FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended July 31, 1996.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ to ______.
Commission file number 1-13580
ALLIED DIGITAL TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
Delaware 38-3191597
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
15 Gilpin Avenue, Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 234-0200
Securities registered pursuant to Section 12(b) of the Act:
Name of exchange
Title of each class on which registered
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Common Stock American Stock Exchange
Class A Redeemable Common Stock Purchase Warrants American Stock Exchange
Class B Redeemable Common Stock Purchase Warrants American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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|_|
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of October 31, 1996, 13,619,644 shares of the registrant's common stock
were outstanding and the aggregate market value of common stock held by
non-affiliates of the registrant, computed by reference to the closing price for
the registrant's common stock on the American Stock Exchange at that date was
$10,694,635.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
Item 1. Business
Allied Digital Technologies Corp., a Delaware corporation ("Allied Digital"
or the "Company"), is engaged primarily in the duplication and replication of
multimedia software products. Through its subsidiary, Hauppauge Records
Manufacturing, Ltd., a New York corporation ("Hauppauge Records"), Allied
Digital duplicates and replicates film and video products for the corporate
communications, educational, religious and special interest video markets, as
well as analog audiocassettes and compact discs with a primary focus on the
recorded music industry. The principal executive office of Allied Digital is
located at 15 Gilpin Avenue, Hauppauge, New York 11788 and its telephone number
is (516) 234-0200.
Corporate Organization
Allied Digital was incorporated in 1994 to acquire Allied Film Laboratory,
Inc., a Michigan corporation engaged in the duplication of multimedia software
products since 1960 ("AFL"), and HMG Digital Technologies Corp. ("HMG"), a
Delaware corporation of which Hauppauge Records is a wholly-owned subsidiary.
See "-- The Reorganization". As of November 1, 1996, AFL was merged with and
into Hauppauge Records (the "Hauppauge Merger") and, commencing as of that date,
all operations of the Company are conducted through Hauppauge Records.
References in this Form 10-K to Allied Digital or the Company as of any date
refer to Allied Digital and its subsidiaries on a consolidated basis.
The portion of the Company's business previously conducted by AFL consists
of duplication of various film and video products for the corporate
communications and educational, religious and special interest (e.g.,
children's, exercise, travel) video markets. The portion of the Company's
business conducted by Hauppauge Records prior to and following the Hauppauge
Merger consists of the duplication and replication of analog audiocassettes,
videocassettes and compact discs, with a primary focus on the recorded music
industry. As part of its business, the Company also provides various related
services, such as dealer and consumer order fulfillment, film-to-tape and
tape-to-film transfers, video editing and videocassette duplication in all
popular formats.
The Reorganization. On January 11, 1995, Allied Digital acquired all of the
outstanding capital stock of each of AFL and HMG. As a result, each of HMG, HRM
Holdings Corp., a wholly-owned subsidiary of HMG, Hauppauge Records and AFL
became a direct or indirect wholly-owned subsidiary of Allied Digital (the
"Reorganization").
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The Hauppauge Merger. Pursuant to the Hauppauge Merger, which was
consummated on November 1, 1996, AFL merged with and into Hauppauge Records and
each issued share of AFL was converted into one share of Hauppauge Records. In
connection with the Hauppauge Merger, the credit facility between AFL and its
senior lender, American National Bank & Trust Company of Chicago ("ANB"), was
terminated and the credit facility between Hauppauge Records and ANB was
restructured in numerous material respects. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation".
Forward-Looking Statements
Certain statements contained in this Item 1 and elsewhere in this Annual
Report regarding matters that are not historical facts, such as anticipated
financial performance, business prospects, technological developments, new
products, research and development activities, the Company's sales and marketing
program and similar matters, may be deemed to be "forward-looking" statements
under the Private Securities Litigation Reform Act of 1995, which provides a
safe harbor for making such statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include competition, technological change, dependence on significant customers
and the recorded music industry, future capital requirements, reliance on key
personnel and competitive pricing pressures.
Multimedia Software Industry
General. The multimedia software industry is fragmented and seasonal.
Although the types and sizes of the businesses in the industry vary greatly, the
industry is generally categorized into specific sub-markets, including
theatrical (i.e., primarily movies), prerecorded music, spoken word, foreign
language, corporate communications, premium promotional, religious, educational,
instructional "How To" and special interest.
Demand for Primary Products and Services.
Compact Discs -- Audio. Consumer demand for audio compact discs ("CDs") has
been increasing steadily since their introduction to the marketplace in the
mid-1980's. Industry analysts estimate that current U.S. household penetration
of CD players is approximately 45%, and predict that it will rise to 70% by the
year 2000. Based on information supplied by the Recording Industry Association
of America ("RIAA"), total shipments in the United States net of returns
("Shipments") of audio CDs increased by 11% between 1994 and 1995 from 671
million units to approximately 745 million units.
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CD-ROM. CD-ROM drives were introduced to the marketplace in 1991. Industry
analysts estimate that in 1993, the year that CDs surpassed audiocassettes in
unit volume, U.S. household penetration of CD-ROM drives was approximately 2.5
million or 8% of the 29 million home computers in the United States. By the end
of 1996, industry experts expect the number of CD-ROM drives to grow to 20
million out of approximately 60 million United States home computers, or 33%.
Various industry sources estimate that Shipments of CD-ROM software
products were approximately 280 million units in 1995. These products were
concentrated in three major categories: educational, entertainment and games.
The Company believes there is a growing use for CD-ROM products in the corporate
communications and premium/promotional market sectors, and this belief is
reflected in the Company's sales and marketing plans for the fiscal year ending
July 31, 1997 ("Fiscal 1997"). See "Sales and Marketing" below.
Audiocassettes. Audiocassettes were the music market's most popular audio
medium until 1993 when they were surpassed in unit volume by CDs. Industry
analysts predict that because of the high existing penetration of the
audiocassette player in United States households, Shipments of audiocassettes in
1996 will remain stable as compared with 1995 with only a mild decline over the
next several years, despite the increasing demand for CDs. According to the
RIAA, aggregate Shipments of pre-recorded music cassettes declined by 24% in
1995 versus 1994. This was a steeper decline than forecasted by industry
analysts, and was due in part to the continuing growth in the audio CD
configuration and in part to an overall slowing of growth in the pre-recorded
music industry. This decline has been offset in part by the dramatic growth in
the spoken word audiocassette business.
Videocassettes. Veronis, Suhler and Associates, a market analyst firm
specializing in media ("VS&A"), and the RIAA estimate that over 94% of
households in the United States own at least one videocassette recorder ("VCR"),
with many households owning multiple VCRs. According to VS&A and the RIAA,
although theatrical video software comprises over 40% of video software sales,
there is significant growth being demonstrated in the corporate communications,
premium/promotional and special interest sub-markets. Industry analysts also
forecast a 15-19% growth in the theatrical release videocassette market for
calendar 1997 due to the strong box office performance of the domestic film
industry thus far in calendar 1996.
There are two primary videocassette formats: standard play and extended
play. Standard play is used for virtually all movies, music videos and certain
other specialty applications. Extended play is used for many applications in
non-theatrical and non-music sub-markets where the superior playback quality of
standard play is not required. In these non-critical applications, the extended
play format is desirable because it uses one third of the tape required for
standard play and can utilize high speed duplication
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technology. These characteristics make extended play less costly to produce than
standard play.
Sales and Marketing
Allied Digital markets its products and services nationally through the use
of its own internal staff of approximately 55 sales and marketing employees
located throughout the United States in key markets. In September 1996, the
Company opened a national sales office in Nashville, Tennessee to coordinate
national sales efforts in the central Southern region of the United States. This
facility complements the national sales and marketing office in New York City.
The Company also operates sales facilities in Landover (MD), Orlando, Elk Grove
(IL), Detroit, Dallas, Houston and San Francisco. Remote sales coverage exists
in Philadelphia, Atlanta, Miami, Austin, Seattle, Boston, Charlotte, Copley (OH)
and Tampa. Other markets are in the process of being staffed.
Approximately 60% of the Company's business is repeat business resulting
from ongoing relationships with its customers. The remainder of the Company's
business comes from new customers, one time orders and occasional orders from
other industry duplicators and replicators.
The Company's manufacturing facilities are geographically distributed
throughout the United States. See "-- Manufacturing". The Company believes that
this geographic distribution of manufacturing facilities enhances its sales and
marketing efforts by giving the Company a regional and local presence, which
facilitates direct contact with customers.
Due to the highly competitive nature of the Company's core
duplication/replication business, Allied Digital has developed additional
"value-added" services in an effort to gain a competitive advantage over its
competitors. These services include graphic design and special packaging, order
fulfillment, direct mail, software authoring, and toll-free phone services.
In addition to the core duplication/replication and value-added services
described above, the Company also offers motion picture film processing,
film-to-tape transfer, video post-production services and recordable laser video
disc services.
The following sets forth Allied Digital's market share and sales
performance for each of its primary product categories:
CD and CD-ROM. Allied Digital replicates CDs and CD-ROMs (collectively, "CD
Products") for which its most significant customers are the domestic music
recording companies. For the fiscal year ended July 31, 1996 ("Fiscal 1996"),
the Company produced approximately 33,179,000 units of CD Products which
generated revenues of
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approximately $27,024,000, or 16% of the Company's sales revenues. During Fiscal
1996, the Company produced approximately 6,200,000 CD-ROM units and
approximately 26,979,000 CD units, which generated revenues of approximately
$5,050,000 and $21,974,000, respectively. Based upon these results and
externally generated market data, the Company estimates that, on a consolidated
basis, it currently holds a 3% market share of all domestic production of CDs.
The Company believes that there is significant growth opportunity in CD
Products, especially as CD-ROM drive penetration into American households
increases and new applications such as DVD (Digital Versatile Disc), a new
high-density compact disc format which allows for significantly greater data
storage than existing disc formats, are introduced to the marketplace.
Audiocassettes. The Company duplicates audiocassettes, for which its most
significant customers are the domestic music recording companies. In Fiscal
1996, the Company produced approximately 55,000,000 audiocassette units
(consisting of approximately 40,334,000 music audiocassette units and 14,666,000
spoken word audiocassette units), which generated revenues of approximately
$28,336,000, or 17% of the Company's aggregate revenues. Based on internal sales
statistics and externally-generated market data, the Company believes it has a
music audiocassette market share of approximately 12%, the largest of any
independent replicator. The Company believes that despite the long-term trend
toward replacing audiocassettes with CDs, there remain opportunities for growth
in this market, especially in light of the cyclical nature of the music
business.
In Fiscal 1996, the Company's spoken word audiocassettes production
included books-on-tape and corporate communications, as well as products for the
foreign language and religious submarkets. The Company's most significant spoken
word audiocassette customers in Fiscal 1996 were domestic publishing companies.
Reliable external market data is not readily available for the spoken word
audiocassette submarket. Consequently, the Company's market share is difficult
to estimate. The Company believes there is significant growth opportunity in
spoken word audiocassettes because of the deep penetration of the audiocassette
player and the relatively low cost of duplicating audiocassettes.
Videocassettes. Based on a combination of industry data and data generated
by its own management, Allied Digital believes it is one of the two largest
duplicators of music videos in the United States with an estimated current
market share of approximately 25%, and the largest independent duplicator of
videocassettes for non-theatrical, non-music video applications, which include
corporate communications, premium/promotional, educational, instructional
"How-To", special interest and religious. In total, Allied Digital believes its
current share of the overall videocassette duplication market in the United
States is approximately 8%. This belief is based upon the fact that in Fiscal
1996, the Company's domestic sales of videocassettes were approximately 56
million units compared to approximately 706 million total domestic unit sales
reported by
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the entire industry for calendar 1995. In Fiscal 1996, Allied Digital had total
sales of videocasettes of approximately $105,000,000, which represented
approximately 64% of Allied Digital's total revenues. Allied Digital believes
that there is significant growth opportunity in videocassettes because of the
deep penetration of the videocassette player into American households and the
extensive use of videocassettes for entertainment and information software.
Other Services. Motion picture film processing, film-to-tape transfer,
video pre and post-production and recordable laser disc services represented
approximately 2% of the Company's sales revenues during Fiscal 1996, versus
approximately 4% for its fiscal year ended July 31, 1995 ("Fiscal 1995").
Marketing Strategy. The Company has allocated approximately $1,000,000 of
its operating budget for Fiscal 1997 to support an aggressive and diversified
series of marketing initiatives designed to broaden the Company's customer base.
The Company's sales and marketing program is targeting the counter-seasonal
consumption patterns typical of industry and business. The purpose of this
strategy is to build counter-seasonal flow in the Company's manufacturing
facilities, and to take advantage of the increase in demand by many industries
and businesses for multimedia products for all types of corporate applications,
including internal communications, training, marketing and sales. The
initiatives include mailings to companies in specific industry segments
identified by a variety of standard industry codes (SICs) within which the
Company's business has been historically successful, and to companies in SICs
not previously served by the Company but whose profiles are similar to those of
existing customers of the Company in terms of line of business, number of
employees and annual revenues. Other initiatives include use of the Company's
web site, print media clip services and reviewing all local business
publications.
Although the Company will continue to focus on the entertainment industry,
the Company believes that the pre-recorded music industry may offer diminishing
returns to the Company in the future as the industry matures due to (i) new
technologies developing for delivery of pre-recorded music media to consumers
and (ii) proprietary manufacturing capabilities of the major recording
companies. For this reason, many of the Company's new sales and marketing plans
involve the non-entertainment sector, where the Company believes there are many
opportunities to develop new, profitable and continuing relationships. There has
been a growing use of CD-ROM drives by the corporate community due to the
transition of many consumers from video media to CD-ROM. CD-ROM offers consumers
a cheaper and faster way to communicate with employees, shareholders and outside
consumers. The Company believes that the development of the corporate CD-ROM
market will provide many opportunities to develop new business relationships.
The Company has purchased new sophisticated sales lead management software,
which it believes will improve significantly the tracking and management of
sales leads
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and make possible the distribution of such leads for prompt review and follow-up
to the appropriate sales facility. The Company has also reconfigured its sales
performance evaluation programs to provide more incentive to its staff for lead
generation and completing sales.
The Company has also dedicated resources and capital of approximately
$75,000 during Fiscal 1996, and has budgeted approximately $250,000 for Fiscal
1997, for the development and test marketing of a prototype proprietary
technology proposed to be marketed under the name "CD Online". The Company has
filed a trademark application with the US Patent and Trademark Office with
respect to such name. This product, which is still in the development stage, is
designed to link the multimedia capability and capacity of a CD-ROM disc with
the real-time communications capability of network dial-up services to yield a
versatile and interactive medium for consumer products companies, corporate
communications and other commercial applications. In addition to its involvement
in the authoring process for the CD-ROM's content, the Company proposes to
manufacture the disc for customers and supply, via joint venture or other
relationship, the network service required to support the real-time
communications component of the technology. The Company also believes that
revenues can be generated through the licensing of the CD Online name and
technology to third parties who would market the service to their customers.
Significant Customers. Allied Digital has more than 2,000 accounts in its
current customer base. Approximately 50% of Allied Digital's sales come from
approximately 40 customers. During Fiscal 1996, PolyGram Group Distribution,
Inc. ("PGD") and Bertelsmann Music Group, Inc. ("BMG") each accounted for more
than 10% of Allied Digital's net sales.
Many of Allied Digital's customers operate without contractual obligations
except for commitments to purchase a certain percentage of their needs from
Allied Digital. The commitments typically last one year or less. However, there
are no adverse consequences to customers with this type of commitment who do not
ultimately place orders with Allied Digital or whose orders do not reach the
committed percentage.
Seasonality. Although demand for Allied Digital's products exists
throughout the year, there is an increase in demand from August through November
due to the extra requirements of customers for the holiday selling season,
particularly sales of theatrical videocassettes and pre-recorded musical CDs and
audiocassettes. Approximately 40% of Allied Digital's revenues are generated
during these months.
Backlog. As of July 31, 1996 and 1995, Allied Digital had open orders on a
consolidated basis of approximately $1.9 million and $4.6 million, respectively.
As of October 31, 1996, Allied Digital had open orders on a consolidated basis
of approximately $3.7 million. Allied Digital expects that the open orders as of
October 31, 1996 will be filled within a 60 day period.
Typically, Allied Digital's customers demand turnaround times (the time
from which a duplicating/replicating order is received until that order is
shipped) of seven days or less. Because of this characteristic of the industry,
Allied Digital does not believe that the size of the backlog at any given time
in and of itself is an effective indication of its ongoing revenues going
forward.
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Manufacturing
General. The Company's manufacturing facilities are geographically
distributed throughout the United States so that high volume manufacturing can
be accomplished in three facilities: Hauppauge (NY) (videocassettes,
audiocassettes and CDs), Clinton (TN) (video-cassettes) and Elk Grove (IL)
(videocassettes). The Company has six other facilities for smaller volume video
manufacturing: Landover (MD), Orlando, Detroit and San Francisco, as well as
Dallas and Houston where film, in addition to video, is duplicated.
CD Products. Allied Digital's production of CD Products begins with
pre-mastering and mastering in controlled "clean room" environments that are
designed to eliminate airborne particles from the manufacturing process. Using
lasers and computer-based photo resist technology, Allied Digital creates exact
digital replicas of the customer's original disc. These glass replicas, or
"masters," are used in the replication process to manufacture duplicates through
an injection molding process using high grade, optical quality polycarbonate.
The polycarbonate is pressed against a metal stamper to create a replica of the
CD Products at a rate of approximately one every five seconds. The clear
polycarbonate disc containing all of the data is then covered with a metallic
coating to provide for reflection of the reading laser beam in the CD player. A
thick layer of lacquer is applied over the metal to protect it and to serve as a
base for printing on the disc. The finished CD Products are then checked to
ensure they conform to strict audio standards established by Allied Digital and
the industry. The finished CD Products are then released to the packaging
department where they are inserted into sleeves or boxes and processed through
high speed shrink-wrapping machines for distribution to Allied Digital's
customers.
As a result of an expansion of Allied Digital's Hauppauge, New York
facility and the installation at such facility of production and multi-media
packaging equipment in 1995, Allied Digital increased its maximum annual
capacity of CD Products to approximately 54 million units in Fiscal 1996
compared with 40 million units per year capacity in Fiscal 1995.
Audiocassettes. The manufacturing process for audiocassettes utilizes
machines that duplicate a tape 80 times faster than normal listening speed.
Master transports are used to download master recordings through the use of
electronic signals to duplicating machines, which allow multiple copies of the
same recording to be duplicated simultaneously. At various points in the
manufacturing process, the tape goes through both a statistical quality control
procedure, to ensure that it meets the technical standards established by RIAA,
and Allied Digital's quality control procedure, which includes a random sampling
of audio levels, physical characteristics, program content, signals and other
characteristics of the tape. The finished audiocassette products are then
released to the packaging department where they are inserted into sleeves or
boxes and processed
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through high speed shrink-wrapping machines for distribution to Allied Digital's
customers.
Allied Digital's audiocassette plant production capacity is between 250,000
and 275,000 audio tapes per 24 hour day, depending upon the length of the tapes.
The expansion of Allied Digital's Hauppauge, New York manufacturing facility in
1995 provided Allied Digital with the capability for multimedia packaging for
audiobook and other spoken word audiocassettes. When necessary, Allied Digital
is able to deliver finished product to its customers approximately 48 to 72
hours after receipt of the sales order.
Videocassettes. The manufacturing process for videocassettes generally
utilizes duplicating machines that copy from a master in "real time" speed,
i.e., the regular speed of the videocassette being duplicated. In this process,
high speed tape winders are used to wind blank tape loaded to specific program
lengths into video shells. The video shells are then loaded into the duplicating
machines which receive the program being copied from a master transport. In
addition, Allied Digital utilizes high speed machines, which allow it to
duplicate a master 150 times faster than in "real time" speed. Real time
duplicating machines are used to duplicate videocassettes in standard play mode.
High speed duplicating machines are capable of duplicating videocassettes in
either the extended play mode or the standard play mode. The extended play
format utilizes less tape than regular speed machines require for the same
program content.
The entire video duplicating and winding process takes place in an
environment that is designed to eliminate airborne particles from the
duplicating process. These areas are air conditioned and pressurized to filter
out such particles. Allied Digital believes that its use of these areas prolongs
the head life on videocassette recorders and results in a higher quality
product.
Once a videocassette is loaded with tape and duplicated, the finished
product is checked to ensure that it conforms to strict audio and visual
standards established by Allied Digital and the industry. The videocassettes are
then released to the packaging department where they are labeled, inserted into
sleeves or boxes and processed through high speed shrink-wrapping machines for
distribution to Allied Digital's customers.
