FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission File No. 2-331855
Go-Video, Inc.
--------------
(Exact name of registrant as specified in its charter)
Delaware 86-0492122
-------- ----------
(State of Incorporation) (IRS E.I.N.)
7835 East McClain Drive, Scottsdale, Arizona 85260
- -------------------------------------------- -----
(Address of principal executive offices) Zip code)
(602) 998-3400
--------------
(Registrant'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 Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ ------
11,530,478 shares of Common Stock were outstanding as of February 7, 1997
<PAGE>
GO-VIDEO, INC.
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION
Consolidated Balance Sheets --
At December 31, 1996 and March 31, 1996 3
Consolidated Statements of Operations --
Three and Nine Months Ended December 31, 1996
and 1995 4
Consolidated Statements of Cash Flows --
Nine Months Ended December 31, 1996 and 1995 5-6
Notes to Consolidated Financial Statements -- 7-8
Management's Discussion and Analysis of Results
of Operations and Financial Condition 9-12
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures S-1
2
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
ASSETS December 31, 1996 March 31, 1996
----------------- --------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 202,774 313,916
Receivables - less allowance for doubtful accounts of
$130,000 3,546,930 4,147,143
Inventories 5,101,378 5,127,103
Prepaid expenses and other assets 120,324 42,021
----------- -----------
Total current assets 8,971,406 9,630,183
----------- -----------
EQUIPMENT AND IMPROVEMENTS:
Furniture, fixtures & equipment 547,179 507,990
Leasehold improvements 208,888 173,157
Office equipment 529,214 483,861
Tooling 1,277,560 1,107,970
----------- -----------
Total 2,562,841 2,272,978
Less accumulated depreciation and amortization 1,462,408 1,100,386
----------- -----------
Equipment and improvements - net 1,100,433 1,172,592
----------- -----------
DUAL-DECK VCR PATENTS, net of amortization of $45,191
and $40,041, respectively 71,560 76,710
GOODWILL, net of amortization of $29,831, and $17,046,
respectively 140,632 153,417
OTHER ASSETS, net of amortization $537,155 and
$471,321, respectively 91,230 165,084
----------- -----------
TOTAL $ 10,375,261 $11,197,986
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,159,432 $ 2,512,594
Accrued expenses 567,173 375,972
Other current liabilities 618,143 731,824
Warranty reserve - current 200,000 186,000
Line of credit 0 2,430,330
Income tax payable 20,000 0
----------- -----------
Total current liabilities 2,564,748 6,236,720
----------- -----------
WARRANTY RESERVE - Long-term 5,000 5,000
----------- -----------
DEFERRED RENT 27,209 15,520
----------- -----------
LONG TERM OBLIGATIONS 201,360 262,885
----------- -----------
MANDATORY CONVERTIBLE SUBORDINATED DEBT 1,270,000 0
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock $.001 par value - authorized, 50,000,000 shares;
issued and outstanding, 11,430,478 and
11,331,012 shares, respectively 11,430 11,331
Additional capital 19,144,203 19,054,796
Unamortized consulting services (12,502) (35,002)
Accumulated deficit (12,836,187) (14,353,264)
----------- -----------
Total stockholders' equity 6,306,944 4,677,861
----------- -----------
TOTAL $10,375,261 $11,197,986
=========== ===========
</TABLE>
3
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(unaudited)
<TABLE>
<CAPTION>
For The Three For The Nine
Months Ended December 31, Months Ended December 31,
------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $ 11,676,234 $ 11,435,206 $ 29,257,396 $ 27,544,911
COST OF SALES 8,333,117 9,062,896 21,905,854 21,993,758
------------ ------------ ------------ ------------
Gross profit 3,343,117 2,372,310 7,351,542 5,551,153
------------ ------------ ------------ ------------
OTHER OPERATING COSTS:
Sales and marketing 1,003,224 1,240,030 2,557,578 3,204,386
Research and development 249,899 164,666 708,044 479,100
General and administrative 744,661 631,815 1,948,552 1,966,652
------------ ------------ ------------ ------------
Total other operating costs 1,997,784 2,036,511 5,214,174 5,650,138
------------ ------------ ------------ ------------
Operating income (loss) 1,345,333 335,799 2,137,368 (98,985)
------------ ------------ ------------ ------------
OTHER (EXPENSE) REVENUES:
Interest income 2,454 751 14,308 2,521
Interest expense (258,014) (250,128) (582,651) (483,320)
Other expense (33,083) (10,017) (31,944) (2,266)
------------ ------------ ------------ ------------
Total other expense (288,643) (259,394) (600,287) (483,065)
------------ ------------ ------------ ------------
INCOME(LOSS) BEFORE INCOME TAXES 1,056,690 76,405 1,537,081 (582,050)
PROVISION FOR INCOME TAXES 20,000 0 20,000 0
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 1,036,690 $ 76,405 $ 1,517,081 $ (582,050)
============ ============ ============ ============
NET INCOME (LOSS) PER
COMMON SHARE $ 0.09 $ 0.01 $ 0.13 $ (0.05)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 11,351,852 11,307,860 11,337,984 11,295,408
============ ============ ============ ============
</TABLE>
4
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Nine
Months Ended December 31,
-------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,517,081 $ (582,050)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 470,317 609,442
Provision for doubtful accounts 3,000 (3,005)
Change in operating assets and liabilities-net
of effect of acquisition:
Receivables 642,212 1,649,188
Inventories 25,724 (4,217,602)
Prepaid expenses and other assets (78,302) (16,645)
Other assets 33,020 15,100
Accounts payable (1,353,161) 1,655,042
Accrued expenses 191,199 (71,558)
Other current liabilities (158,681) 114,059
Warranty reserve 14,000 58,000
Other liabilities (49,834) (1,245)
Income tax expense 20,000 0
----------- -----------
Net cash provided (used) in operating activities 1,276,575 (791,274)
----------- -----------
INVESTING ACTIVITIES:
Equipment and improvement expenditures (291,893) (1,109,832)
Cash acquired from acquisition 0 39,951
----------- -----------
Net cash used in investing activities (291,893) (1,069,881)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 44,995 45,600
Registration costs (35,489) 0
Net (repayments) borrowings under line of credit (2,430,330) 2,151,249
Payment of financing costs (25,000) (85,000)
Proceed from issuance of mandatory convertible debt 1,350,000 0
Payment of debt assumed in acquisition 0 (257,314)
----------- -----------
Net cash (used) provided by financing activities (1,095,824) 1,854,535
----------- -----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (111,142) (6,620)
CASH AND CASH EQUIVALENTS, beginning of period 313,916 166,819
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 202,774 $ 160,199
=========== ===========
SUPPLEMENTAL INFORMATION TO CASH FLOW
STATEMENT:
Interest paid $ 582,641 $ 483,320
=========== ===========
</TABLE>
5
<PAGE>
(Continued)
GO-VIDEO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Nine
Months Ended December 31,
-------------------------
1996 1995
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
In connection with the acquisition, liabilities were
assumed as follows:
Liabilities assumed $ 0 $ 361,120
------------ -----------
Fair value of assets acquired, including $39,951
in cash $ 0 $ 190,657
------------ -----------
Excess of cost over fair value of assets acquired $ 0 $ 170,463
============ ===========
</TABLE>
6
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARY
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------
GENERAL
- -------
In the opinion of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal reoccurring accruals)
necessary to present fairly the financial position of the Company and the
results of its operations and changes in its financial position for the periods
reported. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the entire year.
Inventories at December 31, 1996 consisted of $430,199 of raw materials and
service parts and $4,671,179 of finished goods.
Goodwill of approximately $170,000 resulting from the acquisition of the
Company's Security Products Division is being amortized on the straight line
basis over ten years.
The Company is engaged in one business segment, the design, development,
marketing and licensing of electronic video communication products. The
Company's current primary focus is the design, marketing, sale, and distribution
of several models of its Dual-Deck(TM) videocassette recorder. Sales to Circuit
City Stores totaled 10% or more of net sales for the nine months ended December
31, 1996. Sales to Circuit City Stores were $5,370,407 for the nine month period
ended December 31, 1996. Accounts receivable from Circuit City Stores was
$684,123 at December 31, 1996.
The Company sold $1.5 million of convertible subordinated notes in a private
placement with institutional holders in August 1996. The placement included six
Units, each consisting of one 10% Convertible Subordinated Note in the principal
amount of $250,000 with warrants to purchase 100,000 shares of common stock at
$1.25 per share. The Notes must be converted to common stock within three years.
The warrants have an aggregate fair value of $230,000. In connection with the
private placement, the Company also issued warrants and common stock to the
placement agent with a fair value of $46,000 and $75,000 respectively.
Certain reclassifications have been made to the prior financial statements to
conform to the current classifications.
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
and tax credit carryforwards. The tax effects of significant items comprising
the Company's net deferred tax asset as of December 31, 1996 are as follows:
7
<PAGE>
Deferred Tax Assets:
Current-reserves not currently
deductible $ 473,000
Noncurrent:
Differences between book & tax
basis of property $ 399,000
Operating loss carryforwards 7,722,000
Contribution carryforwards 8,000
Tax credit carryforwards 189,000
Other intangibles 95,000
------------
Net Deferred Tax Asset 8,886,000
Valuation Allowance (8,886,000)
------------
Net Deferred Asset $ -0-
=============
The information presented within the financial statements should be read in
conjunction with the Company's audited Financial Statements for the fiscal year
ended March 31, 1996, the eight month transition period ended March 31, 1995,
and the fiscal year ended July 31, 1994 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" from the 1996 Annual
Report on Form 10-K.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Three months ended December 31, 1996 compared with the three months ended
- --------------------------------------------------------------------------------
December 31, 1995:
- ------------------
Net sales increased 2.1% to $11.7 million during the three months ended December
31, 1996 from $11.4 million during the three months ended December 31, 1995. The
increase in net sales was primarily due to a 13% increase in net units sold for
the three months ended December 31, 1996 compared to the three months ended
December 31, 1995, offset in part by a 10% decrease in average revenue per unit
for the two periods. The increase in net units sold was primarily due to
increased demand for the Company's lowest-priced models, which were sold at
retail prices approximately 25% lower than the models they replaced from the
prior year's comparable period. Net sales of the Company's Security Products
Division, which was acquired on April 1, 1995, were less than 3% of total net
sales for the three months ending December 31, 1996.
Gross profit was $3.3 million and $2.4 million for the three months ended
December 31, 1996 and 1995, respectively, representing a 40.9% increase in gross
profit dollars. Gross profit as a percentage of net sales increased to 28.6% for
the three month period ended December 31, 1996 from 20.7% for the three month
period ended December 31, 1995. The increase in gross profit as a percentage of
sales was primarily due to the Company's reduced manufacturing costs across all
models of its Dual-Deck VCR line.
Sales and marketing expense decreased 19.1% to $1.0 million for the three months
ended December 31, 1996 from $1.2 million for the three months ended December
31, 1995. As a percentage of sales, sales and marketing expenses decreased from
10.8% in the three months ended December 31, 1995, to 8.6% in the three months
ended December 31, 1996. The decrease in sales and marketing expenses as a
percentage of sales was primarily due to reduced spending on marketing and
promotional items and lower commission expense resulting from reduced commission
rates during the three months ended December 31, 1996.
Research and development expenses increased 51.8% to $0.2 million for the three
months ended December 31, 1996. The increase in research and development
expenses was due primarily to expenses incurred in connection with the Company's
development of prototype-digital LCD projection and direct view televisions.
General and administrative expenses increased 17.9% to $0.7 million for the
three months ended December 31, 1996 from $0.6 million for the three months
ended December 31, 1995. As a percentage of net sales, general and
administrative expense increased from 5.5% for the three months ended December
31, 1995 to 6.4% for the three months ended December 31, 1996. The increase in
general and administrative expense was primarily due to compensation expense
recorded by the Company during the three months ended December 31, 1996 related
to the accrual of annual incentive compensation and the fair value of a common
stock grant provided to a non-executive officer employee.
As a result of the above, the Company recorded operating profit of $1,345,333
for the three months ended December 31, 1996 compared with operating profit of
$335,799 for the three months ended December 31, 1995. The Company recorded net
other expense of $288,643 for the three months ended December 31, 1996 compared
with net other expense of $259,394 for the same period of the prior year.
Net income for the three months ended December 31, 1996 was $1,036,690 compared
with net income of $76,405 for the three months ended December 31, 1995. The
Company recorded a provision for
10
<PAGE>
income taxes of $20,000 for the three months ended December 31, 1996
representing its alternative minimum tax liability. The Company did not
recognize income tax expense for the three months ended December 31, 1996 and
December 31, 1995 due to its net operating loss carryforwards.
Nine months ended December 31, 1996 compared with the nine months ended December
- --------------------------------------------------------------------------------
31, 1995:
- ---------
Net sales increased 6.2% to $29.3 million during the nine months ended December
31, 1996 from $27.5 million during the nine months ended December 31, 1995. The
increase in net sales was primarily due to a 28.0% increase in net units sold
for the nine months ended December 31, 1996 compared to the nine months ended
December 31, 1995, offset in part by a 17.0% decrease in average revenue per
unit for the two periods. The increase in net unit sales was due to the
introduction of the Company's GV60xx series (VHS/VHS Dual-Deck VCR) during the
nine months ended December 31, 1996. The decrease in average revenue per unit
was primarily due to an overall decrease in the per unit selling price of the
GV60xx series and the GV40xx series models compared to the GV30xx series and the
GV40xx series models which were sold during the nine months ended December 31,
1995, and the Company's product sales mix which included a higher percentage of
its less expensive price leader models during the nine months ended December 31,
1996 as compared with the nine months ended December 31, 1995. Net sales of the
Company's Security Products Division, which was acquired on April 1, 1995, were
less than 3% of total net sales for the nine months ending December 31, 1996.
