. Notice of prepayment having been
given as aforesaid, the Borrower shall make a prepayment to the Holder on such
prepayment date in an amount equal to (i) the Prepayment Percentage applicable
to such prepayment, multiplied by (ii) the principal amount of this Note
-------------
specified in such prepayment notice to be prepaid on such prepayment date,
together with any premium and all accrued and unpaid interest through the date
of prepayment.
5. Mandatory Prepayments. In addition to the mandatory prepayments
---------------------
required to be made by the Company pursuant to Section 6:
---------
(a) Asset Sales. If at any time the Company intends to consummate any
-----------
Asset Sale in any Fiscal Year (which Asset Sale, when taken together with any
other Asset Sales in the same Fiscal Year, exceeds aggregate proceeds of
$100,000), it shall, within ten (10) Business Days prior to the proposed date of
consummation of such Asset Sale, notify the Holder in writing of the proposed
Asset Sale (including, without limitation, the subject matter and the material
terms thereof and the proposed date of consummation) and the proposed use of the
proceeds to be derived from such Asset Sale. Within five (5) Business Days
following the Holder's receipt of such written notice, the Holder may, by
written notice furnished to the Company, direct the Company to apply all Net
Cash Proceeds derived from such Asset Sale to prepay principal of, accrued and
unpaid premium, if any, and accrued and unpaid interest on this Note; provided,
--------
however, that the Company shall not be obligated to so apply any Net Cash
- -------
Proceeds derived from any such Asset Sale involving equipment or other fixed
assets used by the Company in the conduct of its business to the extent that the
Company uses such Net Cash Proceeds to purchase newer, functionally equivalent
equipment or fixed assets, as the case may be, which is used by the Company in
the conduct of its business. If, subject to the proviso in the immediately
succeeding sentence, the Holder directs the Company to make the mandatory
prepayment contemplated by this Section 5(a), the Company shall make such
------------
prepayment within one (1) Business Day following the date of consummation of
such Asset Sale. In addition, to the extent that the Company receives any cash
or cash equivalents upon
4
<PAGE>
the sale, conversion, collection or other liquidation of any non-cash proceeds
from such Asset Sale, the Company shall notify the Holder in writing within one
(1) Business Day of such receipt. The Holder may, within five (5) Business Days
after receipt of such written notice, direct the Company to make a mandatory
prepayment under this Section 5(a) with such cash or cash equivalents and, if
------------
the Holder so directs the Company, the Company shall make such mandatory
prepayment within one (1) Business Day following its receipt of the Holder's
notice.
(b) Excess Cash Flow. For each Fiscal Year, commencing with the
----------------
Fiscal Year ending October 1, 2000, the Company shall prepay the outstanding
principal balance of this Note in an amount equal to fifty percent (50.0%) of
the Excess Cash Flow (as such term is defined below) for such Fiscal Year. Such
mandatory prepayment shall be due and payable by the Company to the Holder not
later than January 15th of the following Fiscal Year (the date upon which such
prepayment will be made being referred to herein as the "Excess Cash Flow
----------------
Payment Due Date"). The first Excess Cash Flow Payment Due Date shall occur no
- ----------------
later than January 15, 2001. Not later than two (2) Business Days prior to each
Excess Cash Flow Payment Due Date, the Company shall deliver to the Holder an
Excess Cash Flow Calculation Certificate, in substantially the form of Exhibit E
---------
attached to the Securities Purchase Agreement, signed by the Chief Financial
Officer of the Company, showing in reasonable detail the calculation of the
amount of any Excess Cash Flow payment due on such Excess Cash Flow Payment Due
Date. For purposes of this Section 5(b), the term "Excess Cash Flow" means, for
------------ ----------------
any Fiscal Year, (i) EBITDA of the Company and its Subsidiaries for such Fiscal
Year, minus (ii) the sum of (A) Cash Interest Expense; (B) payments of principal
-----
on any Indebtedness of the Company and its Subsidiaries; (C) Capitalized Lease
Obligations of the Company or any of its Subsidiaries representing principal;
(D) cash Taxes paid by the Company and its Subsidiaries; (E) cash dividends or
distributions, if any, paid by the Company or any of its Subsidiaries; (F)
Capital Expenditures; and (G) all Tax Sharing Cash Payments, in each case for
such Fiscal Year.
The mandatory prepayments provided for in this Section 5 shall be paid at
---------
100.0% (i.e., without premium) of the principal amount required to be prepaid,
----
and shall be accompanied by the payment of any accrued and unpaid interest on,
and other amounts owing under, this Note through the date of prepayment, all as
provided for above.
6. Change in Control. If a Change in Control shall occur at any time,
-----------------
the Holder may, at its sole election, require the Borrower to prepay this Note,
in whole or in part, at any time during the one hundred and eighty (180) day
period following the occurrence of the Change in Control, at 104.0% of the
principal balance of this Note, plus all accrued and unpaid interest on, and
----
other amounts owing under, this Note through the date of prepayment. The
Borrower shall notify the Holder in writing, if possible, of any Change in
Control at least ten (10) days prior to the date that such Change in Control is
scheduled to occur. The Borrower shall also notify the Holder of the date on
which any Change in Control shall have actually occurred within one (1) Business
Day after such date and shall inform the Holder, in
5
<PAGE>
such notification, of the Holder's right to require the Borrower to prepay this
Note as provided in this Section 6 and of the date on which such right shall
---------
terminate. If the Holder elects to require the Borrower to prepay this Note
pursuant to this Section 6, it shall furnish a written notice to the Borrower
---------
advising the Borrower of such election and the outstanding principal balance
hereof, premium, accrued and unpaid interest and all other amounts to be
prepaid. The Borrower shall prepay this Note in accordance with this Section 6,
---------
Section 8 and such written notice within one (1) Business Day after its receipt
- ---------
of such written notice.
7. Holder Entitled to Certain Benefits. This Note is the "Note" referred
-----------------------------------
to in the Securities Purchase Agreement which provides for, among other things,
the right of the Purchaser to accelerate the outstanding principal balance of,
premium, if any, and accrued and unpaid interest on, and other amounts owing
under, this Note upon the occurrence of an Event of Default. In addition, this
Note is secured by the "Collateral" referred to in the Collateral Documents and
is guaranteed under the Guaranty.
8. Manner of Payment. Payments of principal, interest and other amounts
-----------------
due under this Note shall be made no later than 12:00 p.m. (noon) (Los Angeles
time) on the date when due and in lawful money of the United States of America
and (by wire transfer in funds immediately available at the place of payment) to
such account as the Holder may designate in writing to the Borrower and, if to
the Purchaser, to: Bank of America, Century City, Private Banking, 2049 Century
Park East, Los Angeles, California 90067; ABA No. 121000358; Account No.
1154603239; Attention: Cheryl Stewart (or such other place of payment as the
Purchaser may designate in writing). All such payments shall be made without any
deduction whatsover, including, without limitation, any deduction for set-off,
recoupment, counterclaim or taxes. Any payments received after 12:00 p.m. (noon)
(Los Angeles time) shall be deemed to have been received on the next succeeding
Business Day. Any payments due hereunder which are due on a day which is not a
Business Day shall be payable on the immediately preceding Business Day,
together with all accrued and unpaid interest through the actual due date of
payment.
9. Maximum Lawful Rate of Interest. The rate of interest payable under
-------------------------------
this Note shall in no event exceed the maximum rate permissible under Applicable
Law. If the rate of interest payable on this Note is ever reduced as a result
of this Section 9 and at any time thereafter the maximum rate permitted under
---------
Applicable Law exceeds the rate of interest provided for in this Note, then the
rate provided for in this Note shall be increased to the maximum rate provided
for under Applicable Law for such period as is required so that the total amount
of interest received by the Holder is that which would have been received by the
Holder but for the operation of the first sentence of this Section 9.
---------
10. Borrower's Waivers. The Borrower hereby waives presentment for
------------------
payment, demand, protest, notice of protest and notice of dishonor, and all
other notices of any kind whatsoever to which it may be entitled under
Applicable Law or otherwise, except for notices to which the Borrower is
expressly entitled under this Note.
6
<PAGE>
11. Registration of Notes. The Company shall maintain at its principal
---------------------
executive office a register in which it shall register this Note, any
Assignments of this Note or any other notes and any other notes issued upon
surrender hereof and thereof. Upon surrender at the Company's principal
executive office of this Note for registration of any Assignment, the Company
shall, at its expense and within three (3) Business Days of such surrender,
execute and deliver one or more new notes of like tenor in the requested
principal denominations and register such new note or notes in the register to
be maintained by the Company. At the option of the Holder, this Note may be
exchanged for one or more new notes of like tenor in the requested principal
denominations, and the Borrower shall deliver such new notes not later than
three (3) Business Days after the Holder's request.
12. Persons Deemed Owners; Participations. Prior to due presentment for
-------------------------------------
registration of any Assignment, the Company may treat the Person in whose name
any Note is registered as the owner and Holder of such Note for all purposes
whatsoever, and the Company shall not be affected by notice to the contrary.
Subject to the preceding sentence, the Purchaser may grant to any Person
participations from time to time in all or any part of this Note on such terms
and conditions as may be determined by the Purchaser in its sole and absolute
discretion. Notwithstanding anything to the contrary contained herein or
otherwise, nothing in this Note, the Securities Purchase Agreement or any other
Investment Document or otherwise shall confer upon the participant any rights in
the Securities Purchase Agreement or any other Investment Document, and the
Purchaser shall retain all rights with respect to the administration, waiver,
amendment, collection and enforcement of, compliance with and consent to the
terms and provisions of this Note, the Securities Purchase Agreement and any
other Investment Document. In addition, the Purchaser may, without the consent
of the participant, give or withhold its consent or agreement to any amendments
to or modifications of this Note, the Securities Purchase Agreement or any other
Investment Document, waive any of the provisions hereof or thereof or exercise
or refrain from exercising any other rights or remedies which the Purchaser may
have under this Note, the Securities Purchase Agreement, any other Investment
Document or otherwise. Notwithstanding the foregoing, the Purchaser will not
agree with the Company, without the prior written consent of the participant
(which consent shall be given or affirmatively withheld not later than three (3)
Business Days after the Purchaser's request therefor): (a) to reduce the
principal of or rate of interest on this Note or (b) to postpone the date fixed
for payment of principal of or interest on the Indebtedness evidenced by this
Note. If the participant does not timely reply to the Purchaser's request for
such consent, the participant shall be deemed to have consented to such
agreement and the Purchaser may take such action in such manner as the Purchaser
determines in the exercise of its independent business judgment.
13. Assignment and Transfer. Subject to Applicable Law, the Holder may,
-----------------------
at any time and from time to time and without the consent of the Company, assign
or transfer to one or more Persons all or any portion of this Note or any
portion thereof (but not less than $500,000 in principal amount in any single
assignment (unless such lesser amount represents the entire outstanding
principal balance hereof)). Upon surrender of this Note at the
7
<PAGE>
Company's principal executive office for registration of any such assignment or
transfer, accompanied by a duly executed instrument of transfer, the Company
shall, at its expense and within three (3) Business Days of such surrender,
execute and deliver one or more new notes of like tenor in the requested
principal denominations and in the name of the assignee or assignees and bearing
the legend set forth on the face of this Note, and this Note shall promptly be
canceled. Each assignment or transfer of this Note, in whole or in part, shall
be registered on the register maintained by the Borrower pursuant to Section 11
----------
immediately following the surrender of this Note. If the entire outstanding
principal balance of this Note is not being assigned, the Borrower shall issue
to the Holder hereof, within three (3) Business Days of the date of surrender
hereof, a new note which evidences the portion of such outstanding principal
balance not being assigned. If this Note is divided into one or more Notes and
is held at any time by more than one Holder, any payments of principal of,
premium, if any, and interest or other amounts on this Note which are not
sufficient to pay all interest or other amounts due thereunder, shall be made
pro rata with respect to all such Notes in accordance with the outstanding
- --- ----
principal amounts thereof, respectively.
14. Loss, Theft, Destruction or Mutilation of this Note. Upon receipt of
---------------------------------------------------
evidence reasonably satisfactory to the Borrower of the loss, theft, destruction
or mutilation of this Note and, in the case of any such loss, theft or
destruction, upon receipt of an indemnity agreement or other indemnity
reasonably satisfactory to the Borrower or, in the case of any such mutilation,
upon surrender and cancellation of such mutilated Note, the Borrower shall make
and deliver within three (3) Business Days a new Note, of like tenor, in lieu of
the lost, stolen, destroyed or mutilated Note.