In the third quarter of Fiscal 1996, Allied Digital adjusted the production
capacity of its facilities in Clinton, Tennessee and Hauppauge, New York to
divide equally between these two facilities their combined 84 million annual
videocassette unit capacity. Allied Digital's total videocassette capacity is
the equivalent of approximately 100 million 60-minute programs annually. When
necessary, Allied Digital is able to deliver finished product to its customers
approximately 24 to 48 hours after receipt of the sales order.
Raw Materials; Supplies. Although Allied Digital's practice is to seek cost
savings and enhanced quality by purchasing from a limited number of suppliers,
all raw materials
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and components necessary to manufacture CD Products are readily available from
several sources of supply at competitive prices.
Blank audiocassettes, videocassettes, cartridges, magnetic tape and other
component parts utilized by Allied Digital in the duplication/replication
process generally are readily available in the marketplace at prices that are
generally stable. Allied Digital purchases its components from a variety of
manufacturers, most of which are located in China, South Korea, Mexico and the
United States. Allied Digital does not believe the loss of any one of its
current suppliers would have a material adverse effect on its business because
alternative sources of supply are generally readily available at competitive
prices. However, a significant change in Allied Digital's ability to obtain
components at comparable prices from suppliers located in China, South Korea,
Mexico and the United States, whether through the imposition of tariffs or other
trade barriers or from any foreign or U.S. supplier for any other reason, could
have a material adverse effect on Allied Digital. Allied Digital does not have
long term contracts with any such suppliers. Allied Digital's customers
generally supply the printed components used in the packaging of the
videocassettes.
Licenses
CD Products. Allied Digital, like most other CD Product manufacturers, uses
patented technology primarily under nonexclusive licenses from the holders of
patents which generally provide for the payment of royalties based upon the
number of CD Products sold. For Fiscal 1996, fees for these licenses of
approximately $2,080,000 were charged against earnings, related primarily to the
licenses with U.S. Philips Corporation and Discovision Associates.
Audiocassettes. The Company does not require any licenses for the
duplication of audiocassettes.
Videocassettes. The industry does not have established quality standards
for the duplication of videocassettes, although the Victor Company of Japan,
Ltd. ("JVC"), which owns the "VHS" logo, has established standards for the
physical characteristics of the videocassette. Compliance with the JVC standards
ensures that the videocassette will be compatible with any VHS machine.
Duplicators whose product conforms to the JVC standards are permitted to apply
the "VHS" logo to such product and pay JVC a license fee for such privilege.
Allied Digital ensures that all of its video product conforms to the JVC
standards and pays JVC a license fee for the privilege of applying the "VHS"
logo to its video product. For Fiscal 1996, fees for this license of
approximately $800,000 were charged against earnings.
Since 1986, Allied Digital has had a license with Macrovision Corporation
to encode videocassettes with anti-piracy protection. The license is for a
one-year term, renewable annually by agreement of both parties. Allied Digital
pays a license fee to
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Macrovision Corporation equal to a portion of the sublicense fees received by
Allied Digital from its customers. For Fiscal 1996, the license fees paid by
Allied Digital to Macrovision under this arrangement were approximately
$216,000, all of which was billed to Allied Digital's customers.
Competition
Allied Digital's core business of replication/duplication is highly
competitive. Although Allied Digital believes that it is the largest independent
duplicator of music audiocassettes and music videocassettes, it is in
competition with approximately 50 music audiocassette duplicators, approximately
100 music videocassette duplicators and approximately five duplicators
manufacturing both media. Allied Digital believes it is the only independent
company in the domestic replication/duplication industry in North America that
manufactures audiocassette, videocassette and CD Products for the prerecorded
music industry.
The Company believes that the principal competitive factors in the
replication/duplication business are: price, terms of sale, quality of service,
range of pre-and post-production services, scope of graphics and packaging
capabilities, order turnaround time, large order capability, order fulfillment
capability, ability to customize small orders to customer specifications, and
certain other value-added service offerings.
Virtually all raw materials, machinery and equipment are readily available
on the open market, and no industry competitor holds proprietary rights or
positions with respect to these factors. Although this fact results in low
barriers to entry, the Company believes that the relatively low margins offered
by the core business and the number of competitors (including the Company) who
offer an array of value-added services, probably serves as a deterrent to entry
by most potential competitors.
The Company also believes that the goodwill and loyalty of many of its
established relationships combined with the excellent reputation which the
Company believes it has in the marketplace give the Company a significant
competitive advantage. The Company further believes that its geographic
diversity, fulfillment capabilities, and national/regional/market-specific sales
and marketing and its geographically dispersed manufacturing and fulfillment
capabilities add to its competitive advantage.
The Company budgets for price erosion which occurs as competition for
market share increases and competitors lower prices to gain that market share.
The Company attempts to limit margin erosion by lowering its material costs and
by achieving unit volume sales increases. While there can be no assurance that
such a margin protection strategy will be successful in the future, the
Company's efforts to reduce operating costs and its new series of marketing and
sales initiatives are intended to forestall and curtail such erosion of margins.
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The Company believes that its principal competitors in each of its product
offerings are as follows:
CD Products. In music CD replication, Allied Digital's major competition is
the in-house capacity of five of the six major domestic pre-recorded music
companies: SONY Music Entertainment, PGD, Warner Elektra Atlantic, BMG, and EMI,
each of which has CD manufacturing capacity to meet all its production needs
except in times of unusually high output. Additionally, there are approximately
50 small to medium-sized (i.e., having an annual capacity of up to approximately
four million to 25 million units) CD Products manufacturers in the marketplace.
Allied Digital believes it is among the larger of the medium-sized companies in
the CD Products replication industry segment.
Audiocassettes. In music audiocassettes, the Company believes that its
principal competitor is Cinram, Ltd., a publicly-traded Canadian-based company
with operations in the United States, and Sonopress Audio, a division of BMG.
Videocassettes. In videocassettes based on 120-minute (feature film)
lengths, the Company believes that its primary competitor is Technicolor, Inc.,
a division of Carlton Communications PLC, followed by Rank Organization PLC.
Both of these companies concentrate their efforts on the feature film business
and other entertainment-related videocassette products. While the Company does a
significant amount of entertainment (i.e., music and feature film) videocassette
duplication, it has concentrated its efforts in the non-entertainment sector,
focusing those efforts within businesses and industries that make extensive use
of multimedia products for all types of corporate and consumer communications.
Employees
At October 29, 1996, Allied Digital had approximately 1,585 full-time
employees of whom approximately 595 (representing those employees employed at
the Hauppauge location) are covered by a collective bargaining agreement between
Hauppauge Records and Local 810, Steel, Metals, Alloys and Hardware Fabricators
and Warehousemen affiliated with the International Brotherhood of Teamsters,
Chauffeurs, Warehousemen and Helpers of America. This agreement was renewed in
January 1994 and expires in January 1997. Management, supervisors and clerical
workers are not covered by the collective bargaining agreement. The Company has
never experienced a strike and believes its relationship with its employees is
satisfactory. Allied Digital provides paid vacations, sick leave, group life,
disability, hospitalization and medical insurance for its employees. During
Fiscal 1996, eligible employees were able to participate in Hauppauge Records'
401(k) plan or AFL's bonus and profit sharing plan. In connection with the
Hauppauge Merger, AFL's bonus and profit sharing plan will be merged into
Hauppauge Records' 401(k) plan.
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<PAGE>
Item 2. Properties
The Company's headquarters are located at 15 Gilpin Avenue, Hauppauge, New
York, where the Company leases approximately 144,000 square feet of
manufacturing, warehouse and office space from Keelson Associates, a general
partnership of which George N. Fishman, Co-Chairman of the Company, is a
partner, for a term expiring November 1, 2015. Effective November 1, 1995, the
annual rent at 15 Gilpin Avenue increased from $248,000 to $813,000 following
completion of a 55,000 square foot expansion, and effective January 1, 1996, the
rent at 15 Gilpin Avenue increased by approximately $133,000 to $946,000
annually based on a fair rental value adjustment and effective May 1, 1996 the
rent at 15 Gilpin Avenue increased by approximately $86,000 to $1,027,000
annually. Effective November 1, 1996 and each year thereafter during the term of
the lease, the rent will increase based on a cost of living adjustment. Future
cumulative rentals under this agreement are approximately $19,937,000.
In addition to the 15 Gilpin Avenue facility, the Company also leases
78,000 square feet of manufacturing warehouse and office space at 30 Gilpin
Avenue, Hauppauge, New York for a term expiring January 31, 1998, at a rental
rate of approximately $49,000 per month. In addition to the executive offices,
these two facilities house the Long Island CD Products replication and
audiocassette and videocassette duplication operations.
The Company intends to move its headquarters to 140 Fell Court, Hauppauge,
New York, where it has entered into a lease expiring October 31, 2001 for
approximately 7,000 square feet of office space at a monthly rental of
$8,458.33.
The Company leases various facilities from Greenfield Land Company, a
Michigan co-partnership ("Greenfield Land") of which William H. Smith
(Co-chairman of the Board and a principal stockholder of Allied Digital),
members of his family and Werner H. Jean (a Director of Allied Digital) are
partners. The office and warehouse space for all locations leased from
Greenfield Land aggregates approximately 284,000 square feet. The 1996 annual
rental payments from the Company to Greenfield Land were approximately
$1,260,000. Future cumulative rentals due under existing leases with Greenfield
Land for 1997 and thereafter are approximately $11,800,000. The existing leases
are for properties located at: 7375 Woodward Avenue (office, warehouse, and
manufacturing), Detroit, Michigan; 7411 and 7371 Woodward Avenue (parking lots),
Detroit, Michigan; 35 W. Bethune (parking lot), Detroit, Michigan; 1322 West
Belmont (office, warehouse and manufacturing facility), Chicago, Illinois; 1330,
1332, and 1334 West Belmont (parking lots), Chicago, Illinois; 4364 35th Street
(office, warehouse and manufacturing facility), Orlando, Florida; 370 JD Yarnell
Industrial Parkway (office, warehouse, and manufacturing facility), Clinton,
Tennessee; Clinton, Tennessee Warehouse (warehouse facility).
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<PAGE>
The Company subleases 16,600 square feet from William H. Smith, as Trustee
for William H. Smith Living Trust Agreement dated November 13, 1978, under two
Sublease Agreements, for property located at 630 Third Street, San Francisco,
California at an aggregate annual rental rate of approximately $314,000 for 1995
and $345,000 for 1996. Pursuant to these subleases, the Company is required to
make certain building improvements and to pay all the utilities, building
insurance and real estate taxes. Future cumulative rentals under these
agreements are approximately $895,000. The leased space is used for
manufacturing, warehouse and office space. The subleases expire in June 1999.
The Company leases approximately 5,976 square feet of manufacturing,
warehouse and office space located at 630 Third Street, San Francisco,
California, from Zellerbach Family Fund for a term expiring July 15, 1997 at an
annual rental rate of approximately $37,000.
The Company also leases manufacturing, warehouse and office space from
Dallas Communications Complex at 6301 and 6305 N. O'Connor Road, Irving, Texas,
representing 18,712 square feet (manufacturing and office facilities), 11,936
square feet (warehouse facility) and 18,900 square feet (manufacturing and
office facilities), respectively. The aggregate annual rent payable under these
leases in 1996 is approximately $380,000. The current leases expire December 31,
1999, January 1, 2000, and December 31, 1999, respectively.
The Company leases approximately 13,243 square feet of manufacturing and
office space located at 819 Brightseat Road, Landover, Maryland, from Security
Trust Company, N.A. for a term expiring September 30, 2001 at an annual rental
rate of approximately $73,000 in 1996.
On a month-to-month basis, the Company leases approximately 15,000 square
feet of warehouse space located at Highway 25 West, Clinton, Tennessee, from
HomeCrest Corporation for $3,000 per month.
The Company leases approximately 51,000 square feet of warehouse space
located at 108 Centre Stage Business Park, Clinton, Tennessee from Joseph A.
Hollingsworth, Jr. for a term expiring July 2, 2000 at a rental rate of $13,750
per month.
The Company leases approximately 3,600 square feet of manufacturing,
warehouse and office space located at 4140B Directors Row, Houston, Texas, from
The Prudential Insurance Company of America for a term expiring December 31,
1996 at an annual rate of approximately $24,000 in 1996.
The Company leases 97,888 square feet of manufacturing, warehouse and
office space located at Elk Grove Industrial Park #33, Elk Grove Village,
DePage, Illinois,
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<PAGE>
from Elk Grove Village Industrial Park Ltd. for a term expiring May 31, 1999 at
an annual rental rate of approximately $649,000.
The Company subleases approximately 4,832 square feet of office space at
1301 Avenue of the Americas, New York, New York from The Bibb Company for a term
expiring December 30, 2000 at an annual rental rate of approximately $149,000
per year.
In addition, from time to time, the Company leases temporary warehouse
space on a month-to-month basis for the storage of customer components and
finished goods.
The Company believes its facilities are adequate for the conduct of its
existing business, including anticipated growth of its CD Products replication
business in Fiscal 1997.
Substantially all of the Company's property is encumbered by security
interests in favor of American National Bank and Trust Company of Chicago
("ANB"), in connection with the credit facility extended by ANB to Hauppauge.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" below. Hauppauge
Records' property also is subject to landlord liens filed by landlords in Texas
and Illinois (Irving, Texas, and Elk Grove, Illinois).
Item 3. Legal Proceedings
Allied Digital is involved in various legal proceedings which are
incidental to the conduct of its business. Allied Digital does not believe that
the outcome of these matters, even if unfavorable to Allied Digital, will have a
material adverse effect on its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information. Allied Digital Common Stock has been traded on the
American Stock Exchange, Inc. ("AMEX") since January 11, 1995 under the symbols
"HDT" (from January 11 to January 29, 1995) and "ADK" (since January 30, 1995).
The Allied Digital Class A Redeemable Warrants and the Allied Digital Class
B Redeemable Warrants have been traded on AMEX since January 11, 1995 under the
symbols "HDT.WS.A." and "HDT.WS.B." (from January 11 to January 29, 1995) and
"ADK.WS.A." and "ADK.WS.B." (since January 30, 1995). The Allied Digital Class C
Warrants are privately held and no trading market for Allied Digital Class C
Warrants currently exists.
No stock price information has been presented for the first and second
quarters ended October 31, 1994 and January 31, 1995, respectively, of Fiscal
1995 because there was no established trading market for Allied Digital prior to
January 11, 1995.
The following table sets forth for the periods indicated the high and low
sales prices per share for Allied Digital Common Stock and the high and low
sales prices per warrant of the Allied Digital Redeemable Warrants on the AMEX.
The information with respect to AMEX quotations was obtained from AMEX.
<TABLE>
<CAPTION>
Allied Digital Allied Digital
Class A Class B
Allied Digital Redeemable Redeemable
Common Stock Warrants Warrants
------------ -------- --------
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1995: $6 5/8 $4 3/4 $1 3/8 $13/16 $11/16 $7/16
Third Quarter (quarter ended
April 30, 1995)
Fourth Quarter (quarter ended $7 3/8 $3 7/8 $1 5/8 $ 5/8 $ 7/8 $5/16
July 31, 1995)
Fiscal 1996: $6 3/8 $5 1/8 $1 $ 7/8 $ 5/8 $ 1/2
First Quarter (quarter ended
October 31, 1995)
Second Quarter (quarter ended $4 1/8 $3 3/4 $ 3/4 $ 5/16 $ 3/8 $ 1/4
January 31, 1996)
Third Quarter (quarter ended $4 1/8 $3 3/8 $ 5/8 $ 3/8 $ 3/16 $ 1/4
April 30, 1996)
Fourth Quarter (quarter ended $3 1/4 $2 5/8 $ 3/8 $ 1/4 $ 1/8 $ 1/8
July 31, 1996)
</TABLE>
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<PAGE>
As of October 31, 1996, the last sales price reported on AMEX for Allied
Digital Common Stock was $2.75. The last sales prices reported on AMEX for
Allied Digital Class A Redeemable Warrants and Allied Digital Class B Redeemable
Warrants were $.0934 on October 25, 1996 and $.125 on October 23, 1996,
respectively.
Holders. As of October 31, 1996, there were approximately 1,254 record
holders of Allied Digital Common Stock, five record holders of Allied Digital
Class A Redeemable Warrants, five record holders of Allied Digital Class B
Redeemable Warrants, and 15 record holders of Allied Digital Class C Warrants.
Dividends. Allied Digital has not paid any dividends on the Allied Digital
Common Stock since its inception. The payment of dividends, if any, will be
contingent upon Allied Digital's revenues and earnings, if any, capital
requirements and general financial condition. It is the current policy of the
Allied Digital Board, in view of Allied Digital's contemplated financial
requirements, to retain all earnings, if any, for use in Allied Digital's
business operations.
Allied Digital is a legal entity separate and distinct from its
subsidiaries. As a holding company with no significant operations of its own,
the principal sources of its funds will be dividends and other distributions
from its operating subsidiaries, borrowings and sales of equity. The right of
Allied Digital, and consequently its shareholders, to participate in any
distribution of assets of any of its subsidiaries is subject to prior claims of
creditors of such subsidiary (except to the extent claims of Allied Digital in
its capacity as a creditor are recognized). Restrictions contained in the credit
agreement of Hauppauge Records impose limitations on the amount of distributions
that Allied Digital's subsidiaries may make to Allied Digital and prohibit
Allied Digital from using any such distributions to pay dividends to its
shareholders.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
the consolidated financial statements of Allied Digital and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Form 10-K. The consolidated financial
statements of Allied Digital as of July 31, 1996 and 1995 and for the fiscal
years ended July 31, 1996 and 1995, for the seven month period ended July 31,
1994 and for the year ended December 31, 1993, together with the reports thereon
of Grant Thornton LLP and Arthur Andersen LLP, appear elsewhere in this Report
on Form 10-K.
-19-
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended Seven Months Ended Year Ended
July 31, July 31, July 31, December 31,
Statement of Operations Data 1996 1995 1994 1993 1993 1992
- - ---------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 163,781,324 $ 119,793,434 $ 40,939,224 $ 54,898,361 $ 93,191,029 $ 69,133,860
Cost of Sales 135,101,336 92,671,882 28,998,070 38,328,802 63,862,188 46,552,980
Nonrecurring charge 1,250,000(1) -- -- -- -- --
------------- ------------- ------------ ------------ ------------ ------------
Gross Margin 27,429,988 27,121,552 11,941,154 16,569,559 29,328,841 22,580,880
Operating Expenses(2) 30,029,406(1) 23,814,608 11,074,704(2) 11,986,078 20,873,006 16,376,061
------------- ------------- ------------ ------------ ------------ ------------
Income (loss) from Operations (2,599,418) 3,306,944 866,450 4,583,481 8,455,835 6,204,819
Interest Expense (6,186,049) (3,816,376) (1,136,736) (564,652) (983,694) (283,937)
Other Income, Net 665,160 762,331 238,382 123,780 230,436 537,147
------------- ------------- ------------ ------------ ------------ ------------
Income (loss) before
Income Taxes (8,120,307) 252,899 (31,904) 4,142,609 7,702,577 6,458,029
Income Tax Provision (Credit) (2,534,847) (2,575,618) 85,218 159,675 375,400 322,800
------------- ------------- ------------ ------------ ------------ ------------
Net Income (Loss) $ (5,585,460) $ 2,828,517 $ (117,122) $ 3,982,934 $ 7,327,177 $ 6,135,229
============= ============= ============ ============ ============ ============
Net Income (Loss) per Share(3) $ (.41) $ .05
============= =============
Cash Dividends(4) -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
As of July 31, As of December 31,
-------------- ------------------
Balance Sheet Data 1996 1995 1994 1993 1993 1992
- - ------------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Excess of Cost over the
Fair Value of Net
Assets Acquired $ 45,537,736 $ 48,118,050 $ 4,066,899 $ 4,370,022 $ 4,243,719 $ --
Total Assets 113,877,633 125,867,285 38,603,511 49,848,926 41,095,847 31,809,884
Long-Term Debt, Including
Current Maturities 39,386,050 46,170,133 16,897,702 12,546,539 12,154,219 3,640,565
Subordinated Notes Payable
to Stockholders 10,996,386 8,416,659 14,000,000 -- -- --
Total Liabilities 75,900,779 82,304,971 38,136,459 32,827,419 23,468,087 17,290,729
Retained Earnings
(Accumulated Deficit) (6,901,415) (1,315,955) (1,452,254) 16,142,436 16,748,689 13,953,542
Working Capital (deficiency) (491,026) 9,690,774 13,998,752 9,344,272 10,673,332 9,493,276
Stockholders' Equity 37,976,854 43,562,314 467,052 17,021,507 17,627,760 14,519,155
</TABLE>
(1) The Fiscal 1996 results of operations were adversely impacted by a
$1,250,000 nonrecurring charge adssociated with a customer allowance and a
restructuring charge of $3,077,295 included in operating expenses. See Notes 9 &
10, respectively, to the Consolidated Financial Statements.
