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 SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 2-331855
GO-VIDEO, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 86-0492122
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(STATE OF INCORPORATION) (IRS E.I.N.)
7835 EAST MCCLAIN DRIVE, SCOTTSDALE, ARIZONA 85260
- -------------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(602) 998-3400
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(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 [ ]
13,419,178 SHARES OF COMMON STOCK WERE OUTSTANDING AS OF NOVEMBER 13, 1998
<PAGE>
GO-VIDEO, INC.
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Consolidated Balance Sheets --
At September 30, 1998 and March 31, 1998 3
Consolidated Statements of Operations --
Three and Six Months Ended September 30, 1998
and 1997 4
Consolidated Statements of Cash Flows --
Six Months Ended September 30, 1998 and 1997 5 - 6
Notes to Consolidated Financial Statements - 7 - 10
Quantitative and Qualitative Disclosures About
Market Risk
Management's Discussion and Analysis of Results
of Operations and Financial Condition 11 - 16
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures S-1
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS SEPTEMBER 30, 1998 MARCH 31, 1998
------------------ --------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 557,026 $ 445,925
Receivables - less allowance for
doubtful accounts of $110,000
and $100,000, respectively 12,432,376 9,460,081
Inventories 15,858,932 6,012,022
Prepaid expenses and other assets 540,106 47,146
Deferred tax asset 100,000 100,000
------------ ------------
Total Current Assets 29,488,440 16,065,174
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EQUIPMENT AND IMPROVEMENTS:
Furniture, fixtures & equipment 743,999 600,143
Leasehold improvements 212,830 212,830
Office equipment 1,104,603 844,056
Tooling 1,482,602 1,353,360
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Total 3,544,034 3,010,389
Less accumulated depreciation
and amortization 2,381,649 2,109,376
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Equipment and Improvements - net 1,162,385 901,013
------------ ------------
Patents, net of amortization of $57,769
and $54,410, respectively 118,248 121,607
Goodwill, net of amortization of $89,345
and $51,139, respectively 1,211,590 119,324
Market Exclusivity Fee 2,322,598 1,374,248
Deferred Income Taxes 470,000 430,000
Other Assets 74,420 33,243
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TOTAL $ 34,847,681 $ 19,044,609
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,376,840 $ 1,999,330
Accrued expenses 1,692,465 1,042,039
Other current liabilities 2,277,585 1,983,875
Warranty reserve 200,000 160,000
Line of credit 12,319,470 1,860,493
Income tax payable 144,200 23,000
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Total current liabilities 21,010,560 7,068,737
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Long Term Liabilities 164,209 127,825
Mandatory Convertible Subordinated Debt 307,500 740,833
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock $.001 par value -
authorized, 50,000,000 shares;
issued and outstanding: 13,316,678
and 12,643,297 shares, respectively 13,317 12,643
Additional capital 21,198,931 20,480,154
Accumulated deficit (7,846,836) (9,385,583)
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Total stockholders' equity 13,365,412 11,107,214
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TOTAL $ 34,847,681 $ 19,044,609
============ ============
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(unaudited)
<TABLE>
<CAPTION>
For The Three For The Six
Months Ended September 30, Months Ended September 30,
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $18,237,517 $12,325,084 $29,966,605 $22,084,390
COST OF SALES 13,776,762 9,207,591 22,094,152 16,595,380
----------- ----------- ----------- -----------
Gross profit 4,460,755 3,117,493 7,872,453 5,489,010
----------- ----------- ----------- -----------
OTHER OPERATING COSTS:
Sales and marketing 1,503,398 1,238,393 2,753,315 2,108,491
Research and development 384,960 157,622 742,817 517,126
General and administrative 1,215,018 853,930 2,284,714 1,555,245
----------- ----------- ----------- -----------
Total other operating costs 3,103,376 2,249,945 5,780,846 4,180,862
----------- ----------- ----------- -----------
Operating income 1,357,379 867,548 2,091,607 1,308,148
----------- ----------- ----------- -----------
OTHER (EXPENSE) REVENUES:
Interest income 6,895 2,334 10,266 4,259
Interest expense (264,226) (168,720) (404,893) (278,007)
Other income (expense) 300 699 375 (8,594)
----------- ----------- ----------- -----------
Total other expense (257,031) (165,687) (394,252) (282,342)
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 1,100,348 701,861 1,697,355 1,025,806
PROVISION FOR INCOME TAXES 100,000 10,000 150,000 15,000
----------- ----------- ----------- -----------
NET INCOME $ 1,000,348 $ 691,861 $ 1,539,355 $ 1,010,806
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE $ .08 $ .06 $ .12 $ .08
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE -
ASSUMING DILUTION $ .07 $ .05 $ .11 $ .07
=========== =========== =========== ===========
</TABLE>
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(unaudited)
For the Six
Months Ended September 30
----------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,539,355 $ 1,010,806
Adjustments to reconcile net income
to net cash used by operating activities -
Depreciation and amortization 315,114 418,750
Provision for losses on accounts receivable (33,799)
Loss on sale of equipment 10,321
Change in operating assets and liabilities -
net of acquisition:
Receivables (2,683,644) (1,261,323)
Inventories (8,990,570) (6,644,760)
Prepaid expenses and other assets (532,960) (236,533)
Other assets (41,178) (5,685)
Accounts payable 2,142,809 1,084,937
Accrued expenses 650,426 (127,160)
Other current liabilities 559,267 639,637
Warranty reserve (50,000) (15,000)
Other long-term liabilities 3,704 2,471
Income taxes payable 121,200 (12,000)
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Net cash used in operating activities (7,000,276) (5,135,339)
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INVESTING ACTIVITIES:
Market exclusivity fee (1,248,350) (729,800)
Cash paid for acquisition net of cash acquired (1,947,034) 0
Equipment and improvement expenditures (391,014) (201,217)
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Net cash used in investing activities (3,586,398) (931,017)
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FINANCING ACTIVITIES:
Proceeds from issuance of common stock 286,118 200,025
Payment on capital lease obligations (47,320) (43,840)
Net borrowings under line of credit 10,458,977 6,163,764
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Net cash provided by financing activities 10,697,775 6,319,949
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NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 111,101 253,393
CASH AND CASH EQUIVALENTS, beginning of period 445,925 302,788
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 557,026 $ 556,181
============ ===========
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Six
Months Ended September 30
--------------------------
1998 1997
---- ----
SUPPLEMENTAL INFORMATION TO CASH FLOW
STATEMENT:
Interest paid $ 404,893 $278,007
========== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of subordinated debt and
accrued interest to common stock $ 216,666 $216,666
========== ========
In connection with the acquisition,
liabilities were
assumed as follows:
Cash paid and liabilities assumed $2,567,965 $ 0
---------- --------
Fair value of assets acquired,
including $33,799 in cash $1,437,494 $ 0
---------- --------
Excess of cost over fair value of
assets acquired $1,130,471 $ 0
========== ========
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARIES
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 recurring 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. The consolidated
financial statements include Go-Video, Inc. and beginning in April 1998 its
wholly owned subsidiary, California Audio Labs, LLC ("Cal Audio"). All
significant intercompany balances and transactions have been eliminated.
Certain reclassifications have been made to the prior financial statements to
conform to the current classifications.
On April 1, 1998, the Company acquired all of the equity interests of Cal Audio.
The purchase price was $1.9 million which includes $1.2 million of debt assumed
plus the assumption of liabilities of $0.6 million. The acquisition was
accounted for using the purchase method of accounting for business combinations.
The excess of assets acquired over liabilities assumed of $1.1 million has been
allocated to goodwill and is being amortized over twenty years.
Inventories at September 30, 1998 consisted of $0.9 million of raw materials and
service parts and $15.0 million of finished goods.
The Market Exclusivity Fee of $2.3 million represents a fee paid by the Company
to Loewe Opta GmbH ("Loewe Opta") for the exclusive right to market and
distribute in North America a line of digital direct view televisions
specifically developed and designed by Loewe Opta for the Company. The fee was
paid in full as of September 30, 1998 and will be amortized on a straight line
basis over the initial term of the agreement which ends on January 1, 2003.
Amortization will begin upon receipt of the first televisions for sale by the
Company, anticipated for the third quarter of fiscal 1999 which ends December
31, 1998.
The Company is engaged in the design, development, and marketing of consumer
electronic audio, video, and television products and video security products.
Sales of the Company's Dual-Deck videocassette recorder have constituted
substantially all of its revenue of the last five fiscal years. For the six
months ended September 30, 1998, one customer represented 22% of the Company's
revenue. Accounts receivable from this customer was $1.8 million at September
30, 1998.
In September 1998, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", which is effective for fiscal years beginning
after December 15, 1998 and establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. The adoption of this
statement on April 1, 1998 had no impact on the Company's financial statement
presentation or related disclosures. In September 1998, the Financial Accounting
Standards Board issued SFAS No 131, "Disclosure about Segments of an Enterprise
and Related Information" which is effective for fiscal years beginning after
December 15, 1998. This standard requires that public companies report certain
<PAGE>
information about operating segments in their financial statements. It also
establishes related disclosures about products and services, geographic areas,
and major customers. The Company does not believe this standard will require
additional disclosures when adopted.
The Financial Accounting Standards Board recently issued SFAS No. 130 on
"Reporting Comprehensive Income" and SFAS No. 131 on "Disclosure about Segments
of an Enterprise and Related Information". The "Reporting Comprehensive Income"
standard is effective for fiscal years beginning after December 15, 1998. The
standard changes the reporting of certain items currently reported in the
stockholders' equity section of the balance sheet. The Company is currently
evaluating what impact this standard will have on the Company's financial
statements. The "Disclosure about Segments of an Enterprise and Related
Information" standard is effective for fiscal years beginning after December 15,
1998. This standard requires that public companies report certain information
about operating segments in their financial statements. It also establishes
related disclosures about products and services, geographic areas, and major
customers. The Company is currently evaluating what impact this standard will
have on its disclosures.
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 September 30, 1998 are as follows:
Deferred Tax Assets:
Current - reserves not currently
deductible $ 492,000
Noncurrent:
Differences between book & tax
basis of property $ 422,000
Operating loss carryforwards 6,687,000
Tax credit carryforwards 189,000
Other intangibles 77,000
-----------
Net Deferred Tax Asset $ 7,867,000
Valuation Allowance (7,297,000)
-----------
Net Deferred Asset $ 570,000
===========
<PAGE>
SFAS No.128, "Earnings Per Share", requires a reconciliation of the numerator
and denominators of basic and diluted earnings per share as follows:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1998 1997
---- ----
Net Income $ 1,000,348 $ 691,861
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Average Outstanding Common Shares 13,311,129 12,269,477
----------- -----------
Basic Net Income Per Share $ .08 $ .06
----------- -----------
Diluted Net Income per Common Share-
Income available to common $ 1,000,348 $ 691,861
stockholders, from above
Add interest on presumed
conversion of convertible debt 11,333 21,250
----------- -----------
Net income available for diluted
earnings per share $ 1,011,681 $ 713,111
=========== ===========
Average outstanding common
shares, from above 13,311,129 12,269,477
Additional dilutive shares related to
stock options and warrants 1,324,980 647,919
Additional dilutive shares related to
subordinated notes 406,000 867,935
----------- -----------
Average outstanding and potentially
dilutive common shares 15,042,109 13,785,331
=========== ===========
Dilutive net income per share $ .07 $ .05
=========== ===========
Options and warrants to purchase 18,300 shares of common stock at various prices
were outstanding during the three months ended September 30, 1998 but were not
included in the computation of diluted earnings per share because the exercise
prices of the options and warrants were greater than the average price of the
common shares.