15. Costs of Collection. The Borrower agrees to pay all costs and
-------------------
expenses, including the fees and expenses of all attorneys, accountants and
other experts retained by the Holder, which are expended or incurred by or on
behalf of the Holder in connection with (a) the collection and enforcement of
this Note, whether or not any action, suit or other proceeding is commenced; (b)
any actions for declaratory relief in any way related to this Note or the
Indebtedness evidenced hereby; (c) the protection or preservation of any rights
or remedies of the Holder under this Note; (d) any actions taken by the Holder
in negotiating any amendment, waiver, consent or release of or under this Note;
(e) any actions taken in reviewing the Borrower's or any of its Subsidiaries'
financial affairs if any Event of Default has occurred or the Holder has
determined in good faith that an Event of Default may likely occur, which
actions shall include, but not be limited to, the following: (i) inspect the
facilities of the Borrower and any of its Subsidiaries or conduct audits or
appraisals of the financial condition of the Borrower and any of its
Subsidiaries; (ii) have an accounting or other firm selected by the Holder
review the books and records of the Borrower and any of its Subsidiaries and
perform a thorough and complete examination thereof; (iii) interview the
Borrower's and each of its Subsidiaries' employees, attorneys, accountants,
customers and any other Persons related to the Borrower or such Subsidiaries;
and (iv) undertake any other action which the Holder believes is necessary to
assess accurately the financial condition and prospects of the Borrower and any
of its Subsidiaries; (f) any refinancing, restructuring
8
<PAGE>
(whether in the nature of a "work out" or otherwise), bankruptcy or insolvency
proceeding involving the Borrower, any of its Subsidiaries or any other
Affiliate of the Borrower securing the payment and performance of this Note; (g)
any actions taken to verify, maintain, perfect and protect any Lien granted to
the Holder; or (h) any effort by the Holder to protect, assemble, complete,
collect, sell, liquidate or otherwise dispose of any Collateral, including in
connection with any case under Bankruptcy Law. The Borrower hereby consents to
the taking of the foregoing actions by the Holder (provided, however, that, with
-------- -------
respect to clause (e)(iii) above, the Borrower will not be required to produce
any document or disclose material to the Holder which would otherwise be
expressly protected from production or disclosure by any attorney-client or
accountant-client privilege existing under Applicable Law, unless waived by the
Borrower).
16. Extension of Time. The Holder may, at its sole option, extend the
-----------------
time for payment of this Note, postpone the enforcement hereof, or grant any
other indulgence without affecting or diminishing the Holder's right to full
recourse against the Borrower hereunder, which right is expressly reserved.
17. Notations. Before disposing of this Note or any portion thereof, the
---------
Purchaser may make a notation thereon (or on a schedule attached thereto) of the
amount of all principal payments previously made by the Company with respect
thereto.
18. Governing Law. In all respects, including all matters of
-------------
construction, validity and performance, this Note and the rights and obligations
arising hereunder shall be governed by, and construed and enforced in accordance
with, the laws of the State of California applicable to contracts made and
performed in such State, without regard to choice of law or conflicts of law
principles.
19. Captions; Construction and Interpretation. The captions contained in
-----------------------------------------
this Note are for convenience of reference only, do not constitute a part of
this Note and are not to be considered in construing or interpreting this Note.
The Company and the Purchaser have each been represented by counsel in the
negotiation and drafting of this Note and neither the Company nor the Purchaser
nor their respective counsel shall be deemed the drafter of this Note for
purposes of construing the provisions of this Note, and all provisions of this
Note shall be construed in accordance with their fair meaning, and not strictly
for or against the Company or the Holder.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
9
<PAGE>
20. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
--------------------
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE BORROWER AND THE HOLDER
DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS.
THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL
SYSTEM AND OF ARBITRATION, AND UNDERSTANDING THEY ARE WAIVING A CONSTITUTIONAL
RIGHT, THE BORROWER AND THE HOLDER (BY ACCEPTANCE HEREOF) WAIVE ALL RIGHT TO
TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
WHETHER IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED
TO, OR INCIDENTAL TO, THIS NOTE, THE SECURITIES PURCHASE AGREEMENT AND/OR ANY
OTHER INVESTMENT DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed
and delivered by its duly authorized representatives on the date first above
written.
OVERHILL FARMS, INC., a Nevada corporation
By:_____________________________________
James Rudis
President and Chief Executive Officer
By:_____________________________________
Richard A. Horvath
Vice President and Chief Financial Officer
10
<PAGE>
EXHIBIT 10.8
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR
QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT IN COMPLIANCE
WITH THE REGISTRATION REQUIREMENTS OF SUCH ACT AND THE REGISTRATION OR
QUALIFICATION REQUIREMENTS OF SUCH STATE SECURITIES LAWS OR PURSUANT TO AN
EXEMPTION FROM SUCH REGISTRATION AND QUALIFICATION.
WARRANT NO. LL-1 November 24, 1999
OVERHILL FARMS, INC.
WARRANT TO PURCHASE 166.04 SHARES OF COMMON STOCK
FOR VALUE RECEIVED, OVERHILL FARMS, INC., a Nevada corporation (the
"Company"), hereby certifies that Levine Leichtman Capital Partners II, L.P., a
-------
California limited partnership, or its assigns (the "Holder"), is entitled to
------
purchase, on the terms and subject to the conditions contained herein, 166.04
shares (the "Warrant Shares") of the Company's common stock, $.01 par value per
--------------
share ("Common Stock"), at the exercise price of $.01 per Warrant Share (the
------------
"Warrant Purchase Price") at any time and from time to time during the Exercise
----------------------
Period (as such term is defined below). The number of Warrant Shares and the
Warrant Purchase Price are subject to adjustment as provided in Section 3. This
---------
Warrant is being issued in connection with the consummation of the transactions
contemplated by the Securities Purchase Agreement dated of even date herewith
among the Company, the initial Holder, Polyphase Corporation, a Nevada
corporation, and Overhill L. C. Ventures, Inc., a California corporation (as it
may be amended, supplemented or otherwise modified and in effect from time to
time, the "Securities Purchase Agreement").
-----------------------------
This Warrant is subject to the following terms and conditions:
1. DEFINITIONS. Unless otherwise indicated in this Warrant, capitalized
-----------
terms used and not otherwise defined in this Warrant have the meanings set forth
in the Securities Purchase Agreement. In addition, the following capitalized
terms have the following meanings:
"Common Stock" has the meaning set forth in the preamble.
------------
1
<PAGE>
"Company" has the meaning set forth in the preamble.
-------
"Convertible Securities" means, when used in this Agreement, any
----------------------
securities or other obligations issued or issuable by the Company or any
other Person that are exercisable or exchangeable for, or convertible into,
any Capital Stock of the Company.
"Current Market Price" per share of Common Stock means, as of any
--------------------
specified date on which the Common Stock is publicly traded, the average of
the daily market prices of the Common Stock over the twenty (20)
consecutive trading days immediately preceding (and not including) such
date. The 'daily market price' for each such trading day shall be (i) the
closing sales price on such day on the principal securities exchange on
which the Common Stock is then listed or admitted to trading or on Nasdaq,
as applicable, (ii) if no sale takes place on such day on any such
securities exchange or system, the average of the closing bid and asked
prices, regular way, on such day for the Common Stock as officially quoted
on any such securities exchange or system, (iii) if the Common Stock is not
then listed or admitted to trading on any securities exchange or system,
the last reported sale price, regular way, on such day for the Common
Stock, or if no sale takes place on such day, the average of the closing
bid and asked prices for the Common Stock on such day, as reported by
Nasdaq or the National Quotation Bureau, and (iv) if the Common Stock is
not then listed or admitted to trading on any securities exchange and if no
such reported sale price or bid and asked prices are available, the average
of the reported high bid and low asked prices on such day, as reported by a
reputable quotation service, or a newspaper of general circulation in the
City of Los Angeles, State of California, customarily published on each
Business Day. If the daily market price cannot be determined for the twenty
(20) consecutive trading days immediately preceding such date in the manner
specified in the foregoing sentence, then the Common Stock shall not be
deemed to be publicly traded as of such date.
"Designated Office" has the meaning set forth in Section 2.1.
----------------- -----------
"DOJ" has the meaning set forth in Section 2.3.
--- -----------
"Effective Date" means the issue date of this Warrant.
--------------
"Excluded Shares" means, collectively, (i) shares of Common Stock or
---------------
Option Rights issued in any of the transactions described in Sections 4.1,
-------------
4.2, 4.3 or 4.5, (ii) shares of Common Stock issued after the date hereof
---------------
upon exercise, exchange or conversion of (A) Option Rights outstanding on
the date hereof or (B) Option Rights issued after the date hereof for which
an adjustment was made pursuant to Section 4.4
-----------
2
<PAGE>
or for which no adjustment is required under Section 4.4, (iii) the
-----------
issuance of this Warrant or any Warrant Shares and (iv) shares of Common
Stock issued pursuant to a bona fide public offering pursuant to an
---------
effective registration statement declared effective by the Commission under
the Securities Act.
"Exercise Notice" has the meaning set forth in Section 2.1.
--------------- -----------
"Exercise Period" means the period commencing on the Effective Date
---------------
and ending on (and including) the Expiration Date.
"Expiration Date" means October 31, 2009.
---------------
"Fair Market Value" with respect to the Warrant Shares means, as of
-----------------
any specified date:
(i) if the Common Stock is publicly traded on such date, the
Current Market Price per share; or
(ii) if the Common Stock is not publicly traded (or deemed not to
be publicly traded) on such date, the fair market value per share of
Common Stock as determined by an independent valuation of the Company,
its Subsidiaries and their respective businesses conducted by an
investment banking or accounting firm of recognized national standing
selected by the mutual written agreement of the Company and the
Holder; provided, however, that if the Company and the Holder are
-------- -------
unable to mutually agree on any such investment banking or accounting
firm within ten (10) days after the date upon which the right or
obligation to select an investment banking or accounting firm arises,
each of the Holder and the Company shall, within three (3) Business
Days thereafter, select one investment banking or accounting firm, and
the two (2) selected firms shall, within three (3) Business Days of
their selection, select a third investment banking or accounting firm
which shall make the relevant determination (which determination shall
be final and binding) within ten (10) Business Days of the submission
of this matter to such third firm; and provided further, however that,
---------------- -------
in determining the fair market value per share of Common Stock, such
investment banking or accounting firm shall not give effect or take
into account any "minority discount" but shall value the Company in
its entirety on an enterprise basis.
"First Repurchase Option" has the meaning set forth in Section 3.1.
----------------------- -----------
3
<PAGE>
"First Repurchase Option Exercise Notice" has the meaning set forth in
---------------------------------------
Section 3.1.
-----------
"FMV Dispute Notice" has the meaning set forth in Section 3.2.
------------------ -----------
"FTC" has the meaning set forth in Section 2.3.
--- -----------
"Holder" has the meaning set forth in the preamble.
------
"HSR Act" has the meaning set forth in Section 2.3.
------- -----------
"Option Rights" means, when used in this Warrant, any warrants,
-------------
options or other rights to subscribe for or purchase, or obligations to
issue, any Capital Stock of the Company, or any Convertible Securities,
including, without limitation, any options or similar rights issued or
issuable under any employee stock option plan, pension plan or other
employee benefit plan of the Company.
"Other Property" has the meaning set forth in Section 4.5.
-------------- -----------
"Repurchase Alternative Payment" has the meaning set forth in Section
------------------------------ -------
3.2.
---
"Second Repurchase Option Effective Date" shall mean the earlier to
---------------------------------------
occur of (i) the Maturity Date (as such term is defined in the Note) and
(ii) the date that all principal of, premium, if any, and accrued and
unpaid interest on the Note shall have been paid in full.
"Second Repurchase Option" has the meaning set forth in Section 3.2.
------------------------ -----------
"Second Repurchase Option Exercise Notice" has the meaning set forth
----------------------------------------
in Section 3.2.
-----------
"Second Repurchase Option Price" has the meaning set forth in Section
------------------------------ -------
3.2.
---
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated by the SEC thereunder, all as the same
shall be in effect at the time.
"Securities Purchase Agreement" has the meaning set forth in the
-----------------------------
preamble of this Warrant.
4
<PAGE>
"Warrant Purchase Price" has the meaning set forth in the preamble of
----------------------
this Warrant (as adjusted in accordance with the terms of this Warrant).
"Warrant" means this Warrant, any amendment or other modification of
-------
this Warrant, and any warrants issued upon transfer, division or
combination of, or in substitution for, this Warrant or any other such
warrant. All such Warrants shall at all times be identical as to terms and
conditions and date, except as to the number of Warrant Shares for which
they may be exercised.
"Warrant Shares" has the meaning set forth in the preamble.
--------------
2. EXERCISE.
--------
2.1 Exercise; Delivery of Certificates. Subject to the provisions of
----------------------------------
Section 2.3, this Warrant may be exercised at the option of the Holder, in whole
- -----------
or in part, at any time and from time to time during the Exercise Period, by (a)
delivering to the Company at its principal executive office (the "Designated
----------
Office") (i) a notice of exercise, in substantially the form attached hereto
- ------
(the "Exercise Notice"), duly completed and signed by the Holder, and (ii) this
---------------
Warrant, and (b) paying the Warrant Purchase Price pursuant to Section 2.2 for
-----------
the number of Warrant Shares being purchased. The Warrant Shares being
purchased under this Warrant will be deemed to have been issued to the Holder,
as the record owner of such Warrant Shares, as of the close of business on the
date on which payment therefor is made by the Holder pursuant to Section 2.2.