Gross profit was $7.4 million and $5.6 million for the nine months ended
December 31, 1996 and 1995, respectively, representing a 32.4% increase in gross
profit dollars. Gross profit as a percentage of net sales increased to 25.1% for
the nine month period ended December 31, 1996 from 20.2% for the nine month
period ended December 31, 1995. The increase in gross profit as a percentage of
sales is primarily due to higher sales margins realized on the GV60xx and GV40xx
series over the GV40xx series and the closeout of the GV30xx series during the
nine months ended December 31, 1995. The Company's higher sales margins are
primarily due to reduced manufacturing costs on its current model lines sold
during the nine months ended December 31, 1996.
Sales and marketing expense decreased 20.2% to $2.6 million for the nine months
ended December 31, 1996 from $3.2 million for the nine months ended December 31,
1995. As a percentage of sales, sales and marketing expenses decreased from
11.6% in the nine months ended December 31, 1995, to 8.7% in the nine months
ended December 31, 1996. The decrease in sales and marketing expenses as a
percentage of sales was primarily due to lower commission expense resulting from
reduced commission rates and reduced spending on market development funds and
promotional items during the nine months ended December 31, 1996.
Research and development expenses increased 47.8% to $0.7 million for the nine
months ended December 31, 1996 from $0.5 million for the nine months ended
December 31, 1995. The increase in research and development expenses was
primarily due to expenses incurred in connection with the Company's development
of prototype-digital LCD projection and direct view televisions.
General and administrative expenses were $1.9 million for the nine months ended
December 31, 1996 and for the nine months ended December 31, 1995. As a
percentage of net sales, general and administrative expense decreased from 7.1%
for the nine months ended December 31, 1995 to 6.7% for the nine months ended
December 31, 1996.
As a result of the above, the Company recorded operating profit of $2,137,368
for the nine months ended December 31, 1996 compared with an operating loss of
$98,985 for the nine months ended December 31, 1995. The Company recorded net
other expense of $600,287 for the nine months ended December 31, 1996 compared
with net other expense of $483,065 for the same period of the prior year. The
increase
11
<PAGE>
in net other expense was primarily due to increased interest expense caused by
an increase in the average daily loans outstanding while the average effective
interest rate remained consistent during the nine month period ending December
31, 1996 as compared to the nine month period ending December 31, 1995.
Net income for the nine months ended December 31, 1996 was $1,517,081 compared
with a net loss of $582,050 for the nine months ended December 31, 1995. The
Company recorded a provision for income taxes of $20,000 for the nine months
ended December 31, 1996 representing its alternative minimum tax liability. For
the nine months ended December 31, 1995, the Company did not recognize an income
tax benefit due to recording a valuation allowance to offset the potential tax
benefit of the loss.
Seasonality
- -----------
The Company principally operates within the Consumer Electronics Industry, which
generally experiences strong seasonality in demand. Accordingly, the Company
expects to continue to experience peaks consistent with previous years in its
sales from September through December, which covers the holiday season.* The
Company's performance during and following this period will be affected by
retail sales of its customers.
Future Results
- --------------
This Report on Form 10-Q contains "Forward Looking Statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. The Company's future
operating results may be affected by a number of factors, including the general
economic conditions in the markets in which the Company operates, the Company's
ability to design, distribute and sell its products profitably, competition in
general and competitive pricing in particular.
Capital Resources and Liquidity
- -------------------------------
Net cash provided in operating activities was $1.3 million for the nine months
ended December 31, 1996 compared to cash used in operations of $0.8 million for
the nine months ended December 31, 1995. The more significant factors comprising
the net cash provided were $1.5 million of net income and a $0.6 million
decrease in receivables offset in part by a $1.4 million decrease in accounts
payable. The decrease in the receivable balance from March 31, 1996 to December
31, 1996 was primarily due to the timing of shipments during the nine months
ended December 31, 1996 as the Company's average collection experience has
generally remained consistent.
The Company had net working capital of $6.4 million and $3.4 million at December
31, 1996 and March 31, 1996, respectively. At December 31, 1996, the Company's
current ratio (the ratio of current assets to current liabilities) was 3.5 to 1.
The Company's sales seasonality requires incremental working capital for
investment primarily in inventories and receivables. The primary source of funds
over the nine months ended December 31, 1996 has been cash from operations. The
Company has a line of credit that was entered into in October 1992 and was last
amended in November 1996. The maximum line of credit, as amended, is $14.0
million limited by specific inventory and receivable balances used as a
borrowing base, and provides for cash loans, letters of credit and acceptances.
The agreement, as amended, has a term of three years, with a non- use fee of
0.25%, and a prepayment (if applicable) fee of 1%. Loans are priced at prime
plus 1.25%. The
- --------
*Contains "Forward Looking Statements".
12
<PAGE>
lender is collateralized by all assets of the Company. The unused and available
line of credit at December 31, 1996 was $4,744,501. Management believes its
current financial resources to be adequate to support operations over the next
twelve months.*
The Company sold $1.5 million of convertible subordinated notes in a private
placement with institutional holders in August 1996. The notes must be converted
to common stock within three years.
The Company expects to incur increased expenses for research and development and
marketing expenses related to the LCD projection television project, the Loewe
Opta television project, and other product lines currently being considered.*
The Company leases a 33,000 square foot executive office and warehouse facility
in north Scottsdale, Arizona, which is fully utilized, in good condition, and
adequate for the Company's needs. The lease began in January 1996 and has a term
of seven years, with one three year extension at the option of the Company.
Inflation
- ---------
Inflation has had no material effect on the Company's operations or financial
condition.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. The following exhibit is filed as part of this Report:
Exhibit No. Description
10.29 Amendment to Financing Agreement between Go-Video,
Inc. and Congress Financial dated November 1, 1996.
27 Financial Data Schedule
b. Reports on Form 8-K
NONE
- --------
*Contains "Forward Looking Statements".
13
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
GO-VIDEO, INC. (Registrant)
Date: February 7, 1997 By /S/ ROGER B. HACKETT
----------------------------------
Roger B. Hackett
Chairman of the Board,
Chief Executive Officer,
President and Chief Operating Officer
Date: February 7, 1997 By /S/ DOUGLAS P. KLEIN
----------------------------------
Douglas P. Klein
Vice President, Chief Financial Officer,
Secretary and Treasurer
(principal financial and
accounting officer)
S-1
Amended and Restated
Loan and Security Agreement
by and between
CONGRESS FINANCIAL CORPORATION (WESTERN)
as Lender
and
Go-Video, Inc.
as Borrower
Dated as of: November 1, 1996
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1. DEFINITIONS.................................................................................. 1
SECTION 2. CREDIT FACILITIES............................................................................ 8
2.1 Revolving Loans..................................................................... 8
2.2 Letter of Credit Accommodations..................................................... 9
2.3 [Intentionally Deleted]............................................................. 11
2.4 Availability Reserves............................................................... 12
SECTION 3. INTEREST AND FEES............................................................................ 12
3.1 Interest............................................................................ 12
3.2 Closing Fee......................................................................... 12
3.3 Facility Fee........................................................................ 13
3.4 Servicing Fee....................................................................... 13
3.5 Unused Line Fee..................................................................... 13
SECTION 4. CONDITIONS PRECEDENT.......................................................................... 13
4.1 [Intentionally Deleted]............................................................. 13
4.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations...................................................................... 13
SECTION 5. GRANT OF SECURITY INTEREST................................................................... 13
SECTION 6. COLLECTION AND ADMINISTRATION................................................................ 14
6.1 Borrower's Loan Account............................................................. 14
6.2 Statements.......................................................................... 15
6.3 Collection of Accounts.............................................................. 15
6.4 Payments............................................................................ 16
6.5 Authorization to Make Loans......................................................... 16
6.6 Use of Proceeds..................................................................... 17
SECTION 7. COLLATERAL REPORTING AND COVENANTS........................................................... 17
7.1 Collateral Reporting................................................................ 17
7.2 Accounts Covenants.................................................................. 18
7.3 Inventory Covenants................................................................. 19
7.4 Equipment Covenants................................................................. 20
7.5 Power of Attorney................................................................... 20
7.6 Right to Cure....................................................................... 21
7.7 Access to Premises.................................................................. 21
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 8. REPRESENTATIONS AND WARRANTIES............................................................... 22
8.1 Corporate Existence, Power and Authority; Subsidiaries.............................. 22
8.2 Financial Statements; No Material Adverse Change.................................... 22
8.3 Chief Executive Office; Collateral Locations........................................ 22
8.4 Priority of Liens; Title to Properties.............................................. 23
8.5 Tax Returns......................................................................... 23
8.6 Litigation.......................................................................... 23
8.7 Compliance with Other Agreements and Applicable Laws................................ 23
8.8 Accuracy and Completeness of Information............................................ 23
8.9 Survival of Warranties; Cumulative.................................................. 24
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS........................................................... 24
9.1 Maintenance of Existence............................................................ 24
9.2 New Collateral Locations............................................................ 24
9.3 Compliance with Laws, Regulations, Etc.............................................. 24
9.4 Payment of Taxes and Claims......................................................... 24
9.5 Insurance........................................................................... 25
9.6 Financial Statements and Other Information.......................................... 25
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc............................. 26
9.8 Encumbrances........................................................................ 27
9.9 Indebtedness........................................................................ 27
9.10 Loans, Investments, Guarantees, Etc................................................. 28
9.11 Dividends and Redemptions........................................................... 28
9.12 Transactions with Affiliates........................................................ 29
9.13 Working Capital..................................................................... 29
9.14 Adjusted Net Worth.................................................................. 29
9.15 Maximum Inventory................................................................... 29
9.16 Costs and Expenses.................................................................. 29
9.17 Further Assurances.................................................................. 30
SECTION 10. EVENTS OF DEFAULT AND REMEDIES.............................................................. 30
10.1 Events of Default................................................................... 30
10.2 Remedies............................................................................ 32
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW ...................................... 33
11.1 Governing Law; Choice of Forum; Service of Process; Jury
Trial Waiver........................................................................ 33
11.2 Waiver of Notices................................................................... 34
11.3 Amendments and Waivers.............................................................. 35
11.4 Waiver of Counterclaims............................................................. 35
11.5 Indemnification..................................................................... 35
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS............................................................. 35
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
12.1 Term................................................................................ 36
12.2 Notices............................................................................. 37
12.3 Partial Invalidity.................................................................. 37
12.4 Successors.......................................................................... 37
12.5 Entire Agreement.................................................................... 37
</TABLE>
iii
<PAGE>
INDEX TO
EXHIBITS AND SCHEDULES
Exhibit A Information Certificate
Schedule 8.4 Existing Liens
Schedule 9.11 Permitted Dividends and Other
Distributions on Capital Stock
iv
<PAGE>
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
------------------------------------------------
This Amended and Restated Loan and Security Agreement dated as of
November 1, 1996 is entered into by and between Congress Financial Corporation
(Western), a California corporation ("Lender") and Go-Video, Inc., a Delaware
corporation ("Borrower").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Lender and Borrower have entered into an Accounts Financing
Agreement [Security Agreement], an Agreement Re: Inventory Loans, a Trade
Financing Agreement Supplement, and an Inventory and Equipment Security
Agreement Supplement, each of which was dated as of October 12, 1992 (as the
foregoing have been amended by that certain Third Combined Amendment to
Financing Agreements, and the Third Combined Amendments to each of such other
supplements and addenda, each dated as of August 11, 1995 and further amended by
those certain letter agreements dated as of October 19, 1995 and June 4, 1996,
the "Original Financing Agreements");
WHEREAS, Borrower has requested that Lender extend and amend the
financing arrangements with Borrower described in the Original Financing
Agreements; and
WHEREAS, Lender is willing to extend and amend the financial
accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree to amend and restate the Original Financing Agreements as follows:
SECTION 1. DEFINITIONS
-----------
All terms used herein which are defined in Article 1 or Article 9 of
the Uniform Commercial Code shall have the meanings given therein unless
otherwise defined in this Agreement. All references to the plural herein shall
also mean the singular and to the singular shall also mean the plural. All
references to Borrower and Lender pursuant to the definitions set forth in the
recitals hereto, or to any other person herein, shall include their respective
successors and assigns. The words "hereof", "herein", "hereunder", "this
Agreement" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not any particular provision of this Agreement
and as this Agreement now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced. An Event of Default shall
exist or continue or be continuing
1
<PAGE>
until such Event of Default is waived in accordance with Section 11.3. Any
accounting term used herein unless otherwise defined in this Agreement shall
have the meanings customarily given to such term in accordance with GAAP. For
purposes of this Agreement, the following terms shall have the respective
meanings given to them below:
1.1 "Accounts" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2 "Adjusted Net Worth" shall mean as to any Person, at any time, in
accordance with GAAP (except as otherwise specifically set forth below), on a
consolidated basis for such Person and its subsidiaries (if any), the amount
equal to: (a) the difference between: (i) the aggregate net book value of all
assets of such Person and its subsidiaries, calculating the book value of
inventory for this purpose on a first-in-first-out basis, after deducting from
such book values all appropriate reserves in accordance with GAAP (including all
reserves for doubtful receivables, obsolescence, depreciation and amortization)
and (ii) the aggregate amount of the indebtedness and other liabilities of such
Person and its subsidiaries (including tax and other proper accruals) plus (b)
indebtedness of such Person and its subsidiaries which is subordinated in right
of payment to the full and final payment of all of the Obligations on terms and
conditions acceptable to Lender.
1.3 "Applicable Inventory Advance Rate" shall mean, at the time of
determination thereof: (a) 65% with respect to Eligible Inventory consisting of
VCR models then in production; (b) 50% with respect to Eligible Inventory
consisting of VCR models no longer in production; (c) 50% with respect to
Eligible Inventory of Borrower's Security Products division; and (d) 50% with
respect to Eligible Inventory consisting of new products provided, however, that
such rates set forth in clauses (c) and (d) may increase, up to 65%, at such
time as (i) Lender has received a satisfactory appraisal of the subject
Inventory; (ii) Borrower has demonstrated for the most recent six months an
average turnover (as defined by GAAP) of not less than 3 times per year for such
Inventory; and (iii) no Event of Default has occurred and is continuing;
provided further, however, that (in addition to any other rights and remedies of
Lender) such rate shall revert to 50% at any time that any of the foregoing
conditions is no longer true.
1.4 "Applicable Inventory Reserve Percentage" means, at any time and
for any category of Eligible Inventory, the percentage obtained by subtracting
from 100% the Applicable Inventory Advance Rate of such Eligible Inventory at
such time.
1.5 "Availability Reserves" shall mean, as of any date of
determination, such amounts as Lender may from time to time establish and revise
in good faith reducing the amount of Revolving Loans and Letter of Credit
Accommodations which would otherwise be available to Borrower under the lending
formula(s) provided for herein: (a) to reflect events, conditions, contingencies
or risks which, as determined by Lender in good faith, do or may affect either
(i) the Collateral or any other property which is security for the
2
<PAGE>
Obligations or its value, (ii) the assets, business or prospects of Borrower or
any Obligor or (iii) the security interests and other rights of Lender in the
Collateral (including the enforceability, perfection and priority thereof) or
(b) to reflect Lender's good faith belief that any collateral report or
financial information furnished by or on behalf of Borrower or any Obligor to
Lender is or may have been incomplete, inaccurate or misleading in any material
respect or (c) in respect of any state of facts which Lender determines in good
faith constitutes an Event of Default or may, with notice or passage of time or
both, constitute an Event of Default.
1.6 "Blocked Accounts" shall have the meaning set forth in Section 6.3
hereof.
1.7 "Collateral" shall have the meaning set forth in Section 5 hereof.
1.8 "Eligible Accounts" shall mean Accounts created by Borrower which
are and continue to be acceptable to Lender based on the criteria set forth
below. In general, Accounts shall be Eligible Accounts if:
(a) such Accounts arise from the actual and bona fide sale and
delivery of goods by Borrower or rendition of services by Borrower in the
ordinary course of its business which transactions are completed in accordance
with the terms and provisions contained in any documents related thereto;
(b) such Accounts are neither unpaid more than 60 days past
their due date nor more than 120 days from the date of the original invoice for
them;
(c) such Accounts comply with the terms and conditions
contained in Section 7.2(c) of this Agreement;
(d) such Accounts do not arise from sales on consignment,
guaranteed sale, sale and return, sale on approval, or other terms under which
payment by the account debtor may be conditional or contingent;
(e) the chief executive office of the account debtor with
respect to such Accounts is located in the United States of America or Canada,
or, at Lender's option, if either: (i) the account debtor has delivered to
Borrower an irrevocable letter of credit issued or confirmed by a bank
satisfactory to Lender, sufficient to cover such Account, in form and substance
satisfactory to Lender and, if required by Lender, the original of such letter
of credit has been delivered to Lender or Lender's agent and the issuer thereof
notified of the assignment of the proceeds of such letter of credit to Lender,
or (ii) such Account is subject to credit insurance payable to Lender issued by
an insurer and on terms and in an amount acceptable to Lender, or (iii) such
Account is otherwise acceptable in all respects to Lender (subject to such
lending formula with respect thereto as Lender may determine);
3
<PAGE>
(f) such Accounts do not consist of progress billings, bill
and hold invoices or retainage invoices, except as to bill and hold invoices, if
Lender shall have received an agreement in writing from the account debtor, in
form and substance satisfactory to Lender, confirming the unconditional
obligation of the account debtor to take the goods related thereto and pay such
invoice;
(g) the account debtor with respect to such Accounts has not
asserted a counterclaim, defense or dispute and does not have, and does not
engage in transactions which may give rise to, any right of setoff against such
Accounts;
(h) there are no facts, events or occurrences which would
impair the validity, enforceability or collectability of such Accounts or reduce
the amount payable or delay payment thereunder;
(i) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;
(j) neither the account debtor nor any officer or employee of
the account debtor with respect to such Accounts is an officer, employee or
agent of or affiliated with Borrower directly or indirectly by virtue of family
membership, ownership, control, management or otherwise;
(k) the account debtors with respect to such Accounts are not
any foreign government, the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, unless, if the
account debtor is the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, upon Lender's
request, the Federal Assignment of Claims Act of 1940, as amended or any similar
State or local law, if applicable, has been complied with in a manner
satisfactory to Lender; provided, however, that until Lender notifies Borrower
to the contrary, United States government Accounts will not be ineligible solely
as a result of this clause (k);
(l) there are no proceedings or actions which are threatened
or pending against the account debtors with respect to such Accounts which might
result in any material adverse change in any such account debtor's financial
condition;
(m) such Accounts of a single account debtor or its affiliates
do not exceed such percentage (not less than 35%) of all otherwise Eligible
Accounts as Lender may in its discretion impose from time to time in the future
as a concentration limit (but the portion of the Accounts not in excess of such
percentage may be deemed Eligible Accounts);
(n) such Accounts are not owed by an account debtor whose
Accounts that are ineligible under clause (b) of this definition constitute more
than fifty percent (50%) of the total Accounts of such account debtor;
4
<PAGE>
(o) such Accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the credit limit with respect to such
account debtors as determined by Lender from time to time (but the portion of
the Accounts not in excess of such credit limit may still be deemed Eligible
Accounts); and
(p) such Accounts are owed by account debtors deemed
creditworthy at all times by Lender, as determined by Lender.
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.9 "Eligible Inventory" shall mean Inventory consisting of boxed and
sealed finished goods held for resale in the ordinary course of the business of
Borrower which are acceptable to Lender based on the criteria set forth below.
In general, Eligible Inventory shall not include (a) raw materials or
work-in-process; (b) components which are not part of finished goods; (c) spare
parts for equipment; (d) packaging and shipping materials; (e) supplies used or
consumed in Borrower's business; (f) Inventory at premises other than those
owned and controlled by Borrower, except if Lender shall have received an
agreement in writing from the person in possession of such Inventory and/or the
owner or operator of such premises in form and substance satisfactory to Lender
acknowledging Lender's first priority security interest in the Inventory,
waiving security interests and claims by such person against the Inventory and
permitting Lender access to, and the right to remain on, the premises so as to
exercise Lender's rights and remedies and otherwise deal with the Collateral;
provided, however, that Inventory shall not be excluded by virtue of this clause
(f) if it is in transit to Borrower, is consigned to Lender or Lender's
designee, Borrower has delivered to Lender all of the original documents of
title (including, but not limited to, bills of lading) for such Inventory
required to perfect Lender's security interest therein, and the same is covered
by insurance satisfactory to Lender in all respects; (g) Inventory subject to a
security interest or lien in favor of any person other than Lender except those
permitted in this Agreement; (h) bill and hold goods; (i) unserviceable,
obsolete or slow moving Inventory; (j) Inventory which is not subject to the
first priority, valid and perfected security interest of Lender; (k) damaged
and/or defective Inventory; (l) Inventory purchased or sold on consignment; and
(m) Inventory subject to trademark licenses or other intellectual property
rights of third persons, or with respect to which Lenders ability to sell such
Inventory following an Event of Default would be restricted. General criteria
for Eligible Inventory may be established and revised from time to time by
Lender in good faith. Any Inventory which is not Eligible Inventory shall
nevertheless be part of the Collateral.
1.10 "Equipment" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
5
<PAGE>
1.11 "Event of Default" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.12 "Financing Agreements" shall mean, collectively, this Agreement,
that certain Security Agreement - Trademark Collateral Assignment, dated as of
October 17, 1992, and all notes, guarantees, security agreements and other
agreements, documents and instruments now or at any time hereafter executed
and/or delivered by Borrower or any Obligor in connection with this Agreement,
as the same now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
1.13 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Boards which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Sections 9.13 and 9.14 hereof, GAAP shall be determined on the
basis of such principles in effect on the date hereof and consistent with those
used in the preparation of the audited financial statements delivered to Lender
prior to the date hereof.
1.14 "Information Certificate" shall mean the Information Certificate
of Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
1.15 "Inventory" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.16 "Inventory Letter of Credit Reserve Amount" shall mean, with
respect to any Letter of Credit Accommodation issued for the purpose of
purchasing goods, the product of (a) the outstanding face amount of such Letter
of Credit Accommodation times (b) the Applicable Inventory Reserve Percentage
for the category of goods being purchased with such Letter of Credit
Accommodation.
1.17 "Letter of Credit Accommodations" shall mean the letters of
credit, merchandise purchase or other guaranties which are from time to time
either (a) issued or opened by Lender for the account of Borrower or any Obligor
or (b) with respect to which Lender has agreed to indemnify the issuer or
guaranteed to the issuer the performance by Borrower of its obligations to such
issuer.
1.18 "Licensing/Manufacturing Agreements" means, collectively, the
License and Technical Assistance Agreement between Borrower and Samsung
Electronics Co., Ltd.
6
<PAGE>
("Samsung") and that certain Manufacturing Agreement between Borrower and
Samsung, and other, similar agreements, now or in the future, including those
between Borrower and Shintom Co., Ltd., and Talk Corporation, and any
replacements, extensions, restatements or amendments thereto.
1.19 "Loans" shall mean the Revolving Loans.
1.20 "Maximum Credit" shall mean the amount of $14,000,000.
1.21 "Net Amount of Eligible Accounts" shall mean the gross amount of
Eligible Accounts less (a) sales, excise or similar taxes included in the amount
thereof and (b) returns, discounts, claims, credits and allowances of any nature
at any time issued, owing, granted, outstanding, available or claimed with
respect thereto.
1.22 "Obligations" shall mean any and all Revolving Loans, Letter of
Credit Accommodations and all other obligations, liabilities and indebtedness of
every kind, nature and description owing by Borrower to Lender and/or its
affiliates, including principal, interest, charges, fees, costs and expenses,
however evidenced, whether as principal, surety, endorser, guarantor or
otherwise, whether arising under this Agreement or otherwise, whether now
existing or hereafter arising, whether arising before, during or after the
initial or any renewal term of this Agreement or after the commencement of any
case with respect to Borrower under the United States Bankruptcy Code or any
similar statute (including, without limitation, the payment of interest and
other amounts which would accrue and become due but for the commencement of such
case), whether direct or indirect, absolute or contingent, joint or several, due
or not due, primary or secondary, liquidated or unliquidated, secured or
unsecured, and however acquired by Lender.
1.23 "Obligor" shall mean any guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than Borrower.
1.24 "Payment Account" shall have the meaning set forth in Section 6.3
hereof.
1.25 "Person" or "person" shall mean any individual, sole
proprietorship, partnership, corporation (including, without limitation, any
corporation which elects subchapter S status under the Internal Revenue Code of
1986, as amended), business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.
1.26 "Prime Rate" shall mean the rate from time to time publicly
announced by Philadelphia National Bank, incorporated as CoreStates Bank, N.A.,
or its successors, at its office in Philadelphia, Pennsylvania, as its prime
rate, whether or not such announced rate is the best rate available at such
bank.
7
<PAGE>
1.27 "Records" shall mean all of Borrower's present and future books of
account of every kind or nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and other data and software
storage media and devices, file cabinets or containers in or on which the
foregoing are stored (including any rights of Borrower with respect to the
foregoing maintained with or by any other person).
1.28 "Revolving Loans" shall mean the loans now or hereafter made by
Lender to or for the benefit of Borrower on a revolving basis (involving
advances, repayments and readvances) as set forth in Section 2.1 hereof.
1.29 "Value" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost computed on a first-in-first-out
basis in accordance with GAAP or (b) market value.
1.30 "Working Capital" shall mean as to any Person, at any time, in
accordance with GAAP, on a consolidated basis for such Person and its
subsidiaries (if any), the amount equal to the difference between: (a) the
aggregate net book value of all current assets of such Person and its
subsidiaries (as determined in accordance with GAAP), calculating the book value
of inventory for this purpose on a first-in-first-out basis, and (b) all current
liabilities of such Person and its subsidiaries (as determined in accordance
with GAAP), provided, that, as to Borrower, for purposes of Section 9.13, the
liabilities of Borrower and its subsidiaries to Lender under this Agreement
shall not be considered current liabilities (whether or not classified as
current liabilities in accordance with GAAP).
SECTION 2. CREDIT FACILITIES
-----------------
2.1 Revolving Loans.
(a) Subject to, and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans to Borrower from time to time in
amounts requested by Borrower up to the amount equal to the sum of:
(i) seventy-five (75%) percent of the Net Amount of
Eligible Accounts, plus
(ii) the least of: (A) the Applicable Inventory
Advance Rate times the Value of Eligible Inventory, or (B) 80% of the
"Orderly Liquidation Value" of Eligible Inventory as established by
third party appraisals conducted pursuant to the terms of Section 7.3
(d) hereof, or (C) the amount equal to: (1) $6,000,000 minus (2) the
aggregate Inventory Letter
8
<PAGE>
of Credit Reserve amount for all outstanding Letter of Credit
Accommodations, less
(iii) any Availability Reserves.
In no event shall there be more than $3,500,000 advanced at any one time against
Eligible Inventory that is in transit to Borrower.
(b) Lender may, in its discretion, from time to time, upon not
less than five (5) days prior notice to Borrower, (i) reduce the lending formula
with respect to Eligible Accounts to the extent that Lender determines in good
faith that: (A) the dilution with respect to the Accounts for any period (based
on the ratio of (1) the aggregate amount of reductions in Accounts other than as
a result of payments in cash to (2) the aggregate amount of total sales) has
increased in any material respect or may be reasonably anticipated to increase
in any material respect above historical levels, or (B) the general
creditworthiness of account debtors has declined or (ii) reduce the lending
formula(s) with respect to Eligible Inventory to the extent that Lender
determines that: (A) the number of days of the turnover of the Inventory for any
period has changed in any material respect or (B) the liquidation value of the
Eligible Inventory, or any category thereof, has decreased, or (C) the nature
and quality of the Inventory has deteriorated. In determining whether to reduce
the lending formula(s), Lender may consider events, conditions, contingencies or
risks which are also considered in determining Eligible Accounts, Eligible
Inventory or in establishing Availability Reserves.
(c) Except in Lender's discretion, the aggregate amount of the
Loans and the Letter of Credit Accommodations outstanding at any time shall not
exceed the Maximum Credit. In the event that the outstanding amount of any
component of the Loans, or the aggregate amount of the outstanding Loans and
Letter of Credit Accommodations, exceed the amounts available under the lending
formulas, the sublimits for Letter of Credit Accommodations set forth in Section
2.2(c) or the Maximum Credit, as applicable, such event shall not limit, waive
or otherwise affect any rights of Lender in that circumstance or on any future
occasions and Borrower shall, upon demand by Lender, which may be made at any
time or from time to time, immediately repay to Lender the entire amount of any
such excess(es) for which payment is demanded.
2.2 Letter of Credit Accommodations.
(a) Subject to, and upon the terms and conditions contained
herein, at the request of Borrower, Lender agrees to provide or arrange for
Letter of Credit Accommodations for the account of Borrower containing terms and
conditions acceptable to Lender and the issuer thereof. Any payments made by
Lender to any issuer thereof and/or related parties in connection with the
Letter of Credit Accommodations shall constitute additional Revolving Loans to
Borrower pursuant to this Section 2.
9
<PAGE>
(b) In addition to any charges, fees or expenses charged by
any bank or issuer in connection with the Letter of Credit Accommodations,
Borrower shall pay to Lender a letter of credit fee at a rate equal to one and
one half percent (1.50%) per annum on the daily outstanding balance of the
Letter of Credit Accommodations for the immediately preceding month (or part
thereof) commencing November 1, 1996, payable in arrears as of the first day of
each succeeding month. Such letter of credit fee shall be calculated on the
basis of a three hundred sixty (360) day year and actual days elapsed and the
obligation of Borrower to pay such fee shall survive the termination or
non-renewal of this Agreement.
(c) No Letter of Credit Accommodations shall be available
unless on the date of the proposed issuance of any Letter of Credit
Accommodations, the Revolving Loans available to Borrower (subject to the
Maximum Credit and any Availability Reserves) are equal to or greater than: (i)
if the proposed Letter of Credit Accommodation is for the purpose of purchasing
Eligible Inventory, the sum of (A) the Applicable Inventory Reserve Percentage
of the cost of such Eligible Inventory, plus (B) freight, taxes, duty and other
amounts which Lender estimates must be paid in connection with such Inventory
upon arrival and for delivery to one of Borrower's locations for Eligible
Inventory within the United States of America and (ii) if the proposed Letter of
Credit Accommodation is for any other purpose, an amount equal to one hundred
(100%) percent of the face amount thereof and all other commitments and
obligations made or incurred by Lender with respect thereto. Effective on the
issuance of each Letter of Credit Accommodation, the amount of Revolving Loans
which might otherwise be available to Borrower shall be reduced by the
applicable amount set forth in Section 2.2(c)(i) or Section 2.2(c)(ii).
(d) Except in Lender's discretion, (i) the amount of all
outstanding Letter of Credit Accommodations and all other commitments and
obligations made or incurred by Lender in connection therewith, shall not at any
time exceed $9,000,000 and (ii) the amount of all outstanding Letter of Credit
Accommodations for the purpose of purchasing Eligible Inventory and all other
commitments and obligations made or incurred by Lender in connection therewith
shall not at any time exceed: (A) $9,000,000 minus (B) the amount of the then
outstanding Revolving Loans based on Eligible Inventory pursuant to Section
2.1(a)(ii) hereof. At any time an Event of Default exists or has occurred and is
continuing, upon Lender's request, Borrower will either furnish cash collateral
to secure the reimbursement obligations to the issuer in connection with any
Letter of Credit Accommodations or furnish cash collateral to Lender for the
Letter of Credit Accommodations, and in either case, the Revolving Loans
otherwise available to Borrower shall not be reduced as provided in Section
2.2(c) to the extent of such cash collateral.
(e) Borrower shall indemnify and hold Lender harmless from and
against any and all losses, claims, damages, liabilities, costs and expenses
which Lender may suffer or incur in connection with any Letter of Credit
Accommodations and any documents, drafts or acceptances relating thereto,
including, but not limited to, any losses, claims, damages, liabilities, costs
and expenses due to any action taken by any issuer or correspondent with
10
<PAGE>
respect to any Letter of Credit Accommodation. Borrower assumes all risks with
respect to the acts or omissions of the drawer under or beneficiary of any
Letter of Credit Accommodation and for such purposes the drawer or beneficiary
shall be deemed Borrower's agent. Borrower assumes all risks for, and agrees to
pay, all foreign, Federal, State and local taxes, duties and levies relating to
any goods subject to any Letter of Credit Accommodations or any documents,
drafts or acceptances thereunder. Borrower hereby releases and holds Lender
harmless from and against any acts, waivers, errors, delays or omissions,
whether caused by Borrower, by any issuer or correspondent or otherwise with
respect to or relating to any Letter of Credit Accommodation. The provisions of
this Section 2.2(e) shall survive the payment of Obligations and the termination
or non-renewal of this Agreement.
(f) Nothing contained herein shall be deemed or construed to
grant Borrower any right or authority to pledge the credit of Lender in any
manner. Lender shall have no liability of any kind with respect to any Letter of
Credit Accommodation provided by an issuer other than Lender unless Lender has
duly executed and delivered to such issuer the application or a guarantee or
indemnification in writing with respect to such Letter of Credit Accommodation.
Borrower shall be bound by any interpretation made in good faith by Lender, or
any other issuer or correspondent under or in connection with any Letter of
Credit Accommodation or any documents, drafts or acceptances thereunder,
notwithstanding that such interpretation may be inconsistent with any
instructions of Borrower. Lender shall have the sole and exclusive right and
authority to, and Borrower shall not: (i) at any time an Event of Default exists
or has occurred and is continuing, (A) approve or resolve any questions of
non-compliance of documents, (B) give any instructions as to acceptance or
rejection of any documents or goods or (C) execute any and all applications for
steamship or airway guaranties, indemnities or delivery orders, and (ii) at all
times, (A) grant any extensions of the maturity of, time of payment for, or time
of presentation of, any drafts, acceptances, or documents, and (B) agree to any
amendments, renewals, extensions, modifications, changes or cancellations of any
of the terms or conditions of any of the applications, Letter of Credit
Accommodations, or documents, drafts or acceptances thereunder or any letters of
credit included in the Collateral. Lender may take such actions either in its
own name or in Borrower's name.
(g) Any rights, remedies, duties or obligations granted or
undertaken by Borrower to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation, shall be deemed to
have been granted or undertaken by Borrower to Lender. Any duties or obligations
undertaken by Lender to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement by Lender in favor of any
issuer or correspondent relating to any Letter of Credit Accommodation, shall be
deemed to have been undertaken by Borrower to Lender and to apply in all
respects to Borrower.
2.3 [Intentionally Deleted]
11
<PAGE>
2.4 Availability Reserves. All Revolving Loans otherwise available to
Borrower pursuant to the lending formulas and subject to the Maximum Credit and
other applicable limits hereunder shall be subject to Lender's continuing right
to establish and revise Availability Reserves.
SECTION 3. INTEREST AND FEES
-----------------
3.1 Interest.
(a) Borrower shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at the rate (effective as of
November 1, 1996) of one and one quarter percent (1.25%) per annum in excess of
the Prime Rate, except that Borrower shall pay to Lender interest, at Lender's
option, without notice, at the rate of three and one quarter percent (3.25%) per
annum in excess of the Prime Rate: (i) on the non-contingent Obligations for the
period from and after the date of termination or non-renewal hereof, or the date
of the occurrence of an Event of Default, and for so long as such Event of
Default is continuing as determined by Lender and until such time as Lender has
received full and final payment of all such Obligations (notwithstanding entry
of any judgment against Borrower) and (ii) on the Revolving Loans at any time
outstanding in excess of the amounts available to Borrower under Section 2
(whether or not such excess(es), arise or are made with or without Lender's
knowledge or consent and whether made before or after an Event of Default). The
foregoing interest rate shall be reduced by one quarter of one percent (0.25%)
at such time as Borrower's annual certified financial statements for its fiscal
year ending March 31, 1997 demonstrate that Borrower's pre-tax net income for
such period is at least $500,000, and so long as no Event of Default has
occurred and is continuing. The reduction of such interest rate shall be
retroactive to the later of April 1, 1997 or ninety days prior to delivery of
such financial statements. All interest accruing hereunder on and after the
occurrence of any of the events referred to in Sections 3.1(a)(i) or 3.1(a)(ii)
above shall be payable on demand.
(b) Interest shall be payable by Borrower to Lender monthly in
arrears not later than the first day of each calendar month and shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed. The interest rate shall increase or decrease by an amount equal to each
increase or decrease in the Prime Rate effective on the first day of the month
after any change in such Prime Rate is announced based on the Prime Rate in
effect on the last day of the month in which any such change occurs. In no event
shall charges constituting interest payable by Borrower to Lender exceed the
maximum amount or the rate permitted under any applicable law or regulation, and
if any part or provision of this Agreement is in contravention of any such law
or regulation, such part or provision shall be deemed amended to conform
thereto.
3.2 Closing Fee. N/A
12
<PAGE>
3.3 Facility Fee. N/A (Note: $70,000 charged in October 1996 as a
"facility fee" will be credited to Borrower as of the Closing Date)
3.4 Servicing Fee. Borrower shall pay to Lender monthly a servicing fee
in an amount equal to $500.00 in respect of Lender's services for each month (or
part thereof) while this Agreement remains in effect and for so long thereafter
as any of the Obligations are outstanding, which fee shall be fully earned as of
and payable in advance on the date hereof and on the first day of each month
hereafter.
3.5 Unused Line Fee. Borrower shall pay to Lender monthly an unused
line fee equal at a rate equal to one quarter of one percent (0.25%) percent per
annum calculated upon the amount by which $14,000,000 exceeds the average daily
principal balance of the outstanding Obligations during the immediately
preceding month (or part thereof) while this Agreement is in effect and for so
long thereafter as any of the Obligations are outstanding, which fee shall be
payable on the first day of each month (commencing December 1, 1996) in arrears.
SECTION 4. CONDITIONS PRECEDENT
--------------------
4.1 [Intentionally Deleted].
4.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations. Each of the following is an additional condition precedent to
Lender making Loans and/or providing Letter of Credit Accommodations to
Borrower, including the initial Loans and Letter of Credit Accommodations and
any future Loans and Letter of Credit Accommodations:
(a) all representations and warranties contained herein and in
the other Financing Agreements shall be true and correct in all material
respects with the same effect as though such representations and warranties had
been made on and as of the date of the making of each such Loan or providing
each such Letter of Credit Accommodation and after giving effect thereto; and
(b) no Event of Default and no event or condition which, with
notice or passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing on and as of the date of the making of
such Loan or providing each such Letter of Credit Accommodation and after giving
effect thereto.
SECTION 5. GRANT OF SECURITY INTEREST
--------------------------
To secure payment and performance of all Obligations, Borrower hereby
grants to Lender a continuing security interest in, a lien upon, and a right of
set off against, and
13
<PAGE>
hereby assigns to Lender as security, the following property and interests in
property, whether now owned or hereafter acquired or existing, and wherever
located (collectively, the "Collateral"):
5.1 Accounts;
5.2 all present and future contract rights, general intangibles
(including, but not limited to, tax and duty refunds, registered and
unregistered patents, trademarks, service marks, copyrights, trade names,
applications for the foregoing, trade secrets, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or licensee, choses in
action and other claims and existing and future leasehold interests in
equipment, real estate and fixtures), chattel paper, documents, instruments,
letters of credit, bankers' acceptances and guaranties;
5.3 all present and future monies, securities, credit balances,
deposits, deposit accounts and other property of Borrower now or hereafter held
or received by or in transit to Lender or its affiliates or at any other
depository or other institution from or for the account of Borrower, whether for
safekeeping, pledge, custody, transmission, collection or otherwise, and all
present and future liens, security interests, rights, remedies, title and
interest in, to and in respect of Accounts and other Collateral, including,
without limitation, (a) rights and remedies under or relating to guaranties,
contracts of suretyship, letters of credit and credit and other insurance
related to the Collateral, (b) rights of stoppage in transit, replevin,
repossession, reclamation and other rights and remedies of an unpaid vendor,
lienor or secured party, (c) goods described in invoices, documents, contracts
or instruments with respect to, or otherwise representing or evidencing,
Accounts or other Collateral, including, without limitation, returned,
repossessed and reclaimed goods, and (d) deposits by and property of account
debtors or other persons securing the obligations of account debtors;
5.4 Inventory;
5.5 Equipment;
5.6 Records; and
5.7 all products and proceeds of the foregoing, in any form, including,
without limitation, insurance proceeds and all claims against third parties for
loss or damage to or destruction of any or all of the foregoing.
SECTION 6. COLLECTION AND ADMINISTRATION
-----------------------------
6.1 Borrower's Loan Account. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded (a) all Loans, Letter of
Credit
14
<PAGE>
Accommodations and other Obligations and the Collateral, (b) all payments made
by or on behalf of Borrower and (c) all other appropriate debits and credits as
provided in this Agreement, including, without limitation, fees, charges, costs,
expenses and interest. All entries in the loan account(s) shall be made in
accordance with Lender's customary practices as in effect from time to time.
6.2 Statements. Lender shall render to Borrower each month a statement
setting forth the balance in the Borrower's loan account(s) maintained by Lender
for Borrower pursuant to the provisions of this Agreement, including principal,
interest, fees, costs and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by Borrower and conclusively binding
upon Borrower as an account stated except to the extent that Lender receives a
written notice from Borrower of any specific exceptions of Borrower thereto
within thirty (30) days after the date such statement has been mailed by Lender.
Until such time as Lender shall have rendered to Borrower a written statement as
provided above, the balance in Borrower's loan account(s) shall be presumptive
evidence of the amounts due and owing to Lender by Borrower.
6.3 Collection of Accounts.
(a) Borrower shall establish and maintain, at its expense,
blocked accounts or lockboxes and related blocked accounts (in either case,
"Blocked Accounts"), as Lender may specify, with such banks as are acceptable to
Lender into which Borrower shall promptly deposit and direct its account debtors
to directly remit all payments on Accounts and all payments constituting
proceeds of Inventory or other Collateral in the identical form in which such
payments are made, whether by cash, check or other manner. The banks at which
the Blocked Accounts are established shall enter into an agreement, in form and
substance satisfactory to Lender, providing that all items received or deposited
in the Blocked Accounts are the property of Lender, that the depository bank has
no lien upon, or right to setoff against, the Blocked Accounts, the items
received for deposit therein, or the funds from time to time on deposit therein
and that the depository bank will wire, or otherwise transfer, in immediately
available funds, on a daily basis, all funds received or deposited into the
Blocked Accounts to such bank account of Lender as Lender may from time to time
designate for such purpose ("Payment Account"). Borrower agrees that all
payments made to such Blocked Accounts or other funds received and collected by
Lender, whether on the Accounts or as proceeds of Inventory or other Collateral
or otherwise shall be the property of Lender.
(b) For purposes of calculating interest on the Obligations,
such payments or other funds received will be applied (conditional upon final
collection) to the Obligations either (i) one (1) business day following the
date of receipt of immediately available federal funds by Lender, or (ii) three
(3) business days following the date of receipt of checks by Lender in the
Payment Account. For purposes of calculating the amount of the Revolving Loans
available to Borrower such payments will be applied (conditional upon final
15
<PAGE>
collection) to the Obligations on the business day of receipt by Lender in the
Payment Account, if such payments are received within sufficient time (in
accordance with Lender's usual and customary practices as in effect from time to
time) to credit Borrower's loan account on such day, and if not, then on the
next business day.
(c) Borrower and all of its affiliates, subsidiaries,
shareholders, directors, employees or agents shall, acting as trustee for
Lender, receive, as the property of Lender, any monies, checks, notes, drafts or
any other payment relating to and/or proceeds of Accounts or other Collateral
which come into their possession or under their control and immediately upon
receipt thereof, shall deposit or cause the same to be deposited in the Blocked
Accounts, or remit the same or cause the same to be remitted, in kind, to
Lender. In no event shall the same be commingled with Borrower's own funds.
Borrower agrees to reimburse Lender on demand for any amounts owed or paid to
any bank at which a Blocked Account is established or any other bank or person
involved in the transfer of funds to or from the Blocked Accounts arising out of
Lender's payments to or indemnification of such bank or person. The obligation
of Borrower to reimburse Lender for such amounts pursuant to this Section 6.3
shall survive the termination or non-renewal of this Agreement.
6.4 Payments. All Obligations shall be payable to the Payment Account
as provided in Section 6.3 or such other place as Lender may designate from time
to time. Lender may apply payments received or collected from Borrower or for
the account of Borrower (including, without limitation, the monetary proceeds of
collections or of realization upon any Collateral) to such of the Obligations,
whether or not then due, in such order and manner as Lender determines. At
Lender's option, all principal, interest, fees, costs, expenses and other
charges provided for in this Agreement or the other Financing Agreements may be
charged directly to the loan account(s) of Borrower. Borrower shall make all
payments to Lender on the Obligations free and clear of, and without deduction
or withholding for or on account of, any setoff, counterclaim, defense, duties,
taxes, levies, imposts, fees, deductions, withholding, restrictions or
conditions of any kind. If after receipt of any payment of, or proceeds of
Collateral applied to the payment of, any of the Obligations, Lender is required
to surrender or return such payment or proceeds to any Person for any reason,
then the Obligations intended to be satisfied by such payment or proceeds shall
be reinstated and continue and this Agreement shall continue in full force and
effect as if such payment or proceeds had not been received by Lender. Borrower
shall be liable to pay to Lender, and does hereby indemnify and hold Lender
harmless for the amount of any payments or proceeds surrendered or returned.
This Section 6.4 shall remain effective notwithstanding any contrary action
which may be taken by Lender in reliance upon such payment or proceeds. This
Section 6.4 shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
6.5 Authorization to Make Loans. Lender is authorized to make the Loans
and provide the Letter of Credit Accommodations based upon telephonic or other
instructions received from anyone purporting to be an officer of Borrower or
other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All
16
<PAGE>
requests for Loans or Letter of Credit Accommodations hereunder shall specify
the date on which the requested advance is to be made or Letter of Credit
Accommodations established (which day shall be a business day) and the amount of
the requested Loan. Requests received after 10:30 a.m. Los Angeles time on any
day shall be deemed to have been made as of the opening of business on the
immediately following business day. All Loans and Letter of Credit
Accommodations under this Agreement shall be conclusively presumed to have been
made to, and at the request of and for the benefit of, Borrower when deposited
to the credit of Borrower or otherwise disbursed or established in accordance
with the instructions of Borrower or in accordance with the terms and conditions
of this Agreement.
6.6 Use of Proceeds. Borrower shall use the initial proceeds of the
Loans provided by Lender to Borrower hereunder only for: (a) payments to each of
the persons listed in the disbursement direction letter furnished by Borrower to
Lender on or about the date hereof and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Financing Agreements. All other Loans made or Letter of
Credit Accommodations provided by Lender to Borrower pursuant to the provisions
hereof shall be used by Borrower only for general operating, working capital and
other proper corporate purposes of Borrower not otherwise prohibited by the
terms hereof. None of the proceeds will be used, directly or indirectly, for the
purpose of purchasing or carrying any margin security or for the purposes of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might cause any of
the Loans to be considered a "purpose credit" within the meaning of Regulation G
of the Board of Governors of the Federal Reserve System, as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
----------------------------------
7.1 Collateral Reporting. Borrower shall provide Lender with the
following documents in a form satisfactory to Lender: (a) on a regular basis as
required by Lender, a schedule of Accounts; (b) on a monthly basis or more
frequently as Lender may request, (i) perpetual inventory reports, (ii)
inventory reports by category and (iii) agings of accounts payable, (c) upon
Lender's request, (i) copies of customer statements and credit memos, remittance
advices and reports, and copies of deposit slips and bank statements, (ii)
copies of shipping and delivery documents, and (iii) copies of purchase orders,
invoices and delivery documents for Inventory and Equipment acquired by
Borrower; (d) agings of accounts receivable on a monthly basis or more
frequently as Lender may request; and (e) such other reports as to the
Collateral as Lender shall request from time to time. If any of Borrower's
records or reports of the Collateral are prepared or maintained by an accounting
service, contractor, shipper or other agent, Borrower hereby irrevocably
authorizes such service, contractor, shipper or agent to deliver such records,
reports, and related documents to Lender and to follow Lender's instructions
with respect to further services at any time that an Event of Default exists or
has occurred and is continuing.
17
<PAGE>
7.2 Accounts Covenants.
(a) Borrower shall notify Lender weekly of: (i) any material
delay in Borrower's performance of any of its obligations to any account debtor
or the assertion of any claims, offsets, defenses or counterclaims by any
account debtor, or any disputes with account debtors, or any settlement,
adjustment or compromise thereof, (ii) all material adverse information relating
to the financial condition of any account debtor and (iii) any event or
circumstance which, to Borrower's knowledge would cause Lender to consider any
then existing Accounts as no longer constituting Eligible Accounts. No credit,
discount, allowance or extension or agreement for any of the foregoing shall be
granted to any account debtor without Lender's consent, except in the ordinary
course of Borrower's business in accordance with practices and policies
previously disclosed in writing to Lender. So long as no Event of Default exists
or has occurred and is continuing, Borrower shall settle, adjust or compromise
any claim, offset, counterclaim or dispute with any account debtor. At any time
that an Event of Default exists or has occurred and is continuing, Lender shall,
at its option, have the exclusive right to settle, adjust or compromise any
claim, offset, counterclaim or dispute with account debtors or grant any
credits, discounts or allowances.
(b) Borrower shall weekly report to Lender any return of
Inventory by an account debtor having a sales price in excess of $5,000. At any
time that Inventory is returned, reclaimed or repossessed, the related Account
shall not be deemed an Eligible Account. In the event any account debtor returns
Inventory when an Event of Default exists or has occurred and is continuing,
Borrower shall, upon Lender's request, (i) hold the returned Inventory in trust
for Lender, (ii) segregate all returned Inventory from all of its other
property, (iii) dispose of the returned Inventory solely according to Lender's
instructions, and (iv) not issue any credits, discounts or allowances with
respect thereto without Lender's prior written consent.
(c) With respect to each Account: (i) the amounts shown on any
invoice delivered to Lender or schedule thereof delivered to Lender shall be
true and complete, (ii) no payments shall be made thereon except payments
immediately delivered to Lender pursuant to the terms of this Agreement, (iii)
no credit, discount, allowance or extension or agreement for any of the
foregoing shall be granted to any account debtor except as reported to Lender in
accordance with this Agreement and except for credits, discounts, allowances or
extensions made or given in the ordinary course of Borrower's business in
accordance with practices and policies previously disclosed to Lender, (iv)
there shall be no setoffs, deductions, contras, defenses, counterclaims or
disputes existing or asserted with respect thereto except as reported to Lender
in accordance with the terms of this Agreement, (v) none of the transactions
giving rise thereto will violate any applicable State or Federal laws or
regulations, all documentation relating thereto will be legally sufficient under
such laws and regulations and all such documentation will be legally enforceable
in accordance with its terms.
18
<PAGE>
(d) Lender shall have the right at any time or times, in
Lender's name or in the name of a nominee of Lender, to verify the validity,
amount or any other matter relating to any Account or other Collateral, by mail,
telephone, facsimile transmission or otherwise.
(e) Borrower shall deliver or cause to be delivered to Lender,
with appropriate endorsement and assignment, with full recourse to Borrower, all
chattel paper and instruments which Borrower now owns or may at any time acquire
immediately upon Borrower's receipt thereof, except as Lender may otherwise
agree.
(f) Lender may, at any time or times that an Event of Default
exists or has occurred and is continuing, (i) notify any or all account debtors
that the Accounts have been assigned to Lender and that Lender has a security
interest therein and Lender may direct any or all accounts debtors to make
payment of Accounts directly to Lender, (ii) extend the time of payment of,
compromise, settle or adjust for cash, credit, return of merchandise or
otherwise, and upon any terms or conditions, any and all Accounts or other
obligations included in the Collateral and thereby discharge or release the
account debtor or any other party or parties in any way liable for payment
thereof without affecting any of the Obligations, (iii) demand, collect or
enforce payment of any Accounts or such other obligations, but without any duty
to do so, and Lender shall not be liable for its failure to collect or enforce
the payment thereof nor for the negligence of its agents or attorneys with
respect thereto and (iv) take whatever other action Lender may deem necessary or
desirable for the protection of its interests. At any time that an Event of
Default exists or has occurred and is continuing, at Lender's request, all
invoices and statements sent to any account debtor shall state that the Accounts
and such other obligations have been assigned to Lender and are payable directly
and only to Lender and Borrower shall deliver to Lender such originals of
documents evidencing the sale and delivery of goods or the performance of
services giving rise to any Accounts as Lender may require.
7.3 Inventory Covenants. With respect to the Inventory: (a) Borrower
shall at all times maintain inventory records reasonably satisfactory to Lender,
keeping correct and accurate records itemizing and describing the kind, type,
quality and quantity of Inventory, Borrower's cost therefor and daily
withdrawals therefrom and additions thereto; (b) Borrower shall conduct a
physical count of the Inventory at least once each year, but at any time or
times as Lender may request on or after an Event of Default, and promptly
following such physical inventory shall supply Lender with a report in the form
and with such specificity as may be reasonably satisfactory to Lender concerning
such physical count; (c) Borrower shall not remove any Inventory from the
locations set forth or permitted herein, without the prior written consent of
Lender, except for sales of Inventory in the ordinary course of Borrower's
business and except to move Inventory directly from one location set forth or
permitted herein to another such location; (d) at least annually, and at such
other times upon Lender's request, Borrower shall, at its expense, but at any
time or times as Lender may request on or after an Event of Default, deliver or
cause to be delivered to Lender written reports or appraisals as to the
Inventory in form, scope and
19
<PAGE>
methodology acceptable to Lender (which shall include a determination of the
Orderly Liquidation Value of such Inventory) and by an appraiser acceptable to
Lender, addressed to Lender or upon which Lender is expressly permitted to rely;
(e) Borrower shall produce, use, store and maintain the Inventory, with all
reasonable care and caution and in accordance with applicable standards of any
insurance and in conformity with applicable laws (including, but not limited to,
the requirements of the Federal Fair Labor Standards Act of 1938, as amended and
all rules, regulations and orders related thereto); (f) Borrower assumes all
responsibility and liability arising from or relating to the production, use,
sale or other disposition of the Inventory; (g) Borrower shall not sell
Inventory to any customer on approval, or any other basis which entitles the
customer to return or may obligate Borrower to repurchase such Inventory; (h)
Borrower shall keep the Inventory in good and marketable condition; and (i)
Borrower shall not, without prior written notice to Lender, acquire or accept
any Inventory on consignment or approval.
7.4 Equipment Covenants. With respect to the Equipment: (a) Borrower
shall, at its expense, at any time or times as Lender may request on or after an
Event of Default, deliver or cause to be delivered to Lender written reports or
appraisals as to the Equipment in form, scope and methodology acceptable to
Lender (which shall include a determination of the Orderly Liquidation value of
such Equipment) and by an appraiser acceptable to Lender; (b) Borrower shall
keep the Equipment in good order, repair, running and marketable condition
(ordinary wear and tear excepted); (c) Borrower shall use the Equipment with all
reasonable care and caution and in accordance with applicable standards of any
insurance and in conformity with all applicable laws; (d) the Equipment is and
shall be used in Borrower's business and not for personal, family, household or
farming use; (e) Borrower shall not remove any Equipment from the locations set
forth or permitted herein, except to the extent necessary to have any Equipment
repaired or maintained in the ordinary course of the business of Borrower or to
move Equipment directly from one location set forth or permitted herein to
another such location and except for the movement of motor vehicles used by or
for the benefit of Borrower in the ordinary course of business; (f) the
Equipment is now and shall remain personal property and Borrower shall not
permit any of the Equipment to be or become a part of or affixed to real
property; and (g) Borrower assumes all responsibility and liability arising from
the use of the Equipment.
7.5 Power of Attorney. Borrower hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as Borrower's true and
lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name,
to: (a) at any time an Event of Default or event which with notice or passage of
time or both would constitute an Event of Default exists or has occurred and is
continuing (i) demand payment on Accounts or other proceeds of Inventory or
other Collateral, (ii) enforce payment of Accounts by legal proceedings or
otherwise, (iii) exercise all of Borrower's rights and remedies to collect any
Account or other Collateral, (iv) sell or assign any Account upon such terms,
for such amount and at such time or times as the Lender deems advisable, (v)
settle, adjust, compromise, extend or renew an Account, (vi) discharge and
release any Account, (vii) prepare, file and sign Borrower's name on any proof
of claim in bankruptcy or other similar
20
<PAGE>
document against an account debtor, (viii) notify the post office authorities to
change the address for delivery of Borrower's mail to an address designated by
Lender, and open and dispose of all mail addressed to Borrower, and (ix) do all
acts and things which are necessary, in Lender's determination, to fulfill
Borrower's obligations under this Agreement and the other Financing Agreements
and (b) at any time to (i) take control in any manner of any item of payment or
proceeds thereof, (ii) have access to any lockbox or postal box into which
Borrower's mail is deposited, (iii) endorse Borrower's name upon any items of
payment or proceeds thereof and deposit the same in the Lender's account for
application to the Obligations, (iv) endorse Borrower's name upon any chattel
paper, document, instrument, invoice, or similar document or agreement relating
to any Account or any goods pertaining thereto or any other Collateral, (v) sign
Borrower's name on any verification of Accounts and notices thereof to account
debtors and (vi) execute in Borrower's name and file any UCC financing
statements or amendments thereto. Borrower hereby releases Lender and its
officers, employees and designees from any liabilities arising from any act or
acts under this power of attorney and in furtherance thereof, whether of
omission or commission, except as a result of Lender's own gross negligence or
wilful misconduct as determined pursuant to a final non-appealable order of a
court of competent jurisdiction.
7.6 Right to Cure. Lender may, at its option, (a) cure any default by
Borrower under any agreement with a third party or pay or bond on appeal any
judgment entered against Borrower, (b) discharge taxes, liens, security
interests or other encumbrances at any time levied on or existing with respect
to the Collateral and (c) pay any amount, incur any expense or perform any act
which, in Lender's judgment, is necessary or appropriate to preserve, protect,
insure or maintain the Collateral and the rights of Lender with respect thereto.
Lender may add any amounts so expended to the Obligations and charge Borrower's
account therefor, such amounts to be repayable by Borrower on demand. Lender
shall be under no obligation to effect such cure, payment or bonding and shall
not, by doing so, be deemed to have assumed any obligation or liability of
Borrower. Any payment made or other action taken by Lender under this Section
shall be without prejudice to any right to assert an Event of Default hereunder
and to proceed accordingly.
7.7 Access to Premises. From time to time as requested by Lender, at
the cost and expense of Borrower, (a) Lender or its designee shall have complete
access to all of Borrower's premises during normal business hours and after
notice to Borrower, or at any time and without notice to Borrower if an Event of
Default exists or has occurred and is continuing, for the purposes of
inspecting, verifying and auditing the Collateral and all of Borrower's books
and records, including, without limitation, the Records, and (b) Borrower shall
promptly furnish to Lender such copies of such books and records or extracts
therefrom as Lender may request, and (c) use during normal business hours such
of Borrower's personnel, equipment, supplies and premises as may be reasonably
necessary for the foregoing and if an Event of Default exists or has occurred
and is continuing for the collection of Accounts and realization of other
Collateral.
21
<PAGE>
SECTION 8. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower hereby represents and warrants to Lender the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which are a continuing condition of the making of Loans and
providing Letter of Credit Accommodations by Lender to Borrower:
8.1 Corporate Existence, Power and Authority; Subsidiaries. Borrower is
a corporation duly organized and in good standing under the laws of its state of
incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse effect on Borrower's financial condition,
results of operation or business or the rights of Lender in or to any of the
Collateral. The execution, delivery and performance of this Agreement, the other
Financing Agreements and the transactions contemplated hereunder and thereunder
are all within Borrower's corporate powers, have been duly authorized and are
not in contravention of law or the terms of Borrower's certificate of
incorporation, by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which Borrower is a party or by which Borrower or
its property are bound. This Agreement and the other Financing Agreements
constitute legal, valid and binding obligations of Borrower enforceable in
accordance with their respective terms. Borrower does not have any subsidiaries
except as set forth on the Information Certificate.
8.2 Financial Statements; No Material Adverse Change. All financial
statements relating to Borrower which have been or may hereafter be delivered by
Borrower to Lender have been prepared in accordance with GAAP and fairly present
the financial condition and the results of operation of Borrower as at the dates
and for the periods set forth therein. Except as disclosed in any interim
financial statements furnished by Borrower to Lender prior to the date of this
Agreement, there has been no material adverse change in the assets, liabilities,
properties and condition, financial or otherwise, of Borrower, since the date of
the most recent audited financial statements furnished by Borrower to Lender
prior to the date of this Agreement.
8.3 Chief Executive Office; Collateral Locations. The chief executive
office of Borrower and Borrower's Records concerning Accounts are located only
at the address set forth below and its only other places of business and the
only other locations of Collateral, if any, are the addresses set forth in the
Information Certificate, subject to the right of Borrower to establish new
locations in accordance with Section 9.2 below. The Information Certificate
correctly identifies any of such locations which are not owned by Borrower and
sets forth the owners and/or operators thereof and to the best of Borrower's
knowledge, the holders of any mortgages on such locations.
22
<PAGE>
8.4 Priority of Liens; Title to Properties. The security interests and
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens indicated on Schedule 8.4
hereto and the other liens permitted under Section 9.8 hereof. Borrower has good
and marketable title to all of its properties and assets subject to no liens,
mortgages, pledges, security interests, encumbrances or charges of any kind,
except those granted to Lender and such others as are specifically listed on
Schedule 8.4 hereto or permitted under Section 9.8 hereof.
8.5 Tax Returns. Borrower has filed, or caused to be filed, in a timely
manner all tax returns, reports and declarations which are required to be filed
by it (without requests for extension except as previously disclosed in writing
to Lender). All information in such tax returns, reports and declarations is
complete and accurate in all material respects. Borrower has paid or caused to
be paid all taxes due and payable or claimed due and payable in any assessment
received by it, except taxes the validity of which are being contested in good
faith by appropriate proceedings diligently pursued and available to Borrower
and with respect to which adequate reserves have been set aside on its books.
Adequate provision has been made for the payment of all accrued and unpaid
Federal, State, county, local, foreign and other taxes whether or not yet due
and payable and whether or not disputed.
8.6 Litigation. Except as set forth on the Information Certificate,
there is no present investigation by any governmental agency pending, or to the
best of Borrower's knowledge threatened, against or affecting Borrower, its
assets or business and there is no action, suit, proceeding or claim by any
Person pending, or to the best of Borrower's knowledge threatened, against
Borrower or its assets or goodwill, or against or affecting any transactions
contemplated by this Agreement, which if adversely determined against Borrower
would result in any material adverse change in the assets, business or prospects
of Borrower or would impair the ability of Borrower to perform its obligations
hereunder or under any of the other Financing Agreements to which it is a party
or of Lender to enforce any Obligations or realize upon any Collateral.
8.7 Compliance with Other Agreements and Applicable Laws. Borrower is
not in default in any material respect under, or in violation in any material
respect of any of the terms of, any agreement, contract, instrument, lease or
other commitment to which it is a party or by which it or any of its assets are
bound and Borrower is in compliance in all material respects with all applicable
provisions of laws, rules, regulations, licenses, permits, approvals and orders
of any foreign, Federal, State or local governmental authority.
8.8 Accuracy and Completeness of Information. All information furnished
by or on behalf of Borrower in writing to Lender in connection with this
Agreement or any of the other Financing Agreements or any transaction
contemplated hereby or thereby, including, without limitation, all information
on the Information Certificate is true and correct in all material respects on
the date as of which such information is dated or certified and does not
23
<PAGE>
omit any material fact necessary in order to make such information not
misleading. No event or circumstance has occurred which has had or could
reasonably be expected to have a material adverse affect on the business, assets
or prospects of Borrower, which has not been fully and accurately disclosed to
Lender in writing.
8.9 Survival of Warranties; Cumulative. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
----------------------------------
9.1 Maintenance of Existence. Borrower shall at all times preserve,
renew and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, tradenames, approvals, authorizations, leases and
contracts necessary to carry on the business as presently or proposed to be
conducted. Borrower shall give Lender thirty (30) days prior written notice of
any proposed change in its corporate name, which notice shall set forth the new
name and Borrower shall deliver to Lender a copy of the amendment to the
Certificate of Incorporation of Borrower providing for the name change certified
by the Secretary of State of the jurisdiction of incorporation of Borrower as
soon as it is available.
9.2 New Collateral Locations. Borrower may open any new location within
the continental United States provided Borrower (a) gives Lender thirty (30)
days prior written notice of the intended opening of any such new location and
(b) executes and delivers, or causes to be executed and delivered, to Lender
such agreements, documents, and instruments as Lender may deem reasonably
necessary or desirable to protect its interests in the Collateral at such
location, including, without limitation, UCC financing statements.
9.3 Compliance with Laws, Regulations, Etc. Borrower shall, at all
times, comply in all material respects with all laws, rules, regulations,
licenses, permits, approvals and orders of any Federal, State or local
governmental authority applicable to it.
9.4 Payment of Taxes and Claims. Borrower shall duly pay and discharge
all taxes, assessments, contributions and governmental charges upon or against
it or its properties or assets, except for taxes the validity of which are being
contested in good faith by appropriate proceedings diligently pursued and
available to Borrower and with respect to which adequate reserves have been set
aside on its books. Borrower shall be liable for any tax or penalties imposed on
Lender as a result of the financing arrangements provided
24
<PAGE>
for herein and Borrower agrees to indemnify and hold Lender harmless with
respect to the foregoing, and to repay to Lender on demand the amount thereof,
and until paid by Borrower such amount shall be added and deemed part of the
Loans, provided, that, nothing contained herein shall be construed to require
Borrower to pay any income or franchise taxes attributable to the income of
Lender from any amounts charged or paid hereunder to Lender. The foregoing
indemnity shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
9.5 Insurance. Borrower shall, at all times, maintain with financially
sound and reputable insurers insurance with respect to the Collateral against
loss or damage and all other insurance of the kinds and in the amounts
customarily insured against or carried by corporations of established reputation
engaged in the same or similar businesses and similarly situated. Said policies
of insurance shall be satisfactory to Lender as to form, amount and insurer.
Borrower shall furnish certificates, policies or endorsements to Lender as
Lender shall require as proof of such insurance, and, if Borrower fails to do
so, Lender is authorized, but not required, to obtain such insurance at the
expense of Borrower. All policies shall provide for at least thirty (30) days
prior written notice to Lender of any cancellation or reduction of coverage and
that Lender may act as attorney for Borrower in obtaining, and at any time an
Event of Default exists or has occurred and is continuing, adjusting, settling,
amending and canceling such insurance. Borrower shall cause Lender to be named
as a loss payee and an additional insured (but without any liability for any
premiums) under such insurance policies and Borrower shall obtain
non-contributory lender's loss payable endorsements to all insurance policies in
form and substance satisfactory to Lender. Such lender's loss payable
endorsements shall specify that the proceeds of such insurance shall be payable
to Lender as its interests may appear and further specify that Lender shall be
paid regardless of any act or omission by Borrower or any of its affiliates. At
its option, Lender may apply any insurance proceeds received by Lender at any
time to the cost of repairs or replacement of Collateral and/or to payment of
the Obligations, whether or not then due, in any order and in such manner as
Lender may determine or hold such proceeds as cash collateral for the
Obligations.
9.6 Financial Statements and Other Information.
(a) Borrower shall keep proper books and records in which true
and complete entries shall be made of all dealings or transactions of or in
relation to the Collateral and the business of Borrower and its subsidiaries (if
any) in accordance with GAAP and Borrower shall furnish or cause to be furnished
to Lender: (i) within thirty (30) days after the end of each fiscal month,
monthly unaudited consolidated financial statements, and, if Borrower has any
subsidiaries, unaudited consolidating financial statements (including in each
case balance sheets, statements of income and loss and statements of
shareholders' equity), all in reasonable detail, fairly presenting the financial
position and the results of the operations of Borrower and its subsidiaries as
of the end of and through such fiscal month and (ii) within ninety (90) days
after the end of each fiscal year, audited consolidated financial statements
and, if Borrower has any subsidiaries, audited
25
<PAGE>
consolidating financial statements of Borrower and its subsidiaries (including
in each case balance sheets, statements of income and loss, statements of cash
flow and statements of shareholders' equity), and the accompanying notes
thereto, all in reasonable detail, fairly presenting the financial position and
the results of the operations of Borrower and its subsidiaries as of the end of
and for such fiscal year, together with the opinion of independent certified
public accountants, which accountants shall be an independent accounting firm
selected by Borrower and reasonably acceptable to Lender, that such financial
statements have been prepared in accordance with GAAP, and present fairly the
results of operations and financial condition of Borrower and its subsidiaries
as of the end of and for the fiscal year then ended.
(b) Borrower shall promptly notify Lender in writing of the
details of (i) any loss, damage, investigation, action, suit, proceeding or
claim relating to the Collateral or any other property which is security for the
Obligations or which would result in any material adverse change in Borrower's
business, properties, assets, goodwill or condition, financial or otherwise and
(ii) the occurrence of any Event of Default or event which, with the passage of
time or giving of notice or both, would constitute an Event of Default.
(c) Borrower shall promptly after the sending or filing
thereof furnish or cause to be furnished to Lender copies of all reports which
Borrower sends to its stockholders generally and copies of all reports and
registration statements which Borrower files with the Securities and Exchange
Commission, any national securities exchange or the National Association of
Securities Dealers, Inc.
(d) Borrower shall furnish or cause to be furnished to Lender
such budgets, forecasts, projections and other information respecting the
Collateral and the business of Borrower, as Lender may, from time to time,
reasonably request. Lender is hereby authorized to deliver a copy of any
financial statement or any other information relating to the business of
Borrower to any court or other government agency or to any participant or
assignee or prospective participant or assignee. Borrower hereby irrevocably
authorizes and directs all accountants or auditors to deliver to Lender, at
Borrower's expense, copies of the financial statements of Borrower and any
reports or management letters prepared by such accountants or auditors on behalf
of Borrower and to disclose to Lender such information as they may have
regarding the business of Borrower. Any documents, schedules, invoices or other
papers delivered to Lender may be destroyed or otherwise disposed of by Lender
one (1) year after the same are delivered to Lender, except as otherwise
designated by Borrower to Lender in writing.
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrower
shall not, directly or indirectly, (a) merge into or with or consolidate with
any other Person or permit any other Person to merge into or with or consolidate
with it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose of
any stock or indebtedness to any other Person or any of its assets to any other
Person (except for (i) sales of Inventory in the ordinary course of business and
(ii) the disposition of worn-out or obsolete Equipment or Equipment no
26
<PAGE>
longer used in the business of Borrower so long as (A) if an Event of Default
exists or has occurred and is continuing, any proceeds are paid to Lender and
(B) such sales do not involve Equipment having an aggregate fair market value in
excess of $10,000 for all such Equipment disposed of in any fiscal year of
Borrower), or (c) form or acquire any subsidiaries, or (d) wind up, liquidate or
dissolve or (e) agree to do any of the foregoing.
9.8 Encumbrances. Borrower shall not create, incur, assume or suffer to
exist any security interest, mortgage, pledge, lien, charge or other encumbrance
of any nature whatsoever on any of its assets or properties, including, without
limitation, the Collateral, except: (a) liens and security interests of Lender;
(b) liens securing the payment of taxes, either not yet overdue or the validity
of which are being contested in good faith by appropriate proceedings diligently
pursued and available to Borrower and with respect to which adequate reserves
have been set aside on its books; (c) non-consensual statutory liens (other than
liens securing the payment of taxes) arising in the ordinary course of
Borrower's business to the extent: (i) such liens secure indebtedness which is
not overdue or (ii) such liens secure indebtedness relating to claims or
liabilities which are fully insured and being defended at the sole cost and
expense and at the sole risk of the insurer or being contested in good faith by
appropriate proceedings diligently pursued and available to Borrower, in each
case prior to the commencement of foreclosure or other similar proceedings and
with respect to which adequate reserves have been set aside on its books; (d)
zoning restrictions, easements, licenses, covenants and other restrictions
affecting the use of real property which do not interfere in any material
respect with the use of such real property or ordinary conduct of the business
of Borrower as presently conducted thereon or materially impair the value of the
real property which may be subject thereto; (e) purchase money security
interests in Equipment (including capital leases) and purchase money mortgages
on real estate not to exceed $50,000 in the aggregate at any time outstanding so
long as such security interests and mortgages do not apply to any property of
Borrower other than the Equipment or real estate so acquired, and the
indebtedness secured thereby does not exceed the cost of the Equipment or real
estate so acquired, as the case may be; and (f) the security interests and liens
set forth on Schedule 8.4 hereto.
9.9 Indebtedness. Borrower shall not incur, create, assume, become or
be liable in any manner with respect to, or permit to exist, any obligations or
indebtedness, except (a) the Obligations; (b) trade obligations and normal
accruals in the ordinary course of business not yet due and payable, or with
respect to which the Borrower is contesting in good faith the amount or validity
thereof by appropriate proceedings diligently pursued and available to Borrower,
and with respect to which adequate reserves have been set aside on its books;
(c) purchase money indebtedness (including capital leases) to the extent not
incurred or secured by liens (including capital leases) in violation of any
other provision of this Agreement; and (d) obligations or indebtedness set forth
on the Information Certificate; provided, that, (i) Borrower may only make
regularly scheduled payments of principal and interest in respect of such
indebtedness in accordance with the terms of the agreement or instrument
evidencing or giving rise to such indebtedness as in effect on the date hereof,
(ii) Borrower shall not, directly or indirectly, (A) amend, modify, alter or
change the terms of
27
<PAGE>
such indebtedness or any agreement, document or instrument related thereto as in
effect on the date hereof, or (B) redeem, retire, defease, purchase or otherwise
acquire such indebtedness, or set aside or otherwise deposit or invest any sums
for such purpose, and (iii) Borrower shall furnish to Lender all notices or
demands in connection with such indebtedness either received by Borrower or on
its behalf, promptly after the receipt thereof, or sent by Borrower or on its
behalf, concurrently with the sending thereof, as the case may be.
9.10 Loans, Investments, Guarantees, Etc. Borrower shall not, directly
or indirectly, make any loans or advance money or property to any person, or
invest in (by capital contribution, dividend or otherwise) or purchase or
repurchase the stock or indebtedness or all or a substantial part of the assets
or property of any person, or guarantee, assume, endorse, or otherwise become
responsible for (directly or indirectly) the indebtedness, performance,
obligations or dividends of any Person or agree to do any of the foregoing,
except: (a) the endorsement of instruments for collection or deposit in the
ordinary course of business; (b) investments in: (i) short-term direct
obligations of the United States Government, (ii) negotiable certificates of
deposit issued by any bank satisfactory to Lender, payable to the order of the
Borrower or to bearer and delivered to Lender, and (iii) commercial paper rated
A1 or P1; provided, that, as to any of the foregoing, unless waived in writing
by Lender, Borrower shall take such actions as are deemed necessary by Lender to
perfect the security interest of Lender in such investments; (c) the guarantees
set forth in the Information Certificate; and (d) so long as no Event of Default
has occurred and is continuing, Borrower may make loans, investments,
guarantees, or purchases not otherwise permitted by clauses (a), (b), and (c)
and not prohibited by any other provision herein, with notice in advance to
Lender, provided, however, that the amount thereof (measured using the
outstanding principal balance of loans, the gross purchase price of purchases
and investments, and the total amount guaranteed) shall not exceed at any one
time the lesser of: (1) $2,000,000; and (2) seventy percent (70%) of the
difference between (i) the sum of (x) Borrower's net worth at such time (as
reflected in the most recent financial statements delivered to Lender) plus (y)
the net cash proceeds held on the date hereof by Borrower from any privately
placed debt issued with provisions requiring the mandatory conversion of such
debt to equity plus (z) the net cash proceeds of all equity issued after the
date hereof by Borrower; and (ii) $7,000,000.
9.11 Dividends and Redemptions. Borrower shall not, directly or
indirectly, declare or pay any dividends on account of any shares of class of
capital stock of Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of capital stock
(or set aside or otherwise deposit or invest any sums for such purpose) for any
consideration other than common stock or apply or set apart any sum, or make any
other distribution (by reduction of capital or otherwise) in respect of any such
shares or agree to do any of the foregoing, except as set forth on Schedule 9.11
hereto.
28
<PAGE>
9.12 Transactions with Affiliates. Borrower shall not enter into any
transaction for the purchase, sale or exchange of property or the rendering of
any service to or by any affiliate, except in the ordinary course of and
pursuant to the reasonable requirements of Borrower's business and upon fair and
reasonable terms no less favorable to the Borrower than Borrower would obtain in
a comparable arm's length transaction with an unaffiliated person.
9.13 Working Capital. [Intentionally Deleted]
9.14 Adjusted Net Worth. [Intentionally Deleted]
9.15 Maximum Inventory. As of the last Business Day of each month
during the term of this Agreement, the aggregate value of: (i) Inventory
(excluding parts, but including Inventory in transit to Borrower's locations);
plus (b) the aggregate face amount of all outstanding Letter of Credit
Accommodations, shall not exceed $18,000,000.
9.16 Costs and Expenses. Borrower shall pay to Lender on demand all
costs, expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents which may hereafter be contemplated (whether or not executed) or
entered into in respect hereof and thereof, including, but not limited to: (a)
all costs and expenses of filing or recording (including Uniform Commercial Code
financing statement filing taxes and fees, documentary taxes, intangibles taxes
and mortgage recording taxes and fees, if applicable); (b) all title insurance
and other insurance premiums, appraisal fees and search fees; (c) costs and
expenses of remitting loan proceeds, collecting checks and other items of
payment, and establishing and maintaining the Blocked Accounts, together with
Lender's customary charges and fees with respect thereto; (d) charges, fees or
expenses charged by any bank or issuer in connection with the Letter of Credit
Accommodations; (e) costs and expenses of preserving and protecting the
Collateral; (f) costs and expenses paid or incurred in connection with obtaining
payment of the Obligations, enforcing the security interests and liens of
Lender, selling or otherwise realizing upon the Collateral, and otherwise
enforcing the provisions of this Agreement and the other Financing Agreements or
defending any claims made or threatened against Lender arising out of the
transactions contemplated hereby and thereby (including, without limitation,
preparations for and consultations concerning any such matters); (g) all
out-of-pocket expenses and costs heretofore and from time to time hereafter
incurred by Lender during the course of periodic field examinations of the
Collateral and Borrower's operations, plus a per diem charge at the rate of $500
per person per day for Lender's examiners in the field and office; provided,
however, that prior to the occurrence and continuation of an Event of Default,
the per diem charge under this clause (g) shall not exceed $5,000 per calendar
year plus out-of-pocket expenses; and (h) the fees and
29
<PAGE>
disbursements of counsel (including legal assistants) to Lender in connection
with any of the foregoing.
9.17 Further Assurances. At the request of Lender at any time and from
time to time, Borrower shall, at its expense, duly execute and deliver, or cause
to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements. Lender may
at any time and from time to time request a certificate from an officer of
Borrower representing that all conditions precedent to the making of Loans and
providing Letter of Credit Accommodations contained herein are satisfied. In the
event of such request by Lender, Lender may, at its option, cease to make any
further Loans or provide any further Letter of Credit Accommodations until
Lender has received such certificate and, in addition, Lender has determined
that such conditions are satisfied. Where permitted by law, Borrower hereby
authorizes Lender to execute and file one or more UCC financing statements
signed only by Lender.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
------------------------------
10.1 Events of Default. The occurrence or existence of any one or more
of the following events are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
(a) Borrower fails to pay when due any of the Obligations or
fails to perform any of the terms, covenants, conditions or provisions contained
in this Agreement or any of the other Financing Agreements;
(b) any representation, warranty or statement of fact made by
Borrower to Lender in this Agreement, the other Financing Agreements or any
other agreement, schedule, confirmatory assignment or otherwise shall when made
or deemed made be false or misleading in any material respect;
(c) any Obligor revokes, terminates or fails to perform any of
the terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such party in favor of Lender;
(d) any judgment for the payment of money is rendered against
Borrower or any Obligor in excess of $50,000 in any one case or in excess of
$100,000 in the aggregate and shall remain undischarged or unvacated for a
period in excess of thirty (30) days or execution shall at any time not be
effectively stayed, or any judgment other than for the payment of money, or
injunction, attachment, garnishment or execution is rendered against Borrower or
any Obligor or any of their assets;
30
<PAGE>
(e) any Obligor (being a natural person or a general partner
of an Obligor which is a partnership) dies or Borrower or any Obligor, which is
a partnership or corporation, dissolves or suspends or discontinues doing
business;
(f) Borrower or any Obligor becomes insolvent (however defined
or evidenced), makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a meeting of its creditors or principal
creditors;
(g) a case or proceeding under the bankruptcy laws of the
United States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against Borrower or any Obligor or all or any part of its
properties and such petition or application is not dismissed within thirty (30)
days after the date of its filing or Borrower or any Obligor shall file any
answer admitting or not contesting such petition or application or indicates its
consent to, acquiescence in or approval of, any such action or proceeding or the
relief requested is granted sooner;
(h) a case or proceeding under the bankruptcy laws of the
United States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by Borrower or any Obligor or for all or any part of its
property; or
(i) any default by Borrower or any Obligor under any
agreement, document or instrument relating to any indebtedness for borrowed
money owing to any person other than Lender, or any capitalized lease
obligations, contingent indebtedness in connection with any guarantee, letter of
credit, indemnity or similar type of instrument in favor of any person other
than Lender, in any case in an amount in excess of $100,000, which default
continues for more than the applicable cure period, if any, with respect
thereto, or any default by Borrower or any Obligor under any material contract,
lease, license (including the Licensing/Manufacturing Agreements), or other
obligation to any person other than Lender, which default continues for more
than the applicable cure period, if any, with respect thereto;
(j) any change in the controlling ownership of Borrower;
(k) the indictment or threatened indictment of Borrower or any
Obligor under any criminal statute, or commencement or threatened commencement
of criminal or civil proceedings against Borrower or any Obligor, pursuant to
which statute or proceedings the penalties or remedies sought or available
include forfeiture of any of the property of Borrower or such Obligor;
31
<PAGE>
(l) there shall be a material adverse change in the business,
assets or prospects of Borrower or any Obligor after the date hereof; or
(m) there shall be an event of default under any of the other
Financing Agreements.
10.2 Remedies.
(a) At any time an Event of Default exists or has occurred and
is continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by Borrower or any Obligor, except as such notice or consent is
expressly provided for hereunder or required by applicable law. All rights,
remedies and powers granted to Lender hereunder, under any of the other
Financing Agreements, the Uniform Commercial Code or other applicable law, are
cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
an injunction to restrain a breach or threatened breach by Borrower of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against Borrower or any Obligor to collect the
Obligations without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of
Default exists or has occurred and is continuing, Lender may, in its discretion
and without limitation, (i) accelerate the payment of all Obligations and demand
immediate payment thereof to Lender (provided, that, upon the occurrence of any
Event of Default described in Sections 10.1(g) and 10.1(h), all Obligations
shall automatically become immediately due and payable), (ii) with or without
judicial process or the aid or assistance of others, enter upon any premises on
or in which any of the Collateral may be located and take possession of the
Collateral or complete processing, manufacturing and repair of all or any
portion of the Collateral, (iii) require Borrower, at Borrower's expense, to
assemble and make available to Lender any part or all of the Collateral at any
place and time designated by Lender, (iv) collect, foreclose, receive,
appropriate, setoff and realize upon any and all Collateral, (v) remove any or
all of the Collateral from any premises on or in which the same may be located
for the purpose of effecting the sale, foreclosure or other disposition thereof
or for any other purpose, (vi) sell, lease, transfer, assign, deliver or
otherwise dispose of any and all Collateral (including, without limitation,
entering into contracts with respect thereto, public or private sales at any
exchange, broker's board, at any office of Lender or elsewhere) at such prices
or terms as Lender may deem reasonable, for cash, upon credit or for future
delivery, with the Lender having the right to purchase the whole or any part of
the Collateral at any such public sale, all of the foregoing being free from any
right or equity of redemption of Borrower, which right or equity of redemption
is hereby expressly waived and released by Borrower and/or (vii) terminate this
Agreement. If any of the Collateral is sold or leased by Lender upon credit
terms or for future delivery, the Obligations shall
32
<PAGE>
not be reduced as a result thereof until payment therefor is finally collected
by Lender. If notice of disposition of Collateral is required by law, five (5)
days prior notice by Lender to Borrower designating the time and place of any
public sale or the time after which any private sale or other intended
disposition of Collateral is to be made, shall be deemed to be reasonable notice
thereof and Borrower waives any other notice. In the event Lender institutes an
action to recover any Collateral or seeks recovery of any Collateral by way of
prejudgment remedy, Borrower waives the posting of any bond which might
otherwise be required.
(c) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of the Obligations, in whole or in part and in such order
as Lender may elect, whether or not then due. Borrower shall remain liable to
Lender for the payment of any deficiency with interest at the highest rate
provided for herein and all costs and expenses of collection or enforcement,
including attorneys' fees and legal expenses.
(d) Without limiting the foregoing, upon the occurrence of an
Event of Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice, (i)
cease making Loans or arranging for Letter of Credit Accommodations or reduce
the lending formulas or amounts of Revolving Loans and Letter of Credit
Accommodations available to Borrower and/or (ii) terminate any provision of this
Agreement providing for any future Loans or Letter of Credit Accommodations to
be made by Lender to Borrower.
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW
--------------------------------
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial
Waiver.
(a) The validity, interpretation and enforcement of this
Agreement and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of California
(without giving effect to principles of conflicts of law).
(b) Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the state courts located in Los Angeles County,
California and the United States District Court for the Central District of
California and waive any objection based on venue or forum non conveniens with
respect to any action instituted therein arising under this Agreement or any of
the other Financing Agreements or in any way connected with or related or
incidental to the dealings of the parties hereto in respect of this Agreement or
any of the other Financing Agreements or the transactions related hereto or
thereto, in each case whether now existing or hereafter arising, and whether in
contract,
33
<PAGE>
tort, equity or otherwise, and agree that any dispute with respect to any such
matters shall be heard only in the courts described above (except that Lender
shall have the right to bring any action or proceeding against Borrower or its
property in the courts of any other jurisdiction which Lender deems necessary or
appropriate in order to realize on the Collateral or to otherwise enforce its
rights against Borrower or its property).
(c) Borrower hereby waives personal service of any and all
process upon it and consents that all such service of process may be made by
certified mail (return receipt requested) directed to its address set forth on
the signature pages hereof and service so made shall be deemed to be completed
five (5) days after the same shall have been so deposited in the U.S. mails, or,
at Lender's option, by service upon Borrower in any other manner provided under
the rules of any such courts. Within thirty (30) days after such service,
Borrower shall appear in answer to such process, failing which Borrower shall be
deemed in default and judgment may be entered by Lender against Borrower for the
amount of the claim and other relief requested.
(d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL
BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT
OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER
EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR
LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to Borrower (whether
in tort, contract, equity or otherwise) for losses suffered by Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Lender, that the losses were
the result of acts or omissions constituting gross negligence or willful
misconduct. In any such litigation, Lender shall be entitled to the benefit of
the rebuttable presumption that it acted in good faith and with the exercise of
ordinary care in the performance by it of the terms of this Agreement.
11.2 Waiver of Notices. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments
34
<PAGE>
and commercial paper, included in or evidencing any of the Obligations or the
Collateral, and any and all other demands and notices of any kind or nature
whatsoever with respect to the Obligations, the Collateral and this Agreement,
except such as are expressly provided for herein. No notice to or demand on
Borrower which Lender may elect to give shall entitle Borrower to any other or
further notice or demand in the same, similar or other circumstances.
11.3 Amendments and Waivers. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender. Lender shall not, by any act, delay, omission or otherwise be deemed to
have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically set
forth therein. A waiver by Lender of any right, power and/or remedy on any one
occasion shall not be construed as a bar to or waiver of any such right, power
and/or remedy which Lender would otherwise have on any future occasion, whether
similar in kind or otherwise.
11.4 Waiver of Counterclaims. Borrower waives all rights to interpose
any claims, deductions, setoffs or counterclaims of any nature (other then
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
11.5 Indemnification. Borrower shall indemnify and hold Lender, and its
directors, agents, employees and counsel, harmless from and against any and all
losses, claims, damages, liabilities, costs or expenses imposed on, incurred by
or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including, without limitation, amounts paid in settlement, court costs, and the
fees and expenses of counsel. To the extent that the undertaking to indemnify,
pay and hold harmless set forth in this Section may be unenforceable because it
violates any law or public policy, Borrower shall pay the maximum portion which
it is permitted to pay under applicable law to Lender in satisfaction of
indemnified matters under this Section. The foregoing indemnity shall survive
the payment of the Obligations and the termination or non-renewal of this
Agreement.
35
<PAGE>
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
--------------------------------
12.1 Term.
(a) This Agreement and the other Financing Agreements shall
become effective as of the date set forth on the first page hereof and shall
continue in full force and effect for a term ending on October 12, 1999 (the
"Renewal Date"), and from year to year thereafter, unless sooner terminated
pursuant to the terms hereof. Lender or Borrower may terminate this Agreement
and the other Financing Agreements effective on the Renewal Date or on the
anniversary of the Renewal Date in any year by giving to the other party at
least sixty (60) days prior written notice; provided, that, this Agreement and
all other Financing Agreements must be terminated simultaneously. Upon the
effective date of termination or non-renewal of the Financing Agreements,
Borrower shall pay to Lender, in full, all outstanding and unpaid Obligations
and shall furnish cash collateral to Lender in such amounts as Lender determines
are reasonably necessary to secure Lender from loss, cost, damage or expense,
including attorneys' fees and legal expenses, in connection with any contingent
Obligations, including issued and outstanding Letter of Credit Accommodations
and checks or other payments provisionally credited to the Obligations and/or as
to which Lender has not yet received final and indefeasible payment. Such cash
collateral shall be remitted by wire transfer in Federal funds to such bank
account of Lender, as Lender may, in its discretion, designate in writing to
Borrower for such purpose. Interest shall be due until and including the next
business day, if the amounts so paid by Borrower to the bank account designated
by Lender are received in such bank account later than 12:00 noon, Los Angeles
time.
(b) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing Agreements
until all Obligations have been fully and finally discharged and paid, and
Lender's continuing security interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Financing Agreements and
applicable law, shall remain in effect until all such Obligations have been
fully and finally discharged and paid.
(c) If for any reason this Agreement is terminated prior to
the end of the then current term or renewal term of this Agreement, in view of
the impracticality and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Lender's lost
profits as a result thereof, Borrower agrees to pay to Lender, upon the
effective date of such termination, an early termination fee in the amount of
one percent (1%) of the Maximum Credit. Such early termination fee shall be
presumed to be the amount of damages sustained by Lender as a result of such
early termination and Borrower agrees that it is reasonable under the
circumstances currently existing. The early termination fee provided for in this
Section 12.1 shall be deemed included in the Obligations. Notwithstanding
anything to the contrary contained in the foregoing, there shall not be any
early termination fee payable if all of the following occur:
36
<PAGE>
(i) Borrower requests early termination of this
Agreement at a time when no Event of Default has occurred and is continuing;
(ii) Borrower has obtained replacement financing on
terms (fees, interest rates, advance rates, line limits, security and other
material credit terms) which are more favorable than the terms being offered by
Lender at such time; and
(iii) Borrower has offered Lender the opportunity to
continue to finance Borrower on such more favorable terms and Lender has
declined to do so.
12.2 Notices. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender at its address set forth below and to Borrower at
its chief executive office set forth below, or to such other address as either
party may designate by written notice to the other in accordance with this
provision, and (b) deemed to have been given or made: if delivered in person,
immediately upon delivery; if by telex, telegram or facsimile transmission,
immediately upon sending and upon confirmation of receipt; if by nationally
recognized overnight courier service with instructions to deliver the next
business day, one (1) business day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing.
12.3 Partial Invalidity. If any provision of this Agreement is held to
be invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
12.4 Successors. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrower and their respective
successors and assigns, except that Borrower may not assign its rights under
this Agreement, the other Financing Agreements and any other document referred
to herein or therein without the prior written consent of Lender. Lender may,
after notice to Borrower, assign its rights and delegate its obligations under
this Agreement and the other Financing Agreements and further may assign, or
sell participations in, all or any part of the Loans, the Letter of Credit
Accommodations or any other interest herein to another financial institution or
other person, in which event, the assignee or participant shall have, to the
extent of such assignment or participation, the same rights and benefits as it
would have if it were the Lender hereunder, except as otherwise provided by the
terms of such assignment or participation.
12.5 Entire Agreement. This Agreement, the other Financing Agreements,
any supplements hereto or thereto, and any instruments or documents delivered or
to be delivered in connection herewith or therewith represents the entire
agreement and understanding concerning the subject matter hereof and thereof
between the parties hereto, and supersede all other prior agreements (including
the Original Financing Agreements),
37
<PAGE>
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written.
IN WITNESS WHEREOF, Lender and Borrower have caused these presents to
be duly executed as of the day and year first above written.
LENDER BORROWER
- ------ --------
CONGRESS FINANCIAL CORPORATION GO VIDEO, INC.
(WESTERN)
By:____________________________________ By:_________________________
Title:_________________________________ Title:______________________
Address: Chief Executive Office:
- -------- -----------------------
225 South Lake Avenue, Suite 1000 7835 McClain Drive
Pasadena, California 91101 Scottsdale, Arizona 85260
38
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 202,774
<SECURITIES> 0
<RECEIVABLES> 3,546,930
<ALLOWANCES> 130,000
<INVENTORY> 5,101,378
<CURRENT-ASSETS> 8,971,406
<PP&E> 1,100,433
<DEPRECIATION> 1,462,408
<TOTAL-ASSETS> 10,375,261
<CURRENT-LIABILITIES> 2,564,748
<BONDS> 0
11,430
0
<COMMON> 0
<OTHER-SE> 6,295,514
<TOTAL-LIABILITY-AND-EQUITY> 10,375,261
<SALES> 29,257,396
<TOTAL-REVENUES> 29,271,704
<CGS> 21,905,854
<TOTAL-COSTS> 21,905,854
<OTHER-EXPENSES> 5,214,174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 582,651
<INCOME-PRETAX> 1,537,081
<INCOME-TAX> 20,000
<INCOME-CONTINUING> 1,517,081
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,517,081
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