<PAGE>
FOR THE SIX MONTHS ENDED SEPTEMBER 30,
1998 1997
---- ----
Net Income $ 1,539,355 $ 1,010,806
----------- -----------
Average Outstanding Common Shares 13,076,683 12,064,849
----------- -----------
Basic Net Income Per Share $ .12 $ .08
----------- -----------
Diluted Net Income per Common Share-
Income available to common $ 1,539,355 $ 1,010,806
stockholders, from above
Add interest on presumed 28,955 44,250
----------- -----------
conversion of convertible debt
Net income available for diluted
earnings per share $ 1,568,310 $ 1,055,056
=========== ===========
Average outstanding common
shares, from above 13,076,683 12,064,849
Additional dilutive shares related to
stock options and warrants 1,230,100 519,022
Additional dilutive shares related to
subordinated notes 508,000 988,537
----------- -----------
Average outstanding and potentially
dilutive common shares 14,814,783 13,572,408
=========== ===========
Dilutive net income per share $ .11 $ .07
=========== ===========
Options and warrants to purchase 155,300 shares of common stock at various
prices were outstanding during the six months ended September 30, 1998, but were
not included in the computation of diluted earnings per share because the
exercise prices of the options and warrants were greater than the average price
of the common shares.
The information presented within the financial statements should be read in
conjunction with the Company's audited Financial Statements for the fiscal years
ended March 31, 1998 and March 31, 1997 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" from the 1998 Annual
Report on Form 10-K.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1997:
Net sales increased 48% to $18.2 million during the three months ended September
30, 1998 from $12.3 million during the three months ended September 30, 1997.
The increase in net sales was primarily due to an 93% increase in unit shipments
of Dual-Deck VCR's ("DDVCR") sold by the Company's Consumer Electronics Division
for the three months ended September 30, 1998 compared to the three months ended
September 30, 1997, offset in part by a 20% decrease in the average selling
price per unit over the two periods. The increase in net units sold was
primarily due to increased demand for the Company's newest model line of DDVCR's
introduced during the three months ended September 30, 1998. The new line of
DDVCR's featured significant reductions in selling prices ranging from 10% to
25%, including a new leader model sold at a retail price of $299 which replaced
a similar model selling at $399. The reduced average selling price per unit also
was affected by a shift in the Company's sales mix during the three months ended
September 30, 1998 which included a higher percentage of the price leader models
than the comparable period of the prior year. Sales of the Company's Security
Products Division were approximately 6% of total net sales for the three months
ended September 30, 1998, up from 2% for the comparable period of the prior
year. The Company's Home Theater Division, which is responsible for the
marketing and sales of high-performance audio, video and television products,
including those designed, developed, and manufactured by Cal Audio, represented
2% of total sales for the three months ended September 30, 1998. The Company
anticipates increased revenue contribution from its Home Theater Division in the
second half of the current fiscal year beginning with the expected third quarter
commencement of sales of its line of digital direct view televisions under the
Loewe brand.
Gross profit was $4.5 million and $3.1 million for the three months ended
September 30, 1998 and 1997, respectively, representing a 43% increase in gross
profit dollars. The increase in gross profit dollars was primarily due to higher
unit sales of DDVCR's. Gross profit as a percentage of sales decreased from
25.3% for the three months ended September 30, 1997 to 24.5% for the three month
period ended September 30, 1998. The decrease in gross profit percentage is
primarily the result of the shift in the Company's sales mix, which included an
increased percentage of its lowest priced DDVCR models which typically have
lower gross margins for the Company.
Sales and marketing expense increased 21% to $1.5 million for the three months
ended September 30, 1998 from $1.2 million for the three months ended September
30, 1997. The increase in sales and marketing expense was primarily due to sales
and marketing expenses incurred by Cal Audio which was acquired on April 1, 1998
and increased advertising used to support sales growth of the DDVCR. As a
percentage of sales, sales and marketing expense decreased from 10.0% in the
three months ended September 30, 1997 to 8.2% in the three months ended
September 30, 1998.
Research and development expense increased 144.2% from $0.2 million for the
three months ended September 30, 1997 to $0.4 million for the three months ended
September 30, 1998. The increased research and development costs are primarily
due to product development costs incurred by Cal Audio. As a percentage of
sales, research and development expense increased from 1.3% for the three months
ended September 30, 1997 to 2.1% for the three months ended September 30, 1998.
The Company intends to continue to increase its product development and
engineering expenditures to support its strategy of diversifying its operations
from support of its Dual-Deck VCR product line to the design, development, and
marketing of multiple lines of audio, video, and television consumer electronic
products.
General and administrative expense increased 42% to $1.2 million for the three
months ended
<PAGE>
September 30, 1998 from $0.9 million for the three months ended September 30,
1997. The increase in general and administrative expense was primarily due to
additional administrative costs incurred due to the acquisition and integration
of Cal Audio and increased personnel and travel expense during the three months
ended September 30, 1998. As a percentage of sales, general and administrative
expense decreased from 6.9% for the three months ended September 30, 1997 to
6.7% for the three months ended September 30, 1998.
As a result of the above, the Company recorded operating profit of $1.4 million
for the three months ended September 30, 1998 compared with operating profit of
$0.9 million for the three months ended September 30, 1997. The Company recorded
net other expense of $0.3 million for the three months ended September 30, 1998
compared to $0.2 million for the three months ended September 30, 1997. The
increase in net other expense was primarily due to increased interest expense
due to higher average borrowings under the Company's line of credit for the
three months ended September 30, 1998 compared with the same period of the prior
year. The Company recorded a provision for income taxes of $100,000,
representing its state and estimated alternative minimum tax liabilities for the
three months ended September 30, 1998. For the three months ended September 30,
1997, the Company recorded a provision for income tax of $10,000, representing
its alternative minimum tax liability.
SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE SIX MONTHS ENDED SEPTEMBER
30, 1997:
Net sales increased 36% to $30.0 million during the six months ended September
30, 1998 from $22.1 million during the six months ended September 30, 1997. The
increase in net sales was primarily due to a 56% increase in net unit shipments
of DDVCR's sold by the Company's Consumer Electronics Division for the six
months ended September 30, 1998 compared to the six months ended September 30,
1997, offset in part by a 13% decrease in the average selling price per unit
over the two periods. The increase in net units sold was primarily due to
increased demand for the Company's newest model line of DDVCR's introduced
during the six months ended September 30, 1998. The new line of DDVCR's featured
significant reductions in selling prices ranging from 10% to 25%, including a
new leader model sold at a retail price of $299 which replaced a similar model
selling at $399. The reduced average selling price per unit also was affected by
a shift in the Company's sales mix during the six months ended September 30,
1998 which included a higher percentage of the price leader models than the
comparable period of the prior year. Sales of the Company's Security Products
Division were approximately 7% of total sales for the six months ended September
30, 1998, up from 3% for the comparable period of the prior year. The Company's
Home Theater Division, which is responsible for the marketing and sales of
high-performance audio, video and television products including those designed,
developed, and manufactured by Cal Audio, represented 3% of total sales for the
six months ended September 30, 1998. The Company anticipates increased revenue
contribution from its Home Theater Division in the second half of the current
fiscal year beginning with the expected third quarter commencement of sales of
its line of digital direct view televisions under the Loewe brand.
Gross profit was $7.9 million and $5.5 million for the six months ended
September 30, 1998 and 1997, respectively, representing a 43% increase in gross
profit dollars. The increase in gross profit dollars was primarily due to higher
unit sales of the current DDVCR model lines and increased gross profit dollars
contributed by the Company's Security and Home Theater Divisions. Gross profit
as a percentage of sales increased from 24.9% for the six months ended September
30, 1997 to 26.3% for the six month period ended September 30, 1998. The
increase in gross profit percentage was primarily a result of higher margins on
certain of the Company's DDVCR models sold in the first quarter of the current
fiscal year, offset in part by the second quarter shift in the Company's sales
mix which included a higher percentage of price leader model DDVCR's which
typically have lower gross margins.
Sales and marketing expense increased 31% to $2.8 million for the six months
ended September 30, 1998 from $2.5 million for the six months ended September
30, 1997. The increase in sales and marketing expense was primarily due to sales
and marketing expenses incurred by California Audio which was acquired on April
1, 1998 and increased advertising used to support sales growth of the
<PAGE>
DDVCR. As a percentage of sales, sales and marketing expense decreased from 9.5%
in the six months ended September 30, 1997 to 9.2% in the six months ended
September 30, 1998.
Research and development expense increased 43% from $0.5 million for the six
months ended September 30, 1997 to $0.7 million for the six months ended
September 30, 1998. The increased research and development costs are primarily
due to product development costs incurred by California Audio. As a percentage
of sales, research and development expense increased from 2.3% for the six
months ended September 30, 1997 to 2.1% for the six months ended September 30,
1998. The Company intends to continue to increase its product development and
engineering expenditures to support its strategy of diversifying its operations
from support of its Dual-Deck VCR product line to the design, development, and
marketing of multiple lines of audio, video, and television consumer electronic
products.
General and administrative expense increased 47% to $2.3 million for the six
months ended September 30, 1998 from $1.6 million for the six months ended
September 30, 1997. The increase in general and administrative expense was
primarily due to additional administrative costs incurred due to the acquisition
and integration of California Audio and increased personnel and travel expense
during the six months ended September 30, 1998. As a percentage of sales,
general and administrative expense increased from 7.0% for the six months ended
September 30, 1997 to 7.6% for the six months ended September 30, 1998.
As a result of the above, the Company recorded operating profit of $2.1 million
for the six months ended September 30, 1998 compared with operating profit of
$1.3 million for the six months ended September 30, 1997. The Company recorded
net other expense of $0.4 million for the six months ended September 30, 1998
compared to $0.3 million for the six months ended September 30, 1997. The
increase in net other expense is primarily due to increased interest expense due
to higher average borrowings under the Company's line of credit for the six
months ended September 30, 1998, compared with the same period of the prior
year. The Company recorded a provision for income taxes of $150,000 representing
its state and estimated alternative minimum tax liabilities for the six months
ended September 30, 1998. For the six months ended September 30, 1997, the
Company recorded a provision for income tax of $15,000 representing its
alternative minimum tax liability.
SEASONALITY
The Company's primary product lines compete within the consumer electronics
industry, which generally experience seasonality in sales. Accordingly, the
Company generally expects to experience peaks in its sales from September
through January, which covers the holiday selling season.
YEAR 2000 COMPLIANCE
The Company is conducting an evaluation of its management information systems
and the possible effect of Year 2000 hardware and software issues. The Company
believes its internal management information systems are Year 2000 compliant. In
addition, the Company is in communication with its significant suppliers,
financial institutions, customers, and other parties that purchase product or
provide critical services or supplies to the Company to assess their respective
compliance with Year 2000 issues. The Company expects to complete its assessment
during 1999. The more significant issue that may impact the Company is the
customer's ability to place electronically transmitted orders. The Company is in
the process of designing a contingency plan, but there can be no assurance that
the Company's significant suppliers and customers will properly address and
resolve such Year 2000 issues. Expenditures to make the Company Year 2000
compliant will be expensed as incurred and are not expected to be material to
the Company's financial position or results of operations.
FUTURE RESULTS
The Company's expectations for results of operations and other forward-looking
statements contained
<PAGE>
in this report on Form 10-Q, particularly statements relating to the
sustainability of profitable growth, the impact of year 2000 issues, and
expected results and the timing of product shipments from the Company's product
line diversification into the video security and home theater markets, involve a
number of risks and uncertainties. Among the factors that could affect future
operating results are the following: business conditions and general economic
conditions; changes in legislation that may affect the ability of the Company to
sell its products; competitive factors, such as the pricing and marketing
efforts of rival companies; timing of product introductions; success of
competing or future technologies; ability to negotiate reduced product
manufacturing costs; and the pace and success of product research and
development, particularly with overseas distributors of the DDVCR and the direct
view digital television development with Loewe Opta GmbH; and the successful
integration of California Audio which was acquired by the Company effective
April 1, 1998. The Company's future results may be affected by the Digital
Millennium Copyright Act of 1998 (effective October 1998), which, among other
requirements, requires all analog VHS format video cassette recorders sold in
the United States after April 2000 to recognize anti-copying technology that
uses the automatic gain control feature. Conforming to the automatic gain
control copy technology would prevent consumers from using the Company's
videocassette recorders to copy certain technically protected tapes. The Company
intends to modify its products to comply with the requirements of this new
legislation by the relevant effective dates. The Company is unable to determine
what the effect of the required modification may be on future sales of its video
cassette recorder products, but believes that any such effect will be mitigated
by the fact that the Company's Dual-Deck VCR offers numerous feature benefits to
consumers over single-deck VCR's, and by the Company's success over the last
several years in significantly reducing the price premium paid by consumers for
the added features of its line of Dual-Deck VCR's over single-deck VCR's.