-----------
Stock certificates representing the Warrant Shares so purchased shall be
delivered to the Holder within three (3) Business Days after this Warrant has
been exercised (or, if applicable, after the conditions set forth in Section 2.3
-----------
have been satisfied); provided, however, that in the case of a purchase of less
-------- -------
than all of the Warrant Shares issuable upon exercise of this Warrant, the
Company shall cancel this Warrant and, within three (3) Business Days after this
Warrant has been surrendered, execute and deliver to the Holder a new Warrant of
like tenor representing the number of unexercised Warrant Shares. Each stock
certificate representing the number of Warrant Shares purchased or purchasable
under this Warrant shall be registered in the name of the Holder or, subject to
compliance with Applicable Law, such other name as shall be designated by the
Holder.
2.2 Payment of Warrant Price. Payment of the Warrant Purchase Price
------------------------
may be made, at the option of the Holder, by (i) certified or official bank
check, (ii) wire transfer, (iii) instructing the Company to withhold and cancel
a number of Warrant Shares then issuable upon exercise of this Warrant with
respect to which the excess of the Fair Market Value over the Warrant Purchase
Price for such canceled Warrant Shares is at least equal to the Warrant Purchase
Price for the shares being purchased, (iv) surrender to the Company of shares of
Common Stock previously acquired by the Holder with a Fair Market Value equal to
the Warrant Purchase Price for the shares then being purchased or (v) any
combination of the
5
<PAGE>
foregoing. The Company shall issue fractional shares of Common Stock upon the
exercise of this Warrant.
2.3 Antitrust Notification. If the Holder determines, in its sole
----------------------
judgment upon the advice of counsel, that an exercise of this Warrant pursuant
to the terms hereof would be subject to the provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the Company
-------
shall, within seven (7) Business Days after receiving notice from the Holder of
the applicability of the HSR Act, file with the United States Federal Trade
Commission (the "FTC") and the United States Department of Justice (the "DOJ")
--- ---
the notification and report form and any supplemental information required to be
filed by it pursuant to the HSR Act in connection with the exercise of this
Warrant. Any such notification and report form and supplemental information
will be in full compliance with the requirements of the HSR Act. The Company
will furnish to the Holder promptly (but in no event more than two (2) Business
Days) such information and assistance as the Holder may reasonably request in
connection with the preparation of any filing or submission required to be filed
by the Holder under the HSR Act. The Company shall respond promptly after
receiving any inquiries or requests for additional information from the FTC or
the DOJ (and in no event more than three (3) Business Days after receipt of such
inquiry or request). The Company shall keep the Holder apprised periodically
and at the Holder's request of the status of any communications with, and any
inquiries or requests for additional information from, the FTC or the DOJ. The
Company shall bear all filing or other fees required to be paid by the Company
and the Holder (or the "ultimate parent entity" of the Holder, if any) under the
HSR Act or any other Applicable Law in connection with such filings and all
costs and expenses (including, without limitation, attorneys' fees and expenses)
incurred by the Company and the Holder in connection with the preparation of
such filings and responses to inquiries or requests. In the event that this
Section 2.3 is applicable to any exercise of this Warrant, the purchase by the
- -----------
Holder of the Warrant Shares subject to the Exercise Notice, and the payment by
the Holder of the Warrant Purchase Price, shall be subject to the expiration or
earlier termination of the waiting period under the HSR Act.
3. RIGHTS TO REPURCHASE WARRANT.
----------------------------
3.1 Right to Repurchase Prior to Repayment of Note. During the
----------------------------------------------
period commencing on the Effective Date and ending at the close of business on
the second anniversary of the Effective Date, the Company shall have the right
to repurchase, in whole but not in part (the "First Repurchase Option"), 47.44
-----------------------
Warrant Shares at a repurchase price equal to $3,000,000. The First Repurchase
Option may be exercised by the Company by furnishing to the Purchaser thirty
(30) days' prior written notice (a "First Repurchase Option Exercise Notice")
---------------------------------------
stating its intention to exercise the First Repurchase Option and specifying a
Business Day within thirty (30) days of the date of delivery of the First
Repurchase Option Exercise Notice as the date of repurchase. A First Repurchase
Option Exercise Notice, once
6
<PAGE>
given in accordance with this Section 3.1, shall be irrevocable. On the
-----------
repurchase date set forth in the First Repurchase Option Exercise Notice, the
Holder shall deliver to the Company this Warrant against (a) payment of
$3,000,000 by wire transfer in immediately available funds to a bank account
designated by the Holder of the repurchase price provided for in this Section
-------
3.1 and (b) the issuance of a new warrant, in substantially the form of this
- ---
Warrant, evidencing the right to purchase the Warrant Shares not so purchased on
the date of repurchase. Notwithstanding the foregoing, the Company may not
exercise the First Repurchase Option if, at the time of delivery of the First
Repurchase Exercise Notice or on the date of repurchase, a Default or Event of
Default has occurred and is continuing or would occur as a result of the
exercise of the First Repurchase Option (or the payment of the First Repurchase
Option repurchase price).
3.2 Right to Repurchase After Repayment of Note.
-------------------------------------------
(a) Whether or not the Company exercises the First Repurchase
Option, on the terms and subject to the conditions set forth in this Section
-------
3.2, the Company shall have the right to repurchase (the "Second Repurchase
- --- -----------------
Option") the Warrant Shares held by the Holder at the time of such repurchase,
in whole but not in part, at a repurchase price equal to the Fair Market Value
thereof (the "Second Repurchase Option Price"). If, however, the Company does
------------------------------
not elect to exercise the Second Repurchase Option pursuant to Section 3.2(b) or
--------------
otherwise notifies the Holder prior to the fifth day immediately following the
Second Repurchase Option Effective Date that it does not intend to exercise the
Second Repurchase Option, the Company shall be deemed to have elected to pay to
the Holder an amount equal to the Repurchase Alternative Payment pursuant to
Section 3.2(c).
- --------------
(b) The Second Repurchase Option may be exercised by the Company
only during the five (5) day period immediately following the Second Repurchase
Option Effective Date by furnishing to the Holder a written notice of exercise
(a "Second Repurchase Option Exercise Notice") during such five (5) day period.
----------------------------------------
The Second Repurchase Option Exercise Notice shall (i) state that the Company
intends to exercise the Second Repurchase Option, (ii) set forth the
determination by the Board of Directors of the Company of the Fair Market Value
of the Warrant Shares and (iii) specify a Business Day occurring within thirty
(30) days immediately following the Second Repurchase Option Effective Date (or
such later date as may be agreed upon by the Holder in writing) as the closing
date for repurchase. A Second Repurchase Option Exercise Notice, once given,
shall be irrevocable. The Holder may challenge or dispute the determination by
the Board of Directors of the Company of the Fair Market Value of the Warrant
Shares by furnishing a written notice to the Company to such effect (a "FMV
---
Dispute Notice"), within five (5) days following the Holder's receipt of the
- --------------
Second Repurchase Option Exercise Notice. If the Holder timely delivers a FMV
Dispute Notice to the Company and the Company and the Holder cannot resolve the
dispute between or among themselves, then the Fair Market Value
7
<PAGE>
of the Warrant Shares shall be determined in accordance with the valuation
procedures set forth in clause (ii) of the definition of Fair Market Value.
If the Holder challenges or disputes the Fair Market Value of the
Warrant Shares, then the closing date of repurchase shall occur within thirty
(30) days after the determination of the Fair Market Value of the Warrant Shares
pursuant to the valuation procedures set forth in clause (ii) of the definition
of Fair Market Value (but not later than seventy (70) days following the date of
the Second Repurchase Option Exercise Notice). If the Holder does not challenge
or dispute the Fair Market Value of the Warrant Shares set forth in the Second
Repurchase Option Exercise Notice, then the closing date for repurchase shall
occur on the date specified in the Second Repurchase Option Exercise Notice. In
either event, at the closing of the repurchase of the Warrant Shares under this
Section 3.2 (which closing shall occur at 9:00 a.m. (Pacific time) on the
- -----------
closing date), the Holder shall deliver to the Company at the offices of the
Holder this Warrant (representing the Warrant Shares then held by the Holder)
against payment by the Company of the Second Repurchase Option Price by wire
transfer in immediately available funds to a bank account designated by the
Holder.
(c) If the Company does not timely furnish to the Holder a Second
Repurchase Option Exercise Notice pursuant to Section 3.2(b) or otherwise
--------------
notifies the Holder prior to the fifth day immediately following the Second
Repurchase Option Effective Date that it does not intend to exercise the Second
Repurchase Option, then the Company shall pay to the Holder, no later than 9:00
a.m. (Pacific time) on the sixth (6th) day immediately following the Second
Repurchase Option Effective Date, an amount equal to $500,000 (the "Repurchase
----------
Alternative Payment"). The Repurchase Alternative Payment shall be made by wire
- -------------------
transfer in immediately available funds to a bank account designated by the
Holder. The Company acknowledges and agrees that, if the Company elects not to
exercise the Second Repurchase Option and to pay to the Holder the Repurchase
Alternative Payment, the Holder shall not be obligated to surrender this Warrant
or any Warrant Shares, but shall be entitled to retain this Warrant, the Warrant
Shares and all rights and benefits accruing hereunder and thereunder (which
rights and benefits shall not be adversely affected by the transactions
contemplated by this Section 3.2). The Company hereby acknowledges that the
-----------
obligation of the Company to pay the Repurchase Alternative Payment pursuant to
this Section 3.2(c) in lieu of exercising the Second Repurchase Option was
--------------
negotiated freely and voluntarily by it in exchange for substantial and valuable
consideration furnished by the Holder to it and its Affiliates. In particular,
the Company agreed to and accepted this provision in exchange for the surrender
by the Holder of a substantial and essential right that the Company had
previously granted to the Holder, the value of which surrendered right cannot be
easily quantified with certainty. The Company acknowledges and agrees that the
Repurchase Alternative Payment represents fair and reasonable value for the
surrender by the Holder of such right.
8
<PAGE>
(d) If the Company does not exercise the Second Repurchase Option
pursuant to Section 3.2(b) (regardless of whether it exercised the First
--------------
Repurchase Option) and, at any time thereafter, the Company receives any
proceeds under the key man life insurance policy required to be maintained by
the Company on the life of James Rudis pursuant to Section 1.9A of Annex A, the
------------ -------
Company shall repurchase from the Holder a number of Warrant Shares then held by
the Holder, if any, equal to (i) fifty percent (50.0%) of the insurance proceeds
so received by the Company, divided by (ii) the Fair Market Value per Warrant
----------
Share. The Company covenants and agrees to set aside fifty percent (50.0%) of
such insurance proceeds and use such proceeds solely for the purposes set forth
in this Section 3.2(d). The Company shall notify the Holder in writing of its
--------------
entitlement to such insurance proceeds within one (1) day of notification of
such entitlement and shall set forth therein the determination by the Board of
Directors of the Company of the Fair Market Value of the Warrant Shares. At
9:00 a.m. (Pacific time) on the third Business Day following the receipt by the
Company of such insurance proceeds, the Company shall pay to the Holder an
amount equal to fifty percent (50.0%) of such insurance proceeds (by wire
transfer in immediately available funds to a bank account designated by the
Holder) against delivery of this Warrant (representing the Warrant Shares then
held by the Holder), unless the Holder delivers to the Company a FMV Dispute
Notice prior to such time. If the Holder timely delivers a FMV Dispute Notice
to the Company and the Company and the Holder cannot resolve the dispute between
or among themselves, then the Fair Market Value of the Warrant Shares shall be
determined in accordance with the valuation procedures set forth in clause (ii)
of the definition of Fair Market Value and the closing of the repurchase shall
be deferred until the fifth Business Day following the determination of the Fair
Market Value of the Warrant Shares. If the number of Warrant Shares repurchased
by the Company under this Section 3.2(d) is less than the total number of
--------------
Warrant Shares then held by the Holder, the Company shall issue to the Holder at
the same time a new warrant, in substantially the form of this Warrant,
evidencing the number of Warrant Shares not so repurchased.
3.3 Payment of Fees. The Company shall bear all fees, costs and
---------------
expenses incurred by the Company and the Holder in connection with the
determination of the Fair Market Value of this Warrant or the Warrant Shares,
and any challenge or dispute thereof, including, without limitation, all fees
and expenses of any investment banking, valuation or accounting firm(s) engaged
by the Company or the Holder and of attorneys in connection with such
calculation. Notwithstanding the foregoing, the Company and the Holder shall
share equally all such fees, costs and expenses if, after the Holder challenges
or disputes the Fair Market Value of the Warrant Shares set forth in the Second
Repurchase Option Exercise Notice, the difference between (a) the Fair Market
Value of the Warrant Shares determined pursuant to the valuation procedures set
forth in clause (ii) of the definition of Fair Market Value and (b) the Fair
Market Value of the Warrant Shares set forth in the Second Repurchase Option
Exercise Notice, is less than five percent (5.0%) of the Fair Market Value of
the Warrant Shares set forth in the Second Repurchase Option Exercise Notice.