(2) Prior to the Reorganization, AFL had a book value stock plan whereby certain
employees of AFL could utilize bonus payments to purchase AFL Common Stock at a
price based on a book value formula. Upon termination of employment, the
employees were required to resell the AFL Common Stock to AFL at a price based
on the book value formula. In connection with the Reorganization, AFL presumed
that the 2,108 shares issued during the seven month period ended July 31, 1994
were issued in contemplation of the Reorganization. Accordingly, AFL recognized
non-cash, nonrecurring, compensation expense of $500,000,
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<PAGE>
which is the difference between the book value price paid and the estimated fair
market value of the AFL Common Stock.
(3) Historical earnings per share data is computed by dividing the historical
earnings data by the weighted average number of shares outstanding during each
of the periods. The weighted average number of shares outstanding were
13,619,644 at July 31, 1996 and 1995. Earnings per common share has not been
presented for historical data due to the recapitalization for AFL via Allied
Digital.
(4) Prior to the Reorganization, AFL had elected to be treated as an S
corporation under the Code. Historically, AFL has not paid cash dividends other
than distributions of approximately 45% to 55% of its taxable income for each
year. These distributions totaled $666,878 for the year ended July 31, 1995,
$18,083,822 and $1,794,041 for the seven month periods ended July 31, 1994 and
1993 and $4,532,030 and $4,473,969 for the years ended December 31, 1993 and
1992, respectively.
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Effective January 12, 1995, the Company acquired all of the outstanding
common stock of AFL and HMG in exchange for approximately 55% and 45% of the
outstanding common shares of Allied Digital, respectively. Subsequently, on
March 10, 1995, Allied Digital changed its fiscal year end from December 31 to
July 31. Consequently, the results of operations (i) for the twelve months ended
July 31, 1996 include the consolidated operations of AFL and HMG for such
period, (ii) for the twelve month period ended July 31, 1995 include the
earnings of AFL for the twelve months ended July 31, 1995 and the earnings of
HMG for the period January 12, 1995 through July 31, 1995, and (iii) for the
seven months ended July 31, 1994 include only the earnings of AFL. Therefore,
the results of operations for the twelve month period ended July 31, 1995 and
the seven month period ended July 31, 1994 are not necessarily indicative of the
performance of AFL and HMG expected for a full (12 month) year.
Results of Operations -- Year Ended July 31, 1996 compared to Year Ended July
31, 1995
Net sales for the twelve month period ended July 31, 1996 ("Fiscal 1996")
were $163.8 million, an increase of $44 million compared to the twelve month
period ended July 31, 1995 ("Fiscal 1995"). Such increase was attributable
primarily to the full year inclusion of HMG's operations in the Fiscal 1996
results ($36.2 million) and increased sales volume in Fiscal 1996 resulting
primarily from the commencement of videocassette duplication and order
fulfillment services under a five-year sales contract entered into with a
customer in June 1995.
Gross margin for Fiscal 1996 increased $0.3 million to $27.4 million, or
17% of net sales, from $27.1 million, or 23% of net sales for Fiscal 1995. The
increase in gross margin dollars was primarily due to the full year inclusion of
HMG margin of $12.0 million in the Fiscal 1996 results as compared to a margin
contribution in Fiscal 1995 by HMG of $8.7 million for the period January 12,
1995 through July 31, 1995. This net $3.3 million gross margin increase was
partially offset by a $1.3 million non-recurring
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<PAGE>
charge in Fiscal 1996 resulting from a sales contract signing allowance with a
large customer. The gross margin was further reduced by the start-up efforts
commencing in June 1995 in preparing to process orders for this large customer
in the Company's Tennessee manufacturing plant. Moreover, declining unit prices
to customers due to continuing price pressures and a change in the Company's
sales mix which includes the adverse impact on average margins caused by a
production and fulfillment sales contract with a large customer further
contributed to the 6% gross margin decline in Fiscal 1996.
Operating expenses for Fiscal 1996 were $30.0 million, or 18% of net sales,
compared to $23.8 million, or 20% of net sales for Fiscal 1995. Of the $6.2
million increase, $3.1 million resulted from a current year restructuring charge
in connection with the Company's June 1996 plan to streamline and reduce
resources utilized in the business and the full year inclusion of HMG operations
in Fiscal 1996 resulting in an incremental increase of approximately $2.3
million in operating expenses over Fiscal 1995 of which $1.0 million results
from the full year inclusion of the amortization of the excess cost over fair
value of the net assets acquired associated with the Reorganization. Operating
expenses for Fiscal 1996 also included a $0.4 million increase in bad debt
expense over the prior year.
Allied Digital's non-operating expenses increased to $5.5 million for
Fiscal 1996 from $3.1 million for Fiscal 1995. This $2.4 million increase was
due to increased interest expense primarily associated with the full year
inclusion of HMG in Fiscal 1996 results together with increased average
borrowings for Allied Digital related to the additional debt required to finance
capital expenditures.
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<PAGE>
For Fiscal 1996, Allied Digital reported a pre-tax loss of $8.1 million,
compared to pre-tax earnings of $0.3 million for Fiscal 1995. The decrease in
income of $8.4 million occurred for the reasons noted above.
A net credit for federal, state and local income taxes of $2.5 million was
recognized for Fiscal 1996 compared to a net credit for federal, state and local
income taxes of $2.6 million for Fiscal 1995. This $2.5 million net credit
relates primarily to a net operating loss, restructuring costs and a
non-recurring charge which will be deductible in future periods, as well as
state investment tax credits realized during this period. The effective tax rate
was approximately 31%. Non deductible expenses related to the amortization of
excess of cost over fair value of net assets acquired arising from the
Reorganization were offset in part during the period by state income tax
benefits and investment tax credits resulting from purchase of equipment in the
State of New York. The effective tax rate is expected to be higher in future
periods due to the non deductible amortization of costs in excess of net assets
acquired, net of non-recurring benefits from investment tax credits.
After recognition of applicable income taxes, Allied Digital reported a net
loss in Fiscal 1996 of $5.6 million as compared to net income of $2.8 million in
Fiscal 1995 for the reasons noted above.
Results of Operations -- Year Ended July 31, 1995 compared to Seven Month Period
Ended July 31, 1994
Net sales of Allied Digital for the twelve month period ended July 31, 1995
("Fiscal 1995") were $119.8 million, an increase of $78.9 million compared to
the seven month period ended July 31, 1994. Such increase was attributable to
the inclusion of an additional five months in the 1995 period for AFL ($38.6
million) and the inclusion of
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<PAGE>
post-acquisition HMG revenues ($45.6 million). Included in these increases are
intercompany sales of $5.3 millon primarily attributable to duplication of
videocassettes by AFL for HMG subsequent to the Reorganization on January 11,
1995.
Revenues for the twelve month period ended July 31, 1995 and seven month
period ended July 31, 1994 include pre-Reorganization revenues from certain
video reproduction work undertaken by AFL on a subcontract basis for HMG. For
the period August 1, 1994 through January 11, 1995, approximately 3.1 million
units were produced by AFL on this basis. The subcontract work was performed by
AFL at an agreed upon rate that was determined in arm's length negotiations. For
the period August 1, 1994 through January 11, 1995, AFL received revenues from
HMG of approximately $4 million under such arrangements (or approximately 10% of
AFL net sales for such period). Gross profit from such revenues was
approximately $1.2 million. For the period January 1, 1994 through July 31,
1994, AFL sales to HMG amounted to approximately $1.0 million (or approximately
2.5% of net sales of AFL for such period).
On a stand alone basis, AFL revenues for Fiscal 1995 were $79.6 million,
slightly greater than net sales of $79.2 million for the twelve month period
ended July 31, 1994 ("Fiscal 1994"). Revenues from two large customers declined
by $15.0 million during Fiscal 1995 due, in one case, to combination of the
customer's business with that of another competitor and, in the other, to
competitive preferences. Such revenues were replaced by new business and by an
increase of $8.4 million in intercompany revenues, to $9.4 million.
HMG revenues were $91.1 million for the 52 week period ended July 31, 1995
("Fiscal 1995"), up $28.8 million compared to the 53 week period ended July 31,
1994 ("Fiscal 1994"). The 46.2% increase was primarily due to an increase of
$12.4 million in sales to three large audio and video customers and a $16.4
million increase in compact disc sales.
Allied Digital's gross margin for the twelve month period ended July 31,
1995 increased $15.2 million to $27.1 million, or 23% of net sales, from $11.9
million, or 29% of net sales for the seven month period ended July 31, 1994. The
increase in gross margin dollars was primarily due to the longer 1995 reporting
period for AFL and the inclusion of HMG margin of $8.7 million for the period
January 12, 1995 through July 31, 1995. The decline in percentage margin of 6%
in Fiscal 1995 is the result of continued competitive price pressures, a change
in customer and product mix associated with the inclusion of post-acquisition
HMG margin and additional costs of approximately $1.6 million associated with
the transfer of the major portion of the high volume videocassette replication
equipment and the related customer accounts from the Company's Hauppauge, New
York facility to the Clinton, Tennessee manufacturing plant. The special
procedures required in connection with this additional business and the start up
of a major new account put a strain on the material handling and packaging
capacity of the facility resulting in delays in delivery and manufacturing
inefficiencies. Allied
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<PAGE>
Digital believes that these problems have been resolved by new plant management
and by the relocation of a portion of the equipment business back to the
Hauppauge, New York facility.
On a stand alone basis for Fiscal 1995, gross margin as a percent of sales
for both AFL and HMG declined from Fiscal 1994. AFL margins declined to 23% of
net sales from 31% and HMG margins declined to 19% of net sales from 21%. The
decrease for AFL of approximately $6.3 million, or 8% on comparable sales
dollars, was primarily due to the decline in sales to the two large customers
noted above and the $8.4 million increase in low margin intercompany sales. The
sharing of margins on intercompany sales affected HMG margins negatively to a
much lesser extent. The margins of both companies were also reduced by declining
unit prices to external customers.
Operating expenses of Allied Digital for the twelve month period ended July
31, 1995 were $23.8 million or 20% of sales compared to $11.1 million or 27% for
the seven month period ended July 31, 1994. Of the $12.7 million increase, $11.6
million was primarily the result of the inclusion of five additional months of
expenses in the 1995 reporting period for AFL and the inclusion of HMG expenses
of $5.3 million for the period January 12, 1995 through July 31, 1995.
Amortization of the excess of cost over fair value of net assets acquired,
primarily associated with the Reorganization, accounted for $1.4 million of the
increase. Offsetting these increases was a decline in discretionary management
bonuses.
The reduction in Allied Digital's operating expenses as a percentage of
sales of 7% from 1994 to 1995 is primarily due to the inclusion of HMG business
operations in Fiscal 1995 results. HMG, because of its different market and
customer mix compared to that of AFL, has historically had relatively lower
percentage operating expenses and higher percentage attributable to
manufacturing costs than AFL.
On a stand alone basis, AFL operating expenses for Fiscal 1995 decreased
approximately $2.7 million from Fiscal 1994. Of this amount, approximately $1.9
million was due to decreased discretionary profit sharing contributions and
management bonuses. Other favorable factors include the capitalization in Fiscal
1995 of $0.6 million of costs associated with internally developed software,
reduced temporary help of $0.2 million, lower employee insurance costs of $0.2
million, reduced depreciation of $0.2 million resulting primarily from the
switch from accelerated to straight line methods and reduced property taxes and
other costs of $0.2 million. Offsetting these reductions were increases in bad
debt expense of $0.4 million and professional fees of $0.2 million.
HMG's operating expenses increased $3.0 million in Fiscal 1995 compared to
Fiscal 1994. Of this increase, $1.3 million was attributable to amortization of
the excess of cost over fair value of net assets acquired associated with the
Reorganization. In accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 54, "push down" accounting has been applied to the
separate financial statements of HMG
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<PAGE>
effective January 11, 1995. Push down accounting reflects in the subsidiary
(HMG) financial statements the new basis of accounting arising from Allied
Digital's acquisition of HMG. Accordingly, the assets and liabilities of HMG at
January 11, 1995 have been adjusted to reflect Allied Digital's allocation of
its cost to acquire HMG to the various assets and liabilities of HMG. Other
significant items included $0.8 million of higher selling expenses due to
increased sales, $0.3 million attributable to the termination and payout of an
employee contract and $0.2 million for discretionary management bonuses.
Allied Digital's income from operations increased $2.4 million to $3.3
million for the twelve month period ended July 31, 1995 from $0.9 million for
the seven month period ended July 31, 1994. Of this increase, $0.3 million was
due to the longer reporting period for AFL and $2.1 million was attributable to
the inclusion of HMG results from January 12, 1995 through July 31, 1995, net of
a $1.3 million charge for amortization relating to the Reorganization, as
described above.
On a stand alone basis, for the reasons noted above, AFL's income from
operations for Fiscal 1995 declined $3.6 million to $1.2 million from $4.8
million for Fiscal 1994. HMG's Fiscal 1995 operating income rose $1.6 million
over Fiscal 1994 to $5.1 million, net of a $1.3 million charge for amortization
of the excess of cost over fair value of net assets acquired associated with the
Reorganization.
Allied Digital's non-operating expenses increased to $3.1 million for the
twelve month period ended July 31, 1995 from $0.9 million for the seven month
period ended July 31, 1994. This $2.2 million increase was due to increased
interest expense of $2.7 million primarily associated with the longer reporting
period and increased average borrowings for AFL and the inclusion of
post-acquisition HMG interest expense of $1.0 million. The increased average
borrowings for AFL relate to the additional debt required to finance the $18.0
million shareholder distribution of April 1, 1994. Increased interest expense
was partially offset by an increase in other income of $0.5 million, of which
$0.4 million represents interest income paid by customers on their past due
accounts during the additional five months in the 1995 reporting period for AFL.
For the twelve month period ended July 31, 1995, Allied Digital realized
income before taxes of $0.3 million, compared to a loss of approximately $32,000
for the seven month period ended July 31, 1994. Fiscal 1995 income before taxes
is comprised of a pre-tax loss of $0.8 million for AFL offset by
post-Reorganization income before taxes for HMG of $1.1 million, net of "push
down" accounting adjustments.
A net credit for federal, state and local income taxes of $2.6 million was
recognized for the twelve months ended July 31, 1995 compared to expense for
state and local income taxes of $0.1 million for the seven months ended July 31,
1994. Because prior to January 12, 1995 AFL elected to be treated as an S
corporation under the Internal Revenue Code, no provision for Federal income
taxes has been included in the financial statements for the seven months ended
July 31, 1994. Pursuant to the
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Reorganization, on January 12, 1995, AFL became disqualified as an S
Corporation. In connection with this disqualification, a net deferred tax asset
of $1.6 million was established. The additional $1.0 million net credit
recognized primarily relates to a net operating loss generated by AFL during the
period from January 12, 1995 to July 31, 1995 as well as state investment tax
credits realized during this period.
The effective tax rate subsequent to the Reorganization was approximately
41%. Non deductible expenses related to the amortization of cost in excess of
net assets acquired arising from the Reorganization were offset during the
period by state investment tax credits resulting from purchase of equipment in
the State of New York.
After recognition of applicable income taxes Allied Digital recognized
income for the twelve months ended July 31, 1995 of $2.8 million, compared to a
net loss of $0.1 million for the seven months ended July 31, 1994 for the
reasons noted above.
Results of Operations -- Seven Month Period Ended July 31, 1994 Compared to
Seven Month Period Ended July 31, 1993
Net sales for the seven month period ended July 31, 1994 were $40.9
million, a decrease of $14.0 million or 25% as compared to the seven month
period ended July 31, 1993. Such decrease was primarily due to a 30% decrease in
video unit sales, most of which is attributable to decreased volume from three
significant customers during the period. In addition, the average program length
of video sales units in the first seven months of 1994 increased from that in
the comparable period in 1993, resulting in increased unit revenues. However,
revenues on comparable length video sales units declined, as a result of
continued price pressures. The decline in sales to three large customers
described above for the seven months ended July 31, 1994 is due, in two cases,
to decreased customer demand of video products and, in the third case, to the
sale of a customer's assets to a company with affiliated video duplication
capabilities. This decline is consistent with cycles of sales to large customers
experienced by AFL in the past.
Revenues for the seven month period ended July 31, 1994 included revenues
from certain video reproduction work undertaken by AFL on a subcontract basis
for HMG. For the seven months ended July 31, 1994, approximately 1.2 million
units were produced by AFL on this basis. The subcontract work, most of which
was performed after June 1, 1994, was performed by AFL at an agreed upon rate
that was determined in arms' length negotiations. For the period ended July 31,
1994, AFL received revenues of approximately $1 million from HMG under such
arrangements (or approximately 2.5% of net sales of AFL for such period).
Gross margin for the seven month period ended July 31, 1994 decreased 28%
to $11.9 million, or 29% of sales, from $16.6 million, or 30% of net sales for
the seven
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month period ended July 31, 1993. Reduced video unit sales were responsible for
the decline in gross margin.
Operating expenses for the seven month period ended July 31, 1994,
decreased to $11.1 million, compared to $12.0 million for the seven month period
ended July 31, 1993. Due to high sales and earnings, the seven months ended July
31, 1993 included expenses for discretionary management and supervisory bonuses,
profit sharing plan contributions and bad debts which were higher than those for
the comparable period in 1994 by $0.44 million, $0.48 million and $0.06 million,
respectively. However, the seven months ended July 31, 1994 also included a
nonrecurring charge of $0.5 million for bonus expense representing the
difference between the cash proceeds received from AFL Common Stock issued on
March 16, 1994 and June 30, 1994 to certain management employees under the AFL
Management Bonus Program and the estimated fair market value of the shares. This
expense had no cash impact. Operating expenses as a percentage of net sales
increased to 27% from 22% for the seven months ended July 31, 1994 compared to
the seven months ended July 31, 1993. This disproportionate increase was due to
the fixed nature of general and administrative expenses such as labor and
depreciation spread over lower net sales.
Income from operations decreased 81% to $0.9 million for the seven month
period ended July 31, 1994 from $4.6 million for the seven month period ended
July 31, 1993. This decrease was due to lower sales volumes and resulting lower
margins which were only partially offset by reduced discretionary bonus and
profit sharing costs.
Non-operating expenses increased 104% to $0.9 million for the seven month
period ended July 31, 1994 from $0.4 million for the seven month period ended
July 31, 1993. This increase was primarily due to the increased interest expense
of $0.6 million primarily associated with the $14 million subordinated
shareholder notes issued by AFL in April 1994, which was partially offset by
interest income of $0.2 million paid by customers on their past due accounts.
For the seven month period ended July 31, 1994, AFL realized a loss before
income taxes of $32,000, a $4.2 million decrease from the seven month period
ended July 31, 1993.
Because AFL elected to be treated as an S corporation under the Internal
Revenue Code, no provision for Federal income taxes has been included in the
financial statements. After recognition of applicable state income taxes based
upon reduced taxable income, AFL recognized a net loss for the seven months
ended July 31, 1994 of $0.1 million, compared to net income of $4.0 million for
the seven months ended July 31, 1993 for the reasons noted above.
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Liquidity and Capital Resources
In conjunction with Allied Digital's restructuring plan and merger of AFL
into Hauppauge Records, the separate senior loan credit facilities previously
maintained by AFL and Hauppauge Records with American National Bank & Trust
Company of Chicago ("ANB") were combined under an amended and restated loan and
security agreement dated as of October 30, 1996 between Hauppauge Records and
ANB and effectuated November 1, 1996 (the "ANB Loan Agreement"). The ANB Loan
Agreement provides for (i) a revolving loan (the "ANB Revolving Loan") of $22
million (subject to certain borrowing base limitations based on Hauppauge
Records' accounts receivable and inventory), which revolving loan includes a
$1.5 million letter of credit facility, (ii) a term loan (the "ANB Term Loan")
in the original principal amount of $25.4 millon, and (iii) an additional loan
(the "ANB Additional Loan") in the original principal amount of $1.5 million.
The ANB Revolving Loan bears interest at the base rate published by ANB plus
1.25%. The ANB Term Loan and the ANB Additional Loan bear interest at the base
rate published by ANB plus 1.50%. At July 31, 1996, the ANB base rate was 8.25%.
The Revolving Facility carries an unused commitment fee of 0.50%. The
obligations of Hauppauge Records under the ANB Loan Agreement are secured by a
lien on substantially all of Hauppauge Records' assets.
At July 31, 1996, the aggregate amount of total indebtedness outstanding of
$50.4 million was as follows: (i) under the ANB Term Loan, $27.1 million, (ii)
under the ANB Revolving Loan, $10.6 million, (iii) the 10% Notes Payable to
Stockholders, $6.6 million, (iv) the 12% Series A Note Payable to Stockholder,
$3.5 million, (v) the 11% Series B Notes Payable to Stockholders, $.9 million,
(vi) the Note Payable to VCA (related to the VCA acquisition), $1.4 million and
(vii) other debt of $0.3 million.
The ANB Term Loan was payable in an initial installment aggregating
$1,695,462 on October 31, 1996, 30 consecutive monthly installments of $548,054
each thereafter through April 30, 1999 and a final installment of $293,098 on
May 30, 1999, together with additional prepayments of principal of $2,000,000 on
October 31, 1997 and $5,000,000, on October 31, 1998. No prepayment fees result
from these scheduled prepayments.
The 10% Notes Payable to Stockholders (the "10% Notes") are unsecured
obligations which bear interest at 10% per annum. Interest accrues only on the
original principal sum of $6.0 million and is payable quarterly. Upon default,
the interest rate increases to 12% per annum. To the extent interest is not
permitted to be paid pursuant to the terms of the ANB Loan Agreement, such
accrued and unpaid interest becomes payable on January 1, 2001. Payment of these
notes is subordinated to the payment of the obligations under the ANB Loan
Agreement. The notes mature on January 1, 2001.
In connection with the Company's restructuring and merger referred to
above, the Subordinated 12% Series A Note Payable to Stockholder was repaid in
full on November 8, 1996 with the $1.5 million proceeds of the Additional Loan
and $2 million advanced by
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certain other stockholders in the form of additional subordinated notes dated
October 30, 1996. Additionally, the payment terms of the 10% Notes having an
original principal sum of $6 million, plus unpaid interest thereon of $0.7
million through October 30, 1996 ($0.6 million as of July 31, 1996) were
extended.
The Series B Notes Payable to Stockholders are unsecured obligations which
bear interest at 11% per annum, payable quarterly. Payment of these notes is
subordinated to the payment of the obligations under the ANB Loan. The notee
mature on January 1, 1999.
The note payable to VCA is unsecured and is payable in annual installments
beginning January 31, 1995 through January 1, 2001, including annual interest of
12%.
Proceeds from the ordinary operations of Hauppauge Records are applied to
reduce the principal amount of borrowings outstanding under the ANB Loan
Agreement. Unused portions of the Revolving Loan may be borrowed and reborrowed,
subject to availability in accordance with the then applicable commitment and
borrowing limitations.
The ANB Loan Agreement contains covenants which, among other things, (a)
require the Company to (i) maintain increasing levels of net worth, (ii)
maintain minimum debt service ratios and (iii) limit its annual capital
expenditures, and (b) place limitations on (i) additional indebtedness,
encumbrances and guarantees, (ii) consolidations, mergers or acquisitions, (iii)
investments or loans, (iv) disposal of property, (v) compensation to officers
and others, (vi) dividends and stock redemptions, (vii) issuance of stock, and a
(viii) transactions with affiliates, all as defined in the ANB Loan Agreement.
Cash Requirements. Allied Digital's current cash requirements, including
working capital and capital expenditure requirements, are funded from the
operations and the proceeds of borrowings by Hauppauge Records under the ANB
Loan Agreement.
As of July 31, 1996, the Company had a net working capital deficiency of
$0.5 million and $5.1 million unused and available under the ANB Revolving Loan.
Net cash provided by operating activities during Fiscal 1996 was $14.3 million,
consisting of a net loss of $5.6 million reduced by depreciation and
amortization of $11.3 million, a provision for doubtful accounts of $1.3
million, an abandoned asset write-off of $0.8 million, a charge for noncash
accrued interest to a stockholder of $0.6 million and net changes in operating
assets and liabilities of $8.4 million, and increased by a change in deferred
income taxes of $2.5 million. Net cash used in investing activities during
Fiscal 1996 totaled $9.3 million, which was used for the purchase of replication
equipment and leasehold improvements.
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Allied Digital currently expects that capital expenditures will be divided
primarily between maintenance capital expenditures and capital projects.
Maintenance capital expenditures include those required to maintain production
performance, while capital projects relate primarily to extending the life of
existing equipment, increasing capacity, and decreasing production costs. Allied
Digital incurs approximately $1.5 million per year in cost of sales for
maintenance and repairs.
Allied Digital has not paid any dividends on the Allied Digital Common
Stock since its inception. The payment of dividends, if any, will be contingent
upon Allied Digital's revenues and earnings, if any, capital requirements and
general financial condition. It is the current policy of the Allied Digital
Board, in view of Allied Digital's contemplated financial requirements, to
retain all earnings, if any, for use in Allied Digital's business operation.
Allied Digital is a legal entity separate and distinct from its
subsidiaries. As a holding company with no significant operations of its own,
the principal sources of its funds will be dividends and other distributions
from its operating subsidiary, borrowings and sales of equity. Restrictions
contained in the ANB Loan Agreement impose limitations on the amount of
distributions that Hauppauge Records may make to Allied Digital and prohibit
Allied Digital from using any such distributions to pay dividends to its
stockholders.
Impact of Inflation
During recent years, Allied Digital has experienced decreasing margins as a
result of competitive pressures in its market segment. Allied Digital believes
that, historically, the decline in its margins has been partially offset by
increases in volume as well as decreases in the cost of components.
Allied Digital from time to time experiences increases in the costs of
material and labor, as well as other manufacturing and operating expenses.
Allied Digital's ability, consistent with that of its competitors, to pass along
such increased costs through increased prices has been difficult due to
competitive pressures. By attempting to control costs, Allied Digital attempts
to minimize any effects of inflation on its operations.
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Item 8. Financial Statements and Supplementary Data
The financial statements of Allied Digital, on a consolidated basis,
together with notes, supplemental schedules and the Independent Auditors'
Reports, are set forth immediately following Item 14 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant
Directors and Executive Officers
The Certificate of Incorporation and Bylaws of the Company provide for a
Board of Directors of not more than 12 directors with the number of directors to
be determined from time to time by the Board of Directors. Currently, the Board
of Directors has fixed the number of directors at nine. The Board of Directors
is divided into three classes with each class of directors elected to a
three-year term of office on a rotating basis. At each annual meeting of
shareholders, a class of directors is elected to succeed the class of directors
whose term of office expires at that meeting. The term of office of William H.
Smith, George N. Fishman and Donald L. Olesen, the three Class I Directors, will
expire at the annual meeting of shareholders to be held in 1999, the term of
office of Jerry E. Stone, Seymour Leslie and John A. Morgan, the three Class II
Directors will expire at the annual meeting of shareholders to be held in 1997,
and the term of office of Werner H. Jean, Eugene A. Gargaro, Jr. and H. Sean
Mathis, the three Class III Directors will expire at the annual meeting of
shareholders to be held in 1998, and, in each case, until the election and
qualification of their respective successors or upon their earlier resignation
or removal. The executive officers of the Company are appointed by, and serve at
the discretion of the Board of Directors. There are no family relationships
among the directors and executive officers of the Company.
Name Age Position with the Company
William H. Smith 71 Co-Chairman of the Board, President and a
director of the Company; director of HMG and
Hauppauge
Records.
George N. Fishman 72 Co-Chairman of the Board, Chief Executive
Officer and a director of the Company; Chairman
of the Board, Chief Executive Officer and a
director of HMG; Chairman of the Board, Chief
Executive Officer and a director of Hauppauge
Records.
Donald L. Olesen 54 President - National Sales and Marketing
Division and a director of the Company;
President of HMG; President of Hauppauge
Records.
John K. Mangini 53 Chief Operating Officer of the Company
Charles P. Kavanagh 47 Secretary of the Company; Chief Financial
Officer of HMG; Vice President - Finance and
Administration of Hauppauge Records.
Eugene A. Gargaro, Jr. 54 Director of the Company.
Werner H. Jean 72 Director of the Company.
Seymour Leslie 73 Director of the Company.
H. Sean Mathis 49 Director of the Company.
John A. Morgan 66 Director of the Company.
Jerry E. Stone 65 Director of the Company; director of HMG and
Hauppauge Records.
The business experience of each of the foregoing persons, during the past
five years, is as follows:
Mr. Smith has been Co-Chairman of the Board and a director of the Company
since January 1995 and President of the Company since November 1995 and a
director of HMG and Hauppauge Records since January 1995. Mr. Smith also was Co-
Chief Executive Officer of the Company from November 1995 until March 1996. Mr.
Smith founded AFL in 1960 was President and a director of AFL from 1960 until
1993 and its Chairman of the Board from 1990 until November 1996. Prior to
organizing AFL, Mr. Smith worked for nine years at Lakeside Laboratory, a film
processing company, in Gary, Indiana. Mr. Smith is active in many business and
industry organizations. Currently, Mr. Smith is the President of the American
Video Duplicator
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Association, and serves on the boards of the International Tape and Disc
Association and the Special Interest Video Association. Mr. Smith holds a
business degree from the University of Colorado.
Mr. Fishman has been Co-Chairman of the Board and a director of the Company
since January 1995 and Chief Executive Officer since March 1996. Mr. Fishman
also has been the Chairman of the Board, Chief Executive Officer and a director
of HMG since 1993, the Chairman of the Board and a director of Hauppauge Records
since 1981 and the Chief Executive Officer of Hauppauge Records since 1991. Mr.
Fishman has been active in the music industry since 1946. He was the former
owner of a predecessor corporation to Hauppauge Records prior to the acquisition
of that company in 1973 by Pickwick International Inc. ("Pickwick"). In 1981,
Mr. Fishman led the management buyout of the record manufacturing business of
American Can Company, the successor to Pickwick, whereupon Hauppauge Records was
formed as a New York corporation. Mr. Fishman is a former physicist and holds a
master of science degree.
Mr. Olesen has been President - National Sales and Marketing Division and a
director of the Company since January 1995. Mr. Olesen also has been the
President of HMG since 1993 and President of Hauppauge Records since July 1991.
He also was a director of HMG and Hauppauge Records until January 1995. Mr.
Olesen has been Hauppauge Records' primary sales executive since 1981. Mr.
Olesen has 27 years of pre-recorded music experience beginning in 1965 with RCA
Records as a management trainee. In 1968, Mr. Olesen joined CBS Records where he
spent 13 years in a variety of positions. From 1971 to 1981, Mr. Olesen served
as the East Coast Regional Sales Manager of CBS Records.
Mr. Mangini has been Chief Operating Officer of the Company since January
15, 1996. Prior to his joining the Company, he spent five years with PolyGram
Group Distribution, Inc. as Senior Vice President of Operations. In 1995, Mr.
Mangini plead guilty to an information alleging tax evasion, paid a $7,500 fine
and was placed on probation for a period of five years. Mr. Mangini's experience
in the entertainment field includes 14 years with RCA Corporation (1973-1987)
beginning as Director of Strategic Planning for the Entertainment Companies
(NBC, Random House and RCA Records) and then becoming Worldwide Chief Financial
Officer of RCA Records, then Vice President - General Manager of the
International Subsidiaries and Senior Vice President - Operations - Worldwide.
In the non-entertainment area, Mr. Mangini was Executive Vice President -U.S.
Operations for adidas USA (1988-1989), Project Manager for Grace Corporation
(1969-1973), specializing in acquisitions and mergers. He had similar experience
with Olin Chemical Corporation (1966-1969). He has 33 years of business
experience and for the past 15 years has concentrated on various turnaround
situations.
Mr. Kavanagh has been Secretary of the Company since January 1995. Mr.
Kavanagh also has been the Chief Financial Officer of HMG since 1993 and the
Vice President - Finance and Administration of Hauppauge Records since 1990. Mr.
Kavanagh also was a director of HMG and Hauppauge Records until January 1995.
Mr. Gargaro has been a director of the Company since January 1995. Mr.
Gargaro has been Vice President and Secretary of Masco Corporation, a
manufacturer of products for the home, since 1993. For more than five years
prior to 1993, Mr. Gargaro was a partner with the law firm of Dykema Gossett
PLLC in Detroit, Michigan. Mr. Gargaro is a director and Secretary of MascoTech,
Inc., an industrial components manufacturing firm, and TriMas Corporation, an
industrial components manufacturing firm.
Mr. Jean has been a director of the Company since January 1995. Mr. Jean
has been a consultant to clients with respect to operational matters since 1983.
Mr. Jean was a director of AFL from 1983 until January 1995. Prior to 1980, Mr.
Jean held positions at American Motors as Corporate Director of Manufacturing,
General Plant Manager, Passenger Cars - Jeep, Divisional Controller, Corporate
Director of Budgets and Facilities Planning Manager. Mr. Jean is a graduate from
New York University and holds a degree in electrical engineering.
Mr. Leslie has been a director of the Company since January 1995. Mr.
Leslie has been Chairman of Leslie Group, Inc., a diversified investment
company, since 1977 and Co-Chairman of Leslie/Linton Entertainment, Inc., a
diversified investment company, since 1989. Mr. Leslie is a director of
Shorewood Packaging Corporation, a packaging company, and Gametek, Inc., a
producer and marketer of video/interactive games. He was a director of HMG from
1993 until January 1995. Mr. Leslie has been active in the music industry since
1953, when he founded Pickwick. Mr. Leslie was Chairman of the Board of Pickwick
until 1977. During his tenure, Pickwick became a dominant force in the industry
which included the development of the Musicland chain into
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the largest record retailer in the world. Since 1977, Mr. Leslie has been
Chairman of Leslie Group, Inc., a diversified investment company. Mr. Leslie was
named President of CBS Video Enterprises ("CBSVE") in 1980. In 1982, Mr. Leslie
left CBSVE to form the MGM/UA Home Entertainment Group, Inc. where he served as
Chairman until 1987.
Mr. Mathis has been a director of the Company since January 1995. Mr.
Mathis is Chairman and a director of Universal Gym Equipment Inc. a privately
owned company. He is also Chairman of the Board of Allis Chalmers, Inc. an
industrial manufacturer, whose main asset is a net operating loss tax
carryforward. From 1991 to 1993, Mr. Mathis was President of RCL, the
predecessor firm of HMG, and from 1993 to present a Director. From 1993 to 1995
Mr. Mathis was president and a director of RCL Capital Corporation, which was
merged into DISC Graphics in November 1995. From 1988 to October 1993, Mr.
Mathis was a Director and Chief Operating Officer of Ameriscribe Corporation
("Ameriscribe"), a national provider of reprographic and related facilities
management services whose stock was traded on the New York Stock Exchange. From
August 1992 to May 1994, Mr. Mathis acted as the Federal Court Appointed Trustee
for International Wire News Service Liquidation Corp., formerly United Press
International ("UPI"). From November 1991 through July 1992, Mr. Mathis was Vice
Chairman and a Director of UPI (then a news syndication service). In August
1991, as a part of a restructuring program, UPI filed for protection under the
Federal Bankruptcy laws.
Mr. Morgan has been a director of the Company since November 1995. Mr.
Morgan has been a Managing Director of Morgan Lewis Githens and Ahn, Inc., an
investment banking firm, since 1982. Mr. Morgan is a director of Flight Safety
International, Inc., a training firm, Masco Corporation, a manufacturer of
products for the home, and TriMas Corporation, an industrial components
manufacturing firm.
Mr. Stone has been a director of the Company since January 1995 and was
Senior Vice President and Chief Financial Officer of the Company from April 1995
until his retirement in June 1996. From 1989 until its acquisition by Rite Aid
Corporation in 1995, Mr. Stone was a director, Senior Vice President and Chief
Financial Officer of Perry Drug Stores. Mr. Stone was a director of AFL From
1982 until January 1995 and has been a director of HMG and Hauppauge Records
since November 1995. From 1986 to 1989, Mr. Stone was a Vice President -
Manufacturing of Talon, Inc. Mr. Stone was Vice President - Finance of Kuhlman
Corporation from 1980 to 1986. From 1957 until 1980, Mr. Stone was with Arthur
Andersen LLP where he became a partner in 1968. Mr. Stone holds an accounting
degree Western Michigan University.
Certain shareholders of the Company, including William H. Smith, Donald L.
Olesen and George N. Fishman, are parties to the Allied Digital Shareholders
Agreement, which, among other things, contains agreements with respect to the
disposition and voting of shares of Common Stock. See "Certain Relationships and
Related Transactions - Allied Digital Shareholders Agreement."
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company under the Securities Exchange Act of 1934 (the
"Exchange Act") during Fiscal 1996 and Forms 5 and amendments thereto furnished
to the Company with respect to Fiscal 1996 and a review of written
representations received by the Company, no person who at any time during Fiscal
1996 was a director, executive officer or beneficial owner of 10% or more of the
outstanding shares of Common Stock failed to file, on a timely basis, reports
required by Section 16(a) of the Exchange Act during the most recent fiscal year
except that Mr. Mathis, a director of the Company, filed Forms 5 reporting an
aggregate of five transactions effected during the months of June and July, 1996
involving the disposition of Common Stock.
Item 11. Executive Compensation
Summary of Compensation
The following table sets forth information regarding compensation for
services rendered, in all capacities, awarded or paid to or earned by each
person who served as the Chief Executive Officer at any time during Fiscal 1996
and each of the four other most highly compensated executive officers of the
Company who received compensation from the Company aggregating at least $100,000
during Fiscal 1996 (collectively, the "Named Executive Officers").
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Summary Compensation Table
Long-Term
Annual Compensation(1)(2)(3) Compensation
---------------------------- ------------
Name and Fiscal Shares Underlying
Principal Position Year(3) Salary($)(1) Bonus ($)(4) Options (#)(5)
------------------ ------- ------------ ------------ --------------
William H. Smith(6) 1996 $190,151 $ 1,229(7) --
Co-Chairman and President 1995 244,376 154,013(7) --
1994 169,310 -- --
George N. Fishman(6) 1996 188,880 -- --
Co-Chairman and Chief 1995 204,451 -- --
Executive Officer 1994 203,461 -- --
James A. Merkle(6)(8) 1996 63,999 _ --
Chief Executive Officer 1995 237,201 -- 50,000
and President 1994 126,484 218,750 --
Donald L. Olesen 1996 312,760 _ --
President-National Sales 1995 323,686 -- 30,000
and Marketing Division 1994 298,163(9) -- --
Charles P. Kavanagh 1996 141,970 -- --
Secretary and Chief 1995 142,263 20,000 20,000
Financial Officer of HMG 1994 139,563 -- --
John K. Mangini(10) 1996 107,692 _ --
Chief Operating Officer 1995 -- -- --
1994 -- -- --
Jerry E. Stone(11) 1996 109,615 -- --
Chief Financial Officer 1995 38,942 _ 20,000
1994 -- -- --
- - ----------
(1) Compensation for Mr. Smith, Mr. Stone and Mr. Merkle was paid by AFL.
Compensation for Mr. Fishman, Mr. Olesen, Mr. Kavanagh and Mr. Mangini was paid
by Hauppauge Records.
(2) The incremental cost of providing perquisites and other personal
benefits paid to each named individual for each year aggregated less than the
lesser of (a) $50,000 and (b) 10% of the total annual salary and bonus set forth
in the columns entitled "Salary" and "Bonus" for such person. Accordingly, such
perquisites and personal benefits have been omitted from the table as permitted
by the rules of the Commission.
(3) During Fiscal 1995, the Company and AFL changed their fiscal year
ending date from December 31 to July 31. Consequently, Fiscal 1994 for the
Company and AFL (and the annual compensation reported with respect to Messrs.
Smith and Merkel during such period) consists of seven months. Fiscal 1994 for
Hauppauge Records was a 53 week period.
(4) Amounts shown include (i) discretionary cash bonuses and (ii) profit
sharing contributions.
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(5) Represents incentive stock options granted under the Incentive Plan.
(6) Mr. Merkle was President and the Chief Executive Officer of the Company
until his resignation in November 1995. Mr. Smith has served as President since
November 1995, Messrs. Smith and Fishman served as Co-Chief Executive Officers
from November 1995 until March 1996 and Mr. Fishman has served as the sole Chief
Executive Officer since March 1996.
(7) Consists of (i) distributions from the AFL profit sharing plan in
Fiscal 1996 and (ii) payments in Fiscal 1995 which were used by Mr. Smith to pay
life insurance premiums.
(8) Pursuant to Mr. Merkle's severance arrangement, the number of shares
issuable upon exercise of the options was reduced to 25,000. See "Employment
Agreements."
(9) Includes $10,935 of commission income earned by Mr. Olesen on the sale
of compact disc units by a third party manufacturer to HMG's customers as to
which HMG received a commission, a portion of which was rebated to Mr. Olesen.
(10) Mr. Mangini joined the Company as Chief Operating Officer on January
16, 1996.
(11) Mr. Stone served as Vice President and Chief Financial Officer of the
Company from April 1995 until his retirement in June 1996. Upon his retirement,
the options granted to Mr. Stone terminated in accordance with the terms of the
Incentive Plan.
Stock Options
Stock Options Granted In Fiscal 1996
No stock option(s) were granted in Fiscal 1996 to the Named Executive
Officers.
Stock Options Held at the End of Fiscal 1996
The following table sets forth the total number of exercisable and
unexercisable stock options held by each of the Name Executive Officers named
who held any stock options as of July 31, 1996. No options to purchase Common
Stock were exercised during Fiscal 1996 and no stock appreciation rights were
outstanding during Fiscal 1996.
<TABLE>
<CAPTION>
Number of Securities Underlying Un- Value of Unexercised In-the
exercised Options at July 31, 1996 Money Options at July 31, 1996
---------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- - ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William H. Smith -- -- - --
George N. Fishman -- -- - --
James A. Merkle 12,500 12,500 0 0
Donald L. Olesen 7,500 22,500 0 0
Charles P. Kavanagh 5,000 15,000 0 0
John K. Mangini 0 0 0 0
Jerry E. Stone 0 0 0 0
</TABLE>
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Description of the Incentive Plan
The Incentive Plan is designed to encourage selected employees of or
consultants to the Company or an affiliated company to acquire a proprietary
interest in the Company in order to create an increased incentive for them to
contribute to the Company's success, and to enhance the Company's ability and
that of its affiliates to attract and retain exceptionally qualified employees
and consultants, thus enhancing the value of the Company for the benefit of its
shareholders. The Incentive Plan permits the issuance of (a) options to purchase
shares of Common Stock ("Options"), (b) shares of such stock ("Restricted
Stock") or units denominated in such shares ("Restricted Stock Units") that are
nontransferable and subject to forfeiture for a designated restricted period,
(c) awards of the right to receive the excess of the fair market value at the
time of exercise of a share of Common Stock over a designated price determined
at the time of grant ("Stock Appreciation Rights" or "SARs"), (d) awards
denominated, or which may be settled in, shares of Common Stock, subject to
satisfaction of designated performance criteria during a designated performance
period ("Performance Awards"), (e) rights to receive the equivalent of dividends
or other distributions upon Common Stock ("Dividend Equivalents"), and (e) other
types of awards denominated or payable in shares of Common Stock ("Other
Stock-Based Awards"). In addition, in connection with the Reorganization, the
holders of options to purchase shares of HMG common stock were issued in
substitution thereof an equivalent number of Options (the "Substitute Options")
under the Incentive Plan.
Subject to adjustment as required or permitted by the Incentive Plan, the
maximum number of shares of Common Stock available for awards under the
Incentive Plan (including Options) is 2,400,000 shares, of which no more than
half may be newly-issued shares.
In general, any employee of or consultant to the Company or an affiliate of
the Company, including any officer or officer-director of the Company, but not
including any non-employee director (unless such person also serves as a
consultant to the Company), may be selected by the Compensation Committee to
receive any type of award under the Incentive Plan; provided, however, that
Other Stock-Based Awards may not be granted to directors or executive officers.
Options granted under the Incentive Plan may be either "Incentive Stock
Options" as that term is defined in Section 422 of the Internal Revenue Code of
1986, or options which do not qualify as Incentive Stock Options ("Non-Qualified
Stock Options"). Incentive Stock Options may be granted only to employees of the
Company. An Incentive Stock Option must expire within ten years from the date it
is granted (five years in the case of such options granted to a holder of more
than 10% of the outstanding Common Stock). Incentive Stock Options are first
exercisable not earlier than one year from the date of grant. The exercise price
of an Incentive Stock Option must be at least equal to the fair market value of
the Common Stock on the date such Incentive Stock Option is granted (or 110% of
the fair market value of the Common Stock in the case of such options granted to
a holder of more than 10% of the outstanding Common Stock). To the extent that
the aggregate fair market value of the Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by an optionee during
any calendar year exceeds $100,000, such options will be treated as
Non-Qualified Stock Options. In addition, Options may include a so-called
"reload" feature under which, at the time of exercise of the Option, if the
holder continues to be eligible to be granted awards under the Incentive Plan
and if the exercise price is paid at least in part in shares of Common Stock
owned by the holder for at least six months, the holder automatically would
receive another Option.
The Incentive Plan also permits the grant of Restricted Stock, Restricted
Stock Units, Stock Appreciation Rights, Performance Awards, Dividend
Equivalents, and/or Other Stock-Based Awards to eligible individuals. Any such
award may be granted in tandem with any other such award or with any Option,
whether at the time of grant of the first award or subsequently. In addition,
subject to the terms of a given award, the Compensation Committee may permit
settlement of any award (other than an award of Restricted Stock or, without the
holder's consent, a Substituted Option) in cash, in shares of Common Stock, by
grant of another award, or in such other form of consideration as it deems
appropriate. The Compensation Committee also may permit settlement in
installments, or defer settlement of, any award (other than Restricted Stock or,
without the holder's consent, a Substituted Option) as it deems appropriate,
subject to the terms of the award, and, regardless of the terms of an award
(other than a Substituted Option), is entitled at any time to cancel the award
upon payment to the holder of its value (as determined by the Compensation
Committee) in cash or another award.
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<PAGE>
Subject to the limitations and requirements of the Incentive Plan and
applicable law and the terms and conditions of any Option or other award, the
Compensation Committee has the authority, among other things, to determine the
expiration date, any vesting schedule, and the per share exercise price for any
Option, the method and form of payment for any exercised Option (which may
include payment in cash, by delivery of shares of Common Stock already held by
the grantee valued at their fair market value or any combination thereof), the
grant price for any SAR, the restricted period for any award of Restricted Stock
or Restricted Stock Units, the performance criteria and performance period for
any Performance Award, and the effect of termination of employment and/or
consulting relationships upon any outstanding award.
Employment Agreements
The Company has employment agreements with Messrs. Fishman and Olesen with
terms expiring December 31, 1997, and with Mr. Kavanagh with a term expiring
December 31, 1996. Payment and performance of all obligations under each
employment agreement are unconditionally guaranteed by the Company.
Pursuant to such employment agreements, (i) Mr. Fishman continues to serve
as the Chairman of the Board and Chief Executive Officer of Hauppauge Records
and serves as Co-Chairman of the Board of the Company at a base salary of
$206,000 per annum, (ii) Mr. Olesen continues to serve as the President of
Hauppauge Records and serves as President-National Sales and Marketing Division
of the Company at a base salary of $298,700 per annum, and (iii) Mr. Kavanagh
continues to serve as the Chief Financial Officer of Hauppauge Records and
serves as Secretary of the Company at a base salary of $138,050 per annum. Each
of such executive officer's base salary is subject to a cost of living increase
on an annual basis based upon a percentage equal to the percentage rate of
inflation during the previous calendar year as measured by the Consumer Price
Index for urban wage earners published by the U.S. Department of Labor, Bureau
of Labor Statistics for the New York-Northern New Jersey area.
If any of Messrs. Fishman, Olesen, or Kavanagh is terminated without cause
prior to the expiration of his employment term, such executive will be entitled
to receive an amount equal to his respective base salary (as adjusted) until the
scheduled expiration of such term. In addition, each employment agreement
prohibits such executive from competing with the Company during the term of the
agreement, provided that in the case of termination by the employer without
cause, the employer continues to pay such executive his salary.
In November 1995, the Company and Mr. Merkle, the former President and
Chief Executive Officer of the Company, entered into a severance agreement
pursuant to which Mr. Merkle's employment agreement was terminated and Mr.
Merkle agreed to provide consulting services to the Company and its subsidiaries
through the end of the original term of his employment agreement (December 31,
1997) at an annual fee equal to the base salary in the employment agreement and
to refrain from competition with the Company during such period. In addition,
consistent with the Incentive Plan, the expiration date of the option granted to
Mr. Merkle during Fiscal 1995 was changed to December 31, 1997 and the number of
shares covered by such option was reduced from 50,000 to 25,000.
Compensation of Directors
The Company pays each of its directors who is not also an officer or
employee of the Company or any subsidiary an annual retainer of $10,000 and an
additional $1,000 for each meeting of the Board of Directors or a committee
thereof attended plus reimbursement for reasonable expenses in connection with
attending meetings. In addition, Mr. Mathis provides consulting services to HMG
for which he is separately compensated. See "Certain Relationships and Related
Transactions."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of October 15, 1996, information with
respect to the beneficial ownership of Common Stock by (i) each person known by
the Company to be the beneficial owner of more than 5% of the outstanding shares
of Common Stock, (ii) each director of the Company, (iii) each executive officer
of the Company named in the Summary Compensation Table and (iv) all directors
and current executive officers of the Company as a group (11 persons):
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<PAGE>
Percentage of
Name and Address(1) Number of Shares Beneficial Ownership
- - ------------------- ---------------- --------------------
William H. Smith(2) 7,307,762 49.8%
7375 Woodward Avenue
Detroit, Michigan 48202
Patricia M. Smith(3) 1,491,533 10.8%
7375 Woodward Avenue
Detroit, Michigan 48202
399 Venture Partners Inc.(4) 1,100,110 8.1%
399 Park Avenue
6th Floor, Zone 11
New York, New York 10043
Donald L. Olesen(5) 901,500 6.6%
1301 Avenue of the Americas
New York, New York 11109
George N. Fishman(6) 894,022 6.6%
15 Gilpin Avenue
Hauppauge, New York 11788
James A. Merkle(7) 577,223 4.2%
921 Woods Road
Ypsilanti, Michigan 48197
Seymour Leslie(8) 352,327 2.6%
1370 Avenue of the Americas
New York, New York 10019
Charles P. Kavanagh(9) 155,275 1.1%
15 Gilpin Avenue
Hauppauge, New York 11788
H. Sean Mathis(10) 86,800 *
1301 Avenue of the Americas
New York, New York 10019
Eugene A. Gargaro, Jr.(11) 20,000 *
21001 Van Born Road
Taylor, Michigan 48180
Jerry E. Stone 4,000 *
15 Anthracite
Mt. Crested Butte, Colorado 81225
Werner H. Jean(12) 4,000 *
16288 Barryknoll Way
Granger, Indiana 46530
John A. Morgan 0 -
767 Fifth Avenue
New York, New York 10153
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<PAGE>
Percentage of
Name and Address(1) Number of Shares Beneficial Ownership
- - ------------------- ---------------- --------------------
John K. Mangini 0 -
15 Gilpin Avenue
New York, New York 11788
All directors and executive 9,725,686 65.9%
officers as a group (13)
- - ----------
* Less than 1%
(1) Unless otherwise noted, the Company believes that all persons named in
the table have (i) sole voting and investment power with respect to all shares
of Common Stock owned by them, except to the extent that authority is shared by
spouses under applicable law, and (ii) record and beneficial ownership of such
shares. All information in the table is based upon reports filed by such persons
with the Securities and Exchange Commission and the Company and upon
questionnaires submitted by such persons to the Company in connection with the
preparation of this Proxy Statement.
(2) Consists of (i) 3,302,507 shares of Common Stock owned by the William
H. Smith Trust, of which Mr. Smith is the trustee, (ii) 550,235 shares of Common
Stock issuable upon exercise of the Class C Warrants owned by the William H.
Smith Trust, (iii) 5,000 shares of Common Stock owned jointly with his wife,
Patricia M. Smith, (iv) 1,273,945 shares of Common Stock owned by the Patricia
M. Smith Trust and 212,588 shares of Common Stock issuable upon exercise of the
Class C Warrants owned by the Patricia M. Smith Trust (see note (3) below), and
(v) 1,682,975 shares owned by Mr. Smith's children and 280,512 shares of Common
Stock issuable upon exercise of Class C Warrants owned by Mr. Smith's children.
All the shares of Common Stock owned by Mrs. Smith and Mr. Smith's children will
be voted as directed by Mr. Smith or his successor as provided in a ten year
shareholder voting agreement, dated as of January 11, 1995, among the Company
and each of the above persons and trusts (the "Smith Family Shareholders
Agreement"). The 3,302,507 shares of Common Stock owned by the William H. Smith
Trust, the 5,000 shares jointly owned by Mr. and Mrs. Smith and the 550,235
shares of Common Stock issuable upon exercise of the Class C Warrants owned by
the William H. Smith Trust are subject to the Allied Digital Shareholders
Agreement. See "Certain Relationships and Related Transactions - Allied Digital
Shareholders Agreement."
(3) Consists of (i) 1,273,945 shares of Common Stock owned by the Patricia
M. Smith Trust, of which Mrs. Smith is the trustee, (ii) 5,000 shares of Common
Stock owned jointly with Mr. Smith, and (iii) 212,588 shares of Common Stock
issuable upon exercise of the Class C Warrants owned by the Patricia M. Smith
Trust. All such shares are subject to the Smith Family Shareholders Agreement
and the Allied Digital Shareholders Agreement. See "Certain Relationships and
Related Transactions - Allied Digital Shareholders Agreement." Mrs. Smith is the
spouse of William H. Smith.
(4) All of the shares owned by Venture Partners are subject to the Allied
Digital Shareholders Agreement. See "Certain Relationships and Related
Transactions - Allied Digital Shareholders Agreement."
(5) Consists of (i) 894,000 shares of Common Stock owned by Mr. Olesen and
(ii) 7,500 shares of Common Stock issuable upon presently exercisable options
granted under the Incentive Plan. See "Executive Compensation - Stock Options."
All the shares owned by Mr. Olesen are subject to the Allied Digital
Shareholders Agreement. See "Certain Relationships and Related Transactions -
Allied Digital Shareholders Agreement."
(6) All of the shares owned by Mr. Fishman are subject to the Allied
Digital Shareholders Agreement. See "Certain Relationships and Related
Transactions - Allied Digital Shareholders Agreement."
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<PAGE>
(7) Consists of (i) 479,677 shares of Common Stock owned by the James A.
Merkle Revocable Living Trust, of which Mr. Merkle is a trustee, (ii) 5,000
shares of Common Stock held by a trust for the benefit of Mr. Merkle's spouse,
(iii) 80,046 shares of Common Stock issuable upon exercise of the Class C
Warrants owned by Mr. Merkle and (iv) 12,500 shares of Common Stock issuable
upon presently exercisable options granted under the Incentive Plan. See
"Executive Compensation - Stock Options." Mr. Merkle was a director and the
President and Chief Executive Officer of the Company until November 5, 1995.
(8) Consists of (i) 327,327 shares of Common Stock owned by Leslie/Linton
Entertainment Inc., a company of which Seymour Leslie is Co-Chairman and a
minority shareholder and (ii) 25,000 shares of Common Stock issuable upon
exercise of Substituted Options granted under the Incentive Plan. See "Executive
Compensation - Stock Options." The shares of Common Stock owned by Leslie/Linton
Entertainment Inc. are subject to the Allied Digital Shareholders Agreement. See
"Certain Relationships and Related Transactions - Allied Digital Shareholders
Agreement." Does not include shares of Common Stock owned by Mr. Leslie's
children as to which he disclaims beneficial ownership.
(9) Consists of (i) 150,275 shares owned by Mr. Kavanagh and (ii) 5,000
shares of Common Stock issuable upon exercise of presently exercisable options
granted under the Incentive Plan. See "Executive Compensation - Stock Options."
(10) Consists of (i) 36,800 shares owned by Mr. Mathis and (ii) 50,000
shares of Common Stock issuable upon exercise of presently exercisable options
granted under the Incentive Plan. See "Executive Compensation - Stock Options."
(11) Consists of (i) 15,000 shares owned by Mr. Gargaro and (ii) 5,000
shares of owned by the Eugene A. Gargaro, Jr. Trust, of which Mr. Gargaro is the
trustee.
(12) Consists of shares owned by the Werner H. Jean Trust, of which Mr.
Jean is the trustee.
(13) Consists of the shares referred to in notes (2), (5) (6), (8), (9),
(10), (11) and (12) above.
The Company does not know of any arrangements, including a pledge by any
person of securities of the Company, the operation of which at a subsequent date
may result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions
Loans from Certain Shareholders
On April 1, 1994, AFL distributed to its shareholders approximately
$18,000,000 consisting of its accumulated previously-taxed earnings through
December 31, 1993. Mr. Smith, Mrs. Smith and certain members of their family and
Mr. Merkle, a former executive officer of the Company, loaned to AFL an
aggregate of approximately $14,000,000 received by them, pursuant to unsecured
promissory notes (the "AFL Shareholder Notes"). The proceeds of these loans were
used to repay a portion of certain bank indebtedness incurred to fund the
distribution. The AFL Shareholder Notes had an original maturity date of January
1, 2000, bore interest at an annual rate of ten percent (10%), and were
subordinated to the payment of certain bank indebtedness of AFL. On January 24,
1995, the AFL Shareholder Notes were repaid by AFL with proceeds of new
financing provided by a lender, except for $4,000,000 of such AFL Shareholder
Notes issued to Mr. Smith (the "Smith Note"). On November 8, 1995, Mr. Smith
made an additional $2,000,000 subordinated loan to AFL (the "Additional Smith
Note") for working capital purposes. In connection with the Hauppauge Merger and
the restructuring of the AFL and Hauppauge Records' credit facilities into one
credit facility, each of the Smith Note and the Additional Smith Note (the
"Smith Notes") was amended and restated. The Smith Notes are each due January 1,
2001, are subordinated to the payment of the indebtedness to the senior lender,
and bear interest at 10% per annum. The payment of interest on the Smith Notes
is conditional upon Hauppauge Records achieving certain financial benchmarks. To
the extent that interest is not paid when due, it is due and payable on the
maturity date of the Smith Notes.
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<PAGE>
In connection with the Hauppauge Merger and the restructuring of the credit
facilities of AFL and Hauppauge Records, HMG prepaid certain indebtedness owed
to 399 Venture Partners, Inc., the Company's principal shareholder, in the
aggregate principal amount of $3,500,000. In order to help finance such
prepayment, Mr. Smith, Mr. Fishman and Mr. Olesen loaned HMG $1,600,000,
$200,000 and $200,000, respectively, (the "HMG Loans"). The HMG Loans are
evidenced by identical promissory notes, except for the name of the payee and
the principal amount (the "HMG Notes"). The HMG Notes are subordinated to the
payment of Hauppauge Records' indebtedness to its senior lender, bear interest
at the rate of 10% per annum, and are due December 31, 1998. The payment of
interest and principal on the HMG Notes is conditional upon Hauppauge Records
achieving certain financial benchmarks. To the extent that interest is not paid
when due, it is due and payable upon maturity of the HMG Notes. In all events,
principal and accrued but unpaid interest on the HMG Notes is due and payable
January 1, 2001.
HMG is indebted to certain shareholders of the Company, including Mr.
Fishman, Mr. Olesen, Mr. Kavanagh and Venture Partners in the aggregate
principal amount of $916,659 (the "Series B Debt"). The Series B Debt is
evidenced by a series of identical promissory notes, except for the name of the
payee and the principal amount (the "Series B Notes"). The Series B Notes are
subordinated to the payment of Hauppauge Records' indebtedness to its senior
lender, bear interest at the rate of 11% per annum, and are due January 1, 1999.
The payment of interest and principal on the HMG Notes is conditional upon
Hauppauge Records achieving certain financial benchmarks.
Guarantee of Certain Obligations of Greenfield Land
The Company has unconditionally guaranteed certain obligations of
Greenfield Land Company ("Greenfield Land") under certain bank financing that
was originally incurred by Greenfield Land in connection with its acquisition
and development of the facilities in Illinois, Michigan and Tennessee that are
leased to the Company. As of November 1, 1996, the aggregate amount of debt of
Greenfield Land which the Company has guaranteed under the bank financing for
Greenfield Land was $1,421,709 and the largest amount which the Company had
guaranteed since the beginning of Fiscal 1996 was $1,789,000. Greenfield Land
has unconditionally guaranteed certain obligations of the Company as part of
such bank financing.
Leases
The Company leases certain of its manufacturing, warehouse and office
space from affiliates. See "Properties." The Company believes that the terms of
such leases are at least as favorable to the Company as those it would receive
from an unaffiliated third party.
Indemnification for Environmental Liabilities
Pursuant to a Global Indemnification Agreement dated June 17, 1994, among
Greenfield Land, Mr. Smith, Mr. Smith's revocable living trust (collectively,
the "beneficiaries"), Hauppauge Records (as the successor to AFL), has agreed to
indemnify the beneficiaries against all liabilities, losses, costs and expenses
(including, without limitation, fines, penalties, judgments, and legal fees)
arising out of, or in anyway related to, (i) the presence, manufacturing or
processing of "hazardous substances" in, on or about the properties leased or
subleased to Hauppauge Records by the beneficiaries (where caused by Hauppauge
Records or a predecessor occupier of the premises), or (ii) the violation of any
"environmental law" by Hauppauge Records. For purposes of the foregoing:
"hazardous substances" are materials or substances regulated under any
environmental law (including, without limitation, chemical wastes, radioactive
materials, and petroleum products and byproducts); and "environmental laws" are
any laws, rules and regulations relating to the protection of human health,
safety, or the environment (including, without limitation, the Toxic Substances
Control Act, the Comprehensive Environment Response, Compensation and Liability
Act, and the Resource Conservation and Recovery Act of 1976). The beneficiaries
paid $25,000 to AFL for this indemnification.
Allied Digital Shareholders Agreement
In connection with the consummation of the Reorganization, the Company, Mr.
Smith, Mrs. Smith, certain trusts of which Mr. Smith or Mrs. Smith act as
trustees (the "AFL Shareholders"), Mr. Fishman, Mr. Olesen, The Donald L. Olesen
Annuity Trust, Leslie/Linton Entertainment, Inc., and Venture Partners (the "HMG
Shareholders" and, together with the AFL Shareholders, the
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<PAGE>
"Allied Digital Shareholder Parties"), entered into the Allied Digital
Shareholders Agreement. Pursuant to the Allied Digital Shareholders Agreement,
among other things, (i) the number of directors of the Company was fixed at nine
members, divided into three classes of three members each, and Mr. Smith, Mr.
Merkle (who resigned effective November 6, 1995), Mr. Jean, Mr. Stone, and Mr.
Gargaro (the "AFL Nominees"), and Mr. Fishman, Mr. Leslie, Mr. Mathis and Mr.
Olesen (the "HMG Nominees"), were elected to the initial Board of Directors of
the Company, (ii) Mr. Smith, Mr. Merkle and Mr. Fishman were re-elected as
directors of the Company for an additional three-year term at the Annual Meeting
held in 1996, (iii) the Allied Digital Shareholder Parties agreed to vote all
shares of Common Stock owned by them against, and to use their best efforts to
cause the then directors of the Company, subject to such directors' fiduciary
duties, to vote against, any proposed change in the size or rights or powers of
the Board of Directors of the Company and (iv) the Allied Digital Shareholder
Parties agreed until at least the day preceding the date of the annual meeting
of shareholders of the Company held in 1998 (the "1998 Annual Meeting") to use
their best efforts to secure the election of Mr. Fishman, Mr. Smith and a person
designated by the AFL Shareholders to the Executive Committee of the Board of
Directors of the Company and the boards of directors of the Company's
subsidiaries. The Allied Digital Shareholders Agreement was amended in November
1995 to provide that Mr. Olesen would be appointed to fill the vacancy in the
Class I Directors resulting from Mr. Merkle's resignation and that Mr. Olesen
would be nominated for election at the Annual Meeting held in 1996 and to
appoint John A. Morgan to fill the vacancy in Class II Directors resulting from
Mr. Olesen's appointment as a Class I Director. Mr. Stone is currently serving
on the boards of directors of the Company's subsidiaries and served as a member
of the Executive Committee until June 1996.
Under the Allied Digital Shareholders Agreement, during the period
commencing on the date of the Allied Digital Shareholders Agreement (January 11,
1995) and ending on the day preceding the date of the Annual Meeting to be held
in 1999, if a seat on the Board of Directors of the Company or on the Executive
Committee of the Board of Directors held by any AFL Nominee or HMG Nominee
becomes vacant during such director's term of any reason (including, without
limitation, such director's death, resignation or removal), then (i) with
respect to a vacant seat previously held by an AFL Nominee, the AFL Shareholders
shall have the right to designate a nominee, who shall be reasonably acceptable
to the HMG Shareholders, to fill such vacancy until the next annual meeting of
shareholders of the Company at which such director's term would expire and the
HMG Shareholders shall use their best efforts to cause the HMG Nominees on the
Board of Directors of the Company, subject to such nominees' fiduciary duties,
to vote in favor of the election and continuation in office of such nominee
designated by the AFL Shareholders, and (ii) with respect to a vacant seat
previously held by an HMG Nominee, the HMG Shareholders shall have the right to
designate a nominee, who shall be reasonably acceptable to the AFL Shareholders,
to fill such vacancy until the next annual meeting of shareholders of the
Company at which such director's term would expire and the AFL Shareholders
shall use their best efforts to cause the AFL Nominees on the Board of Directors
of the Company, subject to such nominees' fiduciary duties, to vote in favor of
the election and continuation in office of such nominee designated by the HMG
Shareholders.
The Allied Digital Shareholders Agreement also provides that except for
transfers among themselves, to family members, to trusts for the benefit of
themselves or their families or to affiliates, (i) prior to July 11, 1997, none
of Mr. Smith, Mrs. Smith, or certain trusts of which Mr. Smith or Mrs. Smith act
as trustees, may transfer any of such shares of Common Stock, other than in
compliance with the volume limitations contained in Rule 144 under the
Securities Act of 1933, and (ii) prior to January 11, 1998, none of Mr. Smith,
Mrs. Smith, or certain trusts of which Mr. Smith or Mrs. Smith act as trustees,
may transfer any of the Allied Digital Class C Warrants.
In addition, under the terms of the Allied Digital Shareholders Agreement,
until January 11, 1998, and subject to certain limited exceptions relating to
transfers among themselves, to family members, to trusts for the benefit of
themselves or their families and to affiliates, none of the AFL Shareholders may
transfer, in any single transaction or series of related transactions to a
single transferee or to a "group," any shares of Common Stock now owned or
hereafter acquired by them if such transfer would cause the number of shares of
Common Stock transferred by all of the AFL Shareholders, individually or in the
aggregate, to such transferee or group to equal or exceed 30% of the Common
Stock outstanding as of the date of the Allied Digital Shareholders Agreement
unless, prior to any such transfer, the proposed transferee (whether an
individual or a group) of such shares of Common Stock executes and delivers to
the Company a written agreement to the effect that such proposed transferee will
not, for a period of 18 months from the closing of such transfer, purchase or
cause the Company, directly or indirectly, to purchase Common Stock at a price
which is less than the highest price paid by the proposed transferee for such
Common Stock from any AFL Shareholder, or for a different form of consideration.
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In the event Mr. Smith dies or becomes incapacitated prior to January 11,
1998, each of the AFL Shareholders (a) is required during the period ending on
such date to vote all shares of Common Stock beneficially owned as directed by
Mr. Jean (currently a director of the Company) or his successor, and (b) is
prohibited during the period ending on January 11, 1998 from transferring any
such shares of Common Stock in a block (or series of sales) of more than 500,000
shares to a single person or group other than (i) a transfer among themselves,
to family members, to trusts for the benefit of themselves or their families or
to affiliates, (ii) in connection with or to fund the payment of federal and
state estate and inheritance taxes and administration and related expenses and
otherwise for the orderly administration of the estate of Mr. Smith or any trust
for his benefit and/or any member of his family, (iii) as any AFL Shareholder
shall reasonably determine to be necessary and ample for the support,
maintenance and education of the AFL Shareholders and family members, or (iv)
with the consent of Mr. Fishman (currently Co-Chairman of the Board) or his
successor.
The Allied Digital Shareholders Agreement also prohibits the Allied Digital
Shareholder Parties and the Company from engaging in a "going private"
transaction under Rule 13d-3 under the Exchange Act prior to January 11, 1998
unless such transaction is approved by a majority of the votes cast by
shareholders who are neither parties to the Allied Digital Shareholders
Agreement nor affiliates or associates of such parties.
Other Transactions
The Company agreed to pay the reasonable legal fees of Greenfield Land in
connection with the Hauppauge Merger.
H. Sean Mathis, a director of the Company, provides strategic advisory
services to HMG pursuant to a five-year consulting agreement expiring in January
2000. Pursuant to such agreement, Mr. Mathis received a fee of $96,000 payable
in 24 monthly installments ending in December 1996.
-46-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements and Schedules
1. List of Financial Statements Included in this
Report
Report of Independent Certified Public
Accountants - Grant Thornton LLP F-2
Report of Independent Certified Public
Accountants - Arthur Andersen LLP F-3
Consolidated Balance Sheets - July 31, 1996
and 1995 F-4
Consolidated Statements of Operations for the
years ended July 31, 1996 and 1995, for
the seven-month periods ended July 31,
1994 and July 31, 1993, and for the year
ended December 31, 1993 F-6
Consolidated Statement of Stockholders'
Equity for the years ended July 31, 1996
and 1995, for the seven-month period
ended July 31, 1994 and for the year
ended December 31, 1993 F-7
Consolidated Statements of Cash Flows for the
years ended July 31, 1996 and 1995, for
the seven-month periods ended July 31,
1994 and July 31, 1993, and for the year
ended December 31, 1993 F-8
Notes to Consolidated Financial Statements F-10 - F-32
2. Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying
Accounts F-33
All other schedules have been omitted because they are inapplicable,
not required, or the information is included elsewhere in the
consolidated financial statements or notes thereto.
(b) The Company filed a Current Report on Form 8-K dated May 28, 1996 with
respect to Item 4 - Changes in Registrant's Certifying Accountant.
(c) Exhibits
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Allied Digital Technologies Corp.
We have audited the accompanying consolidated balance sheet of Allied Digital
Technologies Corp. and subsidiaries (the "Company") as of July 31, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Allied Digital
Technologies Corp. and subsidiaries as of July 31, 1996, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.
We have also audited Schedule II of Allied Digital Technologies Corp. and
subsidiaries as of and for the year ended July 31, 1996. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
GRANT THORNTON LLP
Melville, New York
October 22, 1996 (except for Note 4, as to
which the date is November 8, 1996)
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To Allied Digital Technologies Corp.
We have audited the accompanying consolidated balance sheet of Allied Digital
Technologies Corp. (a Delaware corporation) and subsidiaries as of July 31,
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended, for the seven-month period ended
July 31, 1994 and for the year ended December 31, 1993. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Allied Digital Technologies
Corp. and subsidiaries as of July 31, 1995, and the results of their operations
and their cash flows for the year then ended, for the seven-month period ended
July 31, 1994 and for the year ended December 31, 1993 in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule, as of and for the year ended July 31, 1995, the
seven-month period ended July 31, 1994 and the year ended December 31, 1993, has
been subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan
November 9, 1995
F-3
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
July 31,
ASSETS 1996 1995
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 830,723 $ 559,411
Accounts receivable, less
allowance for doubtful accounts
of $1,515,000 and $871,000 at
July 31, 1996 and 1995, respectively 23,906,859 30,252,770
Inventories 5,374,498 9,412,249
Prepaid expenses 756,009 754,572
Deferred income taxes 3,312,869 1,643,261
------------ ------------
Total current assets 34,180,958 42,622,263
PROPERTY AND EQUIPMENT, AT COST
Manufacturing equipment 65,167,030 54,830,921
Leasehold improvements 10,408,703 9,961,878
Furniture and fixtures 8,072,625 8,698,341
Construction in progress 1,192,941
Automobiles 197,499 224,766
------------ ------------
83,845,857 74,908,847
Less accumulated depreciation (51,620,715) (44,663,850)
and amortization ------------ ------------
32,225,142 30,244,997
OTHER ASSETS
Excess of cost over fair value of net
assets acquired, net of accumulated
amortization of $4,620,134 and
$2,039,820 at July 31,1996 and 1995,
respectively 45,537,736 48,118,050
Deferred income taxes 708,173
Deferred charges, deposits and other 1,225,624 4,881,975
------------- -------------
47,471,533 53,000,025
------------- -------------
$ 113,877,633 $ 125,867,285
============= =============
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS (continued)
July 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
------------- -------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 9,153,641 $ 5,370,376
Accounts payable 16,805,887 22,328,099
Accrued liabilities 8,712,456 5,233,014
------------- -------------
Total current liabilities 34,671,984 32,931,489
LONG-TERM DEBT, less current portion above 30,232,409 40,799,756
SUBORDINATED NOTES PAYABLE TO
STOCKHOLDERS 10,996,386 8,416,660
DEFERRED INCOME TAXES -- 157,066
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 1,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $0.01 par value, 25,000,000
shares authorized, 13,619,644 shares issued
and outstanding 136,196 136,196
Additional paid-in capital 44,742,073 44,742,073
Accumulated deficit (6,901,415) (1,315,955)
------------- -------------
37,976,854 43,562,314
------------- -------------
$ 113,877,633 $ 125,867,285
============= =============
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Seven-month period Year ended
Year ended July 31, ended July 31, December 31,
----------------------------- --------------------------- ------------
1996 1995 1994 1993 1993
------------- ------------- ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales $ 163,781,324 $ 119,793,434 $ 40,939,224 $ 54,898,361 $ 93,191,029
Cost of sales 135,101,336 92,671,882 28,998,070 38,328,802 63,862,188
Nonrecurring charge 1,250,000
------------- ------------- ------------ ------------ ------------
Gross profit 27,429,988 27,121,552 11,941,154 16,569,559 29,328,841
------------- ------------- ------------ ------------ ------------
Operating expenses
Selling, general and administrative 24,371,797 22,254,730 10,743,868 10,860,033 18,890,756
Amortization of excess of cost over
fair value of net assets acquired 2,580,314 1,559,878 176,822 176,822 303,123
Stockholders' bonuses and profit
sharing 154,014 949,223 1,679,127
Restructuring charge 3,077,295
------------- ------------- ------------ ------------ ------------
Total operating expenses 30,029,406 23,814,608 11,074,704 11,986,078 20,873,006
------------- ------------- ------------ ------------ ------------
Income (loss) from operations (2,599,418) 3,306,944 866,450 4,583,481 8,455,835
Other income (expense)
Interest expense (6,186,049) (3,816,376) (1,136,736) (564,652) (983,694)
Other, net 665,160 762,331 238,382 123,780 230,436
------------- ------------- ------------ ------------ ------------
Total other income (expense) (5,520,889) (3,054,045) (898,354) (440,872) (753,258)
------------- ------------- ------------ ------------ ------------
Income (loss) before income taxes (8,120,307) 252,899 (31,904) 4,142,609 7,702,577
Provision (credit) for income taxes (2,534,847) (2,575,618) 85,218 159,675 375,400
------------- ------------- ------------ ------------ ------------
NET INCOME (LOSS) $ (5,585,460) $ 2,828,517 $ (117,122) $ 3,982,934 $ 7,327,177
============= ============= ============ ============ ============
Pro forma data (unaudited)
AFL as a C Corporation subject to
Federal income tax for all
periods
presented (Note 8)
Adjustment to income tax
provision (credit) 2,529,990 (11,000) 1,354,000 2,491,000
------------- ------------- ------------ ------------ ------------
Net income (loss) $ (5,585,460) $ 298,527 $ (106,122) $ 2,628,934 $ 4,836,177
============= ============= ============ ============ ============
Earnings (loss) per share reflecting
consolidated operations of AFL
and HMG (Notes 2 and 3)
Net income (loss) per common share $(.41) $.05
====== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
Allied Digital Technologies Corp.
and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Allied Film Laboratory, Inc.
------------------------------------------
Allied Digital Technologies Corp. Retained
------------------------------------- earnings
Common Paid-in (Accumulated Common Paid-in (accumulated
stock capital deficit) stock capital deficit) Total
--------- ----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1993 $ 22,526 $ 543,087 $ 13,953,542 $ 14,519,155
Net income 7,327,177 7,327,177
Distributions to stockholders (4,532,030) (4,532,030)
Issuance of common stock 487 312,971 313,458
------------ ------------ ------------ ------------
Balance as of January 1, 1994 23,013 856,058 16,748,689 17,627,760
Net loss (117,122) (117,122)
Distributions to stockholders (18,083,821) (18,083,821)
Issuance of common stock $ 2 $ 1,998 702 537,533 540,235
Issuance of shares under
book value stock plan 500,000 500,000
--------- ----------- ------------ ------------ ------------ ------------ ------------
Balance as of July 31, 1994 2 1,998 23,715 1,893,591 (1,452,254) 467,052
Net income (loss) $ (1,315,955) 4,144,472 2,828,517
Distributions to stockholders (666,878) (666,878)
ADT organization costs (500,000) (500,000)
Recapitalization and pooling
of AFL and ADT 74,907 3,867,739 (23,715) (1,893,591) (2,025,340)
Stock issued to purchase HMG 61,287 41,372,336 41,433,623
--------- ----------- ------------ ------------ ------------ ------------ ------------
Balance as of July 31, 1995 136,196 44,742,073 (1,315,955) -- -- -- 43,562,314
Net loss (5,585,460) (5,585,460)
--------- ----------- ------------ ------------ ------------ ------------ ------------
Balance as of July 31, 1996 $ 136,196 $44,742,073 $ (6,901,415) $ -- $ -- $ -- $37,976,854
========= =========== ============ ============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
<TABLE>
<CAPTION>
Allied Digital Technologies Corp.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Seven-month period
Year ended July 31, ended July 31, Year ended
-------------------------- ------------------------ December 31,
1996 1995 1994 1993 1993
------------ ----------- ---------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (5,585,460) $ 2,828,517 $ (117,122) $ 3,982,934 $ 7,327,177
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities
Compensation expense related to
issuance of shares under book
value stock plan 500,000
Noncash accrued interest to
stockholder 579,726
Abandoned asset write-off 837,935
Depreciation and amortization of
property and equipment 8,716,315 6,871,693 2,607,679 2,307,697 4,219,247
Amortization of excess of cost
over fair value of net assets
acquired 2,580,314 1,559,878 176,822 176,822 303,123
Deferred income taxes (2,534,847) (2,575,618)
(Gain) loss on sale of property
and equipment (19,662) (35,502) (10,529) 36,133 41,774
Provision for doubtful accounts 1,297,294 937,504 197,394 255,100 433,038
Changes in operating assets and
liabilities, net of effect of
acquisitions and mergers
Accounts receivable 5,048,617 (4,177,330) 2,006,128 1,536,269 3,487,820
Officer loan receivable 101,167 101,167
Inventories 4,037,751 2,595,669 (1,094,035) (7,106,960) (2,940,911)
Prepaid expenses (1,437) 41,009 (122,293) 72,562 89,962
Other assets 1,403,582 (1,474,849) (515,872) (295,025) 41,839
Accounts payable and
accrued liabilities (2,042,770) 2,496,259 (4,075,111) 1,166,207 (5,335,804)
------------ ----------- ---------- ----------- -----------
Net cash provided by (used in)
operating activities 14,317,358 9,067,230 (446,939) 2,232,906 7,768,432
------------ ----------- ---------- ----------- -----------
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
Allied Digital Technologies Corp.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Seven-month period Year ended
Year ended July 31, ended July 31, December 31,
-------------------------- -------------------------- -----------
1996 1995 1994 1993 1993
----------- ------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities
Purchases of and deposits on
property and equipment $(9,304,407) $ (7,887,612) $ (432,101) $(6,177,177) $(7,191,376)
Costs of HMG acquisition (1,520,856)
Proceeds from sale of property and
equipment 42,443 150,792 52,478 47,698
Proceeds from cash surrender value
of life insurance 754,648
Internally developed software (643,723)
Payment for acquisition, net of cash
acquired (916,096) (916,096)
Sale of marketable securities 385,278 401,806
----------- ------------ ------------ ----------- -----------
Net cash used in investing
activities (9,261,964) (9,146,751) (379,623) (6,707,995) (7,657,968)
----------- ------------ ------------ ----------- -----------
Cash flows from financing activities
Net borrowings (payments) under
revolving notes (6,764,383) 6,023,372 4,900,700 9,165,000 (800,000)
ADT organization costs (500,000)
Repayment of long-term debt (7,490,319) (27,472,086) (157,218) (3,289,340) (3,375,961)
Borrowing of long-term debt and
subordinated notes payable to
stockholders 9,470,620 23,174,729 14,000,000 7,194,300
Payment of deferred financing fees (731,672)
Distributions to stockholders (666,878) (18,083,821) (1,794,040) (4,532,030)
Issuance of common stock in exchange
for cash 540,235 313,458 313,458
----------- ------------ ------------ ----------- -----------
Net cash provided by (used in)
financing activities (4,784,082) (172,535) 1,199,896 4,395,078 (1,200,233)
----------- ------------ ------------ ----------- -----------
NET INCREASE (DECREASE)
IN CASH 271,312 (252,056) 373,334 (80,011) (1,089,769)
Cash and cash equivalents at beginning
of period $ 559,411 $ 811,467 $ 438,133 $ 1,527,902 $ 1,527,902
----------- ------------ ------------ ----------- -----------
Cash and cash equivalents at end of
period $ 830,723 $ 559,411 $ 811,467 $ 1,447,891 $ 438,133
=========== ============ ============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 5,671,786 $ 4,459,248 $ 822,309 $ 365,860 $ 828,101
=========== ============ ============ =========== ===========
Income taxes $ 8,978 $ 1,144,500 $ 287,781 $ 355,480 $ 434,316
=========== ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements have been prepared by Allied Digital
Technologies Corp. ("Allied Digital"), including the accounts of its
wholly-owned subsidiaries, Allied Film Laboratories, Inc. ("AFL") and HMG
Digital Technologies Corporation ("HMG") and subsidiary, HRM Holdings Corp.
("Holdings") and its wholly-owned subsidiary, Hauppauge Record
Manufacturing, Ltd. ("Hauppauge Record"), hereinafter referred to
collectively as the "Company." Allied Digital is a holding company; all
assets, liabilities and operating activities are related to its
wholly-owned subsidiaries, AFL and HMG and subsidiary. The consolidated
statements of operations include the operations of Allied Digital and AFL
(entities under common control through January 12, 1995) for all periods
presented. The results of operations of HMG and subsidiary have been
included in the consolidated results of operations since the date of merger
(Note 2). In conjunction with the Company's restructuring plan (Note 10),
AFL merged with and into Hauppauge Record on November 1, 1996 as a
condition to the Company's debt refinancings described in Note 4 below.
The Company (i) provides video cassette duplication and fulfillment
services in addition to processing and duplicating commercial film and
offering post-production services, and (ii) replicates cassette tapes, VHS
video tapes and compact discs under production contracts with companies
primarily in the recorded music industry.
During fiscal 1995, the Company changed its year-end from December 31 to
July 31. The accompanying financial statements include the results of
operations and cash flows for the seven-month transition period ended July
31, 1994 with comparative presentation of the unaudited results for the
seven months ended July 31, 1993. Results of operations for the seven-month
periods ended July 31, 1994 and 1993 are not necessarily indicative of the
operating results which would be expected for a full year.
NOTE 2 - MERGERS AND ACQUISITIONS
HMG Merger
Effective January 12, 1995, the Company acquired all of the outstanding
common stock of AFL and HMG in exchange for approximately 55% and 45%,
respectively, of the then outstanding common
F-10
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 2 (continued)
shares of Allied Digital. In addition, AFL stockholders were issued Class C
warrants to purchase an additional 1,250,000 shares of Allied Digital
common stock (Note 7). Upon consummation of the merger, existing HMG
warrants totalling 3,067,500 shares, were converted into Allied Digital
warrants on similar terms. In addition, options to acquire up to 400,000
shares of common stock were issued in substitution for outstanding options
of HMG. The acquisition of AFL stock was accounted for as a merger under
the pooling of interests method of accounting as the companies were under
common control. The merger of HMG was accounted for under the purchase
method of accounting as a reverse acquisition of HMG by AFL. Accordingly,
the assets acquired and liabilities assumed of HMG were recorded at their
estimated fair values of approximately $88,666,000 and $45,776,000,
respectively. The excess of fair value of HMG over the estimated fair value
of the net assets acquired was approximately $45,611,000. This asset has
been recorded as excess of cost over fair value of net assets acquired and
is being amortized on a straight-line basis over 20 years.
The unaudited consolidated results of operations on a pro forma basis for
the year ended July 31, 1995 and the seven months ended July 31, 1994 as
though HMG had been acquired as of August 1, 1994 and January 1, 1994,
respectively, are presented below. The pro forma information does not
purport to be indicative of what would have occurred had the acquisition
been made as of those dates or of results which may occur in the future.
Seven-month
Year ended period ended
July 31, July 31,
1995 1994
------------ ------------
(unaudited) (unaudited)
Net sales $161,308,000 $ 77,892,000
Income (loss) before extraordinary item 667,000 (1,034,000)
Net income (loss) 667,000 (1,130,000)
Earnings (loss) per common share before
extraordinary item .05 (.08)
Net earnings (loss) per common share .05 (.08)
Weighted average shares 13,621,113 13,619,644
F-11
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 2 (continued)
In preparing the pro forma data, adjustments have been made for: (i) the
amortization of the excess of cost over fair value of net assets acquired
and stepped-up property and equipment; (ii) the interest expense related to
the borrowings to finance the shareholder distributions of previously taxed
income and the conversion of preferred stock into subordinated debt; (iii)
the elimination of intercompany sales; (iv) the elimination of merger
related costs and redundant general and administrative costs; and (v) the
related tax impacts including the revocation of the Subchapter S election.
The following is a reconciliation from reported net income for Allied
Digital to pro forma consolidated operations of HMG and AFL:
Seven-month
Year ended period ended
July 31, July 31,
1995 1994
(unaudited) (unaudited)
----------- -----------
Net income (loss) as reported $ 2,829,000 $ (117,000)
HMG net earnings, pre-acquisition 768,000 367,000
Elimination of merger costs and redundancies 1,344,000 786,000
Amortization of cost in excess of fair value
of net assets acquired (1,013,000) (1,336,000)
Interest expense (231,000) (699,000)
Reversal of tax credit arising from
revoking S election (1,625,000)
Pro forma tax provision (1,193,000) 231,000
Depreciation of excess of fair value over
book for acquired assets (212,000) (266,000)
----------- -----------
$ 667,000 $(1,034,000)
=========== ===========
AFL provided certain video replication services to HMG. For the period from
January 1, 1994 through July 31 ,1994, sales to HMG amounted to
approximately $998,000. For the period from August 1, 1994 through January
11, 1995, sales to HMG amounted to approximately $4,000,000.
F-12
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 2 (continued)
VCA Acquisition
Effective January 12, 1993, the Company acquired certain assets and assumed
certain liabilities of VCA/Teletronics, Inc. ("VCA") for cash of $1,000,000
and a long-term note payable of $1,570,315 (Note 4). Also, under the
purchase agreement, the Company is contingently liable to VCA for certain
royalty payments payable for each of the calendar years ending December 31,
1996 through and including December 31, 2000 in an amount based on the
number of videotape duplication units sold during those years. As the
amount of videotape duplication units sold during those years is not
reasonably estimable, a liability has not been reflected in the
accompanying financial statements. The purchase agreement also contains a
covenant not-to-compete for a period of three years.
The Company accounted for the acquisition as a purchase. The excess of
consideration paid over the estimated fair value of the net assets acquired
in the amount of $4,546,842 has been recorded as excess of fair value over
the cost of net assets acquired and is being amortized on a straight-line
basis over 15 years.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of Allied
Digital Technologies Corp., and its wholly-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers highly liquid temporary cash investments with an
original maturity of three months or less to be cash equivalents.
F-13
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 3 (continued)
Inventories
Inventories utilized in the manufacturing and loading of videocassettes,
audiocassettes and manufacturing of compact discs are valued at the lower
of cost or market, using the first-in, first-out (FIFO) method. Elements
included in the determination of cost include direct materials, direct
labor and certain other manufacturing labor and overhead costs.
Inventories consist of the following classifications:
July 31,
------------------------------
1996 1995
---------- ----------
Raw materials $3,882,455 $7,296,930
Work-in-process 827,142 1,387,537
Finished goods 664,901 727,782
---------- ----------
$5,374,498 $9,412,249
========== ==========
Property and Equipment
Property and equipment are stated at historical cost.
Depreciation and amortization are provided for over their estimated service
lives. Leasehold improvements are amortized over the lives of the
respective leases or the service lives of the improvements, whichever is
shorter. Straight-line and accelerated methods are used for reporting
purposes. Accelerated methods are used for income tax purposes.
Effective August 1, 1994, AFL changed from accelerated methods to
straight-line depreciation for financial reporting purposes for all new
fixed asset additions in order to establish consistent policies regarding
depreciation with HMG. The straight-line method more accurately reflects
the utilization, resulting revenue stream and rate of degeneration of these
assets. The impact of this change was not material to these consolidated
financial statements.
F-14
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 3 (continued)
Significant Customers
During the year ended July 31, 1996, sales to two customers accounted for
16% and 13% of net sales with corresponding accounts receivable from these
customers totaling 13% and 8% of accounts receivable as of July 31, 1996,
respectively. During the year ended July 31, 1995, sales to one customer
accounted for 15% of net sales with corresponding accounts receivable from
this customer totaling 12% of accounts receivable as of July 31, 1995.
During the seven-month period ended July 31, 1994, sales to one customer
accounted for 11% of net sales with a corresponding account receivable from
this customer totaling 1% of accounts receivable as of July 31, 1994.
During the seven-month period ended July 31, 1993, there were no
significant customers. For the year ended December 31, 1993, sales to two
customers accounted for 17% and 10% of net sales.
Cost in Excess of Fair Value of Net Assets Acquired
On an ongoing basis, management reviews the evaluation and amortization of
cost in excess of fair value of net assets acquired. As part of this
review, the Company considers the value of future cash flows attributable
to the acquired operations in evaluating potential impairment.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of",
requires long-lived assets to be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets
may not be recoverable. This statement is required to be adopted by the
Company during its fiscal year ending July 31, 1997. Although a detailed
analysis has not been performed, the Company believes there would be no
material impact on the consolidated financial statements if this statement
were adopted as of July 31, 1996.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock Based Compensation," provides companies a choice in
the method of accounting used to determine
F-15
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 3 (continued)
stock-based compensation. Companies may account for such compensation
either by using the intrinsic value-based method provided by APB Opinion
No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employers," or the
fair market value-based method provided in SFAS No. 123. This statement is
required to be adopted by the Company during its fiscal year ending July
31, 1997. The Company intends to use the intrinsic value-based method
provided in APB No. 25 to determine stock-based compensation. The sole
effect of the adoption of SFAS No. 123 is the obligation imposed on the
Company to comply with the new disclosure requirements provided
thereunder.
Revenue Recognition
Revenue from substantially all production contracts is generally recognized
upon shipment of the finished goods. In addition, for certain contracts,
where risk and rewards of ownership have passed to the customer, the
Company recognizes revenue when production is complete.
Deferred Charges, Deposits and Other
Deposits and other includes deposits on contractual commitments for
equipment purchases, customer allowances under long-term contracts and
internally developed software costs. Deferred charges consist of loan
origination fees associated with the Company's financing transactions and
have been capitalized and are being amortized over the term of the
underlying credit agreements. Customer allowances are amortized over the
term of the contract provided recoverability is assured (Note 9).
Internally developed software was being amortized on a straight-line basis
over its expected useful life; however, this asset was written off in
fiscal 1996 as an abandoned asset in connection with the Company's
restructuring plan (Note 10).
Other Income
Other income, net includes interest income, recovery of accounts
receivable previously written off as uncollectible and scrap material
sales.
F-16
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 3 (continued)
Earnings (Loss) Per Share
Earnings (loss) per common share have not been presented for pre-fiscal
1995 historical data due to the recapitalization for AFL via Allied
Digital. Pro forma presentation has been made as if both the
recapitalization and merger had occurred as of August 1, 1994 (Note 2).
Pro forma earnings per common share for the year ended July 31, 1995 have
been computed by dividing pro forma net earnings by the pro forma weighted
average shares of common stock issued as a result of the recapitalization
and merger. Net loss per common share for the year ended July 31, 1996 was
computed by dividing the net loss by the weighted average shares
outstanding. The effect of stock options and warrants on the fiscal 1996
computation was not dilutive. Actual and pro forma weighted average shares
outstanding were 13,619,644 and 13,621,113 for the years ended July 31,
1996 and 1995, respectively.
Financial Instruments
The Company's principal financial instruments consist of accounts
receivable, accounts payable, long-term debt and subordinated notes payable
to stockholders. The Company believes that the carrying amount of such
instruments approximates fair value.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements,
as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-17
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 4 - LONG-TERM DEBT AND SUBORDINATED NOTES PAYABLE
Long-term debt and subordinated notes payable consist of the following:
July 31,
----------------------------
1996 1995
------------ ------------
Loan and Security Agreement
Term loan $ 27,112,055 $ 27,084,585
Revolving loan 10,558,492 17,322,875
Subordinated 10% Notes Payable to
Stockholders 6,579,726 4,000,000
Subordinated 12% Series A Note Payable to
Stockholder 3,500,000 3,500,000
Subordinated 11% Series B Notes Payable to
Stockholders 916,660 916,660
Note Payable to VCA 1,389,186 1,570,315
Other 326,317 192,357
------------ ------------
50,382,436 54,586,792
Less current portion (9,153,641) (5,370,376)
------------ ------------
$ 41,228,795 $ 49,216,416
============ ============
Debt Refinancings
In conjunction with the Company's restructuring plan and merger of AFL into
Hauppauge Record referred to in Note 1 above, (i) the separate senior loan
credit facilities previously maintained by AFL and Hauppauge Record with a
bank were combined under an amended and restated loan and security
agreement between Hauppauge Record and such bank dated as of October 30,
1996 and effectuated as of November 1, 1996, (ii) the Subordinated 12%
Series A Note Payable to Stockholder was repaid in full on November 8, 1996
with funds of (a) $1.5 million available as an additional loan under the
October 30, 1996 amended and restated loan and security agreement and (b)
$2 million advanced by certain other stockholders in the form of additional
subordinated notes dated October 30, 1996 and (iii) the payment terms of
the Subordinated 10% Notes Payable to Stockholders having an original
principal sum of $6,000,000, plus unpaid interest thereon of $729,444
through October 30, 1996 ($579,726 as of July 31, 1996) were extended.
F-18
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 4 (continued)
As a result of these subsequent to year-end debt refinancings, the Company
has classified its debt outstanding in the accompanying consolidated
balance sheet as of July 31, 1996 in accordance with the terms of the
October 30, 1996 debt agreements.
Loan and Security Agreement
The October 30, 1996 loan and security agreement provides the Company with
borrowings of up to $48,910,169 under credit facilities consisting of a (i)
$25,410,169 term loan, (ii) $22,000,000 revolving loan facility (combined
with a $1,500,000 letter of credit facility) and (iii) $1,500,000
additional loan.
The loan and security agreement is collateralized by substantially all of
the assets of the Company. The agreement contains covenants which, among
other matters, (1) require the Company to (i) maintain increasing levels of
net worth, (ii) maintain a minimum debt service ratio and (iii) limit its
annual capital expenditures, and (2) place limitations on (i) additional
indebtedness, encumbrances and guarantees, (ii) consolidations, mergers or
acquisitions, (iii) investments or loans, (iv) disposal of property, (v)
compensation to officers and others, (vi) dividends and stock redemptions,
(vii) issuance of stock, and (viii) transactions with affiliates, all as
defined in the agreement. As of July 31, 1996, there is no equity available
for the payment of dividends to stockholders. The agreement also contains
provisions for fees payable to the bank upon prepayment and an increased
rate of interest during periods of default. The term of this agreement
extends to November 30, 2000.
a. Term Loan
The $25,410,169 term loan dated October 30, 1996 ($27,112,055 at July
31, 1996) is payable in an initial installment aggregating $1,695,462
on October 31, 1996, 30 consecutive monthly installments of $548,054
thereafter through April 30, 1999 and a final installment on May 30,
1999 of $273,098 together with additional prepayments of principal of
$2,000,000 on October 31, 1997 and $5,000,000 on October 31, 1998. No
prepayment fees result from these scheduled prepayments. In addition,
interest is payable monthly at 1.5% over the bank's base rate (9.75% at
July 31, 1996).
F-19
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 4 (continued)
b. Revolving Loan
Under the revolving loan facility combined with a $1,500,000 letter of
credit facility, the Company may borrow up to a maximum of $22,000,000
based upon a percentage of accounts receivable and inventory, as
defined, less the sum of the undrawn face amount of any letters of
credit outstanding. Interest is payable monthly at 1.25% over the
bank's base rate. In addition, the Company is required to pay, on a
monthly basis, an unused facility fee of .5% per annum. At July 31,
1996, the Company had approximately $5,090,000 unused and available
under the revolving loan facility.
c. Additional Loan
The $1,500,000 additional loan dated October 30, 1996 (see debt
refinancings above) is payable in 25 consecutive monthly installments
commencing December 31, 1996 of $60,000 each plus interest at 1.5% over
the bank's base rate.
Subordinated 10% Notes Payable to Stockholders
The $6,729,444 subordinated 10% notes payable to stockholders dated October
30, 1996 ($6,579,726 at July 31, 1996) is payable in full on January 1,
2001. Interest accrues only on the original principal sum of $6,000,000 and
is payable quarterly at 10% per annum (12% upon default), however, to the
extent interest is not permitted to be paid pursuant to the terms of the
amended and restated loan and security agreement with the bank, such
accrued and unpaid interest becomes payable on January 1, 2001.
Subordinated 11% Series B Notes Payable to Stockholders
These uncollateralized notes mature on January 1, 1999 with interest
payable quarterly.
Additional 10% Subordinated Notes Payable to Stockholders
The $2,000,000 additional 10% subordinated notes payable to stockholders
dated October 30, 1996 (see debt refinancings above) are uncollateralized
and payable in full on December 31, 1998 with interest payable quarterly;
however, payment of principal and interest may be extended in full or in
F-20
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 4 (continued)
part to January 1, 2001 to the extent not permitted to be paid pursuant to
the terms of the amended and restated loan and security agreement with the
bank.
Note Payable to VCA
This uncollateralized note is payable in annual installments of $385,374
beginning January 1995 through January 2001, including interest at 12%.
The following is a summary of the aggregate annual maturities of long-term
debt and subordinated notes payable as of July 31, 1996 taking into effect
the October 30, 1996 debt refinancings described above:
Year ending July 31,
1997 $ 9,153,641
1998 9,640,406
1999 13,745,697
2000 336,051
2001 17,506,641
-----------
$50,382,436
===========
NOTE 5 - EMPLOYEE BENEFIT PLANS
Profit-sharing Plan
The Company has a profit-sharing plan. Contributions to the plan are
discretionary and are determined annually by the Board of Directors. The
profit-sharing contributions charged to operations totaled $476,000 and
$875,000 for the seven-month period ended July 31, 1993 and for the year
ended December 31, 1993. No contributions were made for the years ended
July 31, 1996 and 1995, and for the seven-month period ended July 31, 1994.
F-21
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 5 (continued)
Retirement Plan
Hauppauge Record participates in a defined benefit multi-employer pension
plan covering union employees. Contributions for the year ended July 31,
1996 and for the period from January 12, 1995 to July 31, 1995 totaled
$308,000 and $153,000, respectively. The Company does not provide other
post-retirement benefits to its employees.
Book Value Stock Plan
The Company had a book value stock plan whereby certain employees of the
Company utilized payments to purchase common stock at a price based on a
book value formula. In connection with the merger discussed in Note 2, the
Company presumed that the 2,108 shares issued during the seven-month period
ended July 31, 1994 were issued in contemplation of this reorganization.
Accordingly, the Company recognized nonrecurring, noncash compensation
expense of $500,000, which is the difference between the book value price
paid and the estimated fair market value of the common stock.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Related Party and Other Leases
The Company leases certain of its processing and administrative facilities
from affiliated companies under noncancellable operating leases which
expire at various dates between 1997 and 2020. Rent expense under these
leases amounted to approximately $2,369,000, $1,706,000, $800,000, $751,000
and $1,325,000 for the years ended July 31, 1996 and 1995, for the
seven-month periods ended July 31, 1994 and 1993, and for the year ended
December 31, 1993, respectively. The Company has guaranteed certain
mortgage debt on these facilities totalling approximately $1,514,000 at
July 31, 1996.
F-22
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 6 (continued)
The Company also leases other processing facilities from various nonrelated
parties under noncancellable operating leases which expire at various dates
between 1997 and 2000 and provide for renewals at various rates and terms.
Amounts charged to operations for these facilities amounted to
approximately $2,237,000, $2,547,000, $797,000, $765,000 and $1,338,000 for
the years ended July 31, 1996 and 1995, for the seven-month periods ended
July 31, 1994 and 1993, and for the year ended December 31, 1993,
respectively.
The minimum annual rental commitments required under all facility leases
are as follows:
Year ending July 31,
1997 $ 4,352,000
1998 3,973,000
1999 3,422,000
2000 2,123,000
2001 1,753,000
Thereafter 20,149,000
-----------
$35,772,000
===========
Other Leases
The Company also leases various office equipment and automobiles under
noncancellable operating leases expiring through March 1998. The minimum
rent commitments required under these leases are as follows:
Year ending July 31,
1997 $ 286,000
1998 217,000
1999 206,000
2000 171,000
2001 143,000
----------
$1,023,000
==========
F-23
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 6 (continued)
Employment Agreements
The Company maintains employment agreements with certain executive
officers. Salary continuation is provided for any executive who is
terminated without cause, as defined.
As of July 31, 1996, the aggregate minimum compensation obligation under
active employment agreements is as follows:
Year ending July 31,
1997 $ 987,000
1998 286,000
----------
$1,273,000
==========
Global Indemnification Agreement
On June 17, 1994, the Company entered into a Global Indemnification
Agreement with affiliates from whom it rents property. The Agreement
indemnifies the affiliates and holds them harmless for liabilities, if any,
related to environmental law and hazardous substance utilization on the
leased properties. This indemnification excludes any hazardous substance
that may be placed on the leased properties by someone other than the
Company, after the Company ceases to occupy the applicable property. In
exchange for indemnifying the affiliates, the Company received $25,000 from
the affiliates.
F-24
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 6 (continued)
Litigation Matters
The Company is involved in various routine litigation which arise through
the normal course of business. Management believes that the resolution of
these matters will not have a material adverse effect on the consolidated
financial position or results of operations.
NOTE 7 - STOCKHOLDERS' EQUITY
The Company's issued and outstanding common stock warrants and options are
as follows:
Common Stock Warrants
The Company has 1,353,750 Class A redeemable warrants and 1,353,750 Class B
redeemable warrants outstanding as of July 31, 1996. Each Class A and Class
B redeemable warrant entitles the registered holder thereof to purchase one
share of common stock at a price of $6.75 and $7.50 per share,
respectively, subject to certain adjustment, until July 28, 1997. The
Company, at its own option, may redeem the Class A redeemable warrants and
the Class B redeemable warrants, in each case as a class and not in part,
at a price of $.05 per warrant provided the reported closing bid price of
the common stock equals or exceeds $8.50 per share for a length of time as
specified in the agreements. The warrant holders have exercise rights until
the close of business on the date fixed for redemption.
The Company has 120,000 units outstanding as of July 31, 1996 which are
exercisable through July 28, 1997 at an exercise price of $9.90 per unit.
Each unit consists of one share of common stock, one Class A redeemable
warrant and one Class B redeemable warrant. The exercise price of the Class
A and the Class B redeemable warrants, in accordance with these units, is
$9.79 and $10.88, respectively.
F-25
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 7 (continued)
The Company also has 1,250,000 Class C warrants outstanding as of July 31,
1996. Each Class C warrant entitles the registered holder thereof to
purchase one share of common stock at a price of $9.00 per share, beginning
two years after the date of the HMG merger (January 12, 1997) and expiring
three years after becoming exercisable.
Stock Options
The Company has established an Amended and Restated 1994 Long-Term
Incentive Plan (the "Plan") under which options to purchase shares of the
Company's common stock and other stock incentives may be granted to
eligible participants. The maximum number of shares available for awards
under the Plan is 2,400,000 shares, of which no more than half may be
newly-issued shares. Shares issued to holders of HMG common stock or AFL
common stock in the merger and subsequently reacquired by Allied Digital,
as well as any other shares acquired by Allied Digital after the merger, in
the public market or otherwise, would not be considered newly-issued shares
for this purpose. Upon consummation of the merger described in Note 2,
Allied Digital issued, under the Plan, options to acquire up to 400,000
shares of common stock in substitution for outstanding options of HMG. At
July 31, 1996, the Company has 547,500 options outstanding, exercisable at
prices ranging from $5.5625 to $8.63, vesting at various dates through July
1999 and expiring at various dates between November 1998 and September
2003.
<TABLE>
<CAPTION>
Incentive Stock Options Nonqualified Stock Options
---------------------------- ----------------------------
Exercise Exercise
price Quantity price Quantity
------------- ------- ----------- -------
<S> <C> <C> <C> <C>
Outstanding August 1, 1994 - - - -
Exchanged in substitution for
outstanding HMG issuances $6.94 50,000 $6.66-$8.63 275,000
Granted during year 5.5625 299,500
------------- ------- ----------- -------
Outstanding July 31, 1995 $5.5625-$6.94 349,500 $6.66-$8.63 275,000
Cancelled during year 5.5625 (77,000) - -
------------- ------- ----------- -------
Outstanding July 31, 1996 $5.5625-$6.94 272,500 $6.66-$8.63 275,000
============= ======= =========== =======
</TABLE>
F-26
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 7 (continued)
In connection with a June 1995 sales contract (Note 9), the Company granted
to a customer 250,000 options to acquire shares of Company common stock at
an exercise price of $5.5625, equivalent to the quoted market price on such
date. These options expire in June 2000.
The following information summarizes the Company's stock options and
warrants at July 31, 1996:
Range of
exercise
Description Authorized Issued Exercisable price
- - ----------- --------- ------- ------- -------------
Class A warrants 1,353,750 1,353,750 1,353,750 $ 6.75
Class B warrants 1,353,750 1,353,750 1,353,750 7.50
Class C warrants 1,250,000 1,250,000 -- 9.00
Units - shares 120,000 120,000 120,000 9.90
Units - Class A warrants 120,000 120,000 120,000 9.79
Units - Class B warrants 120,000 120,000 120,000 10.88
Incentive stock options/
nonqualified stock options 2,400,000 547,500 393,875 5.5625-8.63
Options - other 250,000 250,000 250,000 5.5625
--------- ------- ------- -------------
Balance at July 31, 1996 6,967,500 5,115,000 3,711,375 $5.5625-$10.88
========= ========= ========= =============
NOTE 8 - INCOME TAXES
Prior to January 12, 1995, the stockholders of AFL had elected, under the
provisions of Subchapter S of the Internal Revenue Code, to have the income
and related tax benefits of AFL included in the taxable income of the
individual stockholders. As a result, no provision for Federal income taxes
has been included in the historical statements of operations prior to
January 12, 1995.
On January 12, 1995, AFL became disqualified, under the provisions of
Subchapter S of the Internal Revenue Code, to have the income of the
Company included in the taxable income of the individual stockholders. In
connection with this disqualification, the Company established net deferred
tax assets of approximately $1,625,000. The effect of establishing the
deferred tax assets was included in income for the year ended July 31,
1995. Subsequent to January 12, 1995, the Company has
F-27
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 8 (continued)
provided Federal income taxes in the statements of income based on the
effective tax rate. The unaudited pro forma adjustment to income tax
provision and net income have been presented in the consolidated statements
of income as if the Subchapter S election had been terminated prior to
January 1, 1993.
The Company utilizes the asset and liability method of accounting for
income taxes under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." This statement requires the Company to
recognize deferred tax assets and liabilities for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled.
The provision (credit) for income taxes is as follows:
Seven-month period
Year ended July 31, ended July 31, Year ended
-------------------------- ----------------------- December 31,
1996 1995 1994 1993 1993
----------- ----------- ----------- -------- --------
Federal
Deferred $(1,758,663) $(1,556,409)
State
Current $ 85,218 $159,675 $375,400
Deferred (776,184) (1,019,209)
----------- ----------- ----------- -------- --------
$(2,534,847) $(2,575,618) $ 85,218 $159,675 $375,400
=========== =========== =========== ======== ========
F-28
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 8 (continued)
Deferred income tax assets (liabilities) resulting from differences between
accounting for financial statement purposes and tax purposes are as follows:
July 31,
------------------------------
1996 1995
----------- -----------
Restructuring costs $ 1,115,000
Nonrecurring charge 391,000
Accounts receivable 585,000 $ 332,000
Inventory 144,000 294,000
Accrued salaries 378,000 332,000
Net operating loss carryover 2,365,000 918,000
State investment tax credits 1,239,000 816,000
----------- -----------
6,217,000 2,692,000
----------- -----------
Property and equipment (1,332,000) (632,000)
Other accrued expenses (133,000) (55,000)
----------- -----------
(1,465,000) (687,000)
----------- -----------
Valuation allowance (732,000) (519,000)
----------- -----------
Net deferred tax asset $ 4,020,000 $ 1,486,000
=========== ===========
F-29
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 8 (continued)
The Company's effective income tax rate was 31.2% in 1996 and (1,018)% in
1995. The components of the reconciliation of the Company's effective tax
expense (benefit) to the tax expense (benefit) pursuant to the U.S.
statutory rate of 34% are as follows:
Year ended July 31,
---------------------------
1996 1995
----------- -----------
Federal tax expense (benefit) computed at
statutory rate $(2,760,904) $ 85,986
S corporation earnings -- (880,464)
Amortization of costs in excess of net assets
acquired 625,949 427,582
Nondeductible entertainment expenses 47,775 32,884
State tax benefit net of Federal tax (341,448) (202,370)
Recognition of investment tax credit (106,219) (414,401)
Reinstatement of deferred taxes -- (1,624,835)
----------- -----------
Actual tax benefit $(2,534,847) $(2,575,618)
=========== ===========
HMG is in the process of undergoing an IRS tax examination. In connection
with this examination, management does not anticipate any material adverse
effect on the Company's consolidated financial position and results of
operations upon its ultimate resolution.
The Company has an NOL carryforward as of July 31, 1996 for Federal
purposes of approximately $6,247,000 which expires during the fiscal years
ending 2010 and 2011.
The Company uses the flow-through method of accounting for investment tax
credits. The Company has state investment tax credit carryforwards at July
31, 1996 approximating $1,590,000 which expire between fiscal 2003 and
2006.
F-30
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 9 - NONRECURRING CHARGE
In June 1995, the Company, in connection with consummating a five-year
production and fulfillment sales contract, agreed to, among other things, a
customer signing allowance in the amount of $1,250,000 to be amortized over
the term of the contract. Based on the fiscal 1996 financial results
relating thereto and an assessment made in the fiscal 1996 fourth quarter
of anticipated future results of performing thereunder, the Company
determined that the unamortized balance of the deferred charge was not
recoverable and, accordingly, charged to operations the remaining
unamortized balance.
NOTE 10 - RESTRUCTURING CHARGE
In June 1996, the Company adopted a plan to streamline and reduce resources
utilized in the business which resulted in recording a restructuring charge
of approximately $3.1 million in the fourth quarter of fiscal 1996. The
restructuring charge comprised of work force related expenses of
$1,126,358, idle plant lease costs of $863,000, abandoned asset write off
of $837,935 and other related costs of $250,000. As of July 31, 1996, the
balance of the restructuring liability was approximately $2,239,000 and is
included in accrued expenses.
F-31
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1996 and 1995
NOTE 11 - QUARTERLY FINANCIAL DATA
Summarized quarterly financial data is as follows (unaudited and in thousands):
Net income
Gross (loss)
Revenue margin (ii)(iii)
------- ------ -------
1996
First quarter $47,336 $9,606 $ 851
Second quarter 40,016 6,048 (1,465)
Third quarter 38,631 6,656 (1,012)
Fourth quarter 37,798 5,120 (3,959)
1995
First quarter $21,724 $9,084 $ 2,513
Second quarter (iv) 23,683 6,171 1,578
Third quarter (i) 36,185 7,508 237
Fourth quarter 38,201 4,359 (1,499)
1994
First quarter $25,041 $7,781 $ 2,650
Second quarter 19,099 6,244 585
Third quarter 20,972 6,935 1,506
Fourth quarter 14,120 4,555 (1,513)
- - ----------
(i) Effective January 12, 1995, the Company consummated a reverse acquisition
merger of HMG (Note 2).
(ii) Historical earnings per share have not been presented due to the
recapitalization of AFL via Allied Digital (Note 3).
(iii)Prior to January 12, 1995, the Company was not taxable for Federal income
tax purposes under the provisions of Subchapter S of the Internal Revenue
Code (Note 8).
(iv) Upon becoming disqualified under the provision of Subchapter S on January
12, 1995, the Company established net deferred tax assets of $1,625,000 in
the second quarter of fiscal 1995 (Note 8).
F-32
<PAGE>
Allied Digital Technologies Corp. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
---------------------
(1) (2)
Charged to
Balance at Charged to other Balance at
beginning costs and accounts - Deductions - end of
of period expenses describe describe period
-------- ---------- -------- ---------- ----------
Description
-----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
For the year ended July 31, 1996 $871,000 $1,297,294 $ 653,294 (a) $1,515,000
======== ========== ========== ==========
For the year ended July 31, 1995 $918,000 $ 937,504 $395,000 (b) $1,379,504 (a) $ 871,000
======== ========== ======== ========== ==========
For the seven-month period ended
July 31, 1994 $910,000 $ 197,394 $ 189,394 (a) $ 918,000
======== ========== ========== ==========
For the year ended December 31, 1993 $744,000 $ 433,038 $ 267,038 (a) $ 910,000
======== ========== ========== ==========
</TABLE>
(a) Write-off of uncollectible accounts
(b) Attributable to HMG Merger
F-33
<PAGE>
Exhibit
No. Description of Exhibit
--- ----------------------
(2)(a) Amended and Restated Reorganization Agreement, dated as of October 31,
1994, among Allied Digital Technologies Corp., Allied Film Laboratory, Inc., EOS
Acquisition Corp., Aurora Acquisition Corp., HMG Digital Technologies Corp., HRM
Holdings Corp., and Hauppauge Record Manufacturing Ltd. (herein incorporated by
reference to Exhibit (2)/(10)(a) filed as part of registrant's Registration
Statement on Form S-4, File No. 33-86530).
(2)(b) Amended and Restated Agreement and Plan of Merger, dated as of October
31, 1994, among Allied Digital Technologies Corp., Allied Film Laboratory, Inc.,
and Aurora Acquisition Corp. (herein incorporated by reference to Annex B (pages
B-1 through B-10) to the Proxy Statement and Prospectus that formed a part of
registrant's Registration Statement on Form S-4, File No.
33-86530).
(2)(c) Amended and Restated Agreement of Merger, dated as of October 31, 1994,
among Allied Digital Technologies Corp., EOS Acquisition Corp., and HMG Digital
Technologies Corp. (herein incorporated by reference to Annex C (pages C-1
through C-9) to the Proxy Statement and Prospectus that formed a part of
registrant's Registration Statement on Form S-4, File No. 33-86530).
(3)(i) Certificate of Incorporation of Allied Digital Technologies Corp. and all
amendments thereto (herein incorporated by reference to Exhibit (3)(a)/(4)(a)
filed as part of registrant's Registration Statement on Form S-4, File No.
33-86530).
(3)(ii)(a) Amended and Restated By-laws of Allied Digital Technologies Corp.
(herein incorporated by reference to Exhibit (3)(b)/(4)(b) filed as part of
registrant's Registration Statement on Form S-4, File No. 33-86530).
(3)(ii)(b) First Amendment to Allied Digital Technologies Corp. Amended and
Restated Bylaws (herein incorporated by reference to Exhibit 3 to registrant's
Form 10-Q for the quarterly period ended January 31, 1995).
(4)(a) Specimen certificate for Allied Digital Technologies Corp. Common Stock
(herein incorporated by reference to Exhibit (4)(f) filed as part of
registrant's Registration Statement on Form S-4, File No. 33-86530).
(4)(b) Form of specimen note for HMG 12% Series A Note (herein incorporated by
reference to Exhibit (4)(g)/(10)(b) filed as part of registrant's Registration
Statement on Form S-4, File No. 33-86530).
(4)(c) Amendment No. 1 to the HMG 12% Series A Note (herein incorporated by
reference to Exhibit 4(i)(b) to HMG Digital Technologies Corp. Annual Report on
Form 10-K for the year ended July 31, 1995, Commission File No. 0-20014).
(4)(d) Form of specimen note for HMG 11% Series B Subordinated Note (herein
incorporated by reference to Exhibit (4)(h)/(10)(c) filed as part of
registrant's Registration Statement on Form S-4, File No. 33-86530). (4)(e)
Warrant Agreement, dated as of July 29, 1992, between HMG Digital Technologies
Corp. and RAS Securities Corp. (herein incorporated by reference to Exhibit 4.4
of HMG Digital Technologies Corp.'s Registration Statement on Form S-1, File No.
33-44942).
(4)(f) Warrant Agreement, dated as of July 29, 1992, between HMG Digital
Technologies Corp. and American Stock Transfer & Trust Company (herein
incorporated by reference to Exhibit 4.5 of HMG Digital Technologies Corp.'s
Registration Statement on Form S-1, File No. 33-44942).
(4)(g) Form of Supplemental Warrant Agreement among Allied Digital Technologies
Corp., HMG Digital Technologies Corp. and RAS Securities Corp. (herein
incorporated by reference to Exhibit (4)(m) filed as part of registrant's
Registration Statement on Form S-4, File No. 33-86530).
II-1
<PAGE>
Exhibit
No. Description of Exhibit
--- ----------------------
(4)(h) Form of Supplemental Warrant Agreement among Allied Digital Technologies
Corp., HMG Digital Technologies Corp. and American Stock Transfer & Trust
Company (herein incorporated by reference to Exhibit (4)(n) filed as part of
registrant's Registration Statement on Form S-4, File No. 33-86530).
(4)(i) Form of Class C Warrant Agreement between Allied Digital Technologies
Corp. and American Stock Transfer & Trust Company (herein incorporated by
reference to Exhibit (4)(o)(i) filed as part of registrant's Registration
Statement on Form S-4, File No. 33-86530).
(ii) Form of Class C Warrant Certificate (herein incorporated by
reference to Exhibit (4)(o)(ii) filed as part of registrant's Registration
Statement on Form S-4, File No. 33-86530).
(10)(a) Agreements with American National Bank and Trust Company of Chicago
("ANB"):
(i) Amended and Restated Loan and Security Agreement, dated as of
October 30, 1996, between Hauppauge Record Manufacturing Ltd. and ANB.
(ii) Amended and Restated Revolving Loan Note, dated October 30, 1996,
made by Hauppauge Record Manufacturing Ltd. to the order of ANB in the principal
amount of $22,000,000.
(iii) Amended and Restated Term Note, dated October 30, 1996, made by
Hauppauge Record Manufacturing Ltd. and payable to Lender in the aggregate
principal amount of $25,410,168.93.
(iv) Additional Term Note, dated October 30, 1996, made by Hauppauge
Record Manufacturing Ltd. and payable to ANB in the aggregate principal amount
of $1,500,000.
(v) Amended and Restated Guaranty Agreement, dated as of October 30,
1996, made by HRM Holdings Corp. in favor of ANB.
(vi) Amended and Restated Guaranty Agreement dated October 30, 1996,
made by Hauppauge Record Manufacturing Ltd. in favor of ANB.
(vii) Amended and Restated Subordination Agreement, dated as of
October 30, 1996, between HRM Holdings Corp. and ANB.
(viii) Fee Letter, dated October 30, 1996, between Hauppauge Record
Manufacturing Ltd. and ANB.
(ix) Collateral Patent, Trademark, Copyright and License Agreement,
dated October 30, 1996, made by Hauppauge Record Manufacturing Ltd. in favor of
ANB.
(x) Security Agreement, dated as of October 30, 1996, made by Allied
Digital Technologies Corp., HMG Digital Technologies Corp. and HRM Holdings
Corp. in favor of ANB.
(xi) Amended and Restated Guaranty Agreement, dated as of October 30,
1996, made by Allied Digital Technologies Corp. in favor of ANB.
(10)(b)(i) Amended and Restated Promissory Note, dated October 30, 1996, made by
Hauppauge Record Manufacturing Ltd. in favor of William H. Smith, Trustee, in
the principal amount of $4,000,000.
II-2
<PAGE>
Exhibit
No. Description of Exhibit
--- ----------------------
(10)(b)(ii) Amended and Restated Promissory Note dated October 30, 1996, made by
Hauppauge Record Manufacturing Ltd. in favor of William H. Smith, in the
principal amount of $2,000,000.
(10)(c) Global Indemnification Agreement dated June 17, 1994, among Allied Film
Laboratory, Inc. and Greenfield Land Company and William H. Smith, individually,
d/b/a William H. Smith Realty and William H. Smith, as Trustee, under the
William H. Smith Trust Agreement dated November 13, 1978 (herein incorporated by
reference to Exhibit (99)(j) filed as part of registrant's Registration
Statement on Form S-4, File No. 33-86530).
(10)(d) Non-Negotiable Promissory Note, dated December 29, 1992, made by Allied
Film Laboratory, Inc. to VTC, Inc. (herein incorporated by reference to Exhibit
(99)(o) filed as part of registrant's Registration Statement on Form S-4, File
No. 33-86530).
(10)(e) Asset Purchase Agreement, dated December 29, 1992, between Allied Film
Laboratory, Inc. and VTC, Inc. (herein incorporated by reference to Exhibit
(99)(p) filed as part of registrant's Registration Statement on Form S-4, File
No. 33-86530).
(10)(f) (i) VHