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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 1997
Commission File Number 0-20684
AUREAL SEMICONDUCTOR INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3117385
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
4245 TECHNOLOGY DRIVE
FREMONT, CA 94538
(Address of principal executive offices)
Telephone: (510) 252-4245
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
------- -------
Indicate by check mark whether the registrant has filed all documents required
to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes X No
------- -------
At November 4, 1997, 41,808,486 shares of common stock, $0.001 par value, of
the registrant were outstanding.
This report on Form 10-Q contains 18 pages. The exhibit index is on page 17.
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AUREAL SEMICONDUCTOR INC.
FORM 10-Q
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUREAL SEMICONDUCTOR INC.
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Interim Condensed Consolidated Financial Statements of Aureal
Semiconductor Inc. (the "Company") have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals have been omitted pursuant to such rules and regulations. The
disclosures included in the Interim Condensed Consolidated Financial Statements
should be read in conjunction with the Company's audited financial statements
at December 29, 1996 and the notes thereto included in the Company's 1996
Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles and pursuant to the rules and regulations of the
Securities and Exchange Commission requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Interim Condensed Consolidated Financial Statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of financial position, results
of operations and cash flows for such periods. The results of operations for
the fiscal quarter and three quarters ended September 28, 1997 are not
necessarily indicative of the results that may be expected for any subsequent
quarter or the entire fiscal year ending December 28, 1997.
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AUREAL SEMICONDUCTOR INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 28, December 29,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 20 $ 18
Restricted cash 106 --
Accounts receivable 59 63
Inventories 316 74
Prepaid loan fees and other current assets 540 403
Deferred SFAS 123 fair value of debt related warrants 3,000 --
--------- ---------
Total current assets 4,041 558
Property and equipment:
Machinery and equipment 3,014 2,596
Furniture, fixtures and improvements 914 914
--------- ---------
3,928 3,510
Accumulated depreciation and amortization (3,002) (2,518)
--------- ---------
Net property and equipment 926 992
Reorganization Asset, less accumulated amortization
of $12,971 in 1997 and $11,096 in 1996 625 2,500
Long-term portion of SFAS 123 fair value of debt related warrants 1,500 --
Long-term portion of prepaid loan fees and other assets 254 95
--------- ---------
Total assets $ 7,346 $ 4,145
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable $ 376 $ 670
Accrued compensation and benefits 1,022 1,278
Other accrued liabilities 1,403 1,229
Current portion of pre-petition claims 928 881
--------- ---------
Total current liabilities 3,729 4,058
Line of Credit 17,105 10,325
Long-term portion of pre-petition claims and deferred obligations 4,792 5,523
--------- ---------
Total liabilities 25,626 19,906
--------- ---------
Stockholders' equity (deficit):
Common stock, $0.001 par value:
Authorized shares - 100,000,000; Issued and outstanding
shares - 41,788,796 in 1997 and 39,190,795 in 1996 42 39
Additional paid-in capital 114,286 105,053
Accumulated deficit (132,608) (120,853)
--------- ---------
Total stockholders' equity (deficit) (18,280) (15,761)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 7,346 $ 4,145
========= =========
</TABLE>
See accompanying notes.
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AUREAL SEMICONDUCTOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Quarter Ended Three Quarters Ended
------------- --------------------
September 28, September 29, September 28, September 29,
1997 1996 1997 1996
-------- -------- -------- --------
(Unaudited) Unaudited)
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Net sales $ 338 $ 237 $ 1,460 $ 3,280
Cost of sales 75 44 118 286
------- ------- ------- -------
Gross Margin 263 193 1,342 2,994
Operating expenses:
Research and Development 1,862 1,521 4,861 4,843
Sales and Marketing 880 880 2,554 1,285
General and Administrative 621 502 1,802 1,794
Amortization of Reorganization Asset 625 625 1,875 1,875
Write-off of acquired research and
development in progress -- -- -- 6,013
------- ------ -------- --------
Total operating expenses 3,988 3,528 11,092 15,810
-------- ------ -------- --------
Operating loss (3,725) (3,335) (9,750) (12,816)
Interest income 4 16 10 154
Amortization of debt related warrants (500) -- (500) --
Interest expense (734) (342) (1,899) (1,845)
Other income, net 186 362 384 558
------- ------ -------- --------
Loss from operations before income taxes (4,769) (3,299) (11,755) (13,949)
Provision for income taxes -- -- -- --
------- ------ -------- --------
Net loss $ (4,769) $(3,299) $(11,755) $(13,949)
======== ======== ======== ========
Net loss per share $ (.12) $ (0.08) $ (.29) $ (0.44)
-------- -------- -------- --------
Shares used in calculating per share amounts 41,366 38,930 40,376 31,412
======== ======== ======== ========
</TABLE>
See accompanying notes.
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AUREAL SEMICONDUCTOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Quarters Ended
-------------------------
September 28, September 29,
1997 1996
-------- --------
(Unaudited)
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OPERATING ACTIVITIES
Net loss from operations $(11,755) $(13,949)
Adjustments to reconcile net loss from operations
to net cash used in operating activities:
Depreciation and amortization 2,891 2,388
Write-off of acquired research and development in process -- 6,013
Changes in operating assets and liabilities - net of assets
acquired and liabilities assumed in 1996:
Restricted cash (106) --
Accounts receivable 4 148
Inventories (242) 145
Prepaid expenses and other current assets (328) 1,019
Other assets -- 155
Accounts payable (294) (288)
Accrued compensation and benefits, and
other accrued liabilities (79) (1,712)
-------- --------
Net cash used in operating activities (9,909) (6,081)
-------- --------
INVESTING ACTIVITIES
Payment for acquisition of business, net of cash acquired -- (2,970)
Acquisition of property and equipment (418) (273)
-------- --------
Net cash used in investing activities (418) (3,243)
-------- --------
FINANCING ACTIVITIES
Proceeds from Line of Credit 10,670 2,733
Repayment on Line of Credit (3,890) (14,928)
Principal payments on pre-petition claims (684) (552)
Proceeds from issuance of common stock, net of
issuance costs 4,233 22,134
-------- --------
Net cash provided by financing activities 10,329 9,387
-------- --------
Net increase (decrease) in cash and cash equivalents 2 63
Cash and cash equivalents at beginning of period 18 22
-------- --------
Cash and cash equivalents at end of period $ 20 $ 85
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 1,491 $ 2,163
NON-CASH ACTIVITY
SFAS 123 value of warrants issued in debt transaction $ 5,000 $ --
</TABLE>
See accompanying notes.
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AUREAL SEMICONDUCTOR INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. THE COMPANY AND RECENT EVENTS
Aureal Semiconductor Inc., together with its subsidiary Crystal River
Engineering, Inc. (combined, the "Company") specialize in the design and
marketing of audio semiconductor technologies for use in both the PC and home
electronics markets. Crystal River Engineering, Inc. ("CRE"), founded in 1987
and acquired by Aureal in the second quarter of 1996, has been a pioneer in the
development of 3D audio technologies. The Company's business involves not only
the development and sale of audio processing semiconductor chips, but the
licensing of technology which is designed to define and develop advanced audio
standards in the marketplace.
In October 1997, the Company received the first purchase orders for its
latest product, the Vortex AU8820, a PCI-based AC '97 Digital Audio Processor.
Volume shipments of the AU8820 are expected to begin in the first half of 1998.
Also in October, Analog Devices Inc., an A3D licensee, announced the SoundMax
product line which incorporates A3D Interactive technology. That product line
is featured in Shark Multimedia's Predator 3D sound card. In early November,
Xitel Corporation and Sanyo Technosound Co. Ltd. (a subsidiary of Sanyo
Electric Co. Ltd.) both announced PC sound card products featuring A3D
Interactive technology. These latest product announcements continue to expand
the population of PC products utilizing the Company's A3D Interactive
technology, first introduced in September 1996.
On September 2, 1997, Aureal announced the company had been granted a key
patent for A3D Audio Technology for methods of compressing HRTF (Head Related
Transfer Function) audio filters. The claims covered by this patent, together
with patents previously granted to Aureal, form the basis for the Company's A3D
three-dimensional audio processing technology. The latest issuance increases
Aureal's patent total to 15 U.S patents covering over 240 claims, with an
additional 32 patent applications pending in the field of audio.
On August 6, 1997, the Company completed a private placement of equity
capital. The transaction provided proceeds of approximately $3.8 million from
the sale of 1.9 million common stock units. Each unit consisted of one share of
common stock and one-half of one warrant to purchase one share of common stock
at a price of $2.00 per share. The participants in this private placement
included the TCW Group, Inc., and DDJ Capital Management, LLC. In conjunction
with the equity transaction, the total availability under the Company's line of
credit was increased from $20.0 million to $31.5 million. The maturity date on
this line of credit was extended to March 31, 1999, with an additional year
extension available at the Company's option. In addition, a total of 3,150,000
warrants for the purchase of 3,150,000 shares of common stock (at the purchase
price of $2.00 per share) were issued to the debt holders of the $31.5 million
line of credit (See Note 5). All of the warrants issued in conjunction with
the sale of common stock units and the line of credit extension terminate if
not exercised prior to August 6, 2001. Both the TCW Group, Inc. and DDJ
Capital Management participate in the line of credit as lenders.
In early 1997, both Diamond Multimedia Systems Inc. and Oak Technology,
Inc. announced products which include the licensed A3D Interactive technology
from Aureal. In addition, the technology has been supported by over 50
leading game developers and Microsoft's new DirectSound 5.0 standard.
The Company, in May 1996, acquired 100% ownership of Crystal River
Engineering, a privately held firm specializing in 3D audio technology
development.
In three transactions from February through June 1996, the Company completed
the private sale of 18.9 million shares of common stock for $22 million. The
proceeds from the sale of this common stock were used for working capital, to
pay down the existing working capital line of credit and to partially fund the
acquisition of CRE.
In August 1995, the Company announced that it was divesting its multimedia
components business to implement a business plan based on development and sale
of software and semiconductor solutions providing advanced audio for the PC and
consumer electronics markets. In conjunction with the Company's change in
business, it formally changed its name to Aureal Semiconductor Inc. at its
Annual Stockholders' Meeting in May 1996. The Company's stock symbol on the
OTC Bulletin Board is AURL.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Interim Condensed Consolidated Financial Statements of Aureal
Semiconductor Inc. have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The disclosures
included in the Interim Condensed Consolidated Financial Statements should be
read in conjunction with the Company's audited financial statements at December
29, 1996 and the notes thereto included in the Company's 1996 Annual Report on
Form 10- K.
The Interim Condensed Consolidated Financial Statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of financial position, results
of operations and cash flows for such periods. The results of operations for
the fiscal quarter and three quarters ended September 28, 1997 are not
necessarily indicative of the results that may be expected for any subsequent
quarter or the entire fiscal year ending December 28, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles and pursuant to the rules and regulations of the
Securities and Exchange Commission requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents and Restricted Cash
The Company considers all investments purchased with an original maturity
of three months or less to be cash equivalents. As of September 28, 1997,
$106,000 in restricted cash deposits primarily represented collateral for an
outstanding Stand-by Letter of Credit, supporting product purchase orders.
Inventories
Inventories, which consist predominantly of finished goods at both balance
sheet dates presented, are stated at the lower of cost or market value.
Property and Equipment
Property and equipment are stated at cost and depreciated utilizing the
straight-line method over their estimated useful lives (one and one- half to
five years).
Revenue Recognition
The Company's major sources of revenue consist of sales of proprietary
design, advanced audio semiconductor chips, licensing of related audio
technologies and sales of PC hardware and software for utilization of the audio
technologies. Revenue is recognized upon shipment for product sales. With
respect to licensing transactions, revenue is recognized upon delivery of
certain technologies for development fees, and upon reported sales of licensed
units for royalties.
Concentration of Financial Instrument Risks
Financial instruments which potentially subject the Company to
concentration of market risk consist primarily of the Company's line of credit.
Concentration of market risk on the line of credit is related to changes in the
prime lending rate, as the majority of the Company's debt bears interest rates
which fluctuate with changes in the prime lending rate.
8
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Stock Option Accounting - SFAS No. 123 Adoption
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based
Compensation" which requires increased disclosure of certain calculated value
information related to stock options granted to employees and new accounting
treatment for stock-based compensation granted to non-employees. SFAS No. 123
requires that a fair value be estimated using an option valuation model, such
as the Black-Scholes model. The Black-Scholes model was originally developed
for use in estimating the value of traded options which are fully transferable
and do not require a vesting period - terms which usually are not consistent
which the characteristics of stock-based compensation. In addition, option
valuation models require the input of highly subjective assumptions, including
the estimated time before exercise and the future volatility of the underlying
stock price. Varying the subjective assumptions used in the option valuation
model can materially change the resulting fair value estimate. For the reasons
above, the existing models do not necessarily provide a reliable and accurate
measure of the fair value of a company's stock-based compensation. Aureal
adopted SFAS No. 123 effective for 1996, as required, although under the terms
of the statement, continue to account for stock-based compensation for
employees under the criteria set forth in APB 25.
The amount recognized through three quarters ended September 28, 1997
related to stock options granted to non-employee contractors has not been
material.
SFAS No. 123 also requires the accounting on the basis of estimated fair
value for the warrants issued in association with both the amendment to the
line of credit ("Debt Warrants"), and the sale of common stock ("Equity
Warrants"), as described in Footnotes 4 and 5 below. The fair values of the
Debt Warrants and the Equity Warrants were estimated to be $5.0 million and
$1.5 million respectively. The value of the Debt Warrants is included in both
current and long-term assets in the accompanying balance sheet. Amortization
of the $5.0 million asset, as additional interest expense over the life of the
loan, commenced in August 1997 at the rate of $0.25 million per month.
Earnings (Loss) Per Share
Primary earnings (loss) per share is based upon the weighted average
common and common equivalent shares outstanding during the period. Equivalent
shares, if any, are calculated using the treasury stock method and consist of
outstanding stock options that have a dilutive effect on earnings per share
(EPS). No common stock equivalents were included in the calculations for any
fiscal period presented as, due to the net loss position, any affect would be
antidilutive.
The Financial Accounting Standards Board has issued SFAS No. 128 which is
effective for financial statements for periods ending after December 15, 1997.
Earlier application is not permitted. SFAS No. 128 replaces primary EPS with
basic EPS. Fully diluted EPS, called diluted EPS under SFAS No. 128, is still
calculated using the treasury stock method and includes outstanding warrants
and stock options that have a dilutive effect on earnings per share. Pro forma
amounts of earnings (loss) per share for both basic EPS and diluted EPS, for
all quarters shown, would not differ from the amounts stated.
Amortization of Intangibles
At December 31, 1994, the reorganization value of the Company in excess of
its net assets generated a $44.1 million intangible value that was classified
as a reorganization asset in the consolidated balance sheet of the Company
("Reorganization Asset"). The value of the Reorganization Asset was reduced in
the second quarter of 1995 as the Company exited the retail products business.
The net remaining Reorganization Asset of $625,000 as of September 28, 1997
will be amortized in full in the fourth quarter of 1997.
In conjunction with the acquisition of (CRE) made during the second quarter of
1996 (See Note 3), the allocation of the purchase price included an intangible
asset of $150,000. Amortization over the estimated useful life of eighteen
months for the intangible asset value commenced in mid-1996. As a result of
further asset value allocations throughout the year, the intangible asset was
reduced by $61,000 during 1996.
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3. ACQUISITION OF CRYSTAL RIVER ENGINEERING, INC. ("CRE")
During the second quarter of 1996, the Company acquired 100% ownership of
CRE, a privately held firm specializing in the development of 3D audio
technologies. The acquisition consideration included purchase of stock for
cash totaling approximately $2.9 million, the exchange of stock options valued
at $2.8 million and other cash considerations (both current and deferred)
totaling approximately $0.6 million. The acquisition was recorded using the
purchase accounting method. The fair value of CRE assets and liabilities at
the date of acquisition were recorded in the Company's consolidated financial
statements. As part of the allocation of fair values, the Company recorded a
non-recurring write-off of approximately $6.0 million in the second quarter of
1996 due to recognition that in-process research and development efforts
associated with CRE's 3D audio technology had not reached technological
feasibility with respect to the Company's product line at the date of
acquisition.
4. LINE OF CREDIT
The Company maintains a line of credit managed by TCW Special Credits, an
affiliate of the TCW Group, Inc. ("TCW"), (See Note 5). The maturity date
(originally March 1, 1995) and the total availability under the line (ranging
from $10 million to $31.5 million to date) have been negotiated periodically
with TCW. In conjunction with the private placement of equity, finalized in
August 1997, the line of credit was increased from $20.0 million to $31.5
million, and the maturity date was extended to March 31, 1999. In addition, the
Company has an option to extend the due date an additional year, to March 31,
2000. Borrowings under the facility are secured by substantially all the assets
of the Company and bear interest at the rate of prime (8.50% at September 28,
1997) plus five percent. At September 28, 1997, $17.1 million was outstanding
under the line.
The line of credit lenders include entities affiliated with TCW Special
Credits and DDJ Capital Management LLC. As of November 4, 1997 these entities
controlled approximately 46% and 17% of the Company's outstanding common stock,
respectively.
5. DEBT AND EQUITY FUNDING
On August 6, 1997, the Company completed a private placement of equity
capital, while at the same time increased and extended the Company's line of
credit. The equity transaction provided proceeds of approximately $3.8 million
from the sale of 1.9 million common stock units at a price of $2.00 per unit.
Each unit consisted of one share of common stock and one-half of one warrant to
purchase one share of common stock at a price of $2.00 per share. The
participants in this private placement included the TCW Group, Inc., and DDJ
Capital Management, LLC. In conjunction with the equity transaction, the total
availability under the Company's line of credit was increased from $20.0
million to $31.5 million. The maturity date on this line of credit was
extended to March 31, 1999, with an additional year extension available at the
Company's option.
Also occurring on August 6, 1997, a total of 3,150,000 warrants for the
purchase of 3,150,000 shares of common stock (at a purchase price of $2.00 per
share) were issued to the debt holders of the $31.5 million line of credit. Up
to 2,000,000 of the warrants associated with the line of credit can be
rescinded by the Company upon cancellation of up to $20,000,000 of borrowing
capacity, at the rate of one warrant rescission for each $10 of borrowing
capacity canceled by the Company prior to March 31, 1998. All of the warrants
issued in conjunction with the sale of common stock units and the line of
credit extension terminate if not exercised prior to August 6, 2001. Both the
TCW Group, Inc. and DDJ Capital Management, LLC participate in the line of
credit as lenders. Net proceeds from the sale of stock were used to pay down
the line of credit.
6. INCOME TAXES
The Company was not required to provide for income taxes in the first three
quarters of 1997 or 1996 due to its net operating losses. No tax benefit has
been recorded for the losses due to the uncertainty as to the realizability.
At December 29, 1996, the Company had available net operating loss
carryforwards ("NOL's") of approximately $269 million to reduce future taxable
income. The NOL's expire on various dates through 2011. In connection with
the adoption of fresh start accounting, any tax benefit resulting from the use
of the NOL's generated prior to the bankruptcy plan confirmation in 1994 will
be applied to reduce the Reorganization Asset and any further benefit will be
reported as a direct addition to stockholders' equity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE HEREIN AND THE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
THE YEAR ENDED DECEMBER 29, 1996, CONTAINED IN FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE MADE PURSUANT TO THE SAFE
HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
INVESTORS ARE CAUTIONED THAT SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, DEPENDENCE ON THE PC AND CONSUMER
ELECTRONICS INDUSTRIES AND ON PRODUCT LINES BASED ON NEW TECHNOLOGIES; FOUNDRY
CAPACITY, AVAILABILITY AND RELIABILITY; COMPETITION AND PRICING PRESSURES, AND
OTHER RISKS DETAILED BELOW AND FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH
THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
The Company's strategy combines the development and sale of audio
processing semiconductor chips, with the licensing of technology to strategic
partners in order to define and develop advanced audio standards in the
marketplace. Since early 1996, the Company has focused primarily on
establishing Aureal's technology in the market, as well as the creation and
development of audio semiconductor products.
Recently, progress has been made toward the above objectives along various
fronts, including the release of Aureal's latest semiconductor product, the
release of products by licensees which include A3D technology, adoption of A3D
by major game developers, and the protection of A3D technology with an
increasing patent portfolio. More specifically, production silicon of the
Vortex AU8820, a PCI-based AC '97 Digital Audio Processor is now being
evaluated by customers. Orders to purchase the AU8820 have already been
received, though quantity shipments of this product are not expected until the
first half of 1998. Three major strategic partners licensing A3D technology
have announced products incorporating A3D technology, and are either shipping or
expect to be shipping these products during the fourth quarter of 1997. In
addition, many A3D-enabled PC game titles are either available in the retail
marketplace today or are expected to become available within the next quarter.