9
<PAGE>
3.4 No Representations. In no event shall the Holder be obligated to
------------------
make any representations or warranties as to this Warrant or the Warrant Shares
with respect to the transactions contemplated by this Section 3 or this Warrant
---------
other than with respect to the Holder's organization, good standing and
authority, title to this Warrant, no consents and no conflicts with
organizational documents and material agreements.
4. ADJUSTMENTS TO THE NUMBER OF WARRANT SHARES AND TO THE WARRANT
--------------------------------------------------------------
PURCHASE PRICE. The number of Warrant Shares for which this Warrant is
- --------------
exercisable and the Warrant Purchase Price shall be subject to adjustment from
time to time as set forth in this Section 4.
---------
4.1 Stock Dividends, Subdivisions and Combinations. If at any time
----------------------------------------------
the Company:
(a) pays a dividend or other distribution on its Common Stock in
shares of Common Stock or shares of any other class or series of Capital Stock,
(b) subdivides its outstanding shares of Common Stock into a
larger number of shares of Common Stock, or
(c) combines its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then the number of Warrant Shares purchasable upon exercise of this Warrant
immediately prior to the record date for such dividend or distribution or the
effective date of such subdivision or combination shall be adjusted so that the
Holder shall thereafter be entitled to receive upon exercise of this Warrant the
kind and number of shares of Common Stock that the Holder would have owned or
have been entitled to receive immediately after such record date or effective
date had this Warrant been exercised immediately prior to such record date or
effective date. Any adjustment made pursuant to this Section 4.1 shall become
-----------
effective immediately after the effective date of such event, but be retroactive
to the record date, if any, for such event.
Upon any adjustment of the number of Warrant Shares purchasable upon
the exercise of this Warrant as herein provided, the Warrant Purchase Price per
share shall be adjusted by multiplying the Warrant Purchase Price immediately
prior to such adjustment by a fraction, the numerator of which shall be the
number of Warrant Shares purchasable upon the exercise of this Warrant
immediately prior to such adjustment and the denominator of which shall be the
number of Warrant Shares so purchasable immediately thereafter.
10
<PAGE>
4.2 Issuance of Option Rights. If at any time the Company issues
-------------------------
(without payment of any consideration) to all holders of outstanding Common
Stock any Option Rights, then the Company shall also distribute such Option
Rights to the Holder as if this Warrant had been exercised immediately prior to
the record date for such issuance.
4.3 Distribution of Assets or Securities. If at any time the Company
------------------------------------
makes a distribution to its stockholders (other than in connection with the
liquidation, dissolution or winding up of the Company) of any asset (other than
cash) or security other than those referred to in Sections 4.1, 4.2 or 4.5, the
------------------------
Warrant Purchase Price shall be adjusted and shall be equal to the Warrant
Purchase Price in effect immediately prior to the close of business on the date
fixed for the determination of stockholders entitled to receive such
distribution multiplied by a fraction (which shall not be less than zero), the
-------------
numerator of which shall be the Fair Market Value per share of Common Stock on
the date fixed for such determination, less the then fair market value of the
----
portion of the assets, or the fair market value of the portion of the
securities, as the case may be, so distributed applicable to one share of Common
Stock, and the denominator of which shall be the Fair Market Value per share of
Common Stock. Such adjustment to the Warrant Purchase Price shall become
effective immediately prior to the opening of business on the day immediately
following the date fixed for the determination of stockholders entitled to
receive such distribution. Upon any adjustment in the Warrant Purchase Price as
provided in this Section 4.3, the number of shares of Common Stock issuable upon
-----------
the exercise of this Warrant shall also be adjusted and shall be equal to the
number of Warrant Shares issuable upon exercise of this Warrant immediately
prior to such adjustment multiplied by a fraction, the numerator of which is the
-------------
Warrant Purchase Price in effect immediately prior to such adjustment and the
denominator of which is the Warrant Purchase Price as so adjusted.
4.4 Issuance of Equity Securities at Less Than Fair Market Value. If
------------------------------------------------------------
at any time the Company sells or issues any shares of Common Stock or Option
Rights (excluding the Excluded Shares) at a price per share of Common Stock
(determined in the case of Option Rights by dividing (x) the total amount
receivable by the Company in consideration of the sale and issuance of such
Option Rights, plus the total consideration payable to the Company upon
----
exercise, conversion or exchange thereof, by (y) the maximum number of shares of
Common Stock issuable upon conversion, exercise or exchange of such Option
Rights), that is lower than the Fair Market Value per share of Common Stock in
effect immediately prior to such sale and issuance, then the Warrant Purchase
Price shall be adjusted (calculated to the nearest $.001) so that it shall equal
the price determined by multiplying the Warrant Purchase Price in effect
immediately prior thereto by a fraction, the numerator of which shall be an
amount equal to the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such sale and issuance plus (B) the number of shares of
Common Stock which the aggregate consideration received by the Company
(determined as provided below) for such sale or issuance would purchase at such
Fair Market Value per share, and the denominator of which
11
<PAGE>
shall be the total number of shares of Common Stock outstanding (or deemed to be
outstanding as provided below) immediately after such sale or issuance.
Adjustments shall be made successively whenever such an issuance is made.
For the purposes of such adjustments, the shares of Common Stock which
the holder of any such Option Rights shall be entitled to subscribe for or
purchase shall be deemed to be issued and outstanding as of the date of the sale
and issuance of such Option Rights and the consideration received by the Company
therefor shall be deemed to be the consideration actually received by the
Company for such Option Rights, plus the consideration or premiums stated in
----
such Option Rights to be paid to acquire the shares of Common Stock covered
thereby.
Upon any adjustment in the Warrant Purchase Price as provided in the
penultimate paragraph above, the number of shares of Common Stock purchasable
upon the exercise of this Warrant shall also be adjusted and shall be that
number determined by multiplying the number of Warrant Shares issuable upon
exercise immediately prior to such adjustment by a fraction, the numerator of
which is the Warrant Purchase Price in effect immediately prior to such
adjustment and the denominator of which is the Warrant Purchase Price as so
adjusted.
If at any time the Company sells and issues any shares of Common Stock
or Option Rights containing the right to subscribe for or purchase shares of
Common Stock for a consideration consisting, in whole or in part, of property
other than cash or its equivalent, then in determining the "price per share of
Common Stock" and the "consideration received by the Company" for purposes of
the preceding paragraphs of this Section 4.4, the Board of Directors of the
-----------
Company shall determine, in good faith, the fair market value of property,
subject to the Holder's rights under Section 4.8(e). There shall be no
--------------
adjustment of the Warrant Purchase Price in respect of the Common Stock pursuant
to this Section 4.4 if the amount of such adjustment is less than $0.001 per
-----------
share of Common Stock; provided, however, that any adjustments which by reason
-------- -------
of this provision are not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
4.5 Reorganization, Reclassification, Merger, Consolidation or
----------------------------------------------------------
Disposition of Assets. If at any time the Company reorganizes its capital,
- ---------------------
reclassifies its capital stock, consolidates, merges or combines with or into
another Person (where the Company is not the surviving corporation or where
there is any change whatsoever in, or distribution with respect to, the
outstanding Common Stock), or the Company sells, transfers or otherwise disposes
of all or substantially all of its property, assets or business to another
Person, other than in a transaction provided for in Sections 4.1, 4.2, 4.3, 4.4
---------------------------
or 4.6, and, pursuant to the terms of such reorganization, reclassification,
- ------
consolidation, merger, combination, sale, transfer or other disposition of
assets, (i) shares of common stock of the successor or acquiring Person or
12
<PAGE>
the Company (if it is the surviving corporation) or (ii) any cash, shares of
stock or other securities or property of any nature whatsoever (including
warrants or other subscription or purchase rights) in addition to or in lieu of
common stock of the successor or acquiring Person or the Company ("Other
-----
Property") are to be received by or distributed to the holders of Common Stock
- --------
who are holders immediately prior to such transaction, then the Holder shall
have the right thereafter to receive, upon exercise of this Warrant, the number
of shares of Common Stock, common stock of the successor or acquiring Person,
and/or Other Property which holder of the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to such event would have
owned or received immediately after and as a result of such event. In such
event, the aggregate Warrant Purchase Price otherwise payable for the Warrant
Shares issuable upon exercise of this Warrant shall be allocated among such
securities and Other Property in proportion to the respective fair market values
of such securities and Other Property as determined in good faith by the Board
of Directors of the Company, subject to the Holder's rights under Section
-------
4.8(e).
- ------
In case of any such event, the successor or acquiring Person (if other
than the Company) shall expressly assume the due and punctual observance and
performance of each and every covenant and condition of this Warrant to be
performed and observed by the Company and all the obligations and liabilities
hereunder, subject to such modifications as the Holder may approve in writing
(and memorialized by resolutions of the Board of Directors of the Company) in
order to provide for adjustments of any shares of common stock of such successor
or acquiring Person for which this Warrant thus becomes exercisable, which
modifications shall be as equivalent as practicable to the adjustments provided
for in this Section 4.5. For purposes of this Section 4, "common stock of the
----------- ---------
successor or acquiring Person" shall include stock or other equity securities,
or securities that are exercisable or exchangeable for or convertible into
equity securities, of such corporation, or other securities if such Person is
not a corporation, of any class that is not preferred as to dividends or assets
over any other class of stock of such corporation or Person and that is not
subject to redemption and shall also include any evidences of indebtedness,
shares of stock or other securities that are convertible into or exchangeable
for any such stock, either immediately or upon the arrival of a specified date
or the happening of a specified event and any warrants or other rights to
subscribe for or purchase any such stock. The foregoing provisions of this
Section 4.5 shall similarly apply to successive reorganizations,
- -----------
reclassifications, consolidations, mergers, sales, transfers and other
dispositions of assets.
4.6 Dissolution, Total Liquidation or Winding-Up. If at any time
--------------------------------------------
there is a voluntary or involuntary dissolution, total liquidation or winding-up
of the Company, other than as contemplated by Section 4.5, then the Company
-----------
shall cause to be mailed (by registered or certified mail, return receipt
requested, postage prepaid) to the Holder at the Holder's address as shown on
the Warrant register, at the earliest practicable time (and, in any event, not
less than thirty (30) calendar days before any date set for definitive action)
written notice
13
<PAGE>
of the date on which such dissolution, liquidation or winding-up shall take
place, as the case may be. Such notice shall also specify the date as of which
the record holders of shares of Common Stock shall be entitled to exchange their
shares for securities, money or other property deliverable upon such
dissolution, liquidation or winding-up, as the case may be. On such date, the
Holder shall be entitled to receive upon surrender of this Warrant the cash or
other property, less the Warrant Purchase Price for this Warrant then in effect,
----
that the Holder would have been entitled to receive had this Warrant been
exercised immediately prior to such dissolution, liquidation or winding-up. Upon
receipt of the cash or other property, any and all rights of the Holder to
exercise this Warrant shall terminate in their entirety. If the cash or other
property distributable in the dissolution, liquidation or winding-up has a fair
market value which is less than the Warrant Purchase Price for this Warrant then
in effect, this Warrant shall terminate and be of no further force or effect
upon the dissolution, liquidation or winding-up.
4.7 Other Dilutive Events. If any event occurs as to which the other
---------------------
provisions of this Section 4 are not strictly applicable but as to which the
---------
failure to make any adjustment would not protect the purchase rights represented
by this Warrant in accordance with the intent and principles hereof, then, in
each such case, the Holder may appoint on behalf of the Company an investment
banking or accounting firm of recognized national standing which shall give its
opinion as to the adjustment, if any, on a basis consistent with the intent and
principles established herein, necessary to preserve the purchase rights
represented by this Warrant. Upon receipt of such opinion, the Company will
mail (by registered or certified mail, return receipt requested, postage
prepaid) a copy thereof to the Holder within three (3) Business Days and shall
make the adjustments described therein. The fees and expenses of such
investment banking or accounting firm shall be borne by the Company.
4.8 Other Provisions Applicable to Adjustments Under this Section.
-------------------------------------------------------------
The following provisions shall be applicable to the adjustments provided for
pursuant to this Section 4:
---------
(a) When Adjustments To Be Made. The adjustments required by
---------------------------
this Section 4 shall be made whenever and as often as any specified event
---------
requiring such an adjustment shall occur. For the purpose of any such
adjustment, any specified event shall be deemed to have occurred at the close of
business on the date of its occurrence.
(b) Record Date. If the Company fixes a record date of the
-----------
holders of Common Stock for the purpose of entitling them to (i) receive a
dividend or other distribution payable in shares of Common Stock or in shares of
any other class or series of capital stock or securities convertible into or
exchangeable for Common Stock or shares of any other class or series of capital
stock or (ii) subscribe for or purchase shares of Common Stock or such other
shares or securities, then all references in this Section 4 to the date of the
---------
14
<PAGE>
issuance or sale of such shares of Common Stock or such other shares or
securities shall be deemed to be references to that record date.