CAPITAL RESOURCES AND LIQUIDITY
Net cash used in operating activities was $7.0 million for the six months ended
September 30, 1998 compared to cash used in operations of $5.1 million for the
six months ended September 30, 1997. The more significant factors comprising the
net cash used were an $9.0 million increase in inventory and a $2.7 million
increase in accounts receivable, offset in part by a $2.1 million increase in
accounts payable. The increase in the inventory balance from March 31, 1998 to
September 30, 1998 was primarily due to increased inventories of DDVCR's in
anticipation of higher sales and the April 1, 1998 acquisition of Cal Audio. The
increase in the accounts receivable balance is primarily due to increased
shipments and the timing of these shipments which were weighted more heavily
toward the end of the six month period ending September 30, 1998, as the
Company's average collection experience has generally remained consistent.
The Company had net working capital of $8.5 million and $9.0 million at
September 30, 1998 and March 31, 1998, respectively. At September 30, 1998, the
Company's current ratio (the ratio of current assets to current liabilities) was
1.4 to 1.
The Company's sales seasonality requires incremental working capital for
investment in inventories and receivables, which the Company has primarily
funded through a line of credit with Congress Financial Corporation
("Congress"). The financing agreement with Congress was entered into in October
1992 and was last amended in August 1998. The maximum line of credit, as
amended, is $20.0 million, limited by a borrowing base determined by specific
inventory and receivable balances and provides for cash loans, letters of credit
and acceptances. The agreement, as amended, expires in November 2002 with a
prepayment (if applicable) fee of 1.0% through November 1999, 0.5% from December
1999 until November 2000, and 0.25% in the remaining two years of the agreement.
Loans are priced at the lender's prime lending rate plus 0.5% or LIBOR plus
2.75%. The lender is collateralized by all assets of the Company. The unused and
available line of credit at September 30, 1998 was approximately $2.2 million.
Management believes its current financial resources to be adequate to support
operations over the next twelve months.
In August 1997, the Company sold $1.5 million of convertible subordinated notes
in a private
<PAGE>
placement with institutional holders. Notes outstanding after August 1999 must
be converted to common stock at the option of the Company. As of September 30,
1998, $1.1 million of the notes had been converted into common stock.
Effective January 1, 1998, the Company entered into an agreement with Loewe Opta
GmbH of Kronach, Bavaria, Germany, to develop and market a line of digital
television products designed specifically for the North American market. The
initial agreement is effective through January 1, 2003 with built in five year
extensions. The Company incurred fees totaling $2.3 million for the exclusive
right to market and distribute Loewe Opta direct view televisions in North
America. The fee, as structured, was due in installments through August 1998.
The Company expects to receive the first shipments of product from Loewe during
the third quarter of its fiscal year 1999.
On April 1, 1998 the Company acquired California Audio Labs, L.L.C. ("Cal
Audio"). Cal Audio designs, develops, manufactures and distributes digital audio
and video products marketed to the high-performance home theater market under
the California Audio Labs and Cinevision brand names. The Company has incurred
and expects to continue to incur increased expenses related to the integration
and development of the Cal Audio business and therefore anticipates operating
losses by Cal Audio during the fiscal year ending March 31, 1999.
The Company leases a 33,000 square foot executive office and warehouse facility
in Scottsdale, Arizona, which is fully utilized and in good condition. The lease
began in January 1996 and has a term of seven years, with one three year
extension at the option of the Company. The Company is currently considering its
space requirements in relation to its business plan, which anticipates increased
needs for personnel, office, and warehousing space. As such, the Company may be
required to seek additional space, which would increase the Company's overall
rental costs
INFLATION
Inflation has had no material effect on the Company's operations or financial
condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize market risk sensitive instruments.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on August 20, 1998. There
were present at the Annual Meeting, either in person or by proxy, 11,438,405
shares, which constituted a quorum. At the meeting, shareholders approved the
election of two directors and approved the amendment to the Certificate of
Incorporation to change the name of the Company:
Item 1: Election of the following directors:
For Against Abstain
--- ------- -------
Thomas E. Linnen 11,294,037 0 144,368
William T. Walker Jr 11,294,237 0 143,468
Item 2: To amend the Certificate of Incorporation to change the name of
the Company:
For Against Abstain
--- ------- -------
11,126,503 71,835 240,067
There were no broker non-votes. The continuing directors are Roger B. Hackett,
Thomas F. Hartley and Carmine F. Adimando.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
10.31 Amendment to Financing Agreement between Go-Video, Inc. and Congress
Financial dated August 19, 1998
27 Financial Data Schedule
<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: November 13, 1998 By /S/ ROGER B. HACKETT
---------------------------------
Roger B. Hackett
Chairman of the Board, Chief Executive Officer,
President and Chief Operating Officer
Date: November 13, 1998 By /S/ DOUGLAS P. KLEIN
---------------------------------
Douglas P. Klein
Senior Vice President and Chief Financial Officer,
Secretary, Treasurer
(principal financial and accounting officer)
S-1
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
CONGRESS FINANCIAL CORPORATION (WESTERN),
AS LENDER
AND
GO-VIDEO, INC., AND CALIFORNIA AUDIO LABS, LLC,
AS BORROWERS
DATED AS OF: AUGUST 19, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
SECTION 1. DEFINITIONS..................................................... 1
SECTION 2. CREDIT FACILITIES............................................... 10
2.1 Revolving Loans................................................. 10
2.2 Letter of Credit Accommodations................................. 11
2.3 [Intentionally Deleted]......................................... 13
2.4 Availability Reserves........................................... 13
SECTION 3. INTEREST AND FEES............................................... 14
3.1 Interest........................................................ 14
3.2 Closing Fee..................................................... 15
3.3 Facility Fee.................................................... 15
3.4 Servicing Fee................................................... 15
3.5 Unused Line Fee................................................. 15
3.6 Changes in Laws and Increased Costs of Loans.................... 16
SECTION 4. CONDITIONS PRECEDENT............................................ 16
4.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations.................................................. 17
4.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations.................................................. 17
SECTION 5. GRANT OF SECURITY INTEREST...................................... 17
SECTION 6. COLLECTION AND ADMINISTRATION................................... 18
6.1 Borrower's Loan Account......................................... 18
6.2 Statements...................................................... 18
6.3 Collection of Accounts.......................................... 19
6.4 Payments........................................................ 20
6.5 Authorization to Make Loans..................................... 20
6.6 Use of Proceeds................................................. 21
SECTION 7. COLLATERAL REPORTING AND COVENANTS.............................. 21
7.1 Collateral Reporting............................................ 21
7.2 Accounts Covenants.............................................. 21
7.3 Inventory Covenants............................................. 23
7.4 Equipment Covenants............................................. 24
7.5 Power of Attorney............................................... 24
7.6 Right to Cure................................................... 25
7.7 Access to Premises.............................................. 25
i
<PAGE>
SECTION 8. REPRESENTATIONS AND WARRANTIES.................................. 25
8.1 Corporate Existence, Power and Authority; Subsidiaries.......... 25
8.2 Financial Statements; No Material Adverse Change................ 26
8.3 Chief Executive Office; Collateral Locations.................... 26
8.4 Priority of Liens; Title to Properties.......................... 26
8.5 Tax Returns..................................................... 26
8.6 Litigation...................................................... 27
8.7 Compliance with Other Agreements and Applicable Laws............ 27
8.8 Bank Accounts................................................... 27
8.9 Accuracy and Completeness of Information........................ 27
8.10 Survival of Warranties; Cumulative.............................. 27
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS.............................. 28
9.1 Maintenance of Existence........................................ 28
9.2 New Collateral Locations........................................ 28
9.3 Compliance with Laws, Regulations, Etc.......................... 28
9.4 Payment of Taxes and Claims..................................... 28
9.5 Insurance....................................................... 28
9.6 Financial Statements and Other Information...................... 29
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc......... 30
9.8 Encumbrances.................................................... 30
9.9 Indebtedness.................................................... 31
9.10 Loans, Investments, Guarantees, Etc............................. 31
9.11 Dividends and Redemptions....................................... 32
9.12 Transactions with Affiliates.................................... 32
9.13 Additional Bank Accounts........................................ 32
9.14 Adjusted Net Worth.............................................. 33
9.15 Maximum Inventory............................................... 33
9.16 Costs and Expenses.............................................. 33
9.17 Further Assurances.............................................. 33
SECTION 10. EVENTS OF DEFAULT AND REMEDIES.................................. 34
10.1 Events of Default............................................... 34
10.2 Remedies........................................................ 35
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW..................................... 37
11.1 Governing Law; Choice of Forum; Service of Process;
Jury Trial Waiver............................................... 37
11.2 Waiver of Notices............................................... 38
11.3 Amendments and Waivers.......................................... 38
11.4 Waiver of Counterclaims......................................... 39
11.5 Indemnification................................................. 39
ii
<PAGE>
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS................................ 39
12.1 Term............................................................ 39
12.2 Notices......................................................... 41
12.3 Partial Invalidity.............................................. 41
12.4 Successors...................................................... 41
12.5 Entire Agreement................................................ 41
iii
<PAGE>
INDEX TO
EXHIBITS AND SCHEDULES
----------------------
Exhibit A Information Certificate
Schedule 8.4 Existing Liens
Schedule 8.8 Bank Accounts
Schedule 9.11 Permitted Dividends and Other
Distributions on Capital Stock
iv
<PAGE>
SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
-------------------------------------------------------
This Second Amended and Restated Loan and Security Agreement dated as
of August 19, 1998 is entered into by and between Congress Financial Corporation
(Western), a California corporation ("Lender"), on the one hand, and Go-Video,
Inc., a Delaware corporation ("Go-Video") and California Audio Labs, LLC, a
California limited liability company (" Cal-Audio" ), collectively on the other
hand.
W I T N E S S E T H:
WHEREAS, Lender and Go-Video have entered into an Amended and Restated
Loan and Security Agreement, dated as of November 1, 1996 (as amended by
Amendment Number One thereto, dated as of September 1, 1997, and Amendment
Number Two thereto, dated as of August 14, 1998, the "Original Financing
Agreement");
WHEREAS, Go-Video has directly or indirectly acquired 100% of the
membership interests in Cal-Audio and has requested that Lender extend and amend
the financing arrangements with Go-Video described in the Original Financing
Agreements to, among other things, include Cal-Audio as a co-borrower; 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, unless
the context otherwise requires. 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. The word "including" when used in this Agreement shall mean
"including, without limitation". An Event of Default shall exist or continue or
be continuing until such Event of Default is waived in accordance with Section
11.3 or is cured in a manner satisfactory to Lender, if such Event of Default is
capable of being cured as
1
<PAGE>
determined by Lender. 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 a 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 Eurodollar Rate" shall mean, with respect to each
Interest Period for any Eurodollar Rate Loan, the rate per annum (rounded
upwards, if necessary, to the next one-sixteenth (1/16) of one (1%) percent)
determined by dividing (a) the Eurodollar Rate for such Interest Period by (b) a
percentage equal to: (i) one (1) minus (ii) the Reserve Percentage. For purposes
hereof, "Reserve Percentage" shall mean the reserve percentage, expressed as a
decimal, prescribed by any United States or foreign banking authority for
determining the reserve requirement which is or would be applicable to deposits
of United States dollars in a non-United States or an international banking
office of Reference Bank used to fund a Eurodollar Rate Loan or any Eurodollar
Rate Loan made with the proceeds of such deposit, whether or not the Reference
Bank actually holds or has made any such deposits or loans. The Adjusted
Eurodollar Rate shall be adjusted on and as of the effective day of any change
in the Reserve Percentage.