Although revenues will not result directly from the sale of these PC games,
A3D-enabled games help to create an end-user demand for hardware which
incorporates the Company's A3D technology. Finally, the Company announced
during the quarter the issuance of a key patent for methods of compressing HRTF
(Head Related Transfer Function) audio filters which allows the Company to
produce high quality positional 3D audio in an efficient and cost effective
manner. The patent increases Aureal's patent portfolio to 15 U.S. patents
covering over 240 claims with an additional 32 patent applications pending in
the field of audio.
The majority of the revenues during the first three quarters of 1997
resulted from initial payments for the licensing of the Company's A3D
Interactive technology. Although ongoing revenues may result directly from
these licensing agreements, Aureal expects the majority of its 1998 revenues
will be from semiconductor sales. 1997 results contrast with the first three
quarters of 1996, when revenues pertained to legacy audio technologies
developed prior to the Company's refocus in early 1996. In addition, a number
of structural changes took place in the Company's business during 1996 and the
first three quarters of 1997. Some of these events are detailed in Footnote 1
to the Condensed Consolidated Financial Statements in Item 1 of this report.
These changes include:
- In the first quarter of 1996, the Company licensed the Media Vision
brand name, related trade names and other assets of its previous
retail products business to a third party. The agreement transferred
the retail customer service and technical support obligations to the
buyer.
- In three transactions from February through June 1996, the Company
completed the private sale of 18.9 million shares of common stock
for $22 million.
- The Company, in May 1996, acquired 100% ownership of CRE, a
privately held firm specializing in 3D audio technology development.
- In August of 1997, the company completed a private sale of 1.9
million shares of common stock for $3.8 million. In conjunction with
the equity transaction, the total availability under the Company's
line of credit was increased from $20.0 million to $31.5 million.
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RESULTS OF OPERATIONS
Net Sales
Net sales for the third quarter of 1997 were $0.3 million, compared to $0.7
million in the previous quarter and $0.2 million in the third quarter of 1996.
Year-to-date revenues of $1.5 million for 1997 consisted primarily of revenues
from licensing transactions. Due to the timing of license revenue recognition,
as well as the design-in period for semiconductor products, 1997 revenues have
varied from quarter to quarter. Although third quarter revenues were lower than
that of the previous quarter, the third quarter had a much higher percentage of
revenues coming from semiconductor sales (27% versus less than 2%,
respectively).
Aureal Semiconductor currently has 3D audio technology ("A3D") license
agreements in place with a number of companies. Half of the licensees have
announced products which include Aureal's A3D technology, and are currently
shipping or expect to be shipping these products before yearend 1997. No
revenues were recorded in the first three quarters of 1996 with respect to any
of these licensing agreements. The Company has licensed some of its audio
technology to third parties with the expectation that such technology be
incorporated into the third parties' semiconductor products. Such revenues,
generally in the form of per-unit royalties are recognized upon reported sales
of licensed units. No significant continuing obligations or delivery
requirements exist with respect to the licenses.
The Company currently has two models of semiconductor products in production
and available for sale, the VSP901 Single-Chip Dolby Pro Logic Virtual Surround
Processor, and the ASP321 Karaoke Processor. Aureal's latest product, the
AU8820, is a PCI-based AC '97 audio solution for PCs. Samples are currently
being evaluated by numerous customers, and initial orders for small quantities
of the AU8820 have been received.
Net sales in the first three quarters of 1996 totaled $3.3 million
consisting primarily of revenues from licensing transactions embodying
pre-existing legacy audio technology. The Company does not anticipate
significant future revenues from this legacy audio technology.
Gross Margin
Through three quarters, the gross margin percentages were basically the
same, at 92% for 1997 and 91% for 1996. The gross margin percentage for the
third quarter of 1997 was 78%, compared to 97% for the previous quarter and 82%
for the third quarter of 1996. The change in margin percentage is entirely
attributable to a higher portion of revenues coming from the sale of
semiconductor products and a declining portion coming from licensing
transactions. The lower margin on semiconductor products, relative to
licensing, reflects the current cost of producing physical product for sale.
The vast majority of costs related to technology licensing are recorded as
research and development costs during the development period of the technology.
Relatively little current cost is connected directly with the licensing
transactions, thus producing relatively high gross margin percentages. This
decrease in the current quarter margin percentage has been anticipated, yet
still reflects a large percentage of net sales represented by licensing
transactions. Margin percentages are expected to continue to decline in the
future as semiconductor products become a more significant component of
revenue.
Research and Development
Research and development expenditures for the quarter were $1.9 million, up
from $1.6 million in the second quarter of 1997 and $1.5 million in the third
quarter of 1996. The comparative increase over both the prior quarter and the
prior year was primarily due to two factors. The current quarter had higher
wages and benefits costs associated with an increased staff. Also,
pre-production expenses associated with the Company's semiconductor products
were higher in the current quarter than both the second quarter of 1997 and the
third quarter of last year. Although year-to-date expenses for 1997 and 1996
were essentially even, at $4.9 million and $4.8 million respectively, the level
of spending on research and development is expected to increase in dollars in
future periods.
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Selling and Marketing
Selling and marketing expenses for the third quarter of 1997 were $0.9
million. This was essentially the same level as both the previous quarter and
the third quarter of the previous year. The increase in year-to-date expenses
of $2.6 million for 1997 over year-to-date expenses of $1.3 million in 1996
occurred primarily in the areas of marketing and product development. This
change in marketing costs over last year was mainly the result of increased
staffing. Year-to-date sales expenses of $0.5 million have also increased over
1996 levels, at $0.3 million, as a result of increases in both staffing levels
and travel expenses. Selling and marketing expenses are expected to generally
rise over the long term as travel, promotion and marketing costs grow as Aureal
spends more time with customers, and sales commissions increase with higher
sales volumes.
General and Administrative
General and administrative expenses for the quarter ended September 28,
1997 were $0.6 million, essentially flat in comparison with the first two
quarters of 1997, and the third quarter of 1996. Year-to-date general and
administrative expenses were $1.8 million for both 1997 and 1996. This constant
level of expenditures reflected continued cost containment efforts for this
area of the Company. General and administrative costs are anticipated to
increase in future quarters in support of the Company's activities as product
shipments increase.
Amortization of Reorganization Asset
The Reorganization Asset originated pursuant to the Company's valuation upon
its exit from bankruptcy protection on December 30, 1994 whereby the fair value
of the Company exceeded its net assets by $44.1 million. During the second
quarter of 1995, it was determined that a significant portion of the
Reorganization Asset could no longer be assured of recovery and a $30.5 million
write-off was recorded. The remaining Reorganization Asset value is being
amortized through 1997 at the rate of $625,000 per fiscal quarter.
Interest Expense
Interest expense in all quarters consisted primarily of interest on the
line of credit at the rate of prime plus 5%. Interest expense for the three
quarters ended September 28, 1997 totaled $1.9 million, compared to $1.8
million for the first three quarters of 1996. In the first half of 1996,
equity funding totaling $22 million was utilized to both fund current working
capital needs and pay down the line of credit. The reduction in the average
debt balance outstanding reduced interest expense in the third quarter of 1996,
when compared to the third quarter of 1997. The balance on the line of credit
is expected to increase over future fiscal quarters as it is utilized as a
source of working capital. As a result, interest expense is expected to
increase.
Interest Income and Other Income
Interest income for the first three quarters of 1996 was $154,000
consisting primarily of interest on funds received from the private placements
of common stock in February and March of 1996. Terms of the private placement
transactions placed certain restrictions on the Company's ability to use the
proceeds to reduce the outstanding balance on the line of credit. The invested
cash declined during 1996 as it was utilized for ongoing costs of operations,
as well as for the acquisition of CRE. Cash balances were at a minimum
throughout the first three quarters of 1997, as a result, interest income was
not significant.
The Company recognized net other income of $186,000 for the third quarter
of 1997. This compares to $362,000 for the same quarter of 1996. The income
recognized in both years shown was primarily due to various refunds and
settlement receipts relating to the old retail business.
Income Taxes
The Company was not required to provide income taxes in the first three
quarters of either 1997 or 1996 due to its net operating losses. No tax
benefit has been recorded for the loss due to the uncertainty as to its
realizability.
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LIQUIDITY AND CAPITAL RESOURCES
The net cash flow requirements for the Company have been running in excess
of $1 million per month. The primary factor is the outflow from cash-based
operating expenses, without significant inflow from the cash receipt of revenue
dollars. In addition, the Company expects the need to expand the business with
the manufacture of products (through outside foundries) and financing of
customer receivables as sales of semiconductor products are anticipated to
increase in future quarters. Working capital to enable this growth is expected
to be provided primarily from the Company's working capital line of credit.
For a company just commencing sales, the timing and uncertain amount of
inventory purchases and the collection of revenues make the forecasting of cash
flows from operations inherently difficult. There is no assurance the Company
will generate positive cash flows in the future.
The Company believes that the $31.5 million line of credit, of which $12.0
million was available for borrowings as of November 4, 1997, will provide
adequate financial resources to sustain business for at least the next year.
The Company is currently exploring financing alternatives to supplement its
existing line of credit in order to expand its business. It has no commitments
for any specific financing at this time and there can be no assurance that any
such financing can be obtained at terms acceptable to the Company, or at all.
Capital expenditures of $239,000 during the third quarter of 1997, and
$418,000 for the first three quarters ended September 28, 1997 consisted
primarily of hardware and software tools utilized in the Company's research and
development activities. This compares to capital expenditures of $60,000
during the third quarter of 1996, and $273,000 for the first three quarters of
1996. Capital expenditures are anticipated to grow in the future, but the
amount may fluctuate significantly from quarter to quarter.
The terms of the line of credit, as amended in August 1997, provide for a
maturity date of March 31, 1999. In addition, the Company has an option to
extend the due date an additional year, to March 31, 2000. Borrowings under
the line of credit are secured by substantially all assets of the Company, and
bear interest at the rate of prime plus 5% per annum. The maturity date
(originally March 1, 1995) and the total availability under the line (ranging
from $10 million to $31.5 million to date) have been negotiated periodically
with TCW. As of November 4, 1997, $19.5 million was outstanding under the
line, with $12.0 million available for further borrowing. The line of credit
lenders include entities affiliated with TCW Special Credits and DDJ Capital
Management LLC. As of November 6, 1997 these entities controlled approximately
46% and 17% of the outstanding common stock, respectively.
RISK FACTORS
In evaluating the Company's business, certain factors, including those
discussed below and those included in documents previously filed with the
Securities and Exchange Commission, should be considered in addition to the
other information in this Form 10-Q.
Emerging Technology
The Company's success depends on its ability to develop and market new
technologies aimed at advancing the level of audio quality in the PC and
consumer electronics devices. As new technologies are developed, there can be
no assurance that markets will develop for them, or that markets will develop
on a timely basis for the Company to benefit therefrom. The success of new
products depends on a number of factors, including timely completion of product
development, market acceptance of the Company's and its customers new products
and the Company's ability to offer new products at competitive prices.
Incorporating the Company's new products into its OEM customers' new product
design requires the anticipation of market trends and performance and
functionality requirements of OEM's and the production of products that can be
available in a timely manner consistent with the OEM's development and
production schedule. A failure in any of these areas could have a material
adverse effect on the Company's results of operations.
Each successive generation of microprocessors has provided increased
performance, which could in the future result in a microprocessor capable of
performing advanced audio functions to an extent that the need or preference
for the Company's products could be diminished or eliminated. At this time, a
product with the processing power required to execute high quality audio, video
and graphics simultaneously and all other functions which the host processor
does has not been introduced. The Company believes that advanced audio
processing, done in conjunction with either video or graphics processing is
best performed with a separate accelerator chip in addition to the host
processor. There can be no assurance that the increased capabilities of
microprocessors will not adversely affect demand for the Company's products.
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Product Concentration
Substantially all of the Company's revenues are related to advanced audio
solutions for the PC and consumer electronics markets and the Company expects
this to continue for the foreseeable future. The failure of this market to
continue to grow, any reduction in demand as a result of increased competition
in this market, technological change, failure by the Company to introduce new
versions of products acceptable to the marketplace or other similar factors
would have a material adverse effect on the Company's results of operations.
Competition and Pricing Pressures
The semiconductor industry is extremely competitive, and is characterized
by rapid technological change, evolving industry standards, changing market
conditions and frequent new product introductions and enhancements. The
introduction of products embodying new technologies or standards can render
existing products or products under development obsolete or unmarketable. Many
of the Company's competitors have more extensive engineering, manufacturing,
marketing, financial and personnel resources than those of the Company. The
Company expects competition to increase in the future from existing competitors
and from other companies which may enter the markets with products that may be
less costly or provide higher performance or additional features. In general,
product prices in the semiconductor industry have decreased over the life of a
particular product. As the markets for the Company's products mature and
competition increases, the Company anticipates that prices for its products
will continue to decline. If the Company is unable to reduce its cost
sufficiently to offset declines in product prices or is unable to introduce
new, higher performance products with higher product prices, the Company's
results of operations could be materially adversely affected.
Need for Foundry Access
The Company is a "fabless semiconductor firm" which depends on outside
manufacturing resources for production of all of its semiconductor products.
The foundries which the Company uses have indicated that they have the
manufacturing availability to provide for the Company's planned production of
each product through at least 1998; however the production relationships are
based only upon purchase orders and planned production forecasts. No long term
production contracts have been entered into by the Company, and there is no
assurance that the foundries will continue to provide adequate manufacturing
capacity to the Company, or maintain such capacity at acceptable costs.
Dependence on Personnel
The Company's success depends to a significant extent upon continued
services of key engineering, marketing, sales and management personnel. The
Company's employees may voluntarily terminate their employment with the Company
at any time. The Company recognizes the value of the contributions of each of
its employees and has developed compensation programs, including stock option
plans for the granting of options to all employees, designed to retain its
employees. Competition for such employees is intense and the loss of the
services of such employees could have a material adverse effect on the Company's
results of operations.
Proprietary Rights and Related Litigation
The Company's ability to compete successfully will depend, in part, on its
ability to protect its proprietary technology. The Company relies on a
combination of copyright and trade secret protection, nondisclosure agreements
and licensing arrangements to establish and protect its proprietary rights. In
addition, the Company has 15 patents issued and 32 patent applications pending
in the United States and in foreign countries and intends to file additional
applications as appropriate for patents covering its technologies and products.
There can also be no assurance that any patents that may be issued to the
Company will not be challenged, invalidated or circumvented, or that any rights
granted thereunder would provide proprietary protection to the Company. In
addition, the laws of certain foreign countries may not protect the Company's
proprietary rights to the same extent as do the laws of the United States.
Although the Company does not believe that its products infringe the
proprietary rights of any third parties, there can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting from
infringement claims) will not be asserted against the Company or that any such
assertions will not materially adversely affect the Company's business,
financial condition or results of operations. Irrespective of the validity or
the successful assertion of such claims, the Company could incur significant
cost with respect to the defense thereof which could have a material adverse
effect on the Company's business, financial condition or results of operations.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On September 12, 1997, the Company filed Post-Effective Amendment No. 1 to
its previously filed and effective registration statement on Form S-3 with the
Securities and Exchange Commission for a shelf registration of 34,414,525
shares of Aureal Common Stock. The amendment was declared effective September
18, 1997. This figure represents approximately 82% of the Company's total
outstanding securities, recognizing that 4,205,000 shares registered are
subject to purchase from the Company pursuant to exercise of warrants, but are
not currently outstanding. The equity shares were sold by the Company in its
August 6, 1997 private placement, as well as earlier transactions. The
warrants were issued in conjunction with the most recent private placement of
equity, as well as the transactions to increase the Company's line of credit
and extend its maturity date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit index at page 17.
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the third quarter ended
September 28, 1997.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUREAL SEMICONDUCTOR INC.
Date: November 10, 1997 By: /s/Kenneth A. Kokinakis
---------------------------------------
Kenneth A. Kokinakis
President and Chief Executive Officer
Date: November 10, 1997
By: /s/David J. Domeier
---------------------------------------
David J. Domeier
Vice President of Finance
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description of Document
2.1 Agreement and Plan of Reorganization among the Company,
Aureal Acquisition Corporation, a wholly-owned subsidiary of
the Company and Crystal River Engineering, Inc., dated as of
May 7, 1996 (1)
2.2 Second Amended Joint Plan of Reorganization dated November
10, 1994 (4)
3.1 Second Amended and Restated Certificate of Incorporation of
the Company dated May 8, 1996 (2)
3.2 Restated Bylaws of Aureal Semiconductor Inc. (6)
4.1 Common Stock Purchase Agreement by and among the Company and
certain beneficial owners of 5% or more of the Company's
Common Stock, as amended (3)
4.2 Common Stock Purchase Agreement by and among the Company and
certain entities and individuals dated June 10, 1996 (5)
4.3 Common Stock Purchase Agreement by and among the Company and
certain entities and individuals dated August 6, 1997 (8)
10.1 Second Amended and Restated Loan Agreement between TCW
Special Credits and the Company dated August 6, 1997
increasing the loan commitment from $20 million to $31.5
million.
10.2 1995 Stock Option Plan (3)
10.3 Form of incentive option agreement and non-statutory stock
option agreement used under 1995 Stock Option Plan (3)
10.4 1994 Stock Option Plan (4)
10.5 Form of incentive option agreement and non-statutory stock
option agreement used under 1994 Stock Option Plan (4)
10.6 Industrial Space Sublease with Chemical Waste Management,
Inc. dated September 13, 1995 (3)
10.7 Form of Indemnity Agreement for Directors and Officers (6)
10.8 1996 Outside Directors Stock Option Plan (7)
11.1 Computation of Earnings (Loss) Per Share (See Pages 5 and 9)
27.1 Financial Data Schedule (Edgar Only)
____________________
(1) Incorporated by reference to the exhibits filed with Form 8-K dated
May 22, 1996.
(2) Incorporated by reference to the exhibits filed with Form S-8
(Registration number 333-09531) filed August 2, 1996.
(3) Incorporated by reference to the exhibits filed with Form 10-K for the
year ended December 31, 1995.
(4) Incorporated by reference to the exhibits filed with Form 10-K for the
year ended December 31, 1994.
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(5) Incorporated by reference to the exhibits filed with Form S-3
(Registration number 333-3870) filed June 26, 1996.
(6) Incorporated by reference to the exhibits filed with Form 10-Q for the
quarter ended September 29, 1996.
(7) Incorporated by reference to the exhibits filed with Form 10-K for the
year ended December 29, 1996.
(8) Incorporated by reference to the exhibits filed with Form S-3 (As
Post-Effective Amendment No. 1, Registration number 333-3870) filed
September 12, 1997.
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<PAGE> 1
AUREAL SEMICONDUCTOR INC.
(FORMERLY KNOWN AS
MEDIA VISION TECHNOLOGY INC.)
SECOND AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDED AND RESTATED LOAN AGREEMENT, dated as of August
___, 1997, among AUREAL SEMICONDUCTOR INC. (FORMERLY KNOWN AS MEDIA VISION
TECHNOLOGY INC.), a Delaware corporation, as borrower ("BORROWER"), and TCW
SPECIAL CREDITS, a California general partnership, as agent for the entities
(each a "FUND") set forth on SCHEDULE 1 hereto (TCW Special Credits in such
capacity is hereinafter referred to as "LENDER"), is based upon the following
facts:
W I T N E S S E T H
A. On July 25, 1994, Borrower and Pellucid, as hereinafter
defined, commenced Chapter 11 Case Nos. 94-45107J and 94-45108J (collectively,
the "CHAPTER 11 CASES"), by filing voluntary petitions for relief under the
Bankruptcy Code, as hereinafter defined, with the United States Bankruptcy
Court for the Northern District of California (the "COURT"), which cases have
been jointly administered by the Court.
B. Borrower, Lender and Pellucid entered into a Debtor In
Possession Loan Agreement dated as of September 1, 1994 (the "DIP LOAN
AGREEMENT"), providing for the making of Loans by Lender to Borrower and
Pellucid in an aggregate principal amount not to exceed $10,000,000. In
accordance with the Plan, as hereinafter defined, Pellucid has been merged with
and into Borrower.
C. The DIP Loan Agreement was amended and restated pursuant to an
Amended and Restated Loan Agreement dated as of December 30, 1994, as amended
from time to time (the "EXISTING LOAN AGREEMENT"). As of the date hereof, the
Existing Loan Agreement provides for the making of Loans by Lender to Borrower
in an aggregate principal amount not to exceed $20,000,000.
D. Borrower and Lender desire to amend the Existing Loan Agreement
to, inter alia, increase the amount of the revolving credit facility available
to Borrower to up to $31,500,000 and to extend the maturity of the amounts due
thereunder on the terms and conditions set forth in this Agreement.
E. For ease of reference and clarity, Borrower and Lender desire
to restate the Existing Loan Agreement to incorporate the amendments made
hereby and amend and restate the original promissory note and collateral
documents made by Borrower pursuant to the Existing Loan Agreement. The
parties expressly disclaim any intent to effect a novation or an
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<PAGE> 2
extinguishment or discharge of the Existing Loan Agreement or a discharge of
any of the obligations under the Loan Documents, as defined under the Existing
Loan Agreement, including, without limitation, the promissory note and
collateral documents entered into pursuant to the Existing Loan Agreement, as a
result of entering into this Agreement and the other documents contemplated
herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter contained, Borrower and Lender agree to amend and restate
the Existing Loan Agreement in its entirety as follows:
SECTION 1.
DEFINITIONS
Capitalized terms used in this Agreement shall have the following
respective meanings:
"ACCOUNTS" shall mean all accounts, accounts receivable, other
receivables and rights to payment of every nature, contract rights, chattel
paper, instruments, documents and notes, whether now owned or hereafter
acquired by Borrower or any of its Subsidiaries and whether or not earned by
performance including, without limitation, indebtedness of an obligor arising
under a charge account agreement arising from the sale of merchandise or
services and to the right of payment of any recoveries, interest, finance,
returned check or late charges and other obligations of the obligor thereof.
"ADVANCE" shall mean either a Tranche A Advance or a Tranche B
Advance, and "ADVANCES" shall mean the Tranche A Advances and the Tranche B
Advances, collectively.
"AFFILIATE" shall mean with respect to any Person (i) each
Person that, directly or indirectly, owns or controls, whether beneficially, or
as a trustee, guardian or other fiduciary, 5% or more of the Securities having
ordinary voting power in the election of directors of such Person, (ii) each
Person that controls, is controlled by or is under common control with such
Person or any Affiliate of such Person or (iii) each of such Person's officers,
directors, joint venturers and partners; provided, however, that in no case
shall Lender be deemed to be an Affiliate of Borrower or any of its
Subsidiaries for purposes of this Agreement.
"AGREEMENT" shall mean this Second Amended and Restated Loan
Agreement, including all appendices, exhibits or schedules hereto.
"AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT" shall mean
the Amended and Restated Pledge and Security Agreement, dated as of December
30, 1994 in the form of Exhibit B attached hereto entered into between Lender
and Borrower, which amends and restates in its entirety that certain Pledge and
Security Agreement dated as of September 1, 1994, between Lender and Borrower.
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<PAGE> 3
"AMENDED AND RESTATED PATENT ASSIGNMENT" shall mean the Amended
and Restated Assignment for Security (Patents) made in favor of Lender by
Borrower dated as of December 30, 1994, in the form of Exhibit C attached
hereto, which amends and restates in its entirety that certain Assignment for
Security (Patents) dated as of September 1, 1994, made by Borrower in favor of
Lender.
"AMENDED AND RESTATED TRADEMARK ASSIGNMENT" shall mean the
Amended and Restated Assignment for Security (Trademarks and Trademark
Licenses) made in favor of Lender by Borrower dated as of December 30, 1994, in
the form of Exhibit D attached hereto, which amends and restates in its
entirety that certain Assignment for Security (Trademarks and Trademark
Licenses) dated as of September 1, 1994, made by Borrower in favor of Lender.
"BANK LETTER RESPECTING OPERATING ACCOUNTS" shall mean a letter
agreement substantially in the form of Exhibit E attached hereto.
"BANKRUPTCY CODE" shall mean the provisions of Title 11, United
States Code, as the same may be amended from time to time.
"BASE RATE" shall mean the per annum rate that Bank of America
NT & SA announces from time to time as its base or prime lending rate, as in
effect from time to time.
"BORROWER" shall have the meaning assigned to such term in the
first paragraph of this Agreement.
"BUSINESS DAY" shall mean any day that is not a Saturday, a
Sunday or a day on which banks are required or permitted to be closed in the
State of California or the State of New York.
"CAPITAL EXPENDITURES" shall mean all payments for any fixed
assets or improvements or for replacements, substitutions or additions thereto,
which are required to be capitalized under GAAP.
"CAPITAL LEASE" shall mean, with respect to any Person, any
lease of any property (whether real, personal or mixed) by such Person as
lessee that, in accordance with GAAP, either would be required to be classified
and accounted for as a capital lease on a balance sheet of such Person or
otherwise be disclosed as such in a note to such balance sheet.
"CAPITAL LEASE OBLIGATION" shall mean, with respect to any
Capital Lease, the amount of the obligation of the lessee thereunder that, in
accordance with GAAP, would appear on a balance sheet of such lessee as a
liability in respect of such Capital Lease or otherwise be disclosed in a note
to such balance sheet.
"CASH EQUIVALENTS" shall mean, collectively, the following:
(i) marketable direct obligations issued or unconditionally guaranteed by the
United States of America or any
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<PAGE> 4
agency thereof maturing within 60 days from the date of acquisition thereof;
(ii) commercial paper maturing no more than 60 days from the date of creation
thereof and currently having the highest rating obtainable from either Standard
& Poor's Ratings Group or Moody's Investors Service, Inc.; (iii) certificates
of deposit, maturing no more than 60 days from the date of creation thereof,
issued by commercial banks incorporated under the laws of the United States of
America, each having combined capital, surplus and undivided profits of not
less than $200,000,000 and having a rating of "A" or better by a nationally
recognized rating agency; and (iv) time deposits, maturing no more than 30 days
from the date of creation thereof with commercial banks each having membership
in the Federal Deposit Insurance Corporation or any successor entity, and in
amounts not exceeding the maximum amounts of insurance thereunder.
"CHAPTER 11 CASES" shall have the meaning assigned to it in the
recital clauses hereof.
"CHARGES" shall mean all Federal, state, county, city,
municipal, local, foreign or other governmental (including PBGC) taxes, levies,
assessments, charges, liens, claims or encumbrances upon or relating to (i) the
Collateral, (ii) the Obligations, (iii) Borrower's or any of its Subsidiaries'
employees, payroll, income or gross receipts, (iv) Borrower's or any of its
Subsidiaries' ownership or use of any of their respective assets, or (v) any
other aspect of Borrower's or any of its Subsidiaries' businesses.
"CLOSING DATE" shall mean the first date on which all
conditions precedent set forth in Section 3.1 have been satisfied or waived in
writing by Lender as provided therein.
"COLLATERAL" shall mean the "Collateral" covered by the Amended
and Restated Pledge and Security Agreement, the Subsidiary Pledge and Security
Agreement or any of the other Collateral Documents and any other property, real
or personal, tangible or intangible, now existing or hereafter acquired, that
may at any time be or become subject to a security interest or Lien in favor of
Lender to secure the Obligations.
"COLLATERAL DOCUMENTS" shall mean the Amended and Restated
Pledge and Security Agreement, the Amended and Restated Trademark Assignment,
the Amended and Restated Patent Assignment, the Subsidiary Pledge and Security
Agreement, the Bank Letters Respecting Operating Accounts, the Omnibus Consent
and any other security agreements, pledge agreements, mortgages, deeds of
trust, assignments, financing statements or other agreement, document or
certificate pursuant to which Lender obtains or perfects a security interest in
or Lien on Collateral.
"COLLECTING AGENTS" shall have the meaning assigned to it in
Section 2.2.
"COMMITMENT" shall mean the commitment of Lender to make
Advances as set forth in Section 2.1(b).
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"COMMITMENT TERMINATION DATE" shall mean the earliest of: (i)
the Maturity Date with respect to all Advances; (ii) the date that Lender
elects to terminate Borrower's rights to receive Advances pursuant to Section
9.1; (iii) the date of prepayment in full by Borrower of the Loan and all other
Obligations and termination of the Commitment in accordance with the provisions
of Section 2.2(f).
"CONFIRMATION ORDER" shall mean the order of the Court
confirming the Plan and the financing to be obtained under the Existing Loan
Agreement entered on December 19, 1994.
"CONTINGENT OBLIGATION", as applied to any Person, shall mean
any direct or indirect liability, contingent or otherwise, of that Person (i)
with respect to any Indebtedness, lease, dividend or other obligation of
another if the primary purpose or intent thereof by the Person incurring the
Contingent Obligation is to provide assurance to the obligee of such obligation
of another that such obligation of another will be paid or discharged, or that
any agreements relating thereto will be complied with, or that the holders of
such obligation will be protected (in whole or in part) against loss in respect
thereof, (ii) with respect to any letter of credit issued for the account of
that Person or as to which that Person is otherwise liable for reimbursement of
drawings, or (iii) under interest rate hedge, currency swap and similar
agreements. Contingent Obligations shall include, without limitation, (a) the
direct or indirect guaranty, endorsement (otherwise than for collection or
deposit in the ordinary course of business), co-making, discounting with
recourse or sale with recourse by such Person of the obligation of another, (b)
the obligation to make take-or-pay or similar payments if required regardless
of non-performance by any other party or parties to an agreement, and (c) any
liability of such Person for the obligation of another through any agreement
(contingent or otherwise) (X) to purchase, repurchase or otherwise acquire such
obligation or any security therefor, or to provide funds for the payment or
discharge of such obligation (whether in the form of loans, advances, stock
purchases, capital contributions or otherwise) or (Y) to maintain the solvency
or any balance sheet item, level of income or financial condition of another
if, in the case of any agreement described under subclauses (X) or (Y) of this
sentence, the primary purpose or intent thereof is as described in the
preceding sentence. The amount of any Contingent Obligation shall be equal to
the amount of the obligation so guaranteed or otherwise supported or, if less,
the amount to which such Contingent Obligation is specifically limited.
"CONTRACTUAL OBLIGATION", as applied to any Person, shall mean
any provision of any security issued by that Person or of any material
indenture, mortgage, deed of trust, contract, undertaking, agreement or other
instrument to which that Person is a party or by which it or any of its
properties is bound or to which it or any of its properties is subject.
"COURT" shall have the meaning assigned to it in the recital
clauses hereof.
"DEFAULT" shall mean any event that, with the passage of time,
the giving of notice or both, would become an Event of Default, unless cured or
waived as specifically provided in this Agreement.
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<PAGE> 6
"DEPOSIT ACCOUNT" shall mean a demand, time, savings, passbook
or like account with a bank, savings and loan association, credit union or like
organization, other than an account evidenced by a negotiable certificate of
deposit.
"DISCLOSURE STATEMENT" shall have the meaning assigned to it in
Section 4.5.
"DIP LOAN AGREEMENT" shall have the meaning assigned to it in
the Recitals hereto.
"DOLLARS" and the sign "$" each shall mean freely transferable
lawful money of the United States (expressed in dollars).
"EMPLOYEE BENEFIT PLAN" shall mean any "employee benefit plan"
within the meaning of ERISA Section 3(3), and subject to ERISA, maintained or
contributed to by the Borrower or any ERISA Affiliate.
"ENVIRONMENTAL LAWS" shall mean (i) the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.A. Section
9601 et seq., (ii) the Resource Conservation and Recovery Act, as amended by
the Hazardous and Solid Waste Amendment of 1984, 42 U.S.A. Section 6901 et
seq., (iii) the Clean Air Act, 42 U.S.C.A. Section 7401 et seq., (iv) the Clean
Water Act of 1977, 33 U.S.C.A. Section 1251 et seq., (v) the Toxic Substances
Control Act, 15 U.S.C.A. 2601 et seq., and (vi) all other applicable statutes
or judicial or administrative orders, decrees, rules, regulations or ordinances
of city, county, regional, state and federal governmental agencies or bureaus
relating to air pollution, water pollution, noise control and/or the
generation, storage, use, transportation, handling, discharge, existence,
disposal or recovery of on-site or off-site Hazardous Materials, as each of the
foregoing may be amended from time to time.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
"ERISA AFFILIATE" shall mean any Person that is now or at any
time in the future required to be treated as a single employer with Borrower
under IRC Sections 414(b), (c), (m) or (o).
"ERISA EVENT" shall mean (i) a "reportable event" within the
meaning of Section 4043 of ERISA and the regulations issued thereunder with
respect to any Pension Plan (excluding those for which the provision for 30-day
notice to the PBGC has been waived by regulation); (ii) the failure to meet the
minimum funding standard of Section 412 of the Internal Revenue Code with
respect to any Pension Plan (whether or not waived in accordance with Section
412(d) of the Internal Revenue Code) or the failure to make by its due date a
required installment under Section 412(m) of the Internal Revenue Code with
respect to any Pension Plan or the failure to make any required contribution to
a Multiemployer Plan; (iii) the
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<PAGE> 7
provision by the administrator of any Pension Plan pursuant to Section
4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress
termination described in Section 4041(c) of ERISA; (iv) the withdrawal by
Borrower or any of its ERISA Affiliates from any Pension Plan with two or more
contributing sponsors or the termination of any such Pension Plan resulting in
liability pursuant to Sections 4063 or 4064 of ERISA; (v) the institution by
the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any
event or condition which might constitute grounds under ERISA for the
termination of, or the appointment of a trustee to administer, any Pension
Plan; (vi) the imposition of liability on Borrower or any of its ERISA
Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the
application of Section 4212(c) of ERISA; (vii) the withdrawal by Borrower or
any of its ERISA Affiliates in a complete or partial withdrawal (within the
meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if
there is any potential liability therefor, or the receipt by Borrower or any of
its ERISA Affiliates of notice from any Multiemployer Plan that it is in
reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that
it intends to terminate or has terminated under Section 4041A or 4042 of ERISA;
(viii) the occurrence of an act or omission which could give rise to the
imposition on Borrower or any of its ERISA Affiliates of fines, penalties,
taxes or related charges under Chapter 43 of the Internal Revenue Code or under
Section 409 or 502(c), (i) or (l) or 4071 of ERISA in respect of any Employee
Benefit Plan; (ix) the assertion of a material claim (other than routine claims
for benefits) against any Employee Benefit Plan other than a Multiemployer Plan
or the assets thereof, or against Borrower or any of its ERISA Affiliates in
connection with any such Employee Benefit Plan; (x) receipt from the Internal
Revenue Service of notice of the failure of any Pension Plan (or any other
Employee Benefit Plan intended to be qualified under Section 401(a) of the
Internal Revenue Code) to qualify under Section 401(a) of the Internal Revenue
Code, or the failure of any trust forming part of any Pension Plan to qualify
for exemption from taxation under Section 501(a) of the Internal Revenue Code;
or (xi) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of
the Internal Revenue Code or pursuant to ERISA with respect to any Pension
Plan.
"EVENT OF DEFAULT" shall have the meaning assigned to it in
Section 9.1.
"EXISTING LOAN AGREEMENT" shall have the meaning assigned to it
in the Recitals hereto.
"FEDERAL RESERVE BOARD" shall have the meaning assigned to it
in Section 4.13.
"FINAL ORDER" shall mean an order, judgment or other decree of
the Court which has not been reversed, stayed, modified, or amended and as to
which (i) any right to appeal or seek certiorari, review or rehearing has been
waived or (ii) the time to appeal or seek certiorari, review or rehearing has
expired and as to which no appeal or petition for certiorari, review or
rehearing is pending.
"FISCAL YEAR" shall mean the 52/53 week period ending on the
Sunday nearest to December 31 of each calendar year.
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<PAGE> 8
"FUND" shall have the meaning assigned to it in the first
paragraph of this Agreement.
"FUNDING DATE" shall mean the date of the funding of an
Advance.
"GAAP" shall mean generally accepted accounting principles in
the United States of America as in effect from time to time.
"HAZARDOUS MATERIALS" shall mean any substance, material or
waste the generation, handling, storage, treatment or disposal of which is
regulated by any local or state government authority in any jurisdiction in
which Borrower or any of its Subsidiaries has owned, leased or operated real
property or disposed of hazardous materials, or by the United States
Government, including any material or substance which is defined as a
"hazardous waste", "hazardous material", "hazardous substance", "extremely
hazardous waste" or "restricted hazardous waste" or other similar term or
phrase under any Environmental Law.
"INDEBTEDNESS" shall mean all liabilities for borrowed money,
notes payable and drafts accepted representing extensions of credit whether or
not representing obligations for borrowed money and all other obligations and
indebtedness of any and every kind and nature, including all Contingent
Obligations, Capital Lease Obligations, Charges, liabilities and all
obligations to trade creditors, whether now or hereafter owing, arising, and
howsoever evidenced, created, incurred, acquired or owing, whether primary,
secondary, direct, contingent, fixed or otherwise.
"INDEMNIFIED PERSON" shall have the meaning assigned to it in
Section 10.3.
"INVENTORY" shall mean any "inventory," as such term is defined
in the UCC, now or hereafter owned or acquired by Borrower or any of its
Subsidiaries, wherever located, and, in any event, including all inventory,
merchandise, goods and other personal property which are held by or on behalf
of Borrower or any of its Subsidiaries for sale or lease or are furnished or
are to be furnished under a contract of service or which constitute raw
materials, work in process, or materials used or consumed or to be used or
consumed in Borrower's or such Subsidiary's business, or in the processing,
packaging, advertising, promotion, delivery or shipping of the same, and all
finished goods.
"INVESTMENT" shall mean (i) any direct or indirect purchase or
other acquisition by Borrower or any of its Subsidiaries of, or a beneficial
interest in, Securities of any other Person, or (ii) any direct or indirect
loan, advance or capital contribution by Borrower or any of its Subsidiaries to
any other Person other than Borrower including all indebtedness and accounts
receivable from that other Person that are not current assets or did not arise
from sales to that other Person in the ordinary course of business. The amount
of any Investment shall be the original cost of such Investment plus the cost
of all additions thereto, without any adjustments for increases or decreases in
value, or write-ups, write-downs or write-offs with respect to such Investment.
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<PAGE> 9
"IRC" shall mean the Internal Revenue Code of 1986, as amended,
and any successor thereto.
"IRS" shall have the meaning assigned to it in Section 4.14.
"LEASES" shall mean all of those leasehold estates in real
property now owned or hereafter acquired by Borrower or any of its
Subsidiaries, as lessee.
"LENDER" shall have the meaning assigned to it in the
Introduction hereof and shall include any successors and assigns thereof.
"LIEN" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien (including judgment liens,
liens of mechanics, suppliers and other Persons for the provision of goods or
services, rights of set off and all other liens arising under statute, common
law or judicial interpretation), Charge, claim (including reclamation claims),
security interest, easement or encumbrance, preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever
(including any lease or title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement perfecting a security
interest under the UCC or comparable law of any jurisdiction).
"LOAN" shall mean, collectively, the Advances made or deemed
made by Lender to Borrower pursuant to the terms of this Agreement.
"LOAN DOCUMENTS" shall mean this Agreement, the Notes, the
Collateral Documents, the Subsidiary Guaranty, and all other agreements,
instruments, documents and certificates, including pledges, powers of attorney,
consents, assignments, contracts, notices, and all other written matter whether
heretofore, now or hereafter executed by or on behalf of Borrower or any of its
Affiliates, or any employee of Borrower or any of its Affiliates, and delivered
to Lender, in connection with this Agreement or the transactions contemplated
hereby.
"MARGIN STOCK" shall have the meaning assigned to that term in
Regulation U of the Board of Governors of the Federal Reserve System as in
effect from time to time.
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect
on (i) the business, assets, operations, prospects or financial condition of
Borrower or Borrower and its Subsidiaries, taken as a whole, (ii) Borrower's or
any such Subsidiary's ability to pay or otherwise perform the Obligations in
accordance with the terms hereof and the other Loan Documents, or (iii) the
Collateral or Lender's Liens on the Collateral or the priority of such Liens or
the rights or remedies of Lender under the Loan Documents.
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<PAGE> 10
"MATURITY DATE", with respect to each tranche of Advances,
shall mean March 31, 1999, as it may be extended with respect to the Advances
of a tranche pursuant to the provisions of Section 2.2(g).
"MAXIMUM LAWFUL RATE" shall have the meaning assigned to it in
Section 2.4(d).
"MULTIEMPLOYER PLAN" shall mean an Employee Benefit Plan that
is a "multiemployer plan" within the meaning of ERISA Section 4001(a)(3).
"NOTES" shall mean the Tranche A Note and the Tranche B Note.
"NOTICE OF ADVANCE" shall have the meaning assigned to it in
Section 2.1(b).
"OBLIGATIONS" shall mean all loans, advances, debts,
liabilities and obligations for monetary amounts (whether or not such amounts
are liquidated or determinable) owing by Borrower or any of its Subsidiaries to
Lender, and all covenants and duties regarding such amounts, of any kind or
nature, present or future, whether or not evidenced by any note, agreement or
other instrument, arising under any of the Loan Documents.
"OMNIBUS CONSENT" shall mean the Consent, in substantially the
form of Exhibit H attached hereto to be entered into by Borrower, each of its
Subsidiaries and Lender.
"OPERATING ACCOUNTS" shall mean those certain accounts of
Borrower or any of its Subsidiaries identified in SCHEDULE 4.9 annexed hereto
and any other Operating Accounts opened from time to time with the consent of
Lender.
"PAYMENT ACCOUNT" shall mean that certain account of Lender,
account number 400-3500 in the name of TCW Special Credits Escrow Account at
Sanwa Bank of California/Trust Operations, Monterey Park, California 91754, ABA
number 122003516.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or
any Person succeeding to the functions thereof.
"PELLUCID" shall mean Pellucid, Inc., previously a California
corporation and a wholly owned Subsidiary of Borrower that merged with and into
Borrower as more fully described in the recitals of this Agreement.
"PENSION PLAN" shall mean an Employee Benefit Plan subject to
Title IV of ERISA, other than a Multiemployer Plan.
"PERMITTED ENCUMBRANCES" shall mean the following encumbrances
and claims: (i) Liens (other than a Lien imposed pursuant to Sections
401(a)(29) or 412(n) of the IRC or by ERISA) for taxes or assessments or other
governmental charges or levies, either not yet due and
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<PAGE> 11
payable or to the extent that nonpayment thereof is permitted by the terms of
this Agreement; (ii) pledges or deposits securing obligations under worker's
compensation, unemployment insurance, social security or public liability laws
or similar legislation; (iii) pledges or deposits securing utility payments,
bids, tenders, contracts (other than contracts for the payment of money) or
leases to which Borrower or any of its Subsidiaries is a party as lessee, made
in the ordinary course of business; (iv) deposits securing public or statutory
obligations of Borrower or any of its Subsidiaries; (v) workers', mechanics',
suppliers', carriers', warehousemen's or other similar liens arising in the
ordinary course of business and securing indebtedness that is either (a) not
more than thirty (30) days past the date such indebtedness first became due and
payable or (b) being contested in good faith and, if required according to
GAAP, appropriately reserved for on the books of Borrower or any of its
Subsidiaries; (vi) deposits securing or in lieu of surety, appeal or customs
bonds in proceedings to which Borrower or any of its Subsidiaries is a party;
(vii) any attachment or judgment Liens securing the payment of money not
exceeding $10,000 in the aggregate, unless the judgment it secures shall not
(x) within sixty (60) days after the entry thereof have been discharged, (y)
have been stayed pending appeal, or (z) have been discharged within sixty (60)
days after the expiration of any such stay; (viii) Liens in favor of Lender
under the Collateral Documents; (ix) easements, rights-of-way, restrictions,
minor defects or irregularities in title and other similar charges or
encumbrances not interfering in any material respect with the ordinary conduct
of the business of Borrower or any of its Subsidiaries; (x) any interest or
title of a lessor under any lease permitted by this Agreement and any lease or
sublease granted to others (and permitted by this Agreement) to the extent the
granting or existence of such lease or sublease would not have a Material
Adverse Effect; (xi) Liens arising from UCC financing statements regarding
leases permitted by this Agreement; (xii) Liens on unearned premiums and
dividends that may become payable under directors' and officers' insurance
policies provided that the amount of any pledges and/or deposits permitted by
clauses (ii), (iii), (iv) and (xiii) above shall not exceed in the aggregate
for all such clauses, $1,000,000.
"PERSON" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, institution, public benefit corporation, entity or government
(whether Federal, state, county, city, municipal or otherwise, including any
instrumentality, division, agency, body or department thereof).
"PLAN" shall mean Debtors' Second Amended Joint Plan of
Reorganization," filed by Borrower and Pellucid in the Chapter 11 Cases on
November 11, 1994, as amended by that certain Modification dated December 19,
1994 and as may be further amended thereafter pursuant to Section 7.17 hereof.
"PROJECTIONS" shall have the meaning assigned to it in Section
4.6.
"REAL ESTATE" shall mean all of those plots, pieces or parcels
of land now owned, operated or leased or hereafter acquired, operated or leased
by Borrower or any of its Subsidiaries (the "LAND"), together with the right,
title and interest of Borrower or such Subsidiary, if any, in and to the
streets, the land lying in the bed of any streets, roads or
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<PAGE> 12
avenues, opened or proposed, in front of, adjoining, or abutting the Land to
the center line thereof, the air space and development rights pertaining to the
Land and right to use such air space and development rights, all rights of way,
privileges, liberties, tenements, hereditaments, and appurtenances belonging or
in any way appertaining thereto, all fixtures, all easements now or hereafter
benefiting the Land and all royalties and rights appertaining to the use and
enjoyment of the Land, including, without limitation, all alley, vault,
drainage, mineral, water, oil, and gas rights, together with all of the
buildings and other improvements now or hereafter erected on the Land, and all
fixtures and articles of personal property appertaining thereto and all
additions thereto and substitutions and replacements thereof.
"RECEIPTS" shall mean all cash, Cash Equivalents, checks,
notes, drafts and any items of payment or collection received by or on behalf
of Borrower or any of its Subsidiaries, or by any officers, employees or agents
of Borrower or other Persons acting for or in concert with Borrower or such
Subsidiary to make collections on Borrower's or such Subsidiary's behalf, in
connection with or in any way relating to Borrower or such Subsidiary or the
operation of Borrower's or such Subsidiary's business, including, without
limitation, any proceeds received from (i) any sales of, or loans against,
Accounts of Borrower or such Subsidiary (other than the Loan), (ii) any
disposition of or release of Liens against assets or issuance or sale of
Securities by Borrower or such Subsidiary, (iii) the issuance or sale of
Indebtedness for borrowed money by Borrower or such Subsidiary (other than the
Obligations and other Indebtedness permitted by this Agreement), (iv) insurance
policies (other than liability insurance payable directly or indirectly to a
third party) maintained by Borrower or such Subsidiary, whether or not Lender
is an additional insured or named as loss payee thereunder and (v) the
successful prosecution (including any settlement) of any claims, actions or
other litigation or proceeding by or on behalf of or against Borrower or such
Subsidiary; it being understood and agreed that nothing contained in this
definition shall in any respect be deemed to permit any transactions by
Borrower or such Subsidiary otherwise restricted or prohibited by this
Agreement, including Section 7 hereof.
"RELEASE" shall mean any release, spill, emission, leaking,
pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal,
dumping, leaching or migration of Hazardous Materials into the indoor or
outdoor environment (including, without limitation, the abandonment or disposal
of any barrels, containers or other closed receptacles containing any Hazardous
Materials), or into or out of any Real Estate, including the movement of any
Hazardous Material through the air, soil, surface water, groundwater or
property.
"RESTRICTED PAYMENT" shall mean, with respect to any Person (i)
the direct or indirect declaration or payment of any dividend or the incurrence
of any liability to make any other payment or distribution of cash or other
property or assets in respect of such Person's Securities, (ii) any payment on
account of the purchase, redemption or other retirement or acquisition of such
Person's Securities or any payment made to retire or obtain the surrender of,
any outstanding warrants, options or other rights to acquire any of such
Person's Securities or any other payment or distribution made in respect
thereof, either directly or indirectly, (iii) any direct or indirect payment,
loan, contribution or other transfer of funds or other property to any
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<PAGE> 13
Stockholder or any Subsidiary of such Person in respect of such Person's
Securities or (iv) any payment to any officer, director or employee of such
Person that constitutes a "bonus" that is otherwise not required to be paid
under the terms of employment of such officer, director or employee; provided
that with respect to Borrower, "Restricted Payment" shall not include payments
that may be made by Borrower to its officers and employees in an aggregate
amount not exceeding $1,500,000 under an employee incentive plan, a management
incentive plan, and employee bonus programs.
"SCHEDULE OF DOCUMENTS" shall mean the schedule, including all
appendices, exhibits or schedules thereto, listing certain documents and
information to be delivered in connection with the Loan Documents and the
transactions contemplated thereunder, substantially in the form attached hereto
as SCHEDULE 3.1(A).
"SECURITIES" shall mean any stock, shares, partnership
interests, voting trust certificates, certificates of interest or participation
in any profit-sharing agreement or arrangement, options, warrants, bonds,
debentures, notes, or other evidences of indebtedness, secured or unsecured,
convertible, subordinated or otherwise, or in general any instruments commonly
known as "securities" or any certificates of interest, shares or participations
in temporary or interim certificates for the purchase or acquisition of, or any
right to subscribe to, purchase or acquire, any of the foregoing.
"STOCKHOLDERS" shall mean, with respect to Borrower or any of
its Subsidiaries, all of the holders of Securities of such Person.
"SUBJECT PROPERTY" shall have the meaning assigned to it in
Section 10.3.
"SUBSIDIARY" shall mean, with respect to any Person, any
corporation of which an aggregate of more than 50% of the outstanding
Securities having ordinary voting power to elect a majority of the board of
directors of such corporation (irrespective of whether, at the time, Securities
of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the time,
directly or indirectly, owned legally or beneficially by such Person and/or one
or more Subsidiaries of such Person.
"SUBSIDIARY GUARANTY" shall mean the Subsidiary Guaranty, dated
as of December 30, 1994, in the form of Exhibit E attached hereto, entered into
by each of Borrower's Subsidiaries in favor of Lender.
"SUBSIDIARY PLEDGE AND SECURITY AGREEMENT" shall mean the
Subsidiary Pledge and Security Agreement, dated as of December 30, 1994, in the
form of Exhibit F attached hereto, entered into between Lender and each of
Borrower's Subsidiaries.
"TAX" or "TAXES" shall mean any present or future tax, levy,
impost, duty, charge, fee, deduction or withholding of any nature and whatever
called, by whomsoever, on
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<PAGE> 14
whomsoever and wherever imposed, levied, collected, withheld or assessed;
provided that "TAX ON THE OVERALL NET INCOME" of a Person shall be construed as
a reference to a tax imposed by the jurisdiction in which that Person's
principal office (and/or, in the case of a Lender, its lending office) is
located or in which that Person is deemed to be doing business on all or part
of the net income, profits or gains of that Person (whether worldwide, or only
insofar as such income, profits or gains are considered to arise in or to
relate to a particular jurisdiction, or otherwise).
"TRANCHE A ADVANCE" shall have the meaning assigned to it in
Section 2.1(b) and shall also include, without limitation, any Tranche A
Advance deemed made pursuant to Section 2.1(d) or Section 2.6.
"TRANCHE A COMMITMENT" shall mean the commitment of Lender to
make Tranche A Advances as set forth in Section 2.1(b).
"TRANCHE A NOTE" shall mean the Second Amended and Restated
Revolving Credit Note delivered by Borrower to Lender in a maximum outstanding
principal amount of $20,000,000 for the benefit of the entities set forth in
Schedule 1-A, which Tranche A Note shall be in substantially the form of
Exhibit A-1 attached hereto, which amends and restates in its entirety that
certain Amended and Restated Revolving Credit Note dated as of December 30,
1994, issued by Borrower in favor of Lender.
"TRANCHE B ADVANCE" shall have the meaning assigned to it in
Section 2.1(b) and shall also include, without limitation, any Tranche B
Advance deemed made pursuant to Section 2.1(d) or Section 2.6.
"TRANCHE B COMMITMENT" shall mean the commitment of Lender to
make Tranche B Advances as set forth in Section 2.1(b).
"TRANCHE B NOTE" shall mean the Revolving Credit Notes
delivered by Borrower to Lender in a maximum outstanding principal amount of
$11,500,000 for the benefit of the entities set forth in Schedule 1-A, which
Tranche B Notes shall be in substantially the form of Exhibit A-2 attached
hereto.
"THRESHOLD AMOUNT" shall have the meaning assigned to it in
Section 2.1(b).
"UCC" shall mean the Uniform Commercial Code of the
jurisdiction with respect to which such term is used, as in effect from time to
time.
Any accounting term used in this Agreement shall, unless otherwise
specifically provided herein, have the meaning customarily given such term in
accordance with GAAP, and all financial computations hereunder shall be
computed, unless otherwise specifically provided herein, in accordance with
GAAP consistently applied. All other undefined terms contained in this
Agreement shall, unless the context indicates otherwise, have the meanings
provided for by
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<PAGE> 15
the UCC as in effect in the State of New York to the extent the same are used
or defined therein. The words "herein", "hereof" and "hereunder" and other
words of similar import refer to this Agreement as a whole, including the
Exhibits and Schedules hereto, and not to any particular section, subsection or
clause contained in this Agreement. Any reference to an agreement shall refer
to such agreement as it may be amended, restated, supplemented or otherwise
modified from time to time.
SECTION 2.
AMOUNT AND TERMS OF CREDIT
2.1 REVOLVING CREDIT ADVANCES.
(a) Borrower and Lender agree and confirm that the Obligations of
Borrower as of the date hereof are as set forth on SCHEDULE 2.1(A) attached
hereto. Borrower and Lender acknowledge and agree that there are no valid
counterclaims, setoffs or rights of reclamation against said Obligations or any
other defenses to repayment by Borrower of said Obligations.
(b) Upon and subject to the terms and conditions of this Agreement
and in reliance upon the representations and warranties of Borrower herein set
forth, Lender will make available to Borrower, from time to time upon
Borrower's request, on and after the Closing Date until the Commitment
Termination Date revolving credit advances (each a "TRANCHE A ADVANCE" and
collectively, the "TRANCHE A ADVANCES") in an aggregate amount which, when
added to the aggregate amount of all other outstanding Tranche A Advances shall
not at any time exceed $20,000,000 and revolving credit advances (each a
"TRANCHE B ADVANCE" and collectively, the "TRANCHE B ADVANCES") in an aggregate
amount which, when added to the aggregate amount of all other outstanding
Tranche B Advances shall not at any time exceed $11,500,000; provided that no
Advance shall be made hereunder to Borrower if, after giving effect thereto and
to the application of the proceeds thereof and to any other actual or planned
disbursement by Borrower on the date of such Advance (or within the next 24
hour period), Borrower would have available to it in the deposit accounts
listed in SCHEDULE 4.9 (and, to the extent all outstanding Loan and other due
and payable Obligations have been paid in full, in the Payment Account), cash
and Cash Equivalents (less the amount of all outstanding checks) in an
aggregate amount in excess of $1,500,000 (the "THRESHOLD AMOUNT"); and
provided, further, that Lender shall not be obligated to make any Tranche B
Advances if Borrower may at such time incur Tranche A Advances. Advances made
on any Business Day shall be in an aggregate minimum amount of $100,000 and
integral multiples thereof in excess of that amount. Subject to the provisions
of Section 2.2, Section 9 and the other provisions of this Agreement, and until
all amounts outstanding in respect of the Loan shall become due and payable on
the Commitment Termination Date, Borrower may from time to time borrow, repay
and reborrow pursuant to this Section 2.1(b). Each Advance shall be made on
notice, given by Borrower to Lender no later than 2:00 P.M. (Pacific time) on
the Business Day immediately preceding the Business Day of the proposed
Advance. Each such notice shall be in writing or by facsimile to Kenneth Liang
or such other officer of Lender designated by Lender to receive such request,
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confirmed immediately in writing (a "NOTICE OF ADVANCE"), specifying therein
the requested date and amount of such requested Advance. Lender shall, on the
date of the proposed Advance, upon satisfaction or waiver of the applicable
conditions set forth in Section 3, wire to the bank designated by Borrower and
acceptable to Lender, the amount of such Advance.
(c) The Tranche A Advances shall be evidenced by the Tranche A Note
and the Tranche B Advances shall be evidenced by the Tranche B Notes. The
Notes shall represent the obligation of Borrower to pay the outstanding amount
of the Loan, together with interest thereon computed in accordance with Section
2.4(a), plus all other Obligations of Borrower hereunder. The date and amount
of each Advance and each payment of principal and interest with respect thereto
shall be recorded on the books and records of Lender, which books and records
shall constitute prima facie evidence of the accuracy of the information
therein recorded. Subject to Borrower's rights to prepay the Loan pursuant to
Section 2.2, the entire unpaid principal of and all unpaid accrued interest on
the Loan and all other Obligations shall be due and payable on the Commitment
Termination Date. In the absence of a specific determination by Lender with
respect to the application of any payments received from or on behalf of
Borrower, such payments shall be applied in accordance with Section 2.6.
(d) Lender may, at its option, make Advances for Borrower's account
to the extent that any amounts are due and owing from Borrower on account of
the Obligations, as set forth in Section 2.6.
2.2 COLLECTIONS; MANDATORY AND OPTIONAL PREPAYMENTS; EXTENSION OF MATURITY
DATE.
(a) Receipts shall be received and held by Borrower, its
Subsidiaries and any of their respective officers, employees, agents or other
Persons acting for or in concert with Borrower or any such Subsidiary to make
collections for or on behalf of Borrower or any such Subsidiary ("COLLECTING
AGENTS"), in trust for Lender as Collateral. Notwithstanding any other
provision of this Agreement or any other Loan Document, all Receipts shall be
paid by the obligor thereon into the Operating Accounts. On the last Business
Day of each quarter (or on any other day if required by Lender), Borrower shall
deposit or cause to be deposited all cash and Cash Equivalents that are in the
Operating Accounts that are in the aggregate in excess of the Threshold Amount
into the Payment Account.
(b) Except to the extent otherwise provided herein, upon deposit in
the Payment Account, any Receipts consisting of cash or wire or electronic
transfers in immediately available funds shall be applied by Lender to the Loan
and shall be deemed received by Lender upon deposit in the Payment Account.
Any payments received by Lender under this Section 2.2(b) shall be applied in
the following order unless Lender otherwise elects: (i) any due and payable
fees, expenses or other charges in respect of the Obligations; (ii) any due and
payable interest payments on the Loan; (iii) principal payments on the Tranche
B
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Note (whether or not due and payable); (iv) principal payments on the Tranche A
Note (whether or not due and payable); and (v) other due and payable
Obligations; provided, however, that if an Event of Default has occurred and is
continuing, Lender shall apply principal payments on the Tranche B Note and the
Tranche A Note ratably in accordance with the then outstanding principal
amounts of such Notes.
(c) If on any date the aggregate outstanding amount of Tranche A
Advances exceeds the Tranche A Commitment then in effect, or the Tranche B
Advances exceeds the Tranche B Commitment then in effect, then Borrower shall
immediately repay to Lender the principal amount of the applicable Advances as
is equal to such excess without notice or demand by Lender.
(d) Borrower irrevocably makes, constitutes and appoints Lender,
and all Persons designated by Lender for that purpose, at any time, as
Borrower's true and lawful attorney and agent-in-fact to endorse Borrower's
name on any checks, notes, drafts or other form of payment relating to
Collateral or Receipts or proceeds of Collateral or Receipts that come into
Lender's possession or under Lender's control; provided, however, that such
appointment by Borrower of Lender as Borrower's attorney-in-fact shall in no
case impose upon Lender any obligation or duty to take any actions on behalf of
Borrower or any fiduciary obligations with respect to Borrower.
(e) Borrower shall have the right at any time to prepay all or a
portion of the Loan and permanently reduce any portion of the Commitment
(provided that any reduction in any Commitment shall be in a minimum amount of
$2,500,000), upon providing a notice of prepayment and termination of the
Tranche A Commitment or the Tranche B Commitment to Lender at least two (2)
Business Days prior to such payment and termination, to prepay voluntarily the
all of the Advances of such tranche and cause all other Obligations related to
such Advances to be prepaid or otherwise satisfied, without premium or penalty,
and upon such prepayment or satisfaction, Borrower's rights to receive Advances
of such type shall simultaneously terminate; provided, however, that Borrower
may not prepay any Tranche A Advances so long as any Tranche B Advances are
outstanding. Upon any permanent reduction in the Tranche A Commitment prior to
March 31, 1998, then the number of shares of common stock of the Borrower
covered by the warrants delivered to Lender referred to in Section 3.1(a) shall
be reduced by an amount equal to 2,000,000 multiplied by a fraction, the
numerator of which shall be the amount of such reduction of the Tranche A
Commitment and the denominator of which shall be $20,000,000. Upon termination
of both the Tranche A Commitment and the Tranche B Commitment and payment of
all Obligations, the Commitment Termination Date shall be deemed to have
occurred.
(f) On or prior to March 31, 1999, Borrower shall have the right at
any time, upon delivery of 10 Business Days' prior written notice to Lender, to
extend the Maturity Date relating to Tranche A Advances and Tranche B Advances
to March 31, 2000, effective upon (i) payment to Lender of an extension fee of
2.0% of the outstanding commitment of such tranche, and (ii) delivery by
Borrower to Lender of an Allonge to the Note of such tranche, in form and
substance satisfactory to Lender, evidencing such extension of the Maturity
Date.
2.3 USE OF PROCEEDS.
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Borrower shall apply the proceeds of the Advances as needed in the
ordinary course of its business only for working capital purposes of Borrower
(including cash collateralization of letters of credit issued for the account
of Borrower after the Closing Date); provided that no portion of the Advances
shall be used, directly or indirectly, (i) to finance or make any Restricted
Payment; (ii) to make any payment or prepayment that is prohibited under this
Agreement; (iii) to make any payment in settlement of any claim, action or
proceeding, before any court, arbitrator or other governmental body, including
those set forth in SCHEDULE 4.16; or (iv) to make any payment in respect of
costs associated with the clean-up or other remedial action or other liability
in respect of any Hazardous Materials (or in respect of any other non-
compliance by Borrower or any of its Subsidiaries with Environmental Laws) on
any parcel of Real Estate owned, leased, operated or used by Borrower or any of
its Subsidiaries.
2.4 INTEREST ON LOAN.
(a) Borrower shall be obligated to pay interest on the unpaid
principal amount of the Loan owing to Lender from the Closing Date until the
Loan is paid in full at a rate per annum equal to 5.00% per annum above the
Base Rate in effect from time to time, payable on the first Business Day of
each fiscal quarter, commencing on September 29, 1997, and on the Commitment
Termination Date; provided however, that upon the occurrence and during the
continuation of an Event of Default, the interest on the Loan shall be
calculated at a rate per annum equal to the Base Rate plus 7.00%.
(b) If any payment on the Loan becomes due and payable on a day
other than a Business Day, the maturity thereof shall be extended to the next
succeeding Business Day and, with respect to payments of principal, interest
thereon shall be payable at the then applicable rate during such extension.
(c) All computations of interest shall be made by Lender on the
basis of a year of 360 days, in each case for the actual number of days
(including the first day but excluding the last day) occurring in the period
for which such interest is payable. Each determination by Lender of an
interest rate hereunder shall be conclusive and binding for all purposes,
absent manifest error or bad faith.
(d) Notwithstanding anything to the contrary set forth in this
Section 2.4, if at any time until payment in full of all of the Obligations in
respect of the Loan the amount of interest payable to Lender hereunder exceeds
the amount payable under the highest rate of interest permissible under any law
which a court of competent jurisdiction shall, in a final determination, deem
applicable hereto (the "MAXIMUM LAWFUL RATE"), then in such event and so long
as the amount payable under the Maximum Lawful Rate would be so exceeded, the
amount of interest payable hereunder shall be equal to the amount payable under
the Maximum Lawful Rate. In no event shall the total interest payable by
Borrower hereunder exceed the amount payable under the Maximum Lawful
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Rate. In the event that a court of competent jurisdiction shall make a final
determination that Lender has received interest hereunder or under any of the
Loan Documents in excess of the amount payable under the Maximum Lawful Rate,
Lender shall, to the extent permitted by applicable law, promptly apply such
excess in the following order: (i) then due and payable fees, expenses and
other charges; (ii) then due and payable interest payments; (iii) principal
payments on the Loan (whether or not due and payable); (iv) to any other unpaid
Obligations as provided herein and in the other Loan Documents; and (v)
thereafter as a refund to Borrower or as a court of competent jurisdiction may
otherwise order.
2.5 RECEIPT OF PAYMENTS.
Borrower shall make each payment under this Agreement not later than
10:30 A.M. (Pacific time), on the day when due in lawful money of the United
States of America in immediately available funds to the Payment Account or to
such other Lender's depositary bank as designated by Lender from time to time
for deposit in Lender's depositary account. Concurrently with the making of
any such payment, Borrower shall notify Lender by 2:00 P.M. (Pacific time), by
facsimile confirmed immediately in writing.
2.6 APPLICATION OF PAYMENTS.
Except to the extent that Lender has agreed to a specific application
of payments in this Agreement, Borrower irrevocably waives the right to direct
the application of any payments at any time hereafter received by Lender from
or on behalf of Borrower, and Borrower irrevocably agrees that Lender shall
have the continuing exclusive right to apply all such payments against any then
due and payable Obligations of Borrower and thereafter in repayment of the Loan
(whether or not due and payable) as Lender may deem advisable. In the absence
of a specific determination by Lender with respect thereto, the same shall be
applied in the following order: (i) then due and payable fees, expenses or
other charges; (ii) then due and payable interest payments on the Loan; (iii)
principal payments on the Tranche B Note (whether or not due and payable); (iv)
principal payments on the Tranche A Note (whether or not due and payable); and
(v) other due and payable Obligations; provided, however, that if an Event of
Default has occurred and is continuing, Lender shall apply principal payments
on the Tranche B Note and the Tranche A Note ratably in accordance with the
then outstanding principal amounts of such Notes. Lender is authorized to, and
at its option may, make advances on behalf of Borrower for payment of all then
due fees, expenses, charges, costs, advances and interest incurred by Borrower
hereunder. Such advances shall be made when and as Borrower fails to pay
promptly such fees, expenses, charges, costs, principal and interest and, at
Lender's option and to the extent permitted by law, shall be deemed Advances
constituting part of the Loan for all purposes hereunder and under the other
Loan Documents and shall bear interest as provided in Section 2.4(a).
2.7 ACCESS.
Lender and all of its officers, employees and agents shall have the
right, exercisable as frequently as Lender determines in its sole discretion to
be appropriate, during normal business hours (or at such other times as may be
requested by Lender) to inspect the properties and
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facilities of Borrower and its Subsidiaries and to examine and make extracts
from all of Borrower's and its Subsidiaries' records, files and books of
account. Borrower shall instruct its own and its Subsidiaries' banking and
other financial institutions to make available to Lender such information and
records as Lender may request. Borrower agrees to cooperate with Lender to
permit Lender reasonable access to Borrower's independent certified public
accountants with respect to all matters relating to this Agreement and the Loan
or to Borrower or any of its Subsidiaries.
2.8 CLOSING AND OTHER FEES.
(a) Borrower shall pay to Lender for the account of Lender a
original issue fee in an amount set forth on Schedule I, which amount is
payable on the Closing Date.
(b) Borrower shall pay to Lender, on demand, all fees, costs or
expenses that Lender shall pay to a bank or other similar institution arising
out of or in connection with the forwarding to Borrower or any other Person on
behalf of Borrower of proceeds of the Advances.
SECTION 3.
CONDITIONS PRECEDENT
3.1 CONDITIONS TO EFFECTIVENESS AND CLOSING DATE.
Notwithstanding any other provision of this Agreement, the Commitment
and the obligations of Lender shall not become effective until the following
conditions have been satisfied, in Lender's discretion, or waived in writing by
Lender:
(a) Borrower shall have delivered to Lender the warrants, in form
and substance satisfactory to Lender, set forth on Schedule I entitling Lender
to acquire shares of Common Stock of Borrower with a term of four years and an
exercise price of $2.00 per share.
(b) Borrower shall have delivered or shall have caused to be
delivered to Lender in form and substance satisfactory to Lender each of the
agreements, instruments, documents and materials listed on the Schedule of
Documents as required to be delivered to Lender on or before the Closing Date,
together with such additional information and materials and actions as Lender
may reasonably request, and shall have taken all actions set forth in the
Schedule of Documents required to be taken on or before the Closing Date;
(c) Borrower shall have paid to Lender the original issue fee
required under Section 2.8(a), all accrued and unpaid interest, fees and
expenses to the Closing Date under the Existing Loan Agreement, and all fees
and expenses set forth in Section 10.2 incurred by Lender on or prior to the
Closing Date.
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(d) Borrower shall have delivered or shall cause to be delivered to
Lender a counterpart signature page to the Subsidiary Guaranty executed by
Crystal River Engineering.
3.2 ADDITIONAL CONDITIONS TO EACH ADVANCE.
From and after the Closing Date, in addition to the conditions in
Section 3.1, it shall be a condition to each Advance (including the initial
Advance) that the following statements shall be true on the date of funding of
each such Advance:
(a) All of the representations and warranties of Borrower and its
Subsidiaries contained herein or in any of the Loan Documents shall be correct
in all material respects on and as of the date of funding each such Advance as
though made on and as of such date, except to the extent that any such
representation or warranty expressly relates to an earlier date.
(b) No event shall have occurred and be continuing, or would result
from the funding of any Advance, which constitutes a Default or an Event of
Default.
The acceptance by Borrower of the proceeds of any Advance shall be deemed to
constitute, as of the date of such acceptance or incurrence, as the case may be
(i) a representation and warranty by Borrower that the conditions in this
Section 3.2 with respect to such Advance have been satisfied and (ii) a
confirmation by Borrower and its Subsidiaries of the granting and continuance
of Lender's Lien pursuant to the Collateral Documents.
SECTION 4.
REPRESENTATIONS AND WARRANTIES
To induce Lender to make the Loan as provided for herein, Borrower
makes the following representations and warranties to Lender, each and all of
which shall be true and correct as of the Closing Date and on each date
required to be made pursuant to Section 3.2(a).
4.1 CORPORATE EXISTENCE AND QUALIFICATIONS; COMPLIANCE WITH LAW.
SCHEDULE 4.1 lists the state of incorporation of Borrower and all other
states or jurisdictions in which Borrower is qualified to do business as a
foreign corporation. Borrower and each of its Subsidiaries (i) is a
corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation; (ii) is duly qualified as a foreign
corporation and is in good standing under the laws of each jurisdiction where
its ownership or lease of property or the conduct of its business requires such
qualification (except for jurisdictions in which such failure to so qualify or
to be in good standing would not have a Material Adverse Effect); (iii) has the
requisite corporate power and authority and the legal right to own, pledge,
mortgage or otherwise encumber and operate its properties, to lease the
property it operates under lease and to conduct its business as now, heretofore
and proposed to
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be conducted; and (iv) is in compliance with its charter documents, including,
with respect to Borrower, its Certificate of Incorporation and By-Laws.
4.2 COMPLIANCE WITH LAW.
Borrower and each of its Subsidiaries (i) has, or has made application
for (which application is in process in the ordinary course), all material
licenses, permits, consents or approvals from or by, and has made all material
filings with, and has given all material notices to, all governmental
authorities having jurisdiction, to the extent required for the ownership,
operation and conduct of its properties and business as now owned, operated and
conducted; and (ii) is in compliance with all applicable provisions of law the
failure to comply with which would have a Material Adverse Effect.
4.3 SUBSIDIARIES.
SCHEDULE 4.3 sets forth the Subsidiaries of Borrower, together with
their respective jurisdictions of organization, all other states or
jurisdictions in which each such Subsidiary is qualified to do business as a
foreign corporation, the authorized and outstanding capital Securities of each
such Subsidiary, by class and number and percentage of each class legally owned
by Borrower or a Subsidiary of Borrower or any other Person, or to be so owned.
Such Securities constitute all of the issued and outstanding Securities of
Borrower and each such Subsidiary respectively. Neither Borrower nor any of
its Subsidiaries has any outstanding rights, options, warrants or agreements
pursuant to which it may be required to issue or sell any Securities, except as
set forth in SCHEDULE 4.3.
4.4 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS.
The execution, delivery and performance by Borrower and each of its
Subsidiaries of the Loan Documents and all instruments and documents to be
delivered by Borrower or such Subsidiary hereunder and thereunder and the
creation of all Liens provided for herein and therein and the consummation of
transactions contemplated hereby and thereby, (i) are within Borrower's or such
Subsidiary's corporate power; (ii) have been, or by the Closing Date will be,
duly authorized by all necessary or proper corporate action; (iii) do not
conflict with, result in a breach of or constitute (with due notice or lapse of
time or both) a default under any Contractual Obligation of Borrower or any of
its Subsidiaries; (iv) do not require any approval of stockholders or other
equity holders or any approval or consent of any Person under any Contractual
Obligation of Borrower or any of its Subsidiaries, except for such approvals or
consents which will be obtained on or before the Closing Date and are disclosed
in SCHEDULE 4.4 annexed hereto; (v) are not in contravention of any provision
of Borrower's or any of its Subsidiary's charter documents, including, with
respect to Borrower, its Certificate of Incorporation or By-Laws; (vi) will not
violate any law or regulation, or any order or decree of any court or
governmental instrumentality; and (vii) do not require the consent or approval
of any governmental body, agency or authority. This Agreement is, and the
Notes and the other Loan Documents, when executed and delivered pursuant hereto
will be, the legal, valid and
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binding Obligations of Borrower and each of its Subsidiaries, enforceable in
accordance with their respective terms.
4.5 FINANCIALS.
(a) Borrower has heretofore delivered to Lender a copy of the
Disclosure Statement with respect to the Plan (the "DISCLOSURE STATEMENT").
Such Disclosure Statement contains financial statements that have been prepared
in accordance with GAAP (except, with respect to the interim financial
statements, for normal year end adjustments and the inclusion of footnotes) and
present fairly the financial position of Borrower and its Subsidiaries at such
dates and for the periods then ended.
(b) Borrower has heretofore delivered to Lender a copy of its
audited consolidated financial statements as of December 29, 1996 and for the
year then ended and its unaudited consolidated financial statements as of March
31, 1997 and for the three month period then ended (the "FINANCIAL
STATEMENTS"). Such Financial Statements have been prepared in accordance with
GAAP applied on a basis consistent with prior periods (except as otherwise
stated therein) and present fairly the financial position of Borrower and its
Subsidiaries at such date and for the periods then ended, subject to changes
resulting from audit and normal year end adjustments.
(c) Borrower has no material Contingent Obligations, contingent
liability or liability for taxes, long term lease or other long term commitment
that is not reflected in the foregoing Financial Statements or in the notes
thereto. Since December 31, 1996, except as expressly disclosed in the
Financial Statements referred to in this Section 4.5, no Material Adverse
Effect has occurred.
4.6 PROJECTIONS.
The consolidated projections of Borrower's consolidated balance sheets,
income statements, cash flow statements, capital expenditures and depreciation
for each of Borrower's twelve fiscal months during calendar year 1997 and other
financial projections (the "PROJECTIONS"), a copy of which has been delivered
to Lender, are based upon the assumptions stated therein, which assumptions
Borrower believes to be reasonable and fair in light of current conditions,
and, as of the date hereof, reflect the reasonable and most current estimate of
Borrower of the results of operations and other information projected therein.
Additional projections for future periods requested by Lender and delivered by
Borrower shall become "Projections" hereunder and shall be subject to the terms
of this Section 4.6 and this Agreement.
4.7 TITLE; LIEN; ASSETS OF SUBSIDIARIES.
(a) Borrower and each of its Subsidiaries has good, sufficient and
legal title to all Collateral owned by it free and clear of all Liens
(including, without limitation, fee simple title
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to all of the Real Estate described on SCHEDULE 4.7(A) and good and valid
leasehold interests in the Leases described in SCHEDULE 4.7(B)), except to the
extent permitted under Section 7.3. Neither Borrower nor any of its
Subsidiaries is a party to any contract, agreement, lease or instrument (other
than the Loan Documents) the performance of which, either unconditionally or
upon the happening of an event, will result in or require the creation of a
Lien on the property or assets of Borrower or any of its Subsidiaries or
otherwise result in a violation of this Agreement.
(b) All Real Estate owned or leased by Borrower and its
Subsidiaries is set forth on SCHEDULES 4.7(A) AND 4.7(B), respectively, and
neither Borrower nor any of its Subsidiaries owns any Real Estate or is lessee
or lessor under any Lease other than as set forth therein.
(c) None of the Subsidiaries of Borrower owns assets with an
aggregate fair market value (without netting such market value against any
liability of such Subsidiary) exceeding $100,000.
4.8 INSURANCE POLICIES.
SCHEDULE 4.8 lists insurance of any nature maintained for current
occurrences by Borrower and its Subsidiaries. All insurance policies of
Borrower and its Subsidiaries are in full force and effect and provide coverage
of such risks and for such amounts required pursuant to Section 6.5.
4.9 SCHEDULE OF OPERATING ACCOUNTS.
SCHEDULE 4.9 lists all deposit accounts maintained by Borrower and its
Subsidiaries, and such Schedule correctly identifies the name and address of
each depository, the name in which the account is held, the purpose of the
account, and the complete account number. All such accounts are included in
the definition of Operating Accounts. Except as set forth in SCHEDULE 4.9
neither Borrower nor any of its Subsidiaries maintains any other deposit
account.
4.10 NO DEFAULT.
No Default or Event of Default has occurred and is continuing.
4.11 EMPLOYMENT AND LABOR MATTERS.
There are no strikes or, to the best of Borrower's knowledge, other
labor disputes, against Borrower or its Subsidiaries, pending or, to Borrower's
knowledge, overtly threatened, that could have a Material Adverse Effect.
Hours worked by and payment made to the employees of Borrower or such
Subsidiaries have not been in violation of the Fair Labor Standards Act or any
other applicable law dealing with such matters which violation could have a
Material Adverse Effect. Except as disclosed on SCHEDULE 4.11, all payments
due from Borrower or its Subsidiaries on account of employee health and welfare
insurance which could
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have a Material Adverse Effect if not paid will be paid or, if not due, will be
accrued as a liability on the books of Borrower or its Subsidiaries, as the
case may be.
4.12 INVESTMENT COMPANY ACT.
Neither Borrower nor any of its Subsidiaries is an "investment company"
or an "affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act
of 1940, as amended, assuming Lender is not any such Person under the
Investment Company Act. The making of the Advances, the application of the
proceeds and repayment thereof by Borrower and the consummation of the
transactions contemplated by this Agreement and the other Loan Documents will
not violate any provision of such Act or any rule, regulation or order issued
by the Securities and Exchange Commission thereunder.
4.13 MARGIN REGULATIONS.
Neither Borrower nor any of its Subsidiaries owns any "margin
security," as that term is defined in Regulations G and U of the Board of
Governors of the Federal Reserve System (the "FEDERAL RESERVE BOARD"), and the
proceeds of the Advances will be used only for the purposes contemplated
hereunder. None of the Advances will be used, directly or indirectly, for the
purpose of purchasing or carrying any margin security, for the purpose 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 the
Loan under this Agreement to be considered a "purpose credit" within the
meaning of Regulations G, T, U or X of the Federal Reserve Board. Neither
Borrower nor any of its Subsidiaries will take or permit any agent acting on
its behalf to take any action which might cause this Agreement or any document
or instrument delivered pursuant hereto to violate any regulation of the
Federal Reserve Board.
4.14 TAXES.
Except as set forth in SCHEDULE 4.14, (a) all federal, state, local and
foreign tax returns, reports and statements required to be filed by Borrower
and its Subsidiaries have been filed with the appropriate governmental agencies
and all Charges and other impositions shown thereon to be due and payable have
been paid prior to the date on which any fine, penalty, interest or late charge
may be added thereto for nonpayment thereof, or any such fine, penalty,
interest, late charge or loss has been paid; (b) Borrower and its Subsidiaries
has paid when due and payable all requisite Charges upon the books of such
Person, as the case may be; (c) proper and accurate amounts have been withheld
by Borrower and its Subsidiaries from its employees for all periods in full and
complete compliance with the tax, social security and unemployment withholding
provisions of applicable federal, state, local and foreign law and such
withholdings have been timely paid to the respective governmental agencies; (d)
neither Borrower nor any or its Subsidiaries has executed or filed with the
Internal Revenue Service ("IRS") or any other governmental authority any
agreement or other document extending, or having the effect of
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extending, the period for assessment or collection of any Charges; and (e)
neither Borrower nor any of its Subsidiaries has any obligation under any
written tax sharing agreement.
4.15 ERISA.
(a) Neither Borrower nor any ERISA Affiliate has engaged in a
transaction in respect of which it could have liability under ERISA which could
result in a Material Adverse Effect. There is no lien under ERISA in favor of
any Pension Plan. All Employee Benefit Plans are listed in SCHEDULE 4.15(A).
(b) Except as noted on SCHEDULE 4.15(B), in the case of any Pension
Plan, there is no "accumulated funding deficiency," as defined in Section 302
of ERISA. As of the most recent valuation date for any Pension Plan, the
excess of the actuarial present value (determined on the basis of reasonable
assumptions employed by the independent actuary for such Pension Plan) of the
benefit liabilities (as defined in Section 4001(a)(16) of ERISA) over the fair
market value of the assets of such Pension Plan, individually or in the
aggregate for all Pension Plans (excluding for purposes of such computation any
Pension Plans with respect to which there is no such excess), does not exceed
$500,000.
4.16 NO LITIGATION.
Except as set forth in SCHEDULE 4.16, there is no pending or
threatened, action, suit or proceeding against or affecting Borrower or any of
its Subsidiaries, or the property of Borrower or any of its Subsidiaries, in
any court, or before any arbitrator of any kind, or before or by any
governmental body, which action, suit or proceeding could have a Material
Adverse Effect.
4.17 PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES.
Borrower owns all material licenses, patents, patent applications,
copyrights, service marks, trademarks, trademark applications and trade names
necessary to continue to conduct business as heretofore conducted, now
conducted, and proposed to be conducted, each of which is listed, together with
Patent and Trademark Office application or registration numbers, where
applicable, opposite such Person's name on SCHEDULE 4.17 hereto. None of
Borrower's Subsidiaries own or use any patents, patent applications,
copyrights, service marks, trademarks or trademark applications. Except as
disclosed in SCHEDULE 4.17, Borrower and each of its Subsidiaries conducts its
respective business without infringement or claim of infringement of any
license, patent, copyright, service mark, trademark, trade name, trade secret
or other intellectual property right of others, except where such infringement
or claim of infringement would not have a Material Adverse Effect. Except as
disclosed on SCHEDULE 4.17, there is no infringement or claim of infringement
by others of any material license, patent, copyright, service mark, trademark,
trade name, trade secret or other intellectual property right of Borrower or
any of its Subsidiaries.
4.18 FULL DISCLOSURE.
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No information contained in this Agreement, the other Loan Documents,
the Plan or any other documents or written materials listed on the Schedule of
Documents or furnished by or on behalf of Borrower or any of its Subsidiaries
pursuant to the terms of this Agreement and the Schedule of Documents contains
any untrue statement of a material fact or, when considered in light of
disclosures otherwise made in writing by Borrower or such Subsidiary to Lender,
omits to state a material fact necessary to make the statement contained herein
or therein not materially misleading in light of the circumstances under which
made.
4.19 SECURITY INTERESTS.
(a) As security for the Notes and the other Obligations, on or
prior to the Closing Date, each of Borrower and its Subsidiaries has encumbered
substantially all of its personal property in favor of Lender.
(b) Except as set forth on SCHEDULE 4.19(B) hereto, each Collateral
Document creates in favor of Lender a valid and enforceable perfected security
interest in and Lien on all of the Collateral (as defined in each Collateral
Document) or other interests intended to be created and secured thereby,
superior to and prior to the rights of all third persons and subject to no
other Liens other than Permitted Encumbrances. The pledgor or assignor, as the
case may be, under the Collateral Document has good and marketable title to all
"Collateral" (as defined in such Collateral Document) (and/or the other
interests intended to be secured by such Collateral Document) free and clear of
all Liens except for Permitted Encumbrances. All filings, notices, recordings
and other actions taken or made in the United States, any State thereof or any
subdivision of any State necessary to perfect the Liens in the collateral
created pursuant to the Collateral Documents and the Orders have been made,
given or accomplished.
4.20 HAZARDOUS MATERIALS.
Except as disclosed in PART ONE OF SCHEDULE 4.20, all real property
owned, leased, subleased or operated by Borrower or any of its Subsidiaries and
its current use and all off-site disposals by Borrower or any of its
Subsidiaries of any Hazardous Materials comply with all Environmental Laws. In
addition, PART TWO OF SCHEDULE 4.20 discloses potential or actual environmental
liabilities of Borrower or any Subsidiary of Borrower that are not listed in
PART ONE OF SCHEDULE 4.20 and of which Borrower has knowledge, including
liabilities that are (i) not related to noncompliance with Environmental Laws,
or (ii) associated with properties not owned, leased, subleased or operated by
Borrower or any of its Subsidiaries.
4.21 CONTRACTS AND AGREEMENTS.
(a) SCHEDULE 4.21 lists all outstanding Contractual Obligations of
Borrower and each of its Subsidiaries, except (i) contracts entered into in the
ordinary course of Borrower's or such Subsidiary's business with any customer,
(ii) purchase orders covering Inventory ordered in the ordinary course of
business, (iii) contracts entered into in the ordinary course of Borrower's or
such Subsidiary's business (other than with vendors), which do not involve an
aggregate
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expenditure by Borrower in any year of more than $100,000, (iv) written sales
commissions agreements, and (v) contracts with vendors entered into in the
ordinary course of business. Except as set forth in SCHEDULE 4.21 or otherwise
disclosed to Lender in writing, none of the terms of such Contractual
Obligations have been amended.
(b) Neither Borrower nor any of its Subsidiaries is in default in
the performance, observance or fulfillment of any of the obligations, covenants
or conditions contained in any of its Contractual Obligations, and no condition
exists that, with the giving of notice or the lapse of time or both, would
constitute such a default, except where the consequences, direct or indirect,
of such default or defaults, if any, could not have a Material Adverse Effect.
(c) Neither Borrower nor any of its Subsidiaries is a party or
subject to any agreement or instrument which has or could have in any case or
the aggregate, a Material Adverse Effect.
SECTION 5.
FINANCIAL STATEMENTS AND INFORMATION
5.1 REPORTS AND NOTICES.
Borrower covenants and agrees that from and after the Closing Date and
until the Commitment Termination Date has occurred and the Obligations are
fully satisfied, Borrower shall deliver (or, with respect to documents
described in clause (d) below that are received by Borrower, use its best
efforts to deliver) to Lender:
(a) Immediately upon the determination by Borrower of the
existence of any Default or Event of Default, or of any development or other
information which could have a Material Adverse Effect or otherwise may result
in a Default or Event of Default, telephonic notice specifying the nature of
such Default or Event of Default or development or information, including the
anticipated effect thereof, which notice shall be promptly confirmed in writing
within two days.
(b) As soon as available and in any event within 90 days
after the end of Borrower's Fiscal Year, (a) the consolidated sheet of Borrower
and its Subsidiaries as at the end of such Fiscal Year and the related
consolidated statements of income, stockholders' equity and cash flows of
Borrower and its Subsidiaries for such Fiscal Year, setting forth in each case
in comparative form the corresponding figures for the previous Fiscal Year, all
in reasonable detail and certified by the chief financial officer of Borrower
that they fairly present the financial condition of Borrower and its
Subsidiaries as at the dates indicated and the results of their operations and
their cash flows for the periods indicated, (b) a report thereon of Arthur
Andersen LLP or other independent certified public accountants of recognized
national standing selected by Borrower and satisfactory to Lender, which report
shall be unqualified and shall state that such consolidated financial
statements fairly present the consolidated financial position
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of Borrower and its Subsidiaries as at the dates indicated and the results of
their operations and their cash flows for the periods indicated in conformity
with GAAP applied on a basis consistent with prior years (except as otherwise
disclosed in such financial statements) and that the examination by such
accountants in connection with such consolidated financial statements has been
made in accordance with generally accepted auditing standards;
(c) Promptly upon filing or receiving any such document,
copies of any motion, complaint, pleading or other documentation filed with the
Court or the office of the United States trustee in the Chapter 11 Cases
(except where disclosure is prohibited by Court order), and Borrower agrees to
send counsel for Lender copies of all such filings at the same time as filings
are sent to Lender as provided herein.
(d) Such other information respecting Borrower's or any of
its Subsidiaries' business, assets, operations, financial condition or
prospects (including, without limitation, financial statements, officer's
certifications, and financial projections) or any other matter as Lender may,
from time to time, reasonably request.
SECTION 6.
AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, unless Lender shall otherwise
consent in writing, from and after the date hereof and until the Commitment
Termination Date occurs and the Obligations are fully satisfied:
6.1 MAINTENANCE OF EXISTENCE AND CONDUCT OF BUSINESS.
Borrower shall and shall cause each of its Subsidiaries (a) to do or
cause to be done all things necessary to preserve and keep in full force and
effect its corporate existence; (b) to continue to conduct its business
substantially as now conducted or as otherwise permitted hereunder; (c) at all
times to maintain, preserve and protect all of its rights to enjoy and use
trademarks, trade names and service marks, and preserve all the remainder of
its property in use or useful in the conduct of its business and keep the same
in working order so that the business carried on in connection therewith may be
conducted consistent with current operating practices at all times; and (d) to
transact business in such names as Borrower or such Subsidiary may from time to
time use in conducting its businesses.
6.2 PAYMENT OF OBLIGATIONS.
(a) Except as prohibited by this Agreement or (except with respect
to the Obligations), and subject to Section 6.2(b), Borrower shall and shall
cause each of its Subsidiaries (i) to use its best efforts to pay and discharge
or cause to be paid and discharged all its Indebtedness, including all of the
Obligations, as and when due and payable and (ii) to pay and discharge or cause
to be paid and discharged promptly before any thereof shall become in
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default all (A) Charges imposed upon it, its income and profits, or any of its
property (real, personal or mixed), and (B) lawful claims for labor, materials,
supplies and services or otherwise.
(b) Borrower and each of its Subsidiaries may in good faith contest
the validity or amount of any Indebtedness or Charges or claims arising under
Section 6.2(a) (other than the Obligations), provided that adequate reserves
with respect thereto are maintained on the books of Borrower or such
Subsidiary, in accordance with GAAP.
6.3 BOOKS AND RECORDS.
Borrower shall, and shall cause each of its Subsidiaries to, keep
adequate records and books of account with respect to its business activities,
in which true and proper entries, reflecting all of their respective financial
transactions, are made in accordance with GAAP (subject to normal year end
adjustments) and on a basis consistent with the financial statements referred
to in Section 4.5.
6.4 LITIGATION.
Borrower shall notify Lender in writing, promptly upon learning
thereof, of any litigation or any other proceeding commenced or threatened by
or against Borrower and/or any of its Subsidiaries, and of the institution by
or against any of them of any suit, administrative or other proceeding or
investigation subsequent to the date hereof. Borrower shall disclose to Lender
in writing any material development in any such matter or threatened matter
referred to in the preceding sentence and shall provide such other information
as may be reasonably available to it to enable Lender and its counsel to
evaluate such matters.
6.5 INSURANCE.
Borrower shall maintain, and shall cause each of its Subsidiaries to
maintain, with financially sound and reputable insurers, insurance with respect
to its properties and business against liability, loss or damage of the kinds
customarily carried or maintained under similar circumstances by corporations
of established reputation engaged in similar businesses. On and after the date
which is 15 days after the Closing Date, all such policies shall contain an
endorsement naming Lender as additional insured and loss payee and providing at
least 30 days' prior notice to Lender of cancellation or modification and such
other terms as Lender may reasonably request. All Receipts in respect of such
policies insuring against business interruption shall be paid by the obligor
thereon to the Operating Accounts as described in Section 2.2.
Lender reserves the right at any time, upon review of Borrower's risk
profile, to require additional forms of insurance to, in Lender's sole opinion,
adequately protect Lender's interests.
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6.6 COMPLIANCE WITH LAW.
Except to the extent compliance is excused by the Bankruptcy Code,
Borrower shall, and shall cause each of its Subsidiaries to, comply with all
Federal, state and local laws and regulations applicable to it, including those
relating to ERISA, those regarding the collection, payment and deposit of
sales, employees' income, unemployment and Social Security taxes, all
applicable consumer credit, truth in lending, credit reporting and other
similar laws, rules and regulations and those relating to environmental
matters, where the failure to comply could have a Material Adverse Effect.
6.7 SUPPLEMENTAL DISCLOSURE.
From time to time as may be necessary (in the event that such
information is not otherwise delivered by Borrower to Lender pursuant to this
Agreement), so long as there are Obligations outstanding hereunder or the
Commitment Termination Date has not occurred, Borrower will disclose to Lender
in writing Borrower's knowledge of any material matter hereafter arising which,
if existing or occurring at the Closing Date, would have been required to be
set forth or described in a Schedule or which is necessary to correct any
information in any Schedule which has been rendered inaccurate thereby or which
could reasonably be expected to result in a Material Adverse Effect; it being
understood that the disclosure of such matter shall not cure any Default or
Event of Default or otherwise diminish or otherwise affect Lender's rights and
remedies under this Agreement and the other Loan Documents.
6.8 EMPLOYEE PLANS.
(a) Borrower shall notify Lender of any and all claims (other than
claims for benefits in the normal course), actions, or lawsuits asserted or
instituted, and of any threatened claims, actions or lawsuits, against Borrower
or any ERISA Affiliate, in connection with any Employee Benefit Plan or/and
against any such Employee Benefit Plan itself, or against any fiduciary of, or
service provider to any such Employee Benefit Plan.
(b) Borrower shall notify Lender of the occurrence of any event
that could give rise to a termination of any Pension Plan or any notice
received by Borrower or any ERISA Affiliate under Sections 4219, 4041A, 4042,
4241 or 4245 with respect to any Multiemployer Plan.
6.9 SEC FILINGS AND CERTAIN OTHER NOTICES.
Borrower shall furnish to Lender (i) promptly after the filing thereof
with the Securities and Exchange Commission, a copy of each report, notice or
other filing, if any, by Borrower or any of its Subsidiaries with the
Securities and Exchange Commission, (ii) a copy of each written communication
received by Borrower or any of its Subsidiaries from, or delivered by Borrower
or any of its Subsidiaries to, (A) the Securities and Exchange Commission, or
(B) the Delaware Secretary of State, the California Secretary of State or any
similar state agency or
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official, with respect to the issuance or offering of Securities, in each case
promptly after each such receipt or delivery.
6.10 LEASES; NEW REAL ESTATE.
Borrower shall, or shall cause its appropriate Subsidiary to: (i)
provide Lender with a copy of each notice of default or termination received by
Borrower or such Subsidiary under any material Lease immediately upon receipt
of any such notice, and deliver to Lender a copy of each notice of default or
termination sent by Borrower or such Subsidiary under any such Lease
simultaneously with its delivery of such notice under such Lease; (ii) notify
Lender, not later than 30 days prior to the date of the expiration of the term
of any material Lease, of its intention either to renew or not renew any such
Lease, and, if Borrower or such Subsidiary shall intend to renew such Lease,
the terms and conditions of such renewal Lease; and (iii) notify Lender at
least 30 days prior to the date Borrower or any such Subsidiary takes
possession or becomes liable under any new leased premises or Lease, whichever
is earlier.
6.11 DEPOSIT ACCOUNTS; BANK LETTERS.
Pursuant to Section 2.2, Borrower shall deposit, or shall cause to be
deposited, all Receipts into the Operating Accounts and shall maintain
compliance with all Operating Accounts and cash concentration arrangements.
Upon Lender's request, Borrower shall deliver to Lender copies of all bank
statements describing the activities in such deposit accounts.
6.12 INSURANCE POLICIES.
(a) Within 15 days of the Closing Date, Borrower shall deliver, or
cause to be delivered, to Lender (i) evidence that all insurance policies
required under this Agreement are in full force and effect, certified by the
issuers thereof, together with certificates of loss payable endorsements (Form
BFU 438 or equivalent) to all insurance policies and notices to the issuers of
such policies, and documents evidencing appropriate assignments of the proceeds
of such policies, and (ii) each of the Bank Letters Respecting Operating
Accounts described in Section 3.1(c), in each case executed by the applicable
bank or banks. Borrower has previously delivered to Lender certificates
representing all of the issued and outstanding capital stock of each of its
Subsidiaries, as Collateral.
6.13 BORROWER'S REMEDIAL ACTION REGARDING HAZARDOUS MATERIALS.
Borrower shall promptly take, and shall cause each of its Subsidiaries
promptly to take, any and all necessary remedial action in connection with the
presence, storage, use, disposal, transportation or Release of any Hazardous
Materials on, under or about any Real Estate in order to comply with all
applicable Environmental Laws and Governmental Authorizations. In the event
Borrower or any of its Subsidiaries undertakes any remedial action with respect
to any Hazardous Materials on, under or about any Real Estate, Borrower shall
or shall cause such Subsidiary shall conduct and complete such remedial action
in compliance with all applicable
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Environmental Laws, and in accordance with the policies, orders and directives
of all federal, state and local governmental authorities except when, and only
to the extent that, Borrower's or such Subsidiary's liability for such
presence, storage, use, disposal, transportation or discharge of any Hazardous
Materials is being contested in good faith by Borrower or such Subsidiary.
6.14 FURTHER ASSURANCES.
(a) Whenever and so often as reasonably requested by Lender,
Borrower shall promptly execute and deliver or cause to be executed and
delivered all such other and further instruments, documents or assurances, and
promptly do or cause to be done all such other and further things that may be
necessary or desirable, or that Lender may reasonably request, in order to
further and more fully vest in Lender all rights, interests, powers, benefits,
privileges and advantages conferred or intended to be conferred by this
Agreement, the other Loan Documents and the Orders.
(b) Borrower shall, at any time and from time to time, at the
expense of Borrower, promptly execute and deliver or cause to be executed and
delivered all further instruments and documents, including, without limitation,
mortgages and deeds of trust with respect to the Real Estate and Leases, and
take all further action that may be necessary or desirable, or that Lender may
reasonably request, to perfect and protect any Lien granted or purported to be
granted hereby, by the other Loan Documents or the Orders, or to enable Lender
to exercise and enforce its rights and remedies with respect to any Collateral.
SECTION 7.
NEGATIVE COVENANTS
Borrower covenants and agrees that, without Lender's prior written
consent, from and after the date hereof and until the Commitment Termination
Date occurs and the Obligations are fully satisfied:
7.1 INDEBTEDNESS.
Borrower shall not, nor shall it permit any of its Subsidiaries to,
directly or indirectly, create, incur, assume or guaranty, or otherwise become
or remain directly or indirectly liable with respect to, any Indebtedness,
except:
(i) Borrower and its Subsidiaries may become and remain
liable with respect to the Obligations;
(ii) Borrower and its Subsidiaries may become and remain
liable with respect to Contingent Obligations permitted by Section 7.16 and,
upon any matured obligations actually arising pursuant thereto, the
Indebtedness corresponding to the Contingent Obligations so extinguished;
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(iii) Borrower and its Subsidiaries, as applicable, may
remain liable with respect to Indebtedness described in Schedule 7.1 annexed
hereto; and
(iv) Borrower and its Subsidiaries may become and remain
liable with respect to Indebtedness incurred on or after the Closing Date by
Borrower and such Subsidiaries, as applicable, in the ordinary course of
business to trade creditors and other Persons that does not constitute
Indebtedness for borrowed money.
7.2 INVESTMENTS; LOANS AND ADVANCES.
Borrower shall not make, nor shall it permit any of its Subsidiaries to
make, any Investment; provided, however, that Borrower and its Subsidiaries may
(i) make and own loans and advances to employees for moving and travel, drawing
accounts and similar expenditures in the ordinary course of business in an
aggregate amount not to exceed $50,000 at any time; (ii) make advances to
suppliers to purchase goods in the ordinary course of business; (iii) make and
own Investments in cash and Cash Equivalents not in excess of $1,500,000 in the
aggregate; and (iv) make and own Investments in cash and Cash Equivalents
pledged to certain Persons as described in the definition of Permitted
Encumbrances.
7.3 LIENS.
(a) Prohibition on Liens. Borrower shall not, nor shall it permit
any of its Subsidiaries to, directly or indirectly create, incur, assume or
permit to exist any Lien on or with respect to any property or asset of any
kind (including any document or instrument in respect of goods or accounts
receivable) of Borrower or any of its Subsidiaries, whether now owned or
hereafter acquired, or any income or profits therefrom, or file or permit the
filing of, or permit to remain in effect, any financing statement or other
similar notice of any Lien with respect to any such property, asset, income or
profits under the Uniform Commercial Code of any State or under any similar
recording or notice statute, except for Permitted Encumbrances.
(b) Equitable Lien in Favor of Lender. If Borrower or any of its
Subsidiaries shall create or assume any Lien upon any of its properties or
assets, whether now owned or hereafter acquired, other than Liens excepted by
the provisions of Section 7.3(a), it shall make or cause to be made effective
provision whereby the Obligations will be secured by such Lien equally and
ratably with any and all other Indebtedness secured thereby as long as any such
Indebtedness shall be so secured; provided that, notwithstanding the foregoing,
this covenant shall not be construed as a consent by Lender to the creation or
assumption of any such Lien not permitted by the provisions of Section 7.3(a).
(c) No Further Negative Pledges. Except with respect to specific
property encumbered to secure payment of particular Indebtedness, neither
Borrower nor any of its Subsidiaries shall enter into any agreement prohibiting
the creation or assumption of any Lien upon any of its properties or assets,
whether now owned or hereafter acquired.
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7.4 CAPITAL EXPENDITURES AND CAPITAL LEASE OBLIGATIONS.
Borrower shall not, nor shall it permit any of its Subsidiaries to,
make Capital Expenditures or incur Capital Lease Obligations that exceed
$750,000 in the aggregate for Borrower and its Subsidiaries.
7.5 RESTRICTED PAYMENTS.
Borrower shall not, nor shall it permit any of its Subsidiaries to,
make any Restricted Payments, except for distributions or payments by any
Subsidiary of Borrower to Borrower.
7.6 HEDGING TRANSACTIONS.
Other than as set forth in SCHEDULE 7.6, Borrower shall not, nor shall
it permit any of its Subsidiaries to, engage in any interest rate hedging or
similar transaction.
7.7 CANCELLATION OF INDEBTEDNESS.
Borrower shall not, nor shall it permit any of its Subsidiaries to,
cancel any claim or debt owing to it, except for reasonable consideration and
in the ordinary course of business, other than settlement of intercompany
accounts due from Borrower.
7.8 CAPITAL STRUCTURE; SUBSIDIARIES.
Borrower shall not, nor shall it permit any of its Subsidiaries to,
make any material change in its corporate, capital or legal structure,
including the issuance of any shares of Borrower's or its Subsidiary's
Securities, warrants to purchase any of Borrower's or such Subsidiary's
Securities (other than to Lender) or Securities convertible into Borrower's or
such Subsidiary's Securities (including treasury shares or any shares that have
been permanently retired); provided, however, that any shares of Borrower's or
such Subsidiary's Securities purchased by Borrower or such Subsidiary,
respectively, shall be permanently retired as authorized but unissued
Securities. Borrower shall not create or cause any Person to create, any
additional Subsidiary owned directly or indirectly by Borrower, nor shall it
purchase any equity interest, including the Securities, in any Person.
7.9 MAINTENANCE OF BUSINESS.
(a) Borrower shall not, nor shall it permit any of its Subsidiaries
to, engage in any business other than the business currently engaged in by
Borrower or such Subsidiary.
(b) Borrower shall, and shall cause each of its Subsidiaries to,
enforce all of its rights under each other contract, lease, mortgage, deed of
trust or instrument to which any of them is a party or by which any of them or
any of their respective property is bound, unless in the case of this clause,
such failure to enforce its rights could not have a Material Adverse Effect.
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7.10 TRANSACTIONS WITH AFFILIATES.
Borrower shall not, nor shall it permit any of its Subsidiaries to,
enter into or be a party to any agreement or transaction with any Affiliate of
Borrower or such Subsidiary, except as listed in SCHEDULE 7.10 or unless such
transaction is otherwise permitted under this Agreement, is in the ordinary
course of business of Borrower or such Subsidiary, as the case may be, and is
upon fair and reasonable terms no less favorable to Borrower or such
Subsidiary, as the case may be, than it would obtain in a comparable arm's
length transaction with a Person not an Affiliate of Borrower.
7.11 TRANSFERS OF ASSETS.
(a) Borrower shall not, nor shall it permit any of its Subsidiaries
to, sell, transfer, convey or otherwise dispose of any assets or properties,
except for at least the book value thereof in the ordinary course of business
or engage in any sale-leaseback or similar transaction involving any of its
assets; provided, that Borrower may sell obsolete and excess inventory at fair
market value so long as the price therefor is greater than or equal to the book
value thereof and the aggregate sale price does not exceed $3,000,000 and so
long as Lender has a perfected security interest in the cash proceeds thereof.
Borrower shall not, nor shall it permit any of its Subsidiaries to, acquire any
asset or property, except (i) as permitted under Sections 7.2 or 7.4, or (ii)
in the ordinary course of business.
7.12 MERGERS, ETC.
Borrower shall not, nor shall it permit any of its Subsidiaries to,
directly or indirectly, by operation of law or otherwise, enter into any
transaction to, or otherwise, merge with, consolidate with, acquire in one
transaction or a series of transactions, by purchase or otherwise, all or
substantially all of the business, property, assets, Securities or the
beneficial ownership of, or otherwise combine with, any Person, or form or
acquire or otherwise hold any interest in any Subsidiary (other than
maintenance of the interests in Subsidiaries as set forth in Schedule 4.3) or
wind-up, dissolve itself (or suffer any liquidation or dissolution) or convey,
sell, lease, sub-lease or otherwise dispose of, in one transaction or a series
of transactions, all or any substantial part of its business, property or fixed
assets, whether now owned or hereafter acquired.
7.13 EVENTS OF DEFAULT.
Borrower shall not, nor shall it permit any of its Subsidiaries to,
take or omit to take any action, which act or omission would constitute (i) a
Default or an Event of Default pursuant to, or noncompliance with any of, the
terms of any of the Loan Documents or (ii) a material default or an event of
default pursuant to, or noncompliance with any other contract, lease, mortgage,
deed of trust or instrument to which any of them is a party or by which any of
them or their respective property is bound, or any document creating a Lien,
unless, in the case of
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clause (ii), such default, event of default or noncompliance could not have a
Material Adverse Effect.
7.14 ERISA.
Neither Borrower nor any ERISA Affiliate shall without Lender's prior
written consent acquire any new ERISA Affiliate that maintains or has an
obligation to contribute to a Pension Plan that has either an "accumulated
funding deficiency," as defined in Section 302 of ERISA, or any "amount of
unfunded benefit liabilities," as defined in Section 4001(a)(18) of ERISA in
the case of any plan other than a Multiemployer Plan and in Section 4211 of
ERISA in the case of a Multiemployer Plan. Additionally, neither Borrower nor
any ERISA Affiliate shall, without Lender's prior written consent:
(a) Terminate or permit the existence of circumstances
that could reasonably be expected to result in the termination of any Pension
Plan that is subject to Title IV of ERISA where such termination could
reasonably be anticipated to result in liability to Borrower or any ERISA
Affiliate or otherwise incur liability to the PBGC (other than for premiums) or
to any Pension Plan (other than for contributions under Section 412 of the IRC
or Part 3 of Title I of ERISA);
(b) Fail to make any contributions or fail to pay any
amounts due and owing as required by the terms of any Employee Benefit Plan or
Section 412 of the IRC before such contributions or amounts become delinquent;
(c) Make a complete or partial withdrawal (within the
meaning of Section 4201 of ERISA) from any Multiemployer Plan that would result
in liability under Subtitle E of Title IV of ERISA; and
(d) Incur liability under Chapter 43 of the IRC or under
Section 502(c), (i) or (l) or 4071 of ERISA.
7.15 HAZARDOUS MATERIALS.
Except as set forth on SCHEDULE 4.20, Borrower shall not, nor shall it
permit any of its Subsidiaries or any other Person within the control of
Borrower to, cause or permit the presence, use, generation, manufacture,
installation, release, discharge, storage or disposal of any Hazardous
Materials on, under, in or about any real property owned, leased, subleased,
occupied or used by Borrower or any of its Subsidiaries, or the transportation
of any Hazardous Materials to or from any such real property where such
presence, use, generation, manufacture, installation, release, discharge,
storage, disposal or transportation would violate any Environmental Laws in a
manner which could have a Material Adverse Effect.
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7.16 CONTINGENT OBLIGATIONS.
Borrower shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, create or become or remain liable with respect to any
Contingent Obligation, except:
(i) Borrower and its Subsidiaries may become and remain liable with
respect to Contingent Obligations under (a) guarantees in the ordinary course
of business of the obligations of suppliers consistent with industry practices,
and (b) return policies and price protection policies in favor of customers in
the ordinary course of business consistent with industry practices;
(ii) Borrower and its Subsidiaries may become and remain liable with
respect to Contingent Obligations in respect of any Indebtedness of Borrower or
its Subsidiaries permitted by subsection 7.1; and
(iii) Borrower and its Subsidiaries, as applicable, may remain liable
with respect to Contingent Obligations described in SCHEDULE 7.16 annexed
hereto.
7.17 AMENDMENTS OR WAIVERS OF CERTAIN DOCUMENTS; PREPAYMENTS.
After the Closing Date, Borrower will not, and will not permit any of
its Subsidiaries to, amend or otherwise change the terms of the Plan or of any
agreement related to Indebtedness of Borrower or any of such Subsidiaries, or
make any payment consistent with an amendment or change thereto, without the
consent of Lender. Except for the Obligations, any required mandatory
prepayments of obligations arising pursuant to the Plan and any trade
obligations incurred in the ordinary course of business, neither Borrower nor
any of its Subsidiaries will prepay any principal or interest on any
Indebtedness of Borrower or any of its Subsidiaries prior to the date when due,
or make any payment or deposit with any Person that has the effect of providing
for the satisfaction of any Indebtedness of Borrower or any of its Subsidiaries
prior to the date when due.
SECTION 8.
TERM
8.1 SURVIVAL.
(a) The representations and warranties of Borrower in this
Agreement shall survive the execution, delivery and acceptance hereof by the
parties hereto and the closing of the transactions described herein or related
hereto.
(b) Except as otherwise expressly provided for in the Loan
Documents, no termination or cancellation (regardless of cause or procedure) of
any financing arrangement
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under this Agreement or the Loan Documents shall in any way affect or impair
the powers, obligations, duties, rights and liabilities of Borrower or the
rights of Lender relating to any transaction or event occurring prior to such
termination. Except as otherwise expressly provided herein or in any other
Loan Document, all undertakings, agreements, covenants, warranties, indemnities
and representations contained in the Loan Documents shall survive such
termination or cancellation and shall continue in full force and effect until
such time as all of the Obligations have been paid and performed in full in
accordance with the terms of the agreements creating such Obligations, at which
time the same shall terminate.
(c) Notwithstanding anything to the contrary in this Agreement or
the other Loan Documents, the agreements of Borrower set forth in Sections 10.2
and 10.3 shall survive the repayment of the Loan and Notes and the termination
of this Agreement and the other Loan Documents.
SECTION 9.
EVENTS OF DEFAULT; RIGHTS AND REMEDIES
9.1 EVENTS OF DEFAULT.
If any of the following conditions or events ("Events of Default")
shall occur:
(a) Failure to Make Payments When Due. Failure by Borrower to pay
any installment of principal of or interest on any Loan when due, whether at
stated maturity, by acceleration, by notice of voluntary prepayment, by
mandatory prepayment or otherwise; or failure by Borrower to pay any fee or any
other amount due under this Agreement within five days after the date due; or
(b) Default in Other Agreements.
(i) Failure of Borrower or any of its Subsidiaries to pay
when due (a) any principal of or interest on any Indebtedness (other than
Indebtedness referred to in Section 9.1(a)) in an individual principal amount
of $100,000 or more or any items of Indebtedness with an aggregate principal
amount of $500,000 or more or (b) any Contingent Obligation in an individual
principal amount of $100,000 or more or any Contingent Obligations with an
aggregate principal amount of $500,000 or more, in each case beyond the end of
any grace period provided therefor; or
(ii) breach or default by Borrower or any of its
Subsidiaries with respect to any other material term of (a) any evidence of any
Indebtedness in an individual principal amount of $100,000 or more or any items
of Indebtedness with an aggregate principal amount of $500,000 or more or any
Contingent Obligation in an individual principal amount of $100,000 or more or
any Contingent Obligations with an aggregate principal amount of
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$500,000 or more or (b) any loan agreement, mortgage, indenture or other
agreement relating to such Indebtedness or Contingent Obligation(s), if the
effect of such breach or default is to cause, or to permit the holder or
holders of that Indebtedness or Contingent Obligation(s) (or a trustee on
behalf of such holder or holders) to cause, that Indebtedness or Contingent
Obligation(s) to become or be declared due and payable prior to its stated
maturity or the stated maturity of any underlying obligation, as the case may
be (upon the giving or receiving of notice, lapse of time, both, or otherwise);
or
(c) Breach of Certain Covenants. Failure of Borrower to perform or
comply with any term or condition contained in Section 2.3 or Section 6.1 or
Section 7 of this Agreement; or
(d) Breach of Warranty. Any representation, warranty,
certification or other statement made by Borrower or any of its Subsidiaries in
any Loan Document or in any statement or certificate at any time given by
Borrower or any of its Subsidiaries in writing pursuant hereto or thereto or in
connection herewith or therewith shall be false in any material respect on the
date as of which made; or
(e) Other Defaults Under Loan Documents. Borrower or any of its
Subsidiaries shall default in the performance of or compliance with any term
contained in this Agreement or any of the other Loan Documents, other than any
such term referred to in any other subsection of this Section 9, and such
default shall not have been remedied or waived within five days after the
earlier of (i) an officer of Borrower becoming aware of such default or (ii)
receipt by Borrower of notice from Lender of such default; or
(f) Involuntary Bankruptcy; Appointment of Receiver, etc.
(i) A court having jurisdiction in the premises shall
enter a decree or order for relief in respect of Borrower or any of its
Subsidiaries in an involuntary case under the Bankruptcy Code or under any
other applicable bankruptcy, insolvency or similar law now or hereafter in
effect, which decree or order is not stayed; or any other similar relief shall
be granted under any applicable federal or state law; or
(ii) an involuntary case shall be commenced against
Borrower or any of its Subsidiaries under the Bankruptcy Code or under any
other applicable bankruptcy, insolvency or similar law now or hereafter in
effect; or a decree or order of a court having jurisdiction in the premises for
the appointment of a receiver, liquidator, sequestrator, trustee, custodian or
other officer having similar powers over Borrower or any of its Subsidiaries,
or over all or a substantial part of its property, shall have been entered; or
there shall have occurred the involuntary appointment of an interim receiver,
trustee or other custodian of Borrower or any of its Subsidiaries for all or a
substantial part of its property; or a warrant of attachment, execution or
similar process shall have been issued against any substantial part of the
property of Borrower or any of its Subsidiaries, and any such event described
in this clause (ii) shall continue for 60 days unless dismissed, bonded or
discharged; or
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(g) Voluntary Bankruptcy; Appointment of Receiver, etc.
(i) Borrower or any of its Subsidiaries shall have an
order for relief entered with respect to it or commence a voluntary case under
the Bankruptcy Code or under any other applicable bankruptcy, insolvency or
similar law now or hereafter in effect, or shall consent to the entry of an
order for relief in an involuntary case, or to the conversion of an involuntary
case to a voluntary case, under any such law, or shall consent to the
appointment of or taking possession by a receiver, trustee or other custodian
for all or a substantial part of its property; or Borrower or any of its
Subsidiaries shall make any assignment for the benefit of creditors; or
(ii) Borrower or any of its Subsidiaries shall be unable,
or shall fail generally, or shall admit in writing its inability, to pay its
debts as such debts become due; or the Board of Directors of Borrower or any of
its Subsidiaries (or any committee thereof) shall adopt any resolution or
otherwise authorize any action to approve any of the actions referred to in
clause (i) above or this clause (ii); or
(h) Judgments and Attachments. Any money judgment, writ or warrant
of attachment or similar process involving (i) in any individual case an amount
in excess of $100,000 or (ii) in the aggregate at any time an amount in excess
of $500,000 (in either case not adequately covered by insurance as to which a
solvent and unaffiliated insurance company has acknowledged coverage) shall be
entered or filed against Borrower or any of its Subsidiaries or any of their
respective assets and shall remain undischarged, unvacated, unbonded or
unstayed for a period of 60 days (or in any event later than five days prior to
the date of any proposed sale thereunder); or
(i) Dissolution. Any order, judgment or decree shall be entered
against Borrower or any of its Subsidiaries decreeing the dissolution or split
up of Borrower or that Subsidiary and such order shall remain undischarged or
unstayed for a period in excess of 30 days; or
(j) Employee Benefit Plans. There shall occur one or more ERISA
Events which individually or in the aggregate results in or might reasonably be
expected to result in liability of Borrower or any of its ERISA Affiliates
during the term of this Agreement; or there shall exist an amount of unfunded
benefit liabilities (as defined in Section 4001(a)(18) of ERISA), for Pension
Plans (excluding for purposes of such computation any Pension Plans with
respect to which assets exceed benefit liabilities); or
(k) Material Adverse Effect. Any event or change shall occur that
has caused or evidences, either in any case or in the aggregate, a Material
Adverse Effect.
THEN (i) upon the occurrence of any Event of Default described in subsection
(f) or (g), each of (a) the unpaid principal amount of and accrued interest on
the Loans, and (b) all other Obligations shall automatically become immediately
due and payable, without presentment, demand, protest or other requirements of
any kind, all of which are hereby expressly waived by Borrower, and the
obligation of Lender to make any Loan shall terminate, and (ii) upon the
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occurrence and during the continuation of any other Event of Default, Lender
shall, by written notice to Borrower, declare all or any portion of the amounts
described in clauses (a) and (b) above to be, and the same shall forthwith
become, immediately due and payable, and the obligation of Lender to make any
Loan shall thereupon terminate.
9.2 WAIVERS BY BORROWER.
Borrower waives (i) presentment, demand and protest and notice of
presentment, dishonor, notice of intent to accelerate, notice of acceleration,
protest, default, nonpayment, maturity, release, compromise, settlement,
extension or renewal of any or all commercial paper, accounts, contract rights,
documents, instruments, chattel paper and guaranties or other property at any
time held by Lender on which Borrower may in any way be liable and hereby
ratifies and confirms whatever Lender may do in this regard, (ii) all rights to
notice and a hearing prior to Lender's taking possession or control of, or to
Lender's replevy, attachment or levy upon, the Collateral, or any bond or
security which might be required by any court prior to allowing Lender to
exercise any of its remedies, and (iii) the benefit of all marshalling,
valuation, appraisal and exemption laws. Borrower acknowledges that it has
been advised by counsel of its choice with respect to the effect of the
foregoing waivers and this Agreement and the other Loan Documents and the
transactions evidenced by this Agreement and the other Loan Documents.
SECTION 10.
MISCELLANEOUS
10.1 COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT; SALE OF INTEREST.
The Loan Documents constitute the complete agreement between the
parties (superseding any and all prior discussions and agreements, written and
oral, between Borrower and Lender, including those certain letters dated August
26, 1994, August 19, 1994, December 12, 1994 (collectively, the "PRIOR
LETTERS"), the DIP Loan Agreement and all Loan Documents, as defined therein,
entered into pursuant thereto and the Existing Loan Agreement and all Loan
Documents, as defined therein, entered into pursuant thereto) with respect to
the subject matter hereof. Borrower may not sell, assign or transfer, whether
by operation of law or otherwise, any of the Loan Documents or any portion
thereof, including Borrower's rights, title, interests, remedies, powers and
duties hereunder or thereunder. Borrower hereby consents to Lender's sale of
participations, assignment, transfer or other disposition, at any time or
times, of any interest in any of the Loan Documents or of any portion thereof
or interest therein, including Lender's rights, title, interests, remedies,
powers or duties thereunder, whether evidenced by a writing or not. Borrower
agrees that it will assist and cooperate with Lender in any manner reasonably
requested by Lender to effect the sale of participations in or assignments of
any of the Loan Documents or of any portion thereof or interest therein,
including assistance in the preparation of appropriate disclosure documents or
placement memoranda.
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If Lender assigns or otherwise transfers all or any part of the Notes,
Borrower shall, upon the request of Lender, issue new Notes and an amendment to
this Agreement to effectuate such assignment or transfer.
No amendment or waiver of any provision of this Agreement or the Notes
or any other Loan Document, nor consent to any departure by Borrower, Lender or
any other Person therefrom, shall in any event be effective unless the same
shall be in writing and signed by the Person to be charged thereby, and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given.
10.2 FEES AND EXPENSES.
Borrower shall reimburse Lender on demand for all expenses of Lender in
connection with the underwriting, due diligence analysis and credit approval
with respect to, and the preparation, execution, delivery and on-going
monitoring of, the Loan Documents (including the reasonable fees and
out-of-pocket expenses of Lender's counsel retained in connection with the Loan
Documents and the transactions contemplated thereby). Borrower shall also pay
all transfer, excise, recording or similar taxes (but excluding income or
franchise taxes) in connection with the issuance, sale, delivery or transfer by
Borrower to Lender of the Notes and the execution and delivery of the Loan
Documents and any other agreements and instruments contemplated thereby, and
shall save Lender harmless without limitation as to time against any and all
liabilities with respect to such taxes. If at any time, regardless of the
existence of an Event of Default, Lender shall incur expenses itself or employ
counsel or other professional advisors, including, but not limited to,
environmental, financial and management consultants, for advice or other
representation or shall incur legal, appraisal, accounting, consulting or other
costs and expenses (including any allocated internal costs) in connection with
the Loan Documents and the transactions contemplated thereby, including,
without limitation: (a) any amendment, modification or waiver of, or consent
with respect to, any of the Loan Documents; (b) any litigation, contest,
dispute, suit, proceeding or action (whether instituted by Lender, Borrower or
any other Person) in any way relating to the Collateral, any of the Loan
Documents, or any other agreements to be executed or delivered in connection
therewith or herewith, including any litigation, contest, dispute, suit, case,
proceeding or action, and any appeal or review thereof, in connection with a
case commenced by or against Borrower or any other Person that may be obligated
to any Lender by virtue of the Loan Documents, under the Bankruptcy Code, or
any other applicable Federal, state, or foreign bankruptcy or other similar
law; (c) any attempt to enforce any rights or remedies of Lender against
Borrower, or any other Person that may be obligated to Lender by virtue of any
of the Loan Documents; (d) any attempt to appraise, inspect, verify, protect,
collect, sell, liquidate or otherwise dispose of the Collateral including
payments made to cure defaults affecting any of the Collateral and the costs of
servicing any Accounts; or (e) the Chapter 11 Cases, the Plan and the
Confirmation Order (including, without
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limitation, the on-going monitoring by Lender of the Chapter 11 Cases, the Plan
and the Confirmation Order, including attendance by Lender and its counsel at
hearings or other proceedings and the on-going review of documents filed with
the Court in respect thereof) and Lender's interests with respect to Borrower
or any of its Subsidiaries (including, without limitation, the on-going review
of Borrower's or such Subsidiary's business, assets, operations, prospects or
financial condition as Lender shall deem necessary), the Collateral or the
Obligations; then, and in any such event, the fees and expenses incurred by
Lender and such attorneys and other professional advisors and consultants
arising from such services, including those of any appellate proceedings, and
all expenses, costs, charges and other fees incurred by such counsel or other
professionals in any way or respect arising in connection with or relating to
any of the events or actions described in this Section 10.2 shall be payable,
on demand, by Borrower to Lender and shall be additional Obligations secured
under the Collateral Documents and the other Loan Documents. Without limiting
the generality of the foregoing, such expenses, costs, charges and fees may
include: paralegal fees, costs and expenses; accountants' and experts' fees,
costs and expenses; appraisers' and auditors' fees, costs and expenses;
management and other consultants' fees, costs and expenses; court costs and
expenses; photocopying and duplicating expenses; court reporter fees, costs and
expenses; long distance telephone charges; communication charges, air express
charges; telegram charges; secretarial overtime charges; and expenses for
travel, lodging and food paid or incurred in connection with the performance of
such legal or other professional services. Except with respect to fees payable
to Lender at closing, all other fees and expenses shall be due and payable 30
days after invoice with objection rights being reserved.
10.3 INDEMNITY.
Borrower shall indemnify, pay and hold Lender and each Fund, their
agents and nominees, and their respective Affiliates, officers, directors,
partners, fiduciaries, employees, attorneys and agents (each an "INDEMNIFIED
PERSON") harmless from and against any and all suits, actions, proceedings,
claims, damages, losses, liabilities and expenses (including reasonable
attorneys' fees and disbursements and other costs of investigations or defense,
including those incurred upon any appeal), which may be instituted or asserted
against or incurred by such Indemnified Person, in any manner relating to or
arising out of (i) this Agreement or the other Loan Documents or the
transactions contemplated hereby, (ii) Lender's agreement to make the Loan or
the use or intended use of the proceeds of the Loan, or (iii) the exercise by
Lender of any right or remedy, including any claim, action, suit, proceeding,
loss, cost, damage, liability, deficiency, fine, penalty, punitive damage or
expense (including reasonable attorneys' and consultants' fees, investigation
and laboratory fees, court costs and litigation expenses), directly or
indirectly resulting from, arising out of, or based upon (y) the presence,
release, use, manufacture, installation, generation, discharge, storage or
disposal, at any time, of any Hazardous Materials on, under, in or about, or
the transportation of any such materials to or from, any real property owned,
leased, operated or used by Borrower or any of its Subsidiaries (the "SUBJECT
PROPERTY"); or (z) the violation or alleged violation by Borrower or any of its
Subsidiaries or Affiliates of any law, statute, ordinance, order, rule,
regulation, permit, judgment or license relating to the use, generation,
manufacture, installation, release, discharge, storage or disposal of Hazardous
Materials to or from the Subject Property; which indemnity shall include,
without limitation (A) any damage, liability, fine, penalty, punitive damage,
cost or expense arising from or out of any claim, action, suit or proceeding
for personal injury (including sickness, disease, death, pain or suffering),
tangible or intangible
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property damage, compensation for lost wages, business income, profits or other
economic loss, damage to the natural resources or the environment, nuisance,
pollution, contamination, leak, spill, release or other adverse effect on the
environment, and (B) the cost of any required or necessary repair, cleanup,
treatment, remediation or detoxification of the Subject Property and the
preparation and implementation of any closure, disposal, remedial or other
required actions in connection with the Subject Property; provided, however,
that Borrower shall not be liable for any indemnification to such Indemnified
Person to the extent that any such suit, action, proceeding, claim, damage,
loss, liability or expense was the result of such Indemnified Person's gross
negligence or willful misconduct, as finally determined by a court of competent
jurisdiction. To the extent that the undertaking to indemnify, pay and hold
harmless set forth in the preceding sentence shall be unenforceable under law,
Borrower shall contribute the maximum portion that it is permitted to pay and
satisfy under applicable law, to the payment and satisfaction of all
indemnified liabilities incurred by the Indemnified Persons or any of them.
Borrower, for itself and on behalf of its successors and assigns,
hereby waives, releases and forever discharges any now existing or hereafter
created or arising right or claim against Lender, any other Indemnified Person
provided above or their respective assigns for contribution, reimbursement,
indemnity or other similar rights against Lender, any other Indemnified Person
or their respective assigns in any way related to the use, storage, disposal,
treatment or presence of any Hazardous Materials on, in or about the Subject
Property, including any right to contribution that may exist in Borrower's
favor pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. Section 9601 et seq., or any other similar law,
statute or regulation under any applicable Federal or State law, or under any
common law theory.
Borrower hereby acknowledges and agrees that (i) Lender is not now, and
has not ever been, in control of the Subject Property or of Borrower's affairs;
and (ii) Lender does not have the capacity to influence Borrower's conduct with
respect to the ownership, operation or management of the Subject Property.
10.4 NO WAIVER BY LENDER.
Lender's failure, at any time or times, to require strict performance
by Borrower or any of its Subsidiaries of any provision of this Agreement and
any of the other Loan Documents shall not waive, affect or diminish any right
of Lender thereafter to demand strict compliance and performance therewith.
Any suspension or waiver by Lender of an Event of Default by Borrower or any of
its Subsidiaries under the Loan Documents shall not suspend, waive or affect
any other Event of Default by Borrower or any of its Subsidiaries under this
Agreement and any of the other Loan Documents whether the same is prior or
subsequent thereto and whether of the same or of a different type. None of the
undertakings, agreements, warranties, covenants and representations of Borrower
or any of its Subsidiaries contained in this Agreement or any of the other Loan
Documents and no Event of Default by Borrower or any of its Subsidiaries under
this Agreement and no defaults by Borrower or any such Subsidiary under
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any of the other Loan Documents shall be deemed to have been suspended or
waived by Lender, unless such suspension or waiver is by an instrument in
writing signed by an officer of Lender and directed to such Person specifying
such suspension or waiver.
10.5 REMEDIES.
Lender's rights and remedies under this Agreement shall be cumulative
and nonexclusive of any other rights and remedies which Lender may have under
any other agreement, including the Loan Documents, by operation of law or
otherwise. Recourse to the Collateral shall not be required.
10.6 SET-OFF.
Each of Lender and the banks holding any Operating Account (for the
benefit of the Lender) is hereby authorized at any time and from time to time,
to the fullest extent permitted by applicable law, to set off and apply any and
all funds in the possession of Lender or such bank, as the case may be, all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by Lender, or such bank, to or
for the credit or the account of Borrower, against any and all of the
obligations of Borrower and its Subsidiaries that are then due and payable,
whether by maturity or acceleration or otherwise. Nothing in this Section 10.6
shall impair the right of Lender to exercise any right of set-off or
counterclaim it may have and to apply the amount subject to such exercise to
the payment of indebtedness of Borrower other than its indebtedness under the
Notes. Borrower agrees, to the fullest extent it may effectively do so under
applicable law, that any holder of a participation in the Notes, whether or not
acquired pursuant to the forgoing arrangement, may exercise rights of set-off
or counterclaim and other rights with respect to such participation as fully as
if such holder of a participation were a direct creditor of Borrower in the
amount of such participation.
10.7 PARTIES.
This Agreement and the other Loan Documents shall be binding upon, and
inure to the benefit of Borrower and its Subsidiaries that are party thereto
and Lender, the successors of Lender, and the assigns, transferees and
endorsees of Lender. The security interests and Liens created in this
Agreement, the Collateral Documents and the other Loan Documents shall be and
remain valid and perfected, and the claims, rights and remedies of Lender
hereunder valid and enforceable in accordance with the terms hereof.
10.8 CONFLICT OF TERMS.
Except as otherwise provided in this Agreement or any of the other Loan
Documents by specific reference to the applicable provisions of this Agreement,
if any provision contained in this Agreement is in conflict with, or
inconsistent with, any provision in any of the other Loan Documents, the
provision contained in this Agreement shall govern and control.
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10.9 INDEPENDENCE OF COVENANTS.
All covenants hereunder shall be given independent effect so that if a
particular action or condition is not permitted by any of such covenants, the
fact that it would be permitted by an exception to, or be otherwise within
limitations of, another covenant shall not avoid the occurrence of an Default
or Event of Default if such action is taken or condition exists.
10.10 GOVERNING LAW; BANKRUPTCY COURT JURISDICTION AND VENUE.
EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN
ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE,
THIS AGREEMENT AND THE OBLIGATIONS SET FORTH HEREUNDER AND THE LEGAL RELATIONS
BETWEEN THE PARTIES SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE
AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING
CONFLICT OF LAWS, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
BORROWER CONSENTS TO PERSONAL JURISDICTION, WAIVES ANY OBJECTION AS TO
JURISDICTION OR VENUE, AND AGREES NOT TO ASSERT ANY DEFENSE BASED ON LACK OF
JURISDICTION OR VENUE, IN THE BANKRUPTCY COURT, NORTHERN DISTRICT OF
CALIFORNIA. SERVICE OF PROCESS ON BORROWER, LENDER OR ANY ASSIGNEE LENDER IN
ANY ACTION ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS SHALL BE
EFFECTIVE IF MAILED TO SUCH PARTY AT THE ADDRESS LISTED IN SECTION 10.12.
NOTHING HEREIN SHALL PRECLUDE LENDER FROM BRINGING SUIT OR TAKING OTHER LEGAL
ACTION IN ANY OTHER JURISDICTION.
10.11 MUTUAL WAIVER OF JURY TRIAL; OTHER WAIVERS.
BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL
TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND
EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY
(RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE
RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE
BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE
PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS.
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NO CLAIM MAY BE MADE BY BORROWER AGAINST LENDER OR ITS AGENTS OR
NOMINEES OR THEIR RESPECTIVE AFFILIATES, DIRECTORS, OFFICERS, EMPLOYEES,
ATTORNEYS OR AGENTS FOR ANY SPECIAL INDIRECT, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES IN RESPECT OF ANY BREACH OR WRONGFUL CONDUCT (WHETHER THE
CLAIM THEREFOR IS BASED ON CONTRACT, TORT OR DUTY IMPOSED BY LAW) IN CONNECTION
WITH, ARISING OUT OF OR IN ANY WAY RELATED TO THE TRANSACTIONS CONTEMPLATED AND
RELATIONSHIP ESTABLISHED BY THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR ANY
ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH; AND BORROWER HEREBY
WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY SUCH CLAIM FOR ANY SUCH
DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO EXIST
IN ITS FAVOR.
10.12 NOTICES.
Except as otherwise provided herein, whenever this Agreement provides
that any notice, demand, request, consent, approval, declaration or other
communication shall or may be given to or served upon any of the parties by
another, or whenever any of the parties desires to give or serve upon another
any communication with respect to this Agreement, each such notice, demand,
request, consent, approval, declaration or other communication shall be in
writing and shall be delivered (i) in person with receipt acknowledged, or (ii)
by nationally recognized overnight courier or facsimile with receipt confirmed,
or (iii) by registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
(a) If to Lender at:
TCW Special Credits
c/o Oaktree Capital Management LLC
550 South Hope Street,
Los Angeles, California 90071
Attention: Kenneth Liang
Facsimile: (213) 694-1599
With copies to:
O'Melveny & Myers LLP
1999 Avenue of the Stars
Los Angeles, California 90067
Attention: Warren R. Loui, Esq.
Facsimile: (310) 246-6779
48
<PAGE> 49
(b) If to Borrower, at:
Aureal Semiconductor Inc.
4245 Technology Drive
Fremont, California 94538
Attention: Brendan O'Flaherty
Facsimile: (510) 252-4245
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered or
sent by facsimile, with receipt acknowledged or confirmed, or three (3)
Business Days after the same shall have been deposited in the United States
mail or one (1) Business Day if sent by nationally recognized overnight
courier. Failure or delay in delivering copies of any notice, demand, request,
consent, approval, declaration or other communication to the persons designated
above to receive copies shall in no way adversely affect the effectiveness of
such notice, demand, request, consent, approval, declaration or other
communication.
10.13 SECTION TITLES.
The Section titles and Table of Contents contained in this Agreement
are and shall be without substantive meaning or content of any kind whatsoever
and are not a part of the agreement between the parties hereto.
10.14 COUNTERPARTS.
This Agreement may be executed in any number of separate counterparts,
each of which shall be an original, but all of which shall constitute one and
the same agreement.
10.15 LENDER OBLIGATIONS.
Borrower hereby acknowledges that TCW Special Credits is entering into
this Agreement, and undertaking the obligations of the Lender hereunder, only
as agent or nominee for each Fund and on each Fund's behalf and not
individually, and that TCW Special Credits is not personally liable with
respect to the obligations of the Lender hereunder. Borrower further
acknowledges that the liability of the Funds is several and not joint and
several, in accordance with and in proportion to their respective percentage
interest of the Tranche A Loans and the Tranche B Loans set forth on SCHEDULE
1-A hereto, and each Fund shall be liable for its breach hereof only to the
extent such breach and any loss, cost of damages incurred by Borrower as a
result thereof, relates to such Fund.
[Remainder of page intentionally left blank]
49
<PAGE> 50
IN WITNESS WHEREOF, this Agreement has been duly executed as of
the date first written above.
AUREAL SEMICONDUCTOR INC.
(FORMERLY KNOWN AS MEDIA VISION
TECHNOLOGY INC.),
AS BORROWER
By:__________________________________________
Title:_______________________________________
TCW SPECIAL CREDITS,
as agent and nominee for the entities listed
on Schedule 1 annexed hereto,
AS LENDER
By: TCW ASSET MANAGEMENT
COMPANY, its managing general partner
By:___________________________________
Title:________________________________
By:___________________________________
Title:________________________________
S-1
<PAGE> 51
================================================================================
SECOND AMENDED AND RESTATED LOAN AGREEMENT
DATED AS OF AUGUST 6, 1997
BETWEEN
AUREAL SEMICONDUCTOR INC.
(FORMERLY KNOWN AS MEDIA VISION TECHNOLOGY INC.),
AS BORROWER,
AND
TCW SPECIAL CREDITS,
AS AGENT FOR THE
ENTITIES SET FORTH ON SCHEDULE 1 HERETO,
AND AS LENDER
================================================================================
<PAGE> 52
AUREAL SEMICONDUCTOR INC.
(FORMERLY KNOWN AS
MEDIA VISION TECHNOLOGY INC.)
SECOND AMENDED AND RESTATED LOAN AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SECTION 1.
DEFINITIONS . . . . . . . . . . . . . . . 2
SECTION 2.
AMOUNT AND TERMS OF CREDIT . . . . . . . . . . . 15
2.1 Revolving Credit Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2 Collections; Mandatory and Optional Prepayments;
Extension of Maturity Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.3 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.4 Interest on Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.5 Receipt of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.6 Application of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.7 Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.8 Closing and Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3.
CONDITIONS PRECEDENT . . . . . . . . . . . . . 21
3.1 Conditions to Effectiveness and Closing Date . . . . . . . . . . . . . . . . . . . . . . . 21
3.2 Additional Conditions to Each Advance . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 4.
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . 22
4.1 Corporate Existence and Qualifications; Compliance with Law . . . . . . . . . . . . . . . 22
4.2 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.4 Corporate Power; Authorization; Enforceable Obligations . . . . . . . . . . . . . . . . . 23
4.5 Financials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.6 Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.7 Title; Lien; Assets of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.8 Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.9 Schedule of Operating Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
(i)
<PAGE> 53
<TABLE>
<S> <C> <C>
4.10 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.11 Employment and Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.12 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.13 Margin Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.15 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.16 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.17 Patents, Trademarks, Copyrights and Licenses . . . . . . . . . . . . . . . . . . . . . . . 27
4.18 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.19 Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.20 Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.21 Contracts and Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 5.
FINANCIAL STATEMENTS AND INFORMATION . . . . . . . . . 29
5.1 Reports and Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 6.
AFFIRMATIVE COVENANTS . . . . . . . . . . . . . 30
6.1 Maintenance of Existence and Conduct of Business . . . . . . . . . . . . . . . . . . . . . 30
6.2 Payment of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.3 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.4 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.6 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.7 Supplemental Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6.8 Employee Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6.9 SEC Filings and Certain Other Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6.10 Leases; New Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.11 Deposit Accounts; Bank Letters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.12 Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.13 Borrower's Remedial Action Regarding Hazardous Materials . . . . . . . . . . . . . . . . . 33
6.14 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 7.
NEGATIVE COVENANTS . . . . . . . . . . . . . 34
7.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.2 Investments; Loans and Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.3 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.4 Capital Expenditures and Capital Lease Obligations . . . . . . . . . . . . . . . . . . . . 36
7.5 Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
7.6 Hedging Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
</TABLE>
(ii)
<PAGE> 54
<TABLE>
<S> <C> <C>
7.7 Cancellation of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
7.8 Capital Structure; Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
7.9 Maintenance of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
7.10 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
7.11 Transfers of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
7.12 Mergers, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
7.13 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
7.14 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
7.15 Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
7.16 Contingent Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
7.17 Amendments or Waivers of Certain Documents; Prepayments . . . . . . . . . . . . . . . . . 39
SECTION 8.
TERM . . . . . . . . . . . . . . . . . 40
8.1 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 9.
EVENTS OF DEFAULT; RIGHTS AND REMEDIES . . . . . . . . 40
9.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.2 Waivers by Borrower. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 10.
MISCELLANEOUS . . . . . . . . . . . . . . . 44
10.1 Complete Agreement; Modification of Agreement; Sale of Interest. . . . . . . . . . . . . . 44
10.2 Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
10.3 Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
10.4 No Waiver by Lender. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
10.5 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
10.6 Set-Off. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
10.7 Parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
10.8 Conflict of Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
10.9 Independence of Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
10.10 Governing Law; Bankruptcy Court Jurisdiction and Venue. . . . . . . . . . . . . . . . . . 48
10.11 Mutual Waiver of Jury Trial; Other Waivers. . . . . . . . . . . . . . . . . . . . . . . . 49
10.12 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
10.13 Section Titles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
10.14 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
10.15 Lender Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
</TABLE>
(iii)
<PAGE> 55
INDEX OF EXHIBITS
Exhibit A-1 - Form of Tranche A Revolving Credit Note
Exhibit A-2 - Form of Tranche B Revolving Credit Note
Exhibit B - Form of Amended and Restated Pledge and Security
Agreement
Exhibit C - Form of Amended and Restated Assignment for Security
(Patents)
Exhibit D - Form of Amended and Restated Assignment for Security
(Trademarks and Trademark Licenses)
Exhibit E - Form of Subsidiary Guaranty
Exhibit F - Form of Subsidiary Pledge and Security Agreement
Exhibit G - Form of Bank Letter Respecting Operating Accounts
Exhibit H - Form of Omnibus Consent
(iv)
<PAGE> 56
INDEX OF SCHEDULES
Schedule 1 - Entities for whom TCW Special Credits is Acting as
Agent
Schedule 1-A - Lenders and Commitments
Schedule 2.1(a) - Existing Obligations
Schedule 3.1(a) - Schedule of Documents
Schedule 4.1 - Corporate Qualifications
Schedule 4.3 - Subsidiaries; Rights, Warrants, Options
Schedule 4.4 - Consents and Approvals
Schedule 4.7(a) - Real Estate Owned
Schedule 4.7(b) - Real Estate Leased
Schedule 4.8 - Insurance Policies
Schedule 4.9 - Operating Accounts
Schedule 4.11 - Employment Insurance Payments
Schedule 4.14 - Taxes
Schedule 4.15(a) - ERISA - Employee Benefit Plans
Schedule 4.15(b) - ERISA - Accumulated Funding Deficiencies
Schedule 4.16 - Litigation
Schedule 4.17 - Patents, Trademarks, Copyrights and Licenses
Schedule 4.19(b) - Liens; Priority
Schedule 4.20 - Hazardous Materials
Schedule 4.21 - Contracts and Agreements
Schedule 7.1 - Indebtedness
Schedule 7.6 - Hedging Transactions
Schedule 7.10 - Transactions with Affiliates
Schedule 7.16 - Contingent Obligations
(v)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL QUARTER ENDED
SEPTEMBER 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1998
<PERIOD-START> JUN-30-1997
<PERIOD-END> SEP-28-1997
<CASH> 126
<SECURITIES> 0
<RECEIVABLES> 74
<ALLOWANCES> 14
<INVENTORY> 316
<CURRENT-ASSETS> 4,041
<PP&E> 3,928
<DEPRECIATION> 3,002
<TOTAL-ASSETS> 7,346
<CURRENT-LIABILITIES> 3,729
<BONDS> 0
0
0
<COMMON> 42
<OTHER-SE> (18,322)
<TOTAL-LIABILITY-AND-EQUITY> 7,346
<SALES> 338
<TOTAL-REVENUES> 338
<CGS> 75
<TOTAL-COSTS> 75
<OTHER-EXPENSES> 3,988
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 734
<INCOME-PRETAX> (4,769)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,769)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,769)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