(c) When Adjustment Not Required. If the Company fixes a record
----------------------------
date of the holders of its Common Stock for the purpose of entitling them to
receive a dividend or distribution or subscription or purchase rights to which
the provisions of Section 4.1 would apply, but shall, thereafter and before the
-----------
distribution to stockholders, legally abandon its plan to pay or deliver such
dividend, distribution, subscription or purchase rights, then thereafter no
adjustment shall be required by reason of the taking of such record and any such
adjustment previously made in respect thereof shall be rescinded and annulled.
(d) Notice of Adjustments. Whenever the number of shares of
---------------------
Common Stock for which this Warrant is exercisable or the Warrant Purchase Price
shall be adjusted or recalculated pursuant to this Section 4, the Company shall
immediately prepare a certificate to be executed by the chief financial officer
of the Company setting forth, in reasonable detail, the event requiring the
adjustment or recalculation and the method by which such adjustment or
recalculation was calculated, specifying the number of shares of Common Stock
for which this Warrant is exercisable and (if such adjustment was made pursuant
to Section 4.5) describing the number and kind of any other shares of stock or
-----------
Other Property for which this Warrant is exercisable, and any related change in
the Warrant Purchase Price, after giving effect to such adjustment,
recalculation or change. The Company shall mail (by registered or certified
mail, return receipt requested, postage prepaid) a signed copy of the
certificate to be delivered to the Holder within three (3) Business Days of the
event which caused the adjustment or recalculation. The Company shall keep at
the Designated Office copies of all such certificates and cause them to be
available for inspection at the Designated Office during normal business hours
by the Holder or any prospective transferee of this Warrant designated by the
Holder.
(e) Challenge to Good Faith Determination. Whenever the Board of
-------------------------------------
Directors of the Company is required to make a determination in good faith of
the fair market value of this Warrant or the Warrant Shares under this
Section 4, such determination may be challenged or disputed by the Holder. If
- ---------
the Holder wishes to challenge or dispute any such fair market value
determination, it shall furnish written notice to the Company of its intention
to challenge the same. If the Company and the Holder cannot resolve the dispute
between or among themselves, then such dispute shall be submitted for final
determination to an investment banking or accounting firm pursuant to the
valuation procedures set forth in clause (ii) under the definition of Fair
Market Value. All fees, costs and expenses incurred by the Company and the
Holder in connection with any such determination, and any challenge or dispute
thereof, shall be paid by the Company, or the Company and the Holder, as the
case may be, in accordance with Section 3.3.
-----------
15
<PAGE>
(f) Independent Application. Except as otherwise provided
-----------------------
herein, all subsections of this Section 4 are intended to operate independently
---------
of one another (but without duplication). If an event occurs that requires the
application of more than one subsection, all applicable subsections shall be
given independent effect without duplication.
(g) Other Anti-Dilution Provisions. To the extent that Levine
------------------------------
Leichtman Capital Partners II, L.P. or any of its Affiliates (collectively,
"LLCP") continues to hold this Warrant, in whole or in part, at any time at
----
which the Company takes any action which would have resulted in an adjustment to
the exercise price of, and the number of shares of Common Stock issuable
pursuant to, this Warrant (a "Dilutive Issuance"), then, to the extent that LLCP
-----------------
has exercised all or any portion of this Warrant prior to such time, the Company
shall immediately issue to LLCP upon such Dilutive Issuance, without the payment
of any further consideration of any kind, such number of additional shares of
Common Stock as shall equal the difference between (i) the number of shares of
Common Stock issuable upon the exercise of this Warrant to the extent held
unexercised by LLCP at such time after giving effect to the adjustment thereto
resulting from such Dilutive Issuance and (ii) the number of shares of Common
Stock which would have been issuable upon exercise of this Warrant after giving
effect to such Dilutive Issuance if this Warrant had not been exercised in any
part.
5. MISCELLANEOUS.
-------------
5.1 Restrictive Legend. This Warrant and, unless registered under
------------------
the Securities Act, any Warrant Shares issued upon exercise hereof shall be
stamped or imprinted with a legend in substantially the following form (in
addition to any legends required under applicable state securities laws):
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE
HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER ANY
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED
EXCEPT IN COMPLIANCE WITH THE REGISTRATION REQUIREMENTS OF
SUCH ACT AND THE REGISTRATION OR QUALIFICATION REQUIREMENTS
OF SUCH STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION
FROM SUCH REGISTRATION AND QUALIFICATION.
The legend shall be appropriately modified upon issuance of
certificates for shares of Common Stock.
16
<PAGE>
Upon request of the holder of a Common Stock certificate, the Company
shall issue to that holder a new certificate free of the foregoing legend, if,
with such request, such holder provides the Company with an opinion of counsel
reasonably acceptable to the Company (provided that Riordan & McKinzie, A
--------
Professional Law Corporation, shall be deemed to be acceptable to the Company)
to the effect that the securities evidenced by such certificate may be sold
without restriction under Rule 144 (or any other rule permitting resales of
securities without restriction) promulgated under the Securities Act.
5.2 Holder Entitled to Benefits Under Other Agreements. The Holder
--------------------------------------------------
of this Warrant is entitled to certain rights, benefits and privileges with
respect to this Warrant and the Warrant Shares pursuant to the terms of the
Securities Purchase Agreement, the Registration Rights Agreement (it being
understood that the Warrant Shares constitute "Registrable Securities"
thereunder), the Investor Rights Agreement and certain other Investment
Documents.
5.3 Other Covenants. Without limiting the generality of Section 5.2,
--------------- -----------
the Company covenants and agrees that, as long as this Warrant remains
outstanding or any Warrant Shares are issuable with respect to this Warrant, the
Company will perform all of the following covenants for the express benefit of
the Holder: (a) the Warrant Shares shall, upon issuance, be duly authorized,
validly issued, fully paid and non-assessable shares of Common Stock; (b) each
Holder shall, upon the exercise thereof in accordance with the terms hereof,
receive good and marketable title to the Warrant Shares, free and clear of all
voting and other trust arrangements to which the Company is a party or by which
it is bound, preemptive rights of any stockholder, liens, encumbrances, equities
and claims whatsoever, including, but not limited to, all Taxes, Liens and other
charges with respect to the issuance thereof; (c) at all times prior to the
Expiration Date, the Company shall have reserved for issuance a sufficient
number of authorized but unissued shares of Common Stock, or other securities or
property for which this Warrant may then be exercisable, to permit this Warrant
(or if this Warrant has been divided, all outstanding Warrants) to be exercised
in full; (d) the Company shall deliver to each Holder the information and
reports described in Section 1.3A of Annex A of the Securities Purchase
------------ -------
Agreement as contemplated therein; (e) the Company shall extend to the Holder
the investment monitoring and other rights set forth in the Investor Rights
Agreement, provided that the rights set forth in Section 1.1 of the Investor
--------
Rights Agreement with respect to Board of Director representation may not be
assigned by LLCP to any assignee of this Warrant without the prior written
consent of the Company; and (f) the Company shall provide each Holder with
notice of all corporate actions in the same manner and to the same extent as the
shareholders of the Company.
5.4 Issue Tax. The issuance of shares of Common Stock upon the
---------
exercise of this Warrant shall be made without charge to the Holder for any
issue tax in respect thereof.
17
<PAGE>
5.5 Closing Of Books. The Company will at no time close its transfer
----------------
books against the transfer of this Warrant or of any Warrant Shares in any
manner which interferes with the timely exercise hereof.
5.6 No Voting Rights; Limitation Of Liability. Except as expressly
-----------------------------------------
set forth in this Warrant, nothing contained in this Warrant shall be construed
as conferring upon the Holder (a) the right to vote or consent as a stockholder
in respect of meetings of stockholders for the election of directors of the
Company or any other matter, (b) the right to receive dividends, except as set
forth in Section 4, or (c) any other rights as a stockholder of the Company,
---------
except as set forth in Section 4.2 and Section 4.3 and in the Investor Rights
----------- -----------
Agreement. No provisions hereof, in the absence of affirmative action by the
Holder to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the Holder, shall give rise to any liability of the
Holder for the Warrant Purchase Price or as a shareholder of the Company,
whether such liability is asserted by the Company or by its creditors.
5.7 Modification And Waiver. This Warrant and any provision hereof
-----------------------
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement is sought.
5.8 Notices. All notices, requests, demands and other communications
-------
which are required or may be given under this Warrant shall be in writing and
shall be deemed to have been duly given if transmitted by telecopier with
receipt acknowledged, or upon delivery, if delivered personally or by recognized
commercial courier with receipt acknowledged, or upon the expiration of seventy-
two (72) hours after mailing, if mailed by registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
(a) If to the Holder, at:
c/o Levine Leichtman Capital Partners, Inc.
335 North Maple Drive, Suite 240
Beverly Hills, CA 90210
Attention: Arthur E. Levine, President
Telephone: (310) 275-5335
Facsimile: (310) 275-1441
(b) If to any other Holder, at:
such Holder's address as shown on the books of the Company.
18
<PAGE>
(c) If to the Company, at:
Overhill Farms, Inc.
5730 Uplander Way, Suite 201
Culver City, CA 90230
Attention: James Rudis
Telephone: (310) 641-3680
Telecopier: (310) 645-3914
with a copy to:
--------------
Freeman, Freeman & Smiley, LLP
3415 Sepulveda Blvd. Suite 1200
Los Angeles, CA 90034
Attention: Ross Arbiter, Esq.
Telephone: (310) 255-6100
Telecopier: (310) 391-4042
or at such other address or addresses as the Holder or the Company, as the case
may be, may specify by written notice given in accordance with this Section 5.8.
-----------
5.9 Successors and Assigns. The Company may not assign any of its
----------------------
rights, or delegate any of its obligations, under this Warrant without the prior
written consent of the Holder (which consent may be withheld for any reason or
no reason at all). Subject to the requirements of Applicable Laws, the Holder
may assign this Warrant, in whole or in part, at any time or from time to time,
without the consent of the Company. Each assignment of this Warrant shall be
registered on the books of the Company to be maintained for such purpose upon
surrender of this Warrant at the Designated Office, together with appropriate
instruments of assignment, duly completed and executed. Upon such surrender,
the Company shall within three (3) Business Days, at its own expense, execute
and deliver a new Warrant or Warrants in the name of the assignee or assignees
specified in such assignment and in the denominations specified therein and this
Warrant shall promptly be canceled. If any portion of this Warrant is not being
assigned, the Company shall, at its own expense, within three (3) Business Days
issue to the Holder a new Warrant evidencing the portion not so assigned. If
the Holder assigns this Warrant to one or more Persons, any decisions that the
Holder is entitled to make at any time hereunder shall be made by the Holders
holding more than fifty percent (50.0%) of the aggregate number of Warrant
Shares issuable upon exercise of all of the then exercisable Warrants.
19
<PAGE>
This Warrant shall be binding upon and inure to the benefit of the
Company, the Holder and their respective successors and permitted assigns, and
shall include, with respect to the Company, any Person succeeding the Company by
merger, consolidation, combination or acquisition of all or substantially all of
the Company's assets, and in such case, except as expressly provided herein and
in the Securities Purchase Agreement, all of the obligations of the Company
hereunder shall survive such merger, consolidation, combination or acquisition.
5.10 Captions; Construction and Interpretation. The captions in this
-----------------------------------------
Warrant are for convenience of reference only, do not constitute a part of this
Agreement and are not to be considered in construing or interpreting this
Warrant. All section, preamble, recital, exhibit, schedule, disclosure
schedule, annex, clause and party references are to this Warrant unless
otherwise stated. No party, nor its counsel, shall be deemed the drafter of
this Warrant for purposes of construing the provisions of this Warrant, and all
provisions of this Warrant shall be construed in accordance with their fair
meaning, and not strictly for or against any party.
5.11 Lost Warrant or Certificates. Upon receipt of evidence
----------------------------
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant or of a stock certificate evidencing Warrant Shares
and, in the case of any such loss, theft or destruction, upon receipt of an
indemnity reasonably satisfactory to the Company or, in the case of any such
mutilation, upon surrender and cancellation of this Warrant or stock
certificate, the Company shall make and deliver to the Holder, within three (3)
Business Days of receipt by the Company of such documentation, a new Warrant or
stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or
mutilated Warrant or stock certificate.
5.12 No Impairment. The Company shall not by any action, including,
-------------
without limitation, amending its charter documents or regulations or through any
reorganization, reclassification, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this Warrant,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such actions as may be necessary or appropriate to
protect the rights of the Holder against impairment. Without limiting the
generality of the foregoing, the Company will (i) not increase the par value (if
any) of any shares of Common Stock receivable upon the exercise of this Warrant
above the amount payable therefor upon such exercise immediately prior to such
increase in par value, (ii) take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Common Stock upon the exercise of this Warrant, free
and clear of all liens, encumbrances, equities and claims, and (iii) use its
best efforts to obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be necessary to enable
the Company to perform its obligations under this Warrant.