1.3 "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.
1.4 "Applicable Inventory Advance Rate" shall mean, at the time of
determination thereof: (a) 65% with respect to Eligible Inventory of Go-Video
consisting of VCR models then in production; (b) 50% with respect to Eligible
Inventory of Go-Video consisting of VCR models no longer in production; (c) 65%
with respect to Eligible Inventory of Go-Video's Security Products division
consisting of Samsung branded VCR's and GVI time lapsed VCRs; (d) 50% with
respect to Eligible Inventory of Go-Video's Security Products division that is
not described in the preceding clause (c); (e) 50% with respect to Eligible
Inventory of Go-Video consisting of new products, including Loewe televisions;
and (f) 65% with respect to Eligible Inventory of Cal-Audio; provided, however,
that such rate set forth in clause (e) may increase, up to 65%, at such time as:
(i) Lender has received a satisfactory appraisal (which
2
<PAGE>
shall include, among other things, the orderly liquidation value) of the subject
Inventory; (ii) no Event of Default has occurred and is continuing; and (iii)
Go-Video has achieved satisfactory sales performance as determined by the Lender
for the prior three months; 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.
1.5 "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.
1.6 "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 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) to reflect outstanding Letter of Credit Accommodations as provided in
Section 2.2 hereof or (d) 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.
1.7 "Blocked Accounts" shall have the meaning set forth in Section 6.3
hereof.
1.8 "Borrower" shall mean either Go-Video or Cal-Audio, or both, as the
context may require.
1.9 "Business Day" shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks are authorized or required to close under
the laws of the State of New York or the Commonwealth of Pennsylvania, and a day
on which the Reference Bank and Lender are open for the transaction of business,
except that if a determination of a Business Day shall relate to any Eurodollar
Rate Loans, the term Business Day shall also exclude any day on which banks are
closed for dealings in dollar deposits in the London interbank market or other
applicable Eurodollar Rate market.
1.10 "Collateral" shall have the meaning set forth in Section 5 hereof.
1.11 "Eligible Accounts" shall mean Accounts created by a 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:
3
<PAGE>
(a) such Accounts arise from the actual and bona fide sale and
delivery of goods by such Borrower or rendition of services by such 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 such
Borrower an irrevocable letter of credit issued or confirmed by a bank
satisfactory to Lender and payable only in the United States of America and in
U.S. Dollars, 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);
(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 (but the portion of the Accounts of such account debtor in excess of
the amount at any time and from time to time owed by Borrower to such account
debtor or claimed owed by such account debtor may be deemed Eligible 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;
4
<PAGE>
(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 such
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 35%, or in the case of Sam's Club 40% (but not to exceed
$5,000,000) of all otherwise Eligible Accounts or such other percentage 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;
(o) such Accounts are owed by account debtors whose total
indebtedness to such 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.
5
<PAGE>
1.12 "Eligible Inventory" shall mean Inventory consisting of boxed and
sealed finished goods held for resale in the ordinary course of the business of
a 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 a Borrower's business; (f) Inventory at premises other than those
owned and controlled by a 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 a Borrower, is consigned to Lender or Lender's
designee, a 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.
1.13 "Equipment" shall mean all of each 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.
1.14 "Eurodollar Rate Loans" shall mean any Loans or portion thereof on
which interest is payable based on the Adjusted Eurodollar Rate in accordance
with the terms hereof.
1.15 "Eurodollar Rate" shall mean with respect to the Interest Period
for a Eurodollar Rate Loan, the interest rate per annum equal to the arithmetic
average of the rates of interest per annum (rounded upwards, if necessary, to
the next one-sixteenth (1/16) of one (1%) percent) at which Reference Bank is
offered deposits of United States dollars in the London interbank market (or
other Eurodollar Rate market selected by Borrower and approved by Lender) on or
about 9:00 a.m. (New York time) two (2) Business Days prior to the commencement
of such Interest Period in amounts substantially equal to the principal amount
of the Eurodollar Rate Loans requested by and available to Borrowers in
accordance
6
<PAGE>
with this Agreement, with a maturity of comparable duration to the Interest
Period selected by Borrowers.
1.16 "Event of Default" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.17 "Financing Agreements" shall mean, collectively, this Agreement,
that certain Security Agreement - Trademark Collateral Assignment by Go-Video,
dated as of October 17, 1992, that certain Security Agreement - Trademark
Collateral Assignment by Cal-Audio, of even date herewith, and all notes,
guarantees (including the Guarantee), security agreements and other agreements,
documents and instruments now or at any time hereafter executed and/or delivered
by a 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.
1.18 "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 Board which are applicable to the
circumstances as of the date of determination consistently applied.
1.19 "Guarantee" shall mean that certain Guarantee, of even date
herewith, between Borrowers, on the one hand, and the Lender, on the other hand.
1.20 "Information Certificate" shall mean the Information Certificate
of each Borrower constituting Exhibit A hereto containing material information
with respect to such Borrower, its business and assets provided by or on behalf
of each Borrower to Lender in connection with the preparation of this Agreement
and the other Financing Agreements and the financing arrangements provided for
herein.
1.21 "Interest Period" shall mean for any Eurodollar Rate Loan, a
period of approximately one (1), two (2), or three (3) months duration as
Borrowers may elect, the exact duration to be determined in accordance with the
customary practice in the applicable Eurodollar Rate market; provided, that,
Borrowers may not elect an Interest Period which will end after the last day of
the then-current term of this Agreement.
1.22 "Interest Rate" shall mean, effective as of August 1, 1998: as to
Prime Rate Loans, a rate of one half of one percent (0.50%) per annum in excess
of the Prime Rate and, as to Eurodollar Rate Loans, a rate of two and three
quarters percent (2.75%) per annum (or three percent (3.00%) per annum at any
time when Go-Video's consolidated pre-tax net income (as determined by GAAP) for
the most recently completed fiscal year is less than $1,500,000) in excess of
the Adjusted Eurodollar Rate (based on the Eurodollar Rate applicable for the
Interest Period selected by Borrowers as in effect three (3) Business Days
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after the date of receipt by Lender of the request of Borrowers for such
Eurodollar Rate Loans in accordance with the terms hereof, whether such rate is
higher or lower than any rate previously quoted to Borrowers); provided, that,
the Interest Rate shall mean the rate of two and one half percent (2.50%) per
annum in excess of the Prime Rate as to Prime Rate Loans and the rate of five
percent (5.00%) per annum in excess of the Adjusted Eurodollar Rate as to
Eurodollar Rate Loans, at Lender's option, without notice, (a) for the period
(i) from and after the date of termination or non-renewal hereof until Lender
has received full and final payment of all obligations (notwithstanding entry of
a judgment against either Borrower) and (ii) from and after the date of the
occurrence of an Event of Default for so long as such Event of Default is
continuing as determined by Lender, and (b) on the Revolving Loans at any time
outstanding in excess of the amounts available to Borrowers 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).
1.23 "Inventory" shall mean all of each 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.
1.24 "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.
1.25 "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 a 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 such Borrower of its obligations
to such issuer.
1.26 "Licensing/Manufacturing Agreements" means, collectively, the
License and Technical Assistance Agreement between Go-Video and Samsung
Electronics Co., Ltd. ("Samsung") and that certain Manufacturing Agreement
between Go-Video and Samsung, and other, similar agreements, now or in the
future, including those between Go-Video and Shintom Co., Ltd., and Talk
Corporation, and any replacements, extensions, restatements or amendments
thereto.
1.27 "Loans" shall mean the Revolving Loans.
1.28 "Maximum Credit" shall mean the amount of $20,000,000.
1.29 "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,
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discounts, claims, credits and allowances of any nature at any time issued,
owing, granted, outstanding, available or claimed with respect thereto.
1.30 "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 either Borrower to Lender and/or its
affiliates, including principal, interest, charges, fees, costs and expenses,
however evidenced, whether as principal, surety, endorser, guarantor (including
under the Guarantee) 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 either Borrower under the United States
Bankruptcy Code or any similar statute (including the payment of interest and
other amounts which would accrue and become due but for the commencement of such
case, whether or not such amounts are allowed or allowable in whole or in part
in 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.
1.31 "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 Borrowers.
1.32 "Orderly Liquidation Value" means, for any asset, the "Orderly
Liquidation Value" thereof as established by third party appraisals conducted
pursuant to the terms of Section 7.3 (d) or 7.4 hereof, as the case may be.
1.33 "Payment Account" shall have the meaning set forth in Section 6.3
hereof.
1.34 "Person" or "person" shall mean any individual, sole
proprietorship, partnership, corporation (including any corporation which elects
subchapter S status under the Internal Revenue Code of 1986, as amended),
limited liability company, limited liability partnership, 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.
1.35 "Prime Rate" shall mean the rate from time to time publicly
announced by 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.
1.36 "Prime Rate Loans" shall mean any Loans or portion thereof on
which interest is payable based on the Prime Rate in accordance with the terms
thereof.
1.37 "Records" shall mean all of each 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
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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 either Borrower with respect to the foregoing
maintained with or by any other person).
1.38 "Reference Bank" shall mean CoreStates Bank, N.A., or such other
bank as Lender may from time to time designate.
1.39 "Revolving Loans" shall mean the loans now or hereafter made by
Lender to or for the benefit of a Borrower on a revolving basis (involving
advances, repayments and readvances) as set forth in Section 2.1 hereof.
1.40 "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.
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 Borrowers from time to time in
amounts requested by Borrowers up to the amount equal to the sum of:
(i) eighty (80%) 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 such Eligible Inventory, or (C) the amount
equal to: (1) $10,000,000 minus (2) the aggregate Inventory Letter of
Credit Reserve amount for all outstanding Letter of Credit
Accommodations, plus
(iii) so long as Go-Video's consolidated pre-tax net
income (as determined by GAAP) for the most recently completed fiscal
year was not less than $1,500,000, an amount equal to the lesser of:
(A) (y) 10% (from and including July 1 through and including October 15
of each calendar year) or 5% (from and including October 16 through and
including October 31 of each calendar year) times (z) the sum of the
Value of the Eligible Inventory plus the Net Amount of Eligible
Accounts; or (B) $2,000,000; less
(iv) any Availability Reserves.
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In no event shall there be more than: (1) $6,000,000 advanced at any one time
against Eligible Inventory that is in transit to Borrowers; (2) $15,000,000 in
the aggregate of advances at any one time against Eligible Inventory and
outstanding Letter of Credit Accommodations; (3) $1,500,000 of advances at any
one time against Eligible Accounts and Eligible Inventory of Cal-Audio; (4)
$750,000 of advances at any one time against Eligible Inventory of Cal-Audio; or
(5) $600,000 of advances at any one time against Eligible Inventory of
Go-Video's Security Products division carrying the "Go-Video" brand.
(b) Lender may, in its discretion, from time to time, upon not
less than five (5) days prior notice to Borrowers, (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 the most
recent 6 month 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 (such reduction to effect a 1%
reduction in the advance rate for each 1% by which such average dilution exceeds
10%), 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 Borrowers, Lender agrees to provide or arrange for
Letter of Credit Accommodations for the account of a 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 a
Borrower pursuant to this Section 2.
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(b) In addition to any charges, fees or expenses charged by
any bank or issuer in connection with the Letter of Credit Accommodations,
Borrowers shall pay to Lender a letter of credit fee at a rate equal to one
percent (1.00%) per annum on the daily outstanding balance of the Letter of
Credit Accommodations for the immediately preceding month (or part thereof)
commencing August 1, 1998, payable in arrears as of the first day of each
succeeding month, except that Borrower shall pay to Lender such letter of credit
fee, at Lender's option, without notice, at a rate equal to one percent (1.00%)
percent per annum on such daily outstanding balance for: (i) the period from and
after the date of termination or non-renewal hereof until Lender has received
full and final payment of all Obligations (notwithstanding entry of a judgment
against Borrower) and (ii) the period from and after the date of the occurrence
of an Event of Default for so long as such Event of Default is continuing as
determined by Lender. 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, an Availability Reserve shall
be established in the applicable amount set forth in Section 2.2(c)(i) or
Section 2.2(c)(ii).
(d) Except in Lender's discretion, 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 $10,000,000. At any time an Event of Default exists or has occurred
and is continuing, upon Lender's request, Borrowers 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) Borrowers 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 any losses, claims, damages, liabilities, costs and expenses due to
any action taken by any issuer or correspondent with respect to any Letter
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of Credit Accommodation. Each 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. Each 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. Each Borrower hereby releases and holds Lender harmless
from and against any acts, waivers, errors, delays or omissions, whether caused
by either 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 Borrowers 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.
Borrowers 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 Borrowers. Lender shall have the sole and exclusive right and
authority to, and Borrowers 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 a Borrower's name.
(g) Any rights, remedies, duties or obligations granted or
undertaken by Borrowers 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 Borrowers 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 Borrowers to Lender
and to apply in all respects to Borrowers.
2.3 [INTENTIONALLY DELETED]
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2.4 Availability Reserves. All Revolving Loans otherwise available to
Borrowers 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) Borrowers shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at the Interest Rate. All
interest accruing hereunder on and after the date of any Event of Default or
termination or non-renewal hereof shall be payable on demand.
(b) Borrowers may from time to time request that Prime Rate
Loans be converted to Eurodollar Rate Loans or that any existing Eurodollar Rate
Loans continue for an additional Interest Period. Such request from Borrowers
shall specify the amount of the Prime Rate Loans which will constitute
Eurodollar Rate Loans (subject to the limits set forth below) and the Interest
Period to be applicable to such Eurodollar Rate Loans. Subject to the terms and
conditions contained herein, three (3) Business Days after receipt by Lender of
such a request from Borrowers, such Prime Rate Loans shall be converted to
Eurodollar Rate Loans or such Eurodollar Rate Loans shall continue, as the case
may be, provided, that, (i) no 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, (ii) no party hereto shall have sent any notice of
termination or non-renewal of this Agreement, (iii) Borrowers shall have
complied with such customary procedures as are established by Lender and
specified by Lender to Borrowers from time to time for requests by Borrowers for
Eurodollar Rate Loans, (iv) no more than four (4) Interest Periods may be in
effect at any one time, (v) the aggregate amount of the Eurodollar Rate Loans
must be in an amount not less than $5,000,000 or an integral multiple of
$1,000,000 in excess thereof, (vi) the maximum amount of the Eurodollar Rate
Loans at any time requested by Borrowers shall not exceed the amount equal to
eighty (80%) percent of the lowest principal amount of the Revolving Loans which
it is anticipated will be outstanding during the applicable Interest Period, in
each case as determined by Lender (but with no obligation of Lender to make such
Revolving Loans) and (vii) Lender shall have determined that the Interest Period
or Adjusted Eurodollar Rate is available to Lender through the Reference Bank
and can be readily determined as of the date of the request for such Eurodollar
Rate Loan by Borrowers. Any request by Borrowers to convert Prime Rate Loans to
Eurodollar Rate Loans or to continue any existing Eurodollar Rate Loans shall be
irrevocable. Notwithstanding anything to the contrary contained herein, Lender
and Reference Bank shall not be required to purchase United States Dollar
deposits in the London interbank market or other applicable Eurodollar Rate
market to fund any Eurodollar Rate Loans, but the provisions hereof shall be
deemed to apply as if Lender and Reference Bank had purchased such deposits to
fund the Eurodollar Rate Loans.
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(c) Any Eurodollar Rate Loans shall automatically convert to
Prime Rate Loans upon the last day of the applicable Interest Period, unless
Lender has received and approved a request to continue such Eurodollar Rate Loan
at least three (3) Business Days prior to such last day in accordance with the
terms hereof. Any Eurodollar Rate Loans shall, at Lender's option, upon notice
by Lender to Borrowers, convert to Prime Rate Loans in the event that (i) an
Event of Default or event which, with the notice or passage of time, or both,
would constitute an Event of Default, shall exist, (ii) this Agreement shall
terminate or not be renewed, or (iii) the aggregate principal amount of the
Prime Rate Loans which have previously been converted to Eurodollar Rate Loans
or existing Eurodollar Rate Loans continued, as the case may be, at the
beginning of an Interest Period shall at any time during such Interest Period
exceed either (A) the aggregate principal amount of the Loans then outstanding,
or (B) the sum of the then outstanding principal amount of the Term Loan plus
the Revolving Loans then available to Borrowers under Section 2 hereof.
Borrowers shall pay to Lender, upon demand by Lender (or Lender may, at its
option, charge any loan account of Borrowers) any amounts required to compensate
Lender, the Reference Bank or any participant with Lender for any loss
(including loss of anticipated profits), cost or expense incurred by such
person, as a result of the conversion of Eurodollar Rate Loans to Prime Rate
Loans pursuant to any of the foregoing.
(d) Interest shall be payable by Borrowers 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 on non-contingent Obligations (other than Eurodollar
Rate Loans) 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. All interest accruing
hereunder on and after an Event of Default or termination or non-renewal hereof
shall be payable on demand. In no event shall charges constituting interest
payable by Borrowers to Lender exceed the maximum amount or the rate permitted
under any applicable law or regulation, and if any such 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. Borrowers shall pay to Lender as a closing fee the
amount of $30,000, which shall be fully earned as of and payable on the date
hereof.
3.3 Facility Fee. N/A
3.4 Servicing Fee. Borrowers shall pay to Lender monthly a servicing
fee in an amount equal to $500 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.
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3.5 Unused Line Fee. Borrowers 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 $20,000,000 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 August 1, 1998) in arrears.
3.6 Changes in Laws and Increased Costs of Loans.
(a) Notwithstanding anything to the contrary contained herein,
all Eurodollar Rate Loans shall, upon notice by Lender to Borrowers, convert to
Prime Rate Loans in the event that (i) any change in applicable law or
regulation (or the interpretation or administration thereof) shall either (A)
make it unlawful for Lender, Reference Bank or any participant to make or
maintain Eurodollar Rate Loans or to comply with the terms hereof in connection
with the Eurodollar Rate Loans, or (B) shall result in the increase in the costs
to Lender, Reference Bank or any participant of making or maintaining any
Eurodollar Rate Loans by an amount deemed by Lender to be material, or (C)
reduce the amounts received or receivable by Lender in respect thereof, by an
amount deemed by Lender to be material or (ii) the cost to Lender, Reference
Bank or any participant of making or maintaining any Eurodollar Rate Loans shall
otherwise increase by an amount deemed by Lender to be material. Borrowers shall
pay to Lender, upon demand by Lender (or Lender may, at its option, charge any
loan account of Borrowers) any amounts required to compensate Lender, the
Reference Bank or any participant with Lender for any loss (including loss of
anticipated profits), cost or expense incurred by such person as a result of the
foregoing, including, without limitation, any such loss, cost or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired by such person to make or maintain the Eurodollar Rate Loans or any
portion thereof. A certificate of Lender setting forth the basis for the
determination of such amount necessary to compensate Lender as aforesaid shall
be delivered to Borrowers and shall be conclusive, absent manifest error.
(b) If any payments or prepayments in respect of the
Eurodollar Rate Loans are received by Lender other than on the last day of the
applicable Interest Period (whether pursuant to acceleration, upon maturity or
otherwise), including any payments pursuant to the application of collections
under Section 6.3 or any other payments made with the proceeds of Collateral,
Borrowers shall pay to Lender upon demand by Lender (or Lender may, at its
option, charge any loan account of Borrowers) any amounts required to compensate
Lender, the Reference Bank or any participant with Lender for any additional
loss (including loss of anticipated profits), cost or expense incurred by such
person as a result of such prepayment or payment, including, without limitation,
any loss, cost or expense incurred by reason of the liquidation or reemployment
of deposits or other funds acquired by such person to make or maintain such
Eurodollar Rate Loans or any portion thereof.
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SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations. Each of the following is a condition precedent to Lender making
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:
(a) Lender shall have received (i) financing statements from
Cal-Audio and (ii) searches in which Cal-Audio is debtor;
(b) Lender shall have received a certificate from an officer
of the manager of Cal-Audio attesting to Cal-Audio having duly authorized the
execution, delivery, and performance of this Agreement and the other Financing
Agreements;
(c) Lender shall have received Cal-Audio's governing documents
together with good standing certificates with respect to Cal-Audio; and
(d) Lender shall have received a Guarantee from Go-Video and
Cal-Audio with respect to the obligations of one another to the Lender.
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
Borrowers, 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, each Borrower
hereby grants to Lender a continuing security interest in, a lien upon, and a
right of set off against, and 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"):
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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,
securities and other investment property, letters of credit, bankers'
acceptances and guaranties;
5.3 all present and future monies, securities, credit balances,
deposits, deposit accounts and other property of such 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 such 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 Accommodations and other Obligations and the Collateral, (b) all payments
made by or on behalf of Borrowers 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.
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6.2 Statements. Lender shall render to Go-Video on behalf of Borrowers
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
Borrowers and conclusively binding upon Borrowers as an account stated except to
the extent that Lender receives a written notice from Borrowers of any specific
exceptions of Borrowers thereto within thirty (30) days after the date such
statement has been mailed by Lender. Until such time as Lender shall have
rendered to Go-Video a written statement as provided above, the balance in
Borrowers' loan account(s) shall be presumptive evidence of the amounts due and
owing to Lender by Borrowers.
6.3 Collection of Accounts.
(a) Borrowers shall establish and maintain, at their 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 Borrowers 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"). Each 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
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) Each Borrower and all of its affiliates, subsidiaries,
shareholders, directors, employees or agents shall, acting as trustee for
Lender, receive, as the property of
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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 either Borrower's own funds. Each 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 Borrowers 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 Borrowers or for
the account of Borrowers (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 of Borrowers. Borrowers
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. Borrowers shall be liable to pay to Lender, and do 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 Go-Video or
other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All 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,
Borrowers when deposited to the credit
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of Borrowers or otherwise disbursed or established in accordance with the
instructions of Go-Video or in accordance with the terms and conditions of this
Agreement.
6.6 Use of Proceeds. Borrowers shall use the initial proceeds of the
Loans provided by Lender to Borrowers hereunder only for: (a) payments to each
of the persons listed in the disbursement direction letter furnished by
Borrowers 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 Borrowers pursuant to the provisions
hereof shall be used by Borrowers only for general operating, working capital
and other proper corporate purposes of Borrowers 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 U
of the Board of Governors of the Federal Reserve System, as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
7.1 Collateral Reporting. Borrowers 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
Borrowers; (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 Borrowers'
records or reports of the Collateral are prepared or maintained by an accounting
service, contractor, shipper or other agent, Borrowers hereby irrevocably
authorize 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.
7.2 Accounts Covenants.
(a) Borrowers shall notify Lender weekly of: (i) any material
delay in a 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 a Borrower's knowledge would cause Lender to consider any
then
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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 a 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, each 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) Without limiting the obligations of Borrowers to deliver
any other information to Lender, Borrowers shall weekly report to Lender any
return of Inventory by an account debtor having a sales price in excess of
$50,000. At any time that Inventory is returned, reclaimed or repossessed, the
Account (or portion thereof) which arose from the sale of such returned,
reclaimed or repossessed Inventory 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, Borrowers 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 a 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.
(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) Each Borrower shall deliver or cause to be delivered to
Lender, with appropriate endorsement and assignment, with full recourse to such
Borrower, all chattel
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paper and instruments which such Borrower now owns or may at any time acquire
immediately upon such 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 Borrowers 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) Borrowers
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, Borrowers' cost therefor and daily
withdrawals therefrom and additions thereto; (b) Borrowers 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) Borrowers 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 a 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, Borrowers shall, at their 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 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) Borrowers 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 the requirements of the Federal Fair Labor Standards Act of
1938, as amended and all rules, regulations and orders related thereto); (f)
Borrowers assume all responsibility and liability arising from or
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relating to the production, use, sale or other disposition of the Inventory; (g)
Borrowers shall not sell Inventory to any customer on approval, or any other
basis which entitles the customer to return or may obligate Borrowers to
repurchase such Inventory; (h) Borrowers shall keep the Inventory in good and
marketable condition; and (i) Borrowers 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) Borrowers
shall, at their 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) Borrowers 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 Borrowers' business and not for personal, family, household
or farming use; (e) Borrowers 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
Borrowers 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 Borrowers in the ordinary course of business; (f)
the Equipment is now and shall remain personal property and Borrowers shall not
permit any of the Equipment to be or become a part of or affixed to real
property; and (g) Borrowers assume all responsibility and liability arising from
the use of the Equipment.
7.5 Power of Attorney. Each Borrower hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as such Borrower's true
and lawful attorney-in-fact, and authorizes Lender, in such 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 such 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 such
Borrower's name on any proof of claim in bankruptcy or other similar document
against an account debtor, (viii) notify the post office authorities to change
the address for delivery of such Borrower's mail to an address designated by
Lender, and open and dispose of all mail addressed to such Borrower, and (ix) do
all acts and things which are necessary, in Lender's determination, to fulfill
such 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 such Borrower's mail is deposited, (iii) endorse such Borrower's name upon
any items of payment or proceeds thereof and deposit the same in the Lender's
account for
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application to the Obligations, (iv) endorse such 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 such Borrower's name on any verification of Accounts and notices
thereof to account debtors and (vi) execute in such Borrower's name and file any
UCC financing statements or amendments thereto. Each 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
either Borrower under any agreement with a third party or pay or bond on appeal
any judgment entered against either 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
Borrowers' account therefor, such amounts to be repayable by Borrowers 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 Borrowers. 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 Borrowers, (a) Lender or its designee shall have
complete access to all of Borrowers' premises during normal business hours and
after notice to Borrower, or at any time and without notice to Borrowers 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 Borrowers' books
and records, including the Records, and (b) Borrowers 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 Borrowers' 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.
SECTION 8. REPRESENTATIONS AND WARRANTIES
Each 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 such Borrower:
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8.1 Corporate Existence, Power and Authority; Subsidiaries. Each
Borrower is a corporation or limited liability company duly organized and in
good standing under the laws of its state of organization and is duly qualified
as a foreign corporation or limited liability company 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 such 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 each Borrower's corporate or other powers, have been duly authorized and
are not in contravention of law or the terms of each Borrower's certificate of
incorporation, by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which either Borrower is a party or by which either
Borrower or its property are bound. This Agreement and the other Financing
Agreements constitute legal, valid and binding obligations of each Borrower
enforceable in accordance with their respective terms. Borrower has any
subsidiaries except as set forth on the Information Certificate.
8.2 Financial Statements; No Material Adverse Change. All financial
statements relating to Borrowers which have been or may hereafter be delivered
by Borrowers to Lender have been prepared in accordance with GAAP and fairly
present the financial condition and the results of operation of Borrowers as at
the dates and for the periods set forth therein. Except as disclosed in any
interim financial statements furnished by Borrowers 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 Borrowers,
since the date of the most recent audited financial statements furnished by
Borrowers to Lender prior to the date of this Agreement.
8.3 Chief Executive Office; Collateral Locations. The chief executive
office of each Borrower and such 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 such 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 a
Borrower and sets forth the owners and/or operators thereof and to the best of
each Borrower's knowledge, the holders of any mortgages on such locations.
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. Each 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,
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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. Each 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. Each 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 such 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 Borrowers' knowledge threatened, against or affecting either Borrower,
its assets or business and there is no action, suit, proceeding or claim by any
Person pending, or to the best of Borrowers' knowledge threatened, against
either Borrower or its assets or goodwill, or against or affecting any
transactions contemplated by this Agreement, which if adversely determined
against either Borrower would result in any material adverse change in the
assets, business or prospects of Borrowers or would impair the ability of
Borrowers to perform their 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. Neither
Borrower is 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 each 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 Bank Accounts. All of the deposit accounts, investment accounts or
other accounts in the name of or used by Borrowers maintained at any bank or
other financial institution are set forth on Schedule 8.8 hereto, subject to the
right of Borrower to establish new accounts in accordance with Section 9.13
below.
8.9 Accuracy and Completeness of Information. All information furnished
by or on behalf of Borrowers 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 omit
any material fact necessary in order to make such information not misleading. No
event
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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
Borrowers, which has not been fully and accurately disclosed to Lender in
writing.
8.10 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. Each Borrower shall at all times
preserve, renew and keep in full, force and effect its 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. Each 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 such Borrower shall deliver to Lender a copy of the amendment to
the Certificate of Incorporation or Articles of Organization of such Borrower
providing for the name change certified by the Secretary of State of the
jurisdiction of organization of such Borrower as soon as it is available.
9.2 New Collateral Locations. Either Borrower may open any new location
within the continental United States provided such 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 UCC financing statements.
9.3 Compliance with Laws, Regulations, Etc. Each 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. Each 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 such Borrower and with respect to which adequate reserves have
been set aside on its books. Borrowers shall be liable for any tax or penalties
imposed on Lender as a result of the financing arrangements provided for herein
and each Borrower agrees to indemnify and hold Lender harmless with respect to
the
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foregoing, and to repay to Lender on demand the amount thereof, and until paid
by Borrowers such amount shall be added and deemed part of the Loans, provided,
that, nothing contained herein shall be construed to require either 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. Borrowers 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.
Borrowers shall furnish certificates, policies or endorsements to Lender as
Lender shall require as proof of such insurance, and, if Borrowers fail to do
so, Lender is authorized, but not required, to obtain such insurance at the
expense of Borrowers. 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 each 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. Borrowers 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 Borrowers 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 Borrowers or any of their 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) Each 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 such Borrower and its
subsidiaries (if any) in accordance with GAAP and each 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
either Borrower has any subsidiaries, unaudited consolidating financial
statements (including in each case balance sheets, statements of income and
loss, statements of cash flow, and statements of shareholders' equity), all in
reasonable detail, fairly presenting the financial position and the results of
the operations of such 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 either Borrower
has any subsidiaries, audited consolidating financial statements of such
Borrower and its subsidiaries (including in
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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 such Borrower and its subsidiaries as of the end of and for
such fiscal year, together with the unqualified opinion of independent certified
public accountants, which accountants shall be an independent accounting firm
selected by Borrowers 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 each Borrower and its
subsidiaries as of the end of and for the fiscal year then ended.
(b) Borrowers 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 either
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) Go-Video shall promptly after the sending or filing
thereof furnish or cause to be furnished to Lender copies of all reports which
Go-Video sends to its stockholders generally and copies of all reports and
registration statements which Go-Video files with the Securities and Exchange
Commission, any national securities exchange or the National Association of
Securities Dealers, Inc.
(d) Borrowers shall furnish or cause to be furnished to Lender
such budgets, forecasts, projections and other information respecting the
Collateral and the business of Borrowers, 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
Borrowers to any court or other government agency or to any participant or
assignee or prospective participant or assignee. Each Borrower hereby
irrevocably authorizes and directs all accountants or auditors to deliver to
Lender, at such Borrower's expense, copies of the financial statements of such
Borrower and any reports or management letters prepared by such accountants or
auditors on behalf of such Borrower and to disclose to Lender such information
as they may have regarding the business of such 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 Borrowers to Lender in writing.
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Neither
Borrower shall, 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 longer used in the business of such Borrower so long as (A) if an Event of
Default exists or has
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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
$100,000 for all such Equipment disposed of in any fiscal year of such
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. Neither Borrower shall 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 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 such 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 such 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 such 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 such 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 $200,000 in the aggregate at any time outstanding
so long as such security interests and mortgages do not apply to any property of
such 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. Neither Borrower shall 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 such Borrower is contesting in good faith the amount or
validity thereof by appropriate proceedings diligently pursued and available to
such 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) a 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) neither Borrower shall, directly or indirectly, (A) amend, modify, alter or
change the terms of such indebtedness or any agreement, document or instrument
related thereto as in effect
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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) each Borrower shall furnish to Lender all notices or
demands in connection with such indebtedness either received by such Borrower or
on its behalf, promptly after the receipt thereof, or sent by such Borrower or
on its behalf, concurrently with the sending thereof, as the case may be.
9.10 Loans, Investments, Guarantees, Etc. Neither Borrower shall,
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 such
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, such Borrower shall take such actions as are deemed necessary by
Lender to perfect the security interest of Lender in such investments; (c)
loans, advances and guarantees set forth in the Information Certificate; and (d)
so long as no Event of Default has occurred and is continuing, Borrowers 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) $3,000,000; and (2) seventy percent
(70%) of the difference between (i) the sum of (x) Borrowers' 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 Borrowers 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 Borrowers; and (ii) $7,000,000.
9.11 Dividends and Redemptions. Neither Borrower shall, directly or
indirectly, declare or pay any dividends on account of any shares of class of
capital stock of such 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.
9.12 Transactions with Affiliates. Neither Borrower shall enter into
any transaction for the purchase, sale or exchange of property or the rendering
of any service to or by any
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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 such Borrower than such Borrower would obtain in a comparable arm's
length transaction with an unaffiliated person.
9.13 Additional Bank Accounts. Borrowers shall not, directly or
indirectly, open, establish or maintain any deposit account, investment account
or any other account with any bank or other financial institution, other than
the Blocked Accounts and the accounts set forth in Schedule 8.8 hereto, except:
(a) as to any new or additional Blocked Accounts and other such new or
additional accounts which contain any Collateral or proceeds thereof, with the
prior written consent of Lender and subject to such conditions thereto as Lender
may establish and (b) as to any accounts used by Borrowers to make payments of
payroll, taxes or other obligations to third parties, after prior written notice
to Lender.
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 Borrowers' locations);
plus (b) the aggregate face amount of all outstanding Letter of Credit
Accommodations, shall not exceed $26,000,000.
9.16 Costs and Expenses. Borrowers 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: (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 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 Borrowers'
operations, plus a per diem charge at the rate of $500 per person per day for
Lender's
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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 $7,500 per calendar year plus out-of-pocket
expenses; and (h) the fees and 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, each 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
Borrowers 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, each 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) either 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
either 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
either Borrower or any Obligor in excess of $100,000 in any one case or in
excess of $200,000 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
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the payment of money, or injunction, attachment, garnishment or execution is
rendered against Borrower or any Obligor or any of their assets;
(e) any Obligor (being a natural person or a general partner
of an Obligor which is a partnership) dies or either Borrower or any Obligor,
which is a partnership, limited liability company, limited partnership or a
corporation, dissolves or suspends or discontinues doing business;
(f) either 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 either 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 either 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 either Borrower or any Obligor or for all or any part of
its property; or
(i) any default by either 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 $500,000, which default
continues for more than the applicable cure period, if any, with respect
thereto, or any default by either 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 either
Borrower;
(k) the indictment or threatened indictment of either Borrower
or any Obligor under any criminal statute, or commencement or threatened
commencement of criminal or civil proceedings against either Borrower or any
Obligor, pursuant to which
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statute or proceedings the penalties or remedies sought or available include
forfeiture of any of the property of either Borrower or such Obligor;
(l) there shall be a material adverse change in the business,
assets or prospects of either 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 Borrowers 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 Borrowers of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against Borrowers 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 Borrowers, at Borrowers' 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 Borrowers, which
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right or equity of redemption is hereby expressly waived and released by
Borrowers 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 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 Borrowers 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 Borrowers waive 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, Borrowers waive 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. Borrowers 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 Borrowers 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 Borrowers.
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) Borrowers 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, tort, equity or
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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 Borrowers or their 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
Borrowers or their property).
(c) Each 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 such Borrower in any other manner provided
under the rules of any such courts. Within thirty (30) days after such service,
such Borrower shall appear in answer to such process, failing which such
Borrower shall be deemed in default and judgment may be entered by Lender
against such Borrower for the amount of the claim and other relief requested.
(d) BORROWERS 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. BORROWERS 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
BORROWERS 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 Borrowers (whether
in tort, contract, equity or otherwise) for losses suffered by Borrowers 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. Each Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all
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instruments 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 either Borrower which Lender may elect to give shall entitle either
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 and as to amendments, as also signed by an authorized officer of each
Borrower. 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. Each 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. Each 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 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, each 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.
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
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effect for a term ending on November 1, 2002 (the "Renewal Date"), and from year
to year thereafter, unless sooner terminated pursuant to the terms hereof.
Lender or Borrowers 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, Borrowers 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
payments in respect of the Obligations and 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 Borrowers for such purpose. Interest
shall be due until and including the next business day, if the amounts so paid
by Borrowers 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 Borrowers of their 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, Borrowers agree to pay to Lender, upon the
effective date of such termination, an early termination fee in the amount set
forth below if such termination is effective in the period indicated: one
percent
Period Amount
------ ------
the date hereof to and
including October 31, 2000 1% of Maximum Credit
November 1, 2000 to and
including October 31, 2001 0.5% of Maximum Credit
November 1, 2001 to and
including October 31, 2002 0.25% of Maximum Credit
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Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrowers agree
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:
(i) Borrowers request early termination of this
Agreement at a time when no Event of Default has occurred and is continuing;
(ii) Borrowers have 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) Borrowers have offered Lender the opportunity
to continue to finance Borrowers 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 Borrowers
at Go-Video's 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, Borrowers and their respective
successors and assigns, except that Borrowers 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 Borrowers, 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
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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), understandings, negotiations and
discussions, representations, warranties, commitments, proposals, offers and
contracts concerning the subject matter hereof, whether oral or written. In the
event of any inconsistency between the terms of this Agreement and any schedule
or exhibit hereto, the terms of this Agreement shall govern.
IN WITNESS WHEREOF, Lender and Borrowers have caused these presents to
be duly executed as of the day and year first above written.
LENDER BORROWERS
- ------ ---------
CONGRESS FINANCIAL CORPORATION GO VIDEO, INC.
(WESTERN)
By:______________________________ By: /S/ DOUGLAS KLEIN
Title:___________________________ Title: VP & CFO
Address: Chief Executive Office:
225 South Lake Avenue, Suite 1000 7835 East McClain Drive
Pasadena, California 91101 Scottsdale, Arizona 85260
CALIFORNIA AUDIO LABS, LLC
By: /S/ DOUGLAS KLEIN
Title: VP & CFO OF GO-VIDEO, INC.,
MANAGER
Chief Executive Office:
7835 East McClain Drive
Scottsdale, Arizona 85260
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<PAGE>
GUARANTEE
---------
August 19, 1998
Congress Financial Corporation (Western)
225 S. Lake Avenue, Suite 1000
Pasadena, California 91101
Re: Go-Video, Inc. and California Audio Labs, LLC (jointly "Borrowers")
Gentlemen:
Congress Financial Corporation (Western) ("Lender") and Borrowers have
entered into certain financing arrangements pursuant to which Lender may make
loans and advances and provide other financial accommodations to Borrowers as
set forth in the Second Amended and Restated Loan and Security Agreement, dated
August 19, 1998 by and among Borrowers and Lender (as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, the "Loan Agreement"), and other agreements, documents and instruments
referred to therein or at any time executed and/or delivered in connection
therewith or related thereto, including, but not limited to, this Guarantee (all
of the foregoing, together with the Loan Agreement, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, being collectively referred to herein as the "Financing Agreements").
Due to the close business and financial relationships among Borrowers
and each and all of the undersigned (individually and collectively,
"Guarantors"), in consideration of the benefits which will accrue to Guarantors
and as an inducement for and in consideration of Lender making loans and
advances and providing other financial accommodations to Borrowers pursuant to
the Loan Agreement and the other Financing Agreements, each of Guarantors hereby
jointly and severally agrees in favor of Lender as follows:
1. GUARANTEE.
(a) Each of Guarantors absolutely and unconditionally, jointly
and severally, guarantees and agrees to be liable for the full and indefeasible
payment and performance when due of the following (all of which are collectively
referred to herein as the "Guaranteed Obligations"): (i) all obligations,
liabilities and indebtedness of any kind, nature and description of Borrowers 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 the Loan Agreement, the other
Financing Agreements or otherwise, whether now existing or hereafter arising,
whether arising before, during or after the initial or any renewal term of the
Loan Agreement or after the commencement of any case with respect to Borrowers
under the United States Bankruptcy Code or any similar statute (including,
without limitation, the
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payment of interest and other amounts, which would accrue and become due but for
the commencement of such case, whether or not such amounts are allowed or
allowable in whole or in part in any such case and including loans, interest,
fees, charges and expenses related thereto and all other obligations of
Borrowers or its successors to Lender arising after 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 and (ii) all expenses (including,
without limitation, attorneys' fees and legal expenses) incurred by Lender in
connection with the preparation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of Borrowers's obligations,
liabilities and indebtedness as aforesaid to Lender, the rights of Lender in any
collateral or under this Guarantee and all other Financing Agreements or in any
way involving claims by or against Lender directly or indirectly arising out of
or related to the relationships between Borrowers, any of Guarantors or any
other Obligor (as hereinafter defined) and Lender, whether such expenses are
incurred before, during or after the initial or any renewal term of the Loan
Agreement and the other Financing Agreements or after the commencement of any
case with respect to Borrowers or any of Guarantors under the United States
Bankruptcy Code or any similar statute.
(b) This Guarantee is a guaranty of payment and not of
collection. Each of Guarantors agrees that Lender need not attempt to collect
any Guaranteed Obligations from Borrowers, any one of Guarantors or any other
Obligor or to realize upon any collateral, but may require any one of Guarantors
to make immediate payment of all of the Guaranteed Obligations to Lender when
due, whether by maturity, acceleration or otherwise, or at any time thereafter.
Lender may apply any amounts received in respect of the Guaranteed Obligations
to any of the Guaranteed Obligations, in whole or in part (including attorneys'
fees and legal expenses incurred by Lender with respect thereto or otherwise
chargeable to Borrowers or Guarantors) and in such order as Lender may elect.
(c) Payment by Guarantors shall be made to Lender at the
office of Lender from time to time on demand as Guaranteed Obligations become
due. Guarantors shall make all payments to Lender on the Guaranteed 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. One or more
successive or concurrent actions may be brought hereon against any of Guarantors
either in the same action in which Borrowers or any of the other Guarantors or
any other Obligor is sued or in separate actions. In the event any claim or
action, or action on any judgment, based on this Guarantee is brought against
any of Guarantors, each of Guarantors agrees not to deduct, set-off, or seek any
counterclaim for or recoup any amounts which are or may be owed by Lender to any
of Guarantors.
2. WAIVERS AND CONSENTS.
(a) Notice of acceptance of this Guarantee, the making of
loans and advances and providing other financial accommodations to Borrowers and
presentment, demand, protest, notice of protest, notice of nonpayment or default
and all other notices to which Borrowers or any of Guarantors are entitled are
hereby waived by each of Guarantors. Each of Guarantors also
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<PAGE>
waives notice of and hereby consents to, (i) any amendment, modification,
supplement, extension, renewal, or restatement of the Loan Agreement and any of
the other Financing Agreements, including, without limitation, extensions of
time of payment of or increase or decrease in the amount of any of the
Guaranteed Obligations, the interest rate, fees, other charges, or any
collateral, and the guarantee made herein shall apply to the Loan Agreement and
the other Financing Agreements and the Guaranteed Obligations as so amended,
modified, supplemented, renewed, restated or extended, increased or decreased,
(ii) the taking, exchange, surrender and releasing of collateral or guarantees
now or at any time held by or available to Lender for the obligations of
Borrowers or any other party at any time liable on or in respect of the
Guaranteed Obligations or who is the owner of any property which is security for
the Guaranteed Obligations (individually, an "Obligor" and collectively, the
"Obligors"), including, without limitation, the surrender or release by Lender
of any one of Guarantors hereunder, (iii) the exercise of, or refraining from
the exercise of any rights against Borrowers, any of Guarantors or any other
Obligor or any collateral, (iv) the settlement, compromise or release of, or the
waiver of any default with respect to, any of the Guaranteed Obligations and (v)
any financing by Lender of Borrowers under Section 364 of the United States
Bankruptcy Code or consent to the use of cash collateral by Lender under Section
363 of the United States Bankruptcy Code. Each of Guarantors agrees that the
amount of the Guaranteed Obligations shall not be diminished and the liability
of Guarantors hereunder shall not be otherwise impaired or affected by any of
the foregoing.
(b) No invalidity, irregularity or unenforceability of all or
any part of the Guaranteed Obligations shall affect, impair or be a defense to
this Guarantee, nor shall any other circumstance which might otherwise
constitute a defense available to or legal or equitable discharge of Borrowers
in respect of any of the Guaranteed Obligations, or any one of Guarantors in
respect of this Guarantee, affect, impair or be a defense to this Guarantee.
Without limitation of the foregoing, the liability of Guarantors hereunder shall
not be discharged or impaired in any respect by reason of any failure by Lender
to perfect or continue perfection of any lien or security interest in any
collateral or any delay by Lender in perfecting any such lien or security
interest. As to interest, fees and expenses, whether arising before or after the
commencement of any case with respect to Borrowers under the United States
Bankruptcy Code or any similar statute, Guarantors shall be liable therefor,
even if Borrowers's liability for such amounts does not, or ceases to, exist by
operation of law. Each of Guarantors acknowledges that Lender has not made any
representations to any of Guarantors with respect to Borrowers, any other
Obligor or otherwise in connection with the execution and delivery by Guarantors
of this Guarantee and Guarantors are not in any respect relying upon Lender or
any statements by Lender in connection with this Guarantee.
(c) Each of Guarantors hereby irrevocably and unconditionally
waives and relinquishes all statutory, contractual, common law, equitable and
all other claims against Borrowers, any collateral for the Guaranteed
Obligations or other assets of Borrowers or any other Obligor, for subrogation,
reimbursement, exoneration, contribution, indemnification, setoff or other
recourse in respect to sums paid or payable to Lender by each of Guarantors
hereunder and each of Guarantors hereby further irrevocably and unconditionally
waives and relinquishes any and all other benefits which Guarantors might
otherwise directly or indirectly receive or be entitled
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to receive by reason of any amounts paid by or collected or due from Guarantors,
Borrowers or any other Obligor upon the Guaranteed Obligations or realized from
their property.
3. Right to Dispose of Security; Impairment of Rights. Each
Guarantor hereby authorizes and empowers Lender, in its discretion, without any
notice or demand to such Guarantor and without affecting the liability of such
Guarantor hereunder, to exercise any right or remedy which Lender may have
available to it, including but not limited to, judicial foreclosure, exercise of
rights of power of sale without judicial action or taking a deed or an
assignment in lieu of foreclosure as to any collateral security for the
Guaranteed Obligations, whether real, personal or intangible property, and each
Guarantor hereby waives any defense to the recovery by Lender against such
Guarantor or any of its assets or properties of any deficiency after such action
notwithstanding any impairment or loss of any right of reimbursement or
subrogation or other right or remedy against Borrowers or any other Obligor or
against any assets or properties of Borrowers or any other Obligor. Each
Guarantor hereby waives all rights of subrogation, reimbursement,
indemnification and contribution and any other rights and defenses that are or
may become available to such Guarantor or other surety by reason of California
Civil Code Sections 2797 to 2855, inclusive. Each Guarantor waives all rights
and defenses that each Guarantor may have because the Guaranteed Obligations are
secured by real property. This means, among other things (a) Lender may obtain
payment of the Guaranteed Obligations from each Guarantor without first
foreclosing on any real or personal property collateral pledged by Borrowers and
(b) if Lender forecloses on any real property collateral pledged by Borrowers:
(i) the amount of the Guaranteed Obligations may be reduced only by the price
for which such collateral is sold at the foreclosure sale, even if the
collateral is worth more than the sale price and (ii) Lender may obtain payment
of the Guaranteed Obligations from each Guarantor and if Lender, by foreclosing
on the real property collateral, has destroyed any right either Guarantor may
have to receive any payments from Borrowers. This is an unconditional and
irrevocable waiver of any rights and defenses each Guarantor may have because
the Guaranteed Obligations are secured by real property. These rights and
defenses include, but are not limited to, any rights or defenses based upon
Sections 580a, 580b, 580d, or 726 of the Code of Civil Procedure. Each Guarantor
waives all rights and defenses arising out of an election of remedies by Lender,
even though such election of remedies, including the election to pursue a
nonjudicial foreclosure, has destroyed such Guarantor's rights of subrogation
and reimbursement against the principal by the operation of Section 580d of the
Code of Civil Procedure or otherwise. Without limiting the foregoing and without
waiving the benefits of California Commercial Code Section 9501, each Guarantor
specifically agrees that any action maintained by Lender for the appointment of
a receiver, trustee or custodian to collect rents, issues or profits or to
obtain possession of any property shall not constitute an "action" within the
meaning of Section 726 of the California Code of Civil Procedure.
4. Additional Indebtedness; Duty of Guarantor. Each Guarantor
acknowledges that Guaranteed Obligations may arise from time to time at the
request of Borrowers or otherwise as provided in the Loan Agreement without
further authorization from, the consent of or notice to, such Guarantor,
notwithstanding any adverse change in the condition of the business, assets or
prospects of Borrowers or any other Obligor after the date hereof. In giving
Lender this Guarantee, neither Guarantor is concerned with the condition of the
business, assets or prospects
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<PAGE>
of Borrowers or of any other Obligor and waives the right, if any, to require
Lender to disclose to either Guarantor any information Lender may now have or
hereafter acquire concerning the business, assets or prospects of Borrowers or
any other Obligor. Each Guarantor has established adequate means to obtain from
Borrowers on a continuing basis financial and other information pertaining to
Borrowers' business, assets and prospects, and assumes the responsibility for
being and keeping informed of the financial and other conditions of Borrowers
and of all circumstances bearing upon the risk of nonpayment of the Guaranteed
Obligations which diligent inquiry would reveal. Lender need not inquire into
the powers of Borrowers or the authority of its officers, directors, members or
agents acting or purporting to act on their behalf, and any Guaranteed
Obligations created in reliance upon the purported exercise of such power or
authority are and shall be included within the Guaranteed Obligations and
Guarantors shall be liable therefor. All Guaranteed Obligations to Lender
heretofore, now or hereafter created shall be deemed to have been granted at the
specific authorization and request of Guarantors and in consideration of and in
reliance upon this Guarantee.
5. Subordination. Payment of all amounts now or hereafter owed to
Guarantors by Borrowers or any other Obligor is hereby subordinated in right of
payment to the indefeasible payment in full to Lender of the Guaranteed
Obligations and all such amounts and any security and guarantees therefor are
hereby assigned to Lender as security for the Guaranteed Obligations.
6. Acceleration. Notwithstanding anything to the contrary contained
herein or any of the terms of any of the other Financing Agreements, the
liability of Guarantors for the entire Guaranteed Obligations shall mature and
become immediately due and payable, even if the liability of Borrowers or any
other Obligor therefor does not, upon the occurrence of any act, condition or
event which constitutes an Event of Default as such term is defined in the Loan
Agreement.
7. Account Stated. The books and records of Lender showing the account
between Lender and Borrowers shall be admissible in evidence in any action or
proceeding against or involving Guarantors as prima facie proof of the items
therein set forth, and the monthly statements of Lender rendered to Borrowers,
to the extent to which no written objection is made within thirty (30) days from
the date of sending thereof to Borrowers, shall be deemed conclusively correct
and constitute an account stated between Lender and Borrowers and be binding on
Guarantors.
8. Termination. This Guarantee is continuing, unlimited, absolute and
unconditional. All Guaranteed Obligations shall be conclusively presumed to have
been created in reliance on this Guarantee. Each of Guarantors shall continue to
be liable hereunder until one of Lender's officers actually receives a written
termination notice from a Guarantor sent to Lender at its address set forth
above by certified mail, return receipt requested and thereafter as set forth
below. Such notice received by Lender from any one of Guarantors shall not
constitute a revocation or termination of this Guarantee as to any of the other
Guarantors. Revocation or termination hereof by any of Guarantors shall not
affect, in any manner, the rights of Lender or any obligations or duties of any
of Guarantors (including the Guarantor which may have sent such notice) under
this Guarantee with respect to (a) Guaranteed Obligations which have been
created, contracted, assumed or incurred prior to the receipt by Lender of such
written notice of revocation or
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termination as provided herein, including, without limitation, (i) all
amendments, extensions, renewals and modifications of such Guaranteed
Obligations (whether or not evidenced by new or additional agreements, documents
or instruments executed on or after such notice of revocation or termination),
(ii) all interest, fees and similar charges accruing or due on and after
revocation or termination, and (iii) all attorneys' fees and legal expenses,
costs and other expenses paid or incurred on or after such notice of revocation
or termination in attempting to collect or enforce any of the Guaranteed
Obligations against Borrowers, Guarantors or any other Obligor (whether or not
suit be brought), or (b) Guaranteed Obligations which have been created,
contracted, assumed or incurred after the receipt by Lender of such written
notice of revocation or termination as provided herein pursuant to any contract
entered into by Lender prior to receipt of such notice. The sole effect of such
revocation or termination by any of Guarantors shall be to exclude from this
Guarantee the liability of such Guarantor for those Guaranteed Obligations
arising after the date of receipt by Lender of such written notice which are
unrelated to Guaranteed Obligations arising or transactions entered into prior
to such date. Without limiting the foregoing, this Guarantee may not be
terminated and shall continue so long as the Loan Agreement shall be in effect
(whether during its original term or any renewal, substitution or extension
thereof).
9. Reinstatement. If after receipt of any payment of, or proceeds of
collateral applied to the payment of, any of the Guaranteed Obligations, Lender
is required to surrender or return such payment or proceeds to any Person for
any reason, then the Guaranteed Obligations intended to be satisfied by such
payment or proceeds shall be reinstated and continue and this Guarantee shall
continue in full force and effect as if such payment or proceeds had not been
received by Lender. Each of Guarantors shall be liable to pay to Lender, and
does indemnify and hold Lender harmless for the amount of any payments or
proceeds surrendered or returned. This Section 9 shall remain effective
notwithstanding any contrary action which may be taken by Lender in reliance
upon such payment or proceeds. This Section 9 shall survive the termination or
revocation of this Guarantee.
10. Amendments and Waivers. Neither this Guarantee 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. Corporate Existence, Power and Authority. Each of Guarantors is a
corporation or limited liability company duly organized and in good standing
under the laws of its state or other jurisdiction 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 the financial condition, results of operation or businesses of
any of Guarantors or the rights of Lender
6
<PAGE>
hereunder or under any of the other Financing Agreements. The execution,
delivery and performance of this Guarantee is within the corporate powers of
each of Guarantors, have been duly authorized and are not in contravention of
law or the terms of the certificates of incorporation, by-laws, or other
organizational documentation of each of Guarantors, or any indenture, agreement
or undertaking to which any of Guarantors is a party or by which any of
Guarantors or its property are bound. This Guarantee constitutes the legal,
valid and binding obligation of each of Guarantors enforceable in accordance
with its terms. Any one of Guarantors signing this Guarantee shall be bound
hereby whether or not any of the other Guarantors or any other person signs this
Guarantee at any time.
12. GOVERNING LAW; CHOICE OF FORUM; SERVICE OF PROCESS; JURY TRIAL
WAIVER.
(a) The validity, interpretation and enforcement of this
Guarantee and any dispute arising out of the relationship between any of
Guarantors and Lender, 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) Each of Guarantors hereby irrevocably consents and submits
to the non-exclusive jurisdiction of the Los Angeles County Superior Court and
the United States District Court for the Central District of California and
waives any objection based on venue or forum non conveniens with respect to any
action instituted therein arising under this Guarantee or any of the other
Financing Agreements or in any way connected with or related or incidental to
the dealings of any of Guarantors and Lender in respect of this Guarantee 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, and agrees that any dispute arising out of the
relationship between any of Guarantors or Borrowers and Lender or the conduct of
any such persons in connection with this Guarantee, the other Financing
Agreements or otherwise shall be heard only in the courts described above
(except that Lender shall have the right to bring any action or proceeding
against any of Guarantors or its property in the courts of any other
jurisdiction which Lender deems necessary or appropriate in order to realize on
collateral at any time granted by Borrowers or any of Guarantors to Lender or to
otherwise enforce its rights against any of Guarantors or its property).
(c) Each of Guarantors 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 any of Guarantors in any other
manner provided under the rules of any such courts. Within thirty (30) days
after such service, any of Guarantors so served shall appear in answer to such
process, failing which such Guarantors shall be deemed in default and judgment
may be entered by Lender against Guarantors for the amount of the claim and
other relief requested.
(d) EACH OF GUARANTORS HEREBY WAIVES ANY RIGHT TO TRIAL
BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING
7
<PAGE>
UNDER THIS GUARANTEE OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF ANY OF GUARANTORS AND
LENDER IN RESPECT OF THIS GUARANTEE 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. EACH OF
GUARANTORS 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 ANY OF
GUARANTORS OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS
AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF GUARANTORS AND
LENDER TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to Guarantors (whether
in tort, contract, equity or otherwise) for losses suffered by Guarantors in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Guarantee, 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 the Loan Agreement and
the other Financing Agreements.
13. Notices. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender at its address set forth above and to each of
Guarantors 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.
14. Partial Invalidity. If any provision of this Guarantee is held to
be invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Guarantee as a whole, but this Guarantee 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.
15. Entire Agreement. This Guarantee represents the entire agreement
and understanding of this parties concerning the subject matter hereof, and
supersedes all other prior agreements, understandings, negotiations and
discussions, representations, warranties, commitments, proposals, offers and
contracts concerning the subject matter hereof, whether oral or written.
8
<PAGE>
16. Successors and Assigns. This Guarantee shall be binding upon
Guarantors and their respective successors and assigns and shall inure to the
benefit of Lender and its successors, endorsees, transferees and assigns. The
liquidation, dissolution or termination of any of Guarantors shall not terminate
this Guarantee as to such entity or as to any of the other Guarantors.
17. Construction. All references to the term "Guarantors" wherever used
herein shall mean each and all of Guarantors and their respective successors and
assigns, individually and collectively, jointly and severally (including,
without limitation, any receiver, trustee or custodian for any of Guarantors or
any of their respective assets or any of Guarantors in its capacity as debtor or
debtor-in-possession under the United States Bankruptcy Code). All references to
the term "Lender" wherever used herein shall mean Lender and its successors and
assigns and all references to the term "Borrowers" wherever used herein shall
mean Borrowers and its successors and assigns (including, without limitation,
any receiver, trustee or custodian for Borrowers or any of its assets or
Borrowers in its capacity as debtor or debtor-in-possession under the United
States Bankruptcy Code). All references to the term "Person" or "person"
wherever used herein 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),
limited liability company, limited liability partnership, business trust,
unincorporated association, joint stock corporation, trust, joint venture or
other entity or any government or any agency or instrumentality of political
subdivision thereof. All references to the plural shall also mean the singular
and to the singular shall also mean the plural.
IN WITNESS WHEREOF, each of Guarantors has executed and delivered this
Guarantee as of the day and year first above written.
ATTEST: GO-VIDEO, INC.,
a Delaware corporation
/S/ ROBERT J. MOROCCO By: /S/ DOUGLAS KLEIN
Title: VP & CFO
ATTEST: CALIFORNIA AUDIO LABS, LLC,
a California limited liability company
/S/ ROBERT J. MOROCCO By: /S/ DOUGLAS KLEIN
Title: VP & CFO OF GO-VIDEO, INC.,
MANAGER OF CALIFORNIA
AUDIO LABS, LLC
9
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