20
<PAGE>
5.13 Governing Law. In all respects, including all matters of
-------------
construction, validity and performance, this Warrant and the rights and
obligations arising hereunder shall be governed by, and construed and enforced
in accordance with, the laws of the State of California applicable to contracts
made and performed in the State of California, without regard to principles
thereof regarding conflicts of laws.
5.14 Remedies. If the Company fails to perform, comply with or
--------
observe any covenant or agreement to be performed, complied with or observed by
it under this Warrant, the Holder may proceed to protect and enforce its rights
by suit in equity or action at law, whether for specific performance of any term
contained in this Warrant or for an injunction against the breach of any such
term or in aid of the exercise of any power granted in this Warrant or to
enforce any other legal or equitable right, or to take any one or more of such
actions. The Company agrees to pay all fees, costs, and expenses, including,
without limitation, fees and expenses of attorneys, accountants and other
experts retained by the Holder, and all fees, costs and expenses of appeals,
incurred or expended by the Holder in connection with the enforcement of this
Warrant or the collection of any sums due hereunder, whether or not suit is
commenced. None of the rights, powers or remedies conferred under this Warrant
shall be mutually exclusive, and each right, power or remedy shall be cumulative
and in addition to any other right, power or remedy whether conferred by this
Warrant or now or hereafter available at law, in equity, by statute or
otherwise.
5.15 WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION
--------------------
WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED
BY AN EXPERIENCED AND EXPERT PERSON AND THE COMPANY AND THE HOLDER WISH
APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE
COMPANY AND THE HOLDER DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE
APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF
THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, AND UNDERSTANDING THEY
ARE WAIVING A CONSTITUTIONAL RIGHT, THE COMPANY AND THE HOLDER (BY ACCEPTANCE
HEREOF) WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING
BROUGHT TO RESOLVE ANY DISPUTE, WHETHER IN CONTRACT, TORT, OR OTHERWISE, ARISING
OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO, THE WARRANT SHARES, THIS
WARRANT, THE SECURITIES PURCHASE AGREEMENT AND/OR ANY OTHER INVESTMENT DOCUMENT
OR THE TRANSACTIONS COMPLETED HEREBY OR THEREBY.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed and
issued by its duly authorized representatives on the date first above written.
21
<PAGE>
OVERHILL FARMS, INC., a Nevada corporation
By:______________________________________________
James Rudis
President and Chief Executive Officer
By:_______________________________________________
Richard A. Horvath
Vice President and Chief Financial Officer
22
<PAGE>
OVERHILL FARMS, INC.
FORM OF EXERCISE SUBSCRIPTION
-----------------------------
(To be signed only upon exercise of this Warrant)
The undersigned hereby irrevocably elects to exercise its Warrant to
purchase ___________________________________ (_______) shares of Common Stock
for an aggregate Warrant Purchase Price of _________________________________
Dollars ($______).
[If the Holder has determined upon advice of counsel that compliance with
the HSR Act is required, include the following sentences: "The undersigned has
determined that this exercise is subject to the HSR Act and requests that the
Company file the requisite notification and report form with, and pay all
requisite filing fees to, the FTC and the DOJ as promptly as possible. The
purchase of the shares described above and the payment of the Warrant Purchase
Price are subject to the expiration or earlier termination of the waiting period
under the HSR Act."]
The Warrant Purchase Price to be paid as follows (check as applicable):
___ Certified or official bank check in the amount of $_________;
___ Wire transfer in the amount of $_________;
___ Cancellation of _________________________ Warrant Shares; or
___ Surrender of __________________ shares of Common Stock.
The undersigned hereby requests that [if the Holder has determined upon
advice of counsel that compliance with the HSR Act is required, include the
following phrase: "upon the expiration or earlier termination of the waiting
period under the HSR Act"] a certificate(s) for the shares of Common Stock be
issued in the name of _________________________, and delivered to,
____________________, whose address is __________________________________.
The undersigned represents that it is acquiring such shares of Common Stock
for its own account for investment purposes only and not with a view to or for
sale in connection with any distribution thereof, and, as to the undersigned,
the representations and warranties of the Purchaser set forth in Section 4 of
---------
the Securities Purchase Agreement are true and correct on the date hereof as if
made by the undersigned on this date.
Dated: ________ ____________________________________________________________
Name of the Holder (must conform precisely to the
name specified on the face of the Warrant)
____________________________________________________________
Signature of authorized representative of the Holder
____________________________________________________________
Print or type name of authorized representative
Social Security Number or Employer
Tax Identification Number of the Holder:____________________
Address of the Holder: _____________________________________
_____________________________________
_____________________________________
<PAGE>
EXHIBIT 10.9
EXECUTION COPY
--------------
INVESTOR RIGHTS AGREEMENT
-------------------------
THIS INVESTOR RIGHTS AGREEMENT is entered into as of the 24th day of
November 1999 (this "Agreement"), by and among OVERHILL FARMS, INC., a Nevada
---------
corporation (the "Company"), POLYPHASE CORPORATION, a Nevada corporation
-------
("Parent"), LEVINE LEICHTMAN CAPITAL PARTNERS II, L.P., a California limited
- --------
partnership ("LLCP").
----
R E C I T A L S
- - - - - - - -
A. The parties and OVERHILL L.C. VENTURES, INC., a California
corporation, are parties to the Securities Purchase Agreement dated of even date
herewith (as amended from time to time, the "Securities Purchase Agreement")
-----------------------------
pursuant to which, on the date hereof, the Company is issuing to LLCP, and LLCP
is purchasing from the Company, the Securities, all on the terms and subject to
the conditions set forth in the Securities Purchase Agreement. Unless otherwise
indicated, capitalized terms used and not otherwise defined in this Agreement
shall have the meanings set forth in the Securities Purchase Agreement.
B. The execution of this Agreement by the Company and Parent is a
condition precedent to the obligation of LLCP to consummate the transactions
contemplated by the Securities Purchase Agreement.
C. In consideration of the substantial direct and indirect benefits which
the Company and the Guarantors will realize from the consummation of the
transactions contemplated by the Securities Purchase Agreement, the Company has
agreed to grant to LLCP the investment monitoring and other rights set forth in
this Agreement.
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. INVESTMENT MONITORING RIGHTS.
----------------------------
1.1 Election of LLCP Representative to Board.
----------------------------------------
(a) The Company and Parent hereby represent and warrant that they have
taken all requisite action (corporate or otherwise) to increase the authorized
number of directors of the Company to five (5) and to cause Arthur E. Levine to
be duly elected to the Board of Directors of the Company (the "Board"),
-----
effective as of the Closing.
<PAGE>
(b) From and at all times after the date hereof and until the
expiration of this Section 1.1 pursuant to Section 1.6, Parent agrees that it
----------- -----------
will vote (or cause to be voted) all shares of the Capital Stock of the Company
now owned or held or hereafter acquired by it, directly or indirectly, so that:
(i) Arthur E. Levine or such other Person designated by LLCP
(Mr. Levine, together with such other designated Person, being referred to
herein as the "LLCP Representative") shall be elected to the Board at each
-------------------
election of directors; and
(ii) An individual who is Independent shall be elected to the
Board at each election of directors.
In addition, Parent shall take (or cause to be taken) all other necessary or
desirable actions to ensure that the LLCP Representative and the Independent
Director are or remain as duly elected members of the Board. In no event shall
Parent, the Board or any other Person (other than LLCP) have the power to remove
the LLCP Representative from the Board without the prior written consent of
LLCP.
(c) In the event of the death, resignation or removal of the LLCP
Representative at any time, or in the event the LLCP Representative shall not be
elected to the Board at any election of directors for any reason, the Company
shall, upon the request of LLCP, promptly (and in any event within five (5) days
of such request) take such steps as may be necessary or appropriate to cause
another Person designated by LLCP to become the LLCP Representative on the
Board, including increasing the size of the Board and/or filling the resulting
vacancy with an LLCP Representative. Such steps may include calling and
holding, in accordance with the Bylaws of the Company and Applicable Laws, a
special meeting of the Board or the shareholders of the Company or circulating a
written consent for execution by members of the Board and/or the shareholders.
To the extent that the Board delegates any of its duties to an executive
committee or other committee, the LLCP Representative shall, upon the request of
LLCP, be appointed to such committee.
(d) In the event of the death or resignation of the then current
Independent Director at any time, Parent and the Company shall, as soon as
practicable (but not later than thirty (30) days following such death or
resignation), take such steps as may be necessary or appropriate to cause
another Person who is Independent to be duly elected or appointed to the Board
as the Independent Director. Such steps may include calling and holding, in
accordance with the Bylaws of the Company and Applicable Laws, a special meeting
of the Board or the shareholders of the Company or circulating a written consent
for execution by members of the Board and/or the shareholders. To the extent
that the Board delegates any of its duties to an executive committee or other
committee, the Independent Director shall be appointed to such committee. In
addition, Parent agrees that it will not remove (or take any other action to
remove) the Independent Director, unless and until an individual who is
Independent takes
-2-
<PAGE>
office as a replacement Independent Director as provided in Section 2.14A of
-------------
Annex A of the Securities Purchase Agreement.
(e) The agreements set forth in this Section 1.1 are intended to
-----------
constitute enforceable voting agreements within the scope of Section 706(a) of
the General Corporation Law of the State of California.
1.2 Observation Rights. Without limiting any of the rights of LLCP in
------------------
Section 1, if, at any time, no LLCP Representative is serving on the Board for
- ---------
any reason, LLCP shall receive notice of and be entitled to have one (1)
representative and one (1) advisor to such representative (or, at LLCP's
election, two (2) representatives) attend as observers all meetings of the Board
and of all committees thereof and at all meetings of the shareholders of the
Company. Notice of such meetings shall be given to LLCP in the same manner and
at the same time as to the members of the Board or such committees (which in any
event shall not be less than forty-eight (48) hours prior to such meeting unless
otherwise agreed to by LLCP in advance and in writing) and at the same time as
to the shareholders of the Company, as the case may be. LLCP shall be provided
with copies of (i) a meeting agenda, if any is prepared, (ii) all information
that is provided to the members of the Board or such committees or to the
shareholders of the Company (whether prior to, at, or subsequent to any such
meetings), as the case may be, at the same time as such materials are provided
to the members of the Board or such committee or to the shareholders of the
Company, as the case may be, and (iii) copies of the minutes of all meetings of
the Board and such committees and of all meetings of shareholders concurrently
with the distribution of such minutes to one or more members of the Board or
such committees or shareholders, as the case may be, but in no event later than
forty-five (45) days after each such meeting.
1.3 Operating Committee. On the date hereof, the Company shall take all
-------------------
necessary action to establish an operating committee (the "Operating Committee")
-------------------
to, among other things, (a) review the annual operating and capital budget of
the Company and its subsidiaries; (b) compare budgeted versus actual
performance; (c) analyze working capital management; and (d) review the cash
flow performance of the Company and its subsidiaries. The Operating Committee
shall also consider such additional financial matters as the Operating Committee
shall deem advisable. The Operating Committee shall not constitute a committee
designated by the Board pursuant to the Company's Bylaws or Section 311 of the
California Corporations Code, and shall not have any authority to act in the
name of or on behalf of the Company or any of its subsidiaries, but the
Operating Committee shall have the right to make suggestions and to recommend
actions to the Board or to the Board of Directors of any subsidiary of the
Company or to any committee of any such Board of Directors, either in writing or
by attending, through a representative, a meeting of such Board of Directors or
such committee. The Operating Committee shall at all times be comprised of at
least two (2) members of senior management of the Company, who initially shall
be James Rudis and Richard Andrew Horvath, and two (2) members designated by
LLCP (who shall be representatives of Levine
-3-
<PAGE>
Leichtman Capital Partners, Inc. ("LLCP Inc."), an Affiliate of LLCP). The
--------
financial officers and other members of senior management of the Company shall
be available at each meeting of the Operating Committee to review financial
information and discuss other matters, and the Chief Financial Officer and other
members of senior management of Parent shall, at the request of LLCP furnished
two (2) days prior to such meeting, be available by telephonic conference at
each meeting of the Operating Committee to review financial information and
discuss other matters. Regular meetings of the Operating Committee shall take
place on or about the third Tuesday of each calendar month. The first meeting
of the Operating Committee shall be held on Tuesday, December 21, 1999.
Meetings may be conducted by telephone so long as each of the persons attending
can hear each of the other persons attending the meeting. The Company's
financial officers shall prepare a financial package for delivery to all
Operating Committee members at least forty-eight (48) hours prior to each
regularly scheduled monthly meeting. The financial package shall include, among
other things, (i) a consolidated and consolidating balance sheet, statement of
operations and statement of cash flows for Parent and the Company and their
Subsidiaries for the most recent one-month period and for the year-to-date
period, (ii) a comparison of the actual results of operations for such periods
to the same periods in the prior year and to the budget and forecast, (iii) an
explanation of any variances in such actual results of operations from such
budget and forecast, (iv) the status of any permitted dispositions of assets by
the Company, (v) an update of the status of all litigation or similar
proceedings pending against Parent, the Company or any of their Subsidiaries and
(vii) such other information regarding Parent and the Company and the Company's
Subsidiaries as any member of the Operating Committee may from time to time
request.
1.4 Vote of Independent Director.
----------------------------
(a) Notwithstanding any other provision of the Articles of
Incorporation of the Company to the contrary, or any provision of Applicable
Laws that may otherwise empower the Company, the Company shall not, without the
unanimous affirmative vote of the Board of Directors of the corporation (which
shall include the affirmative vote of an Independent Director) and the
affirmative vote of the holders holding at least ninety percent of the issued
and outstanding capital stock of the corporation entitled to vote thereon, do
any of the following after the date hereof:
(i) Engage in any business or activity other than in accordance
with Article Three of the Amended Charter;
(ii) Incur any indebtedness, or assume or guarantee any
indebtedness of any other Person, other than in connection with the
activities described in Article Three of the Amended Charter;
-4-
<PAGE>
(iii) Dissolve or liquidate, in whole or in part (including a
dissolution or liquidation of the Company at the request of the holders
holding at least a majority of the issued and outstanding capital stock of
the Company);
(iv) Consolidate with or merge into any other Person, or sell,
convey or transfer all or substantially all of its properties and assets to
any other person or entity or acquire all or substantially all of the
assets or Capital Stock or any other Person;
(v) Institute any proceedings to be adjudicated bankrupt or
insolvent, or consent to the institution of any bankruptcy, insolvency or
reorganization proceedings against it, or file a petition or answer or
consent to seeking or consenting to its reorganization or relief under any
applicable federal or state law relating to bankruptcy, or consent to the
appointment of, or taking possession by, a receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the corporation or any
substantial part of its assets or properties, or make any assignment for
the benefit of creditors, or admit in writing its inability to pay its
debts generally as they become due, or take any corporation action in
furtherance of any such action; or
(vi) Authorize any amendment or alteration to, or repeal of, the
Articles of Incorporation of the Company.
(b) If, at any time after the date hereof, no individual is serving
as the Independent Director on the Board of Directors of the Company, the
Company shall not, without the affirmative vote of the LLCP Representative and
the affirmative vote of the holders holding at least ninety percent of the
issued and outstanding capital stock of the corporation entitled to vote
thereon, take any of the actions enumerated in clauses (i) through (vi) above.
In addition, Parent hereby agrees that it will not vote any of the shares of the
Capital Stock of the Company now owned or held or hereafter acquired by it in
favor of any of the matters enumerated in clauses (i) through (vi) above unless
the Independent Director (or, as provided in the immediately preceding sentence,
the LLCP Representative) votes in favor of such matter.
1.5 Consulting Fees.
---------------
(a) In consideration of the services rendered and to be rendered by
LLCP Inc. to the Company under this Section 1 within the first three (3) twelve-
---------
month periods immediately following the date hereof, which services are hereby
acknowledged by the Company as being substantial and valuable to its business,
the Company agrees to pay to LLCP Inc. a consulting fee in the aggregate amount
of $540,000. The Company agrees that the full amount of such consulting fee
shall be fully earned as of the date hereof (whether or not the Securities
remain outstanding at all times during the entire three (3) year period), but
that such consulting fee shall be due and payable in three (3) equal
installments as follows: (a)
-5-
<PAGE>
$180,000 shall be due and payable on January 10, 2000, (b) $180,000 shall be due
and payable on January 10, 2001 and (c) $180,000 shall be due and payable on
January 10, 2002; provided, however, that upon the earlier to occur of (i) a
-------- -------
Change in Control and (ii) the date that all principal of, premium, if any, and
accrued and unpaid interest on the Notes shall have been paid in full, all
consulting fees remaining unpaid under this Section 1.5(a) at such time shall
--------------
become immediately due and payable to LLCP Inc.
(b) In addition, the Company agrees to pay to LLCP Inc. additional
consulting fees in consideration of services to be rendered by LLCP Inc. to the
Company under this Section 1 within each of the two (2) twelve-month periods
---------
ending on the fourth and fifth anniversaries of the date hereof. The amount of
such additional consulting fee shall be $180,000 for each such twelve month
period and shall be due and payable, with respect to the first such twelve month
period, on January 10, 2003, and with respect to the second such twelve month
period, on January 10, 2004; provided, however, that upon the occurrence of a
-------- -------
Change in Control, all consulting fees remaining unpaid under this Section
-------
1.5(b) at such time shall become immediately due and payable to LLCP Inc.
- ------
(c) The consulting fees payable to LLCP Inc. under this Section 1.5
-----------
shall be paid by wire transfer in immediately available funds to a bank account
designated by LLCP Inc. In no event shall LLCP Inc. be obligated to refund or
waive its receipt of all or any portion of the consulting fees payable to it
hereunder for any reason.
1.6 Survival of Rights. The rights granted to LLCP under Section 1.1
------------------ -----------
(Election of LLCP Representative to Board) and Section 1.2 (Observation Rights)
-----------
shall be effective as of the date hereof and shall continue for so long as LLCP
continues to hold, directly or indirectly, at least $2,500,000 in outstanding
principal amount of the Note, or LLCP continues to hold (or is deemed to hold),
directly or indirectly, at least five percent (5.0%) of the shares of Common
Stock calculated on a Fully Diluted Basis. The rights granted to LLCP under
Section 1.3 (Operating Committee) shall be effective as of the date hereof and
- -----------
shall continue for so long as any principal of the Note remains outstanding.
Notwithstanding anything to the contrary contained herein or otherwise, the
rights granted to LLCP under Section 1.1 (Election of LLCP Representative to
-----------
Board), Section 1.2 (Observation Rights) and Section 1.3 (Operating Committee)
----------- -----------
shall continue to survive to the extent that LLCP holds any portion of the
Indebtedness evidenced by the Note or any Warrant Shares and informs the Company
in writing that it believes in good faith that it is required to retain such
rights to qualify as a "venture capital operating company" for purposes of
complying with ERISA.
2. INDEMNIFICATION AND INSURANCE.
-----------------------------
2.1 The Company shall, to the maximum extent permitted by law, indemnify,
defend and hold harmless the LLCP Representative, any LLCP representative on the
Operating Committee, LLCP and the employees, partners, principals, agents,
attorneys, accountants, representatives and Affiliates of LLCP (including,
without limitation, LLCP Inc.)
-6-
<PAGE>
(collectively, the "LLCP Parties"), from and against all costs, expenses,
------------
liabilities, claims, judgments, damages and losses, including, without
limitation, all attorneys' fees and the cost of any investigation and
preparation incurred in connection therewith, incurred in connection with any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (collectively, "Liabilities and Costs"), arising
---------------------
out of or in any way related to the fact that any LLCP Party is or was a
director, officer, employee or other agent of the Company or any subsidiary of
the Company, is or was serving on the Operating Committee, is or was serving as
an observer of the Board, or is or was serving at the request of the Company as
a director, officer, employee, trustee, agent or fiduciary of another
corporation, partnership, joint venture, employee benefit plan, trust or other
enterprise.
2.2 Upon request by any LLCP Party, the Company, shall advance (within
five (5) Business Days of such request) any and all expenses, including, without
limitation, any and all attorneys' fees and the cost of any investigation and
preparation incurred in connection with any matter for which such LLCP Party is
or may be entitled to indemnification hereunder; provided, however, that if and
-------- -------
to the extent that a court of competent jurisdiction finally determines that
such LLCP Party is not permitted to be indemnified with respect to such matter
under applicable law, the Company shall be entitled to be reimbursed for any
expenses so advanced. The Company shall also indemnify each LLCP Party from and
against any and all Liabilities and Costs incurred in connection with any claim
or action brought to enforce such LLCP Party's rights under this Section 2, or
---------
under Applicable Law or the Company's charter or bylaws now or hereafter in
effect relating to indemnification, or for recovery under directors' and
officers' liability insurance policies maintained by the Company, regardless of
whether such LLCP Party is ultimately determined to be entitled to such
indemnification or insurance recovery, as the case may be. If, for any reason,
the foregoing indemnification is not available for any reason or is not
sufficient to indemnify and hold the LLCP Parties harmless from all such
Liabilities and Costs, then the Company shall contribute to the amount of all
such Liabilities and Costs paid or payable by any LLCP Party in such proportion
as is appropriate to reflect not only the relative benefits received by the
Company, on the one hand, and LLCP, on the other hand, but also the relative
fault of each, as well as any other equitable considerations. The Company's
reimbursement, indemnity and contribution obligations shall be in addition to
any liability the Company may otherwise have at law or under any other
agreement, including, without limitation, the Securities Purchase Agreement, and
such obligations shall extend, upon the same terms, to all LLCP Parties. This
Section 2 shall survive indefinitely the termination of this Agreement.
- ---------
2.3 At any time that an LLCP Representative is serving on the Board, the
Company shall maintain in force and effect one or more directors and officers
liability insurance policies providing at least $5,000,000 in insurance coverage
for director liability, including coverage for claims under federal and state
securities laws.
-7-
<PAGE>
3. CO-SALE AGREEMENT.
-----------------
3.1 If Parent proposes to sell or transfer any shares of Common Stock now
owned or held by Parent ("Co-Sale Shares") in one (1) transaction or any series
--------------
of related transactions, then Parent shall promptly give written notice (the
"Co-Sale Notice") to the Company and to LLCP at least thirty (30) days prior to
--------------
the closing of such sale or transfer. The Co-Sale Notice shall describe in
reasonable detail the proposed sale or transfer, including, without limitation,
the number of Co-Sale Shares to be sold or transferred, the nature of such sale
or transfer, the consideration to be paid and the name and address of each
prospective purchaser or transferee. In the event that the sale or transfer is
being made pursuant to the provisions of Section 3.8, the Notice shall state
-----------
under which paragraph and subparagraph the sale or transfer is being made.
3.2 LLCP shall have the right, exercisable upon written notice to Parent
within twenty (20) days after receipt of the Co-Sale Notice, to participate in
such sale on the same terms and conditions as specified in the Co-Sale Notice.
To the extent that LLCP exercises such right of participation in accordance with
the terms and conditions set forth in this Section 3, the number of Co-Sale
---------
Shares that Parent may sell in the transaction(s) shall be correspondingly
reduced.
3.3 If there shall be a decrease in the price to be paid by the proposed
purchaser for the Co-Sale Shares to be purchased from the price set forth in the
Co-Sale Notice, which decrease is acceptable to Parent, or any other material
change in the terms or conditions set forth in the Co-Sale Notice which are less
favorable to Parent but which are acceptable to Parent, Parent shall immediately
notify LLCP in writing of such decrease or other change, and LLCP shall have ten
(10) Business Days from the date of receipt of such written notice to modify the
number of shares of Common Stock it will sell to the purchaser, as previously
indicated in the written notice delivered by LLCP pursuant to Section 3.2.
-----------
3.4 LLCP may sell all or any part of that number of shares of Common Stock
equal to the product of (a) the aggregate number of shares of Common Stock
covered by the Co-Sale Notice, multiplied by (ii) a fraction, the numerator of
-------------
shares of Common Stock or Warrant Shares, as applicable, held by LLCP at the
time of the sale or transfer (collectively, the "LLCP Shares") and the
-----------
denominator of which is the total number of shares of Common Stock held by
Parent and any other shareholder of the Company, plus the number of LLCP Shares
----
at the time of the sale or transfer. In no event shall LLCP be required to make
any representation or warranty in connection with the sale to any prospective
purchase other than as to the organization and authority of LLCP, title to the
shares of Common Stock to be sold by LLCP and the absence of conflict with laws
or material agreements of LLCP.
-8-
<PAGE>
3.5 LLCP shall effect its participation in the sale by promptly delivering
to Parent for transfer to the prospective purchaser one or more certificates,
properly endorsed for transfer, which represent:
(a) the type and number of shares of Common Stock which LLCP elects to
sell; or
(b) that number of Warrant Shares which is at such time convertible
into the number of shares of Common Stock which LLCP elects to sell; provided,
--------
however, that if the prospective purchaser objects to the delivery of Warrant
- -------
Shares in lieu of Common Stock, LLCP shall convert such Warrant Shares into
Common Stock and deliver Common Stock as provided in Section 3.4(a). The
--------------
Company agrees to make any such conversion concurrent with the actual transfer
of such shares to the purchaser.
3.6 The stock certificate or certificates that LLCP delivers to Parent
pursuant to Section 3.4 shall be transferred to the prospective purchaser in
-----------
consummation of the sale of the Common Stock pursuant to the terms and
conditions specified in the Co-Sale Notice, and Parent shall concurrently
therewith remit to LLCP that portion of the sale proceeds to which LLCP is
entitled by reason of LLCP's participation in such sale in immediately available
funds. To the extent that any prospective purchaser prohibits such assignment
or otherwise refuses to purchase shares or other securities from LLCP, Parent
shall not sell to such prospective purchaser any shares of Common Stock unless
and until, simultaneously with such sale, Parent shall purchase such shares or
other securities from LLCP. Subject to the foregoing sentence, if Parent does
not complete the proposed sale or transfer for any reason, Parent shall
immediately return to LLCP all documents (including, without limitation, the
Warrant and all stock certificates, stock assignments and/or powers of attorney)
which LLCP delivered to Parent pursuant to this Section 3 or otherwise in
---------
connection with such sale or other transfer.
3.7 The exercise or non-exercise of the rights of LLCP hereunder to
participate in one or more sales of Co-Sale Shares by Parent shall not adversely
affect its rights to participate in subsequent sales of Co-Sale Shares by
Parent.
3.8 Exempt Transfers. The provisions of Section 3 shall not apply to the
---------------- ---------
sale of any Co-Sale Shares (a) to the public pursuant to a registration
statement filed with, and declared effective by, the Commission under the
Securities Act of 1933, as amended (the "Securities Act") or (b) to the Company.
--------------
3.9 Prohibited Transfers.
--------------------
(a) If Parent sells (or enters into any agreement, arrangement or
understanding to sell) any Co-Sale Shares in contravention of the co-sale rights
of LLCP hereunder (a "Prohibited Transfer"), LLCP shall have, in addition to all
-------------------
other rights, powers
-9-
<PAGE>
or remedies available at law, in equity, under this Agreement or any other
Investment Document or under Applicable Law, the right to exercise the
Prohibited Transfer Put (as such term is defined below), and Parent shall be
bound by the applicable provisions hereof.
(b) In the event of a Prohibited Transfer, LLCP shall have the right
to sell to Parent (the "Prohibited Transfer Put") the type and number of shares
-----------------------
of Common Stock equal to the number of shares LLCP would have been entitled to
transfer to the purchaser under Section 3.2 had the Prohibited Transfer been
-----------
effected pursuant to and in compliance with the terms hereof. Such sale shall
be made on the following terms and conditions:
(i) The price per share at which shares are to be sold to
Parent shall be equal to the price per share paid by the purchaser to
Parent in the Prohibited Transfer. Parent shall also reimburse LLCP for any
and all fees and expenses, including attorneys, accountants and other
expenses, incurred pursuant to the exercise or attempted exercise of LLCP's
rights under Section 3;
---------
(ii) Within thirty (30) days after the later of the dates on
which LLCP (A) received notice of the Prohibited Transfer or (B) otherwise
became aware of the Prohibited Transfer, LLCP shall, if exercising the
Prohibited Transfer Put, deliver to Parent the certificate or certificates
representing the shares to be sold, each certificate to be properly
endorsed for transfer;
(iii) Parent shall, upon receipt of the certificate or
certificates representing the shares to be sold by LLCP, pay the aggregate
purchase price therefor and the amount of reimbursable fees and expenses,
as specified in Section 3.9(b)(i), by wire transfer in immediately
-----------------
available funds; and
(iv) Notwithstanding the foregoing, any attempt by Parent to
transfer any Co-Sale Shares in violation of Section 3 shall be void and the
---------
Company agrees that it will not effect such a transfer nor will it treat
any alleged transferee as the holder of such shares without the written
consent of LLCP.
4. RIGHT OF FIRST REFUSAL.
----------------------
4.1 The Company hereby grants to LLCP the right of first refusal to
purchase a pro rata share of New Securities (as such term in defined below)
--------
which the Company may, from time to time, propose to sell and issue, and the
Company shall not issue any New Securities without complying with the provisions
of this Section 4. For purposes of this right of first refusal, LLCP's pro rata
--------- --------
share shall be equal to the percentage equal to a fraction, the numerator of
which is the number of shares of Common Stock held by LLCP or issuable upon the
exercise of the Warrant or other Option Rights of the Company held by LLCP
immediately prior to the issuance of the New Securities, and the denominator of
which is the sum of (a) the total number of shares of Common Stock outstanding
immediately prior to the issuance of the
-10-
<PAGE>
New Securities, assuming the exercise of all Option Rights of the Company
outstanding immediately prior to the issuance of the New Securities.
4.2 The term "New Securities" shall mean any capital stock (including
--------------
Common Stock or preferred stock) of the Company whether now authorized or not,
and any Option Rights of the Company; provided, however, that the term New
-------- -------
Securities does not include any securities issued in a public offering pursuant
to a registration under the Securities Act with an aggregate offering price to
the public of at least $10,000,000.
4.3 If the Company proposes to undertake an issuance of New Securities, it
shall give LLCP written notice (an "Issuance Notice") of its intention,
---------------
describing the type of New Securities, and their price and the general terms
upon which the Company proposes to issue the same. LLCP shall have thirty (30)
days after its receipt of the Issuance Notice to agree to purchase LLCP's pro
rata share of such New Securities for the price and upon the terms specified in
the notice by giving written notice to the Company and indicating therein the
quantity of New Securities to be purchased.
4.4 The right of first refusal granted under this Section 4 shall expire
---------
on the earlier to occur of (a) the tenth anniversary of the date of this
Agreement and (ii) the date upon which the number of Warrant Shares held by
LLCP, directly or indirectly, is less than five percent (5.0%) of the number of
shares of Common Stock calculated on a Fully Diluted Basis.
5. MISCELLANEOUS.
-------------
5.1 Legends. All certificates representing shares of Capital Stock of the
-------
Company now owned or held or hereafter acquired by Parent shall have stamped or
endorsed thereon a legend substantially in the following form (in addition to
any legends required under applicable state securities laws):
THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS
OF AN INVESTOR RIGHTS AGREEMENT DATED AS OF NOVEMBER 24, 1999, BY AND
AMONG THE HOLDER, THE COMPANY AND CERTAIN OTHER PERSONS. COPIES OF
SUCH AGREEMENT MAY BE OBTAINED FROM THE COMPANY UPON WRITTEN REQUEST.
5.2 Stock Transfer Records. The Company shall make appropriate notations
----------------------
in its stock transfer records of the restrictions on transfer provided for in
this Agreement and shall not record any transfers of capital stock not made in
strict compliance with the terms of this Agreement. The Company acknowledges
that any such transfer shall constitute an Event of Default under Section 10.1
of the Securities Purchase Agreement.
-11-
<PAGE>
5.3 Successors and Assigns. The rights and obligations of LLCP under this
----------------------
Agreement shall be freely assignable in connection with any transfer of the
Warrant or any portion thereof or of any shares of Common Stock issued upon the
exercise thereof in whole or in part; provided, however, that the rights of LLCP
-------- -------
under Section 1 may not be assigned except in connection with any such transfer
---------
to an Affiliate of LLCP. Any assignee of such rights shall be entitled to all
of the benefits of this Agreement as if such assignee were an original party
hereto.
5.4 Entire Agreement. This Agreement constitutes the full and entire
----------------
agreement and understanding among the parties with respect to the subject matter
hereof and supersedes all prior oral and written, and all contemporaneous oral,
agreements and understandings relating to the subject matter hereof.
5.5 Notices. All notices, requests, demands and other communications
-------
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given if transmitted by telecopier with
receipt acknowledged, or upon delivery, if delivered personally or by recognized
commercial courier with receipt acknowledged, or upon the expiration of 72 hours
after mailing, if mailed by registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
(1) If to LLCP, to:
Levine Leichtman Capital Partners II, L.P.
c/o Levine Leichtman Capital Partners, Inc.
335 North Maple Drive, Suite 240
Beverly Hills, CA 90210
Attention: Arthur E. Levine, President
Telephone: (310) 275-5335
Telecopier: (310) 275-1441
with a copy to:
--------------
Riordan & McKinzie
300 South Grand Avenue, Suite 2900
Los Angeles, CA 90071
Attention: Richard J. Welch, Esq.
Telephone: (213) 629-4824
Telecopier: (213) 629-8550
-12-
<PAGE>
(2) If to the Company, at:
Overhill Farms, Inc.
5730 Uplander Way, Suite 201
Culver City, CA 90230
Attention: James Rudis
Telephone: (310) 641-3680
Telecopier: (310) 645-3914
with a copy to:
--------------
Freeman, Freeman & Smiley, LLP
3415 Sepulveda Blvd. Suite 1200
Los Angeles, CA 90034
Attention: Ross Arbiter, Esq.
Telephone: (310) 255-6100
Telecopier: (310) 391-4042
(3) If to Parent, at:
Polyphase Corporation
4800 Broadway
Addison, Texas 75248
Attention: James Rudis
Telephone: (972) 386-0101
Telecopier: (972) 386-8008
or at such other address or addresses as LLCP, such assignee, the Company or
Parent, as the case may be, may specify by written notice given in accordance
with this Section 5.5.
-----------
5.6 Severability. In case any provision of this Agreement shall be
------------
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
5.7 Counterparts. This Agreement may be executed in two or more
------------
counterparts and by facsimile, each of which shall be an original, but all of
which together shall constitute one instrument.
5.8 Descriptive Headings, Construction and Interpretation. The
-----------------------------------------------------
descriptive headings of the several paragraphs of this Agreement are for
convenience of reference only and do not constitute a part of this Agreement and
are not to be considered in construing or interpreting this Agreement. All
section, preamble, recital and party references are to this Agreement unless
otherwise stated. No party, nor its counsel, shall be deemed the drafter of
-13-
<PAGE>
this Agreement for purposes of construing the provisions of this Agreement, and
all provisions of this Agreement shall be construed in accordance with their
fair meaning, and not strictly for or against any party.
5.9 Waivers and Amendments. Neither this Agreement nor any provision
----------------------
hereof may be changed, waived, discharged or terminated orally or by course of
dealing, but only by a statement in writing signed by all of the parties.
5.1 Remedies. In the event that the Company or Parent fails to observe or
--------
perform any covenant or agreement to be observed or performed under this
Agreement, LLCP may proceed to protect and enforce its rights by suit in equity
or action at law, whether for specific performance of any term contained in this
Agreement or for an injunction against the breach of any such term or in aid of
the exercise of any power granted in this Agreement or to enforce any other
legal or equitable right of LLCP, or to take any one or more of such actions.
The Company agrees to pay all fees, costs, and expenses, including, without
limitation, fees and expenses of attorneys, accountants and other experts
retained by LLCP, and all fees, costs and expenses of appeals, incurred or
expended by LLCP in connection with the enforcement of this Agreement or the
collection of any sums due hereunder, whether or not suit is commenced. None of
the rights, powers or remedies conferred under this Agreement shall be mutually
exclusive, and each such right, power or remedy shall be cumulative and in
addition to any other right, power or remedy whether conferred by this Agreement
or now or hereafter available at law, in equity, by statute or otherwise.
5.1 Governing Law. In all respects, including all matters of
-------------
construction, validity and performance, this Agreement and the rights and
obligations arising hereunder shall be governed by, and construed and enforced
in accordance with, the laws of the State of California applicable to contracts
made and performed in such state, without regard to principles regarding choice
of law or conflicts of laws.
5.1 WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
--------------------
COMPLEX COMMERCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSONS AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO
ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, AND UNDERSTANDING THEY ARE WAIVING A CONSTITUTIONAL RIGHT, THE
PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER IN CONTRACT, TORT, OR
OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO, THIS
AGREEMENT, ANY OTHER INVESTMENT DOCUMENT OR THE TRANSACTIONS COMPLETED HEREBY
AND THEREBY.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their duly authorized representatives as of the date first
written above.
COMPANY LLCP
- ------- ----
OVERHILL FARMS, INC., a Nevada LEVINE LEICHTMAN CAPITAL
corporation PARTNERS, INC., a California corporation
On behalf of LEVINE LEICHTMAN
By:_____________________________ CAPITAL PARTNERS II, L.P., a
James Rudis California limited partnership
President and Chief Executive
Officer By:__________________________
Lauren B. Leichtman
Chief Executive Officer
By:_____________________________
Richard Andrew Horvath
Vice President and Chief
Financial Officer
PARENT
- ------
POLYPHASE CORPORATION, a
Nevada corporation
By:_____________________________
James Rudis
President and Chief Executive
Officer
By:_____________________________
William Shatley
Senior Vice President and
Chief Financial Officer
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,368
<SECURITIES> 0
<RECEIVABLES> 26,902
<ALLOWANCES> 407
<INVENTORY> 36,278
<CURRENT-ASSETS> 66,535
<PP&E> 13,066
<DEPRECIATION> 7,527
<TOTAL-ASSETS> 93,917
<CURRENT-LIABILITIES> 30,985
<BONDS> 36,458
0
0
<COMMON> 178
<OTHER-SE> 5,048
<TOTAL-LIABILITY-AND-EQUITY> 93,917
<SALES> 44,443
<TOTAL-REVENUES> 44,443
<CGS> 35,000
<TOTAL-COSTS> 35,000
<OTHER-EXPENSES> 6,316
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,993
<INCOME-PRETAX> 1,298
<INCOME-TAX> 19
<INCOME-CONTINUING> 1,279
<DISCONTINUED> 0
<EXTRAORDINARY> (1,290)
<CHANGES> 0
<NET-INCOME> (11)
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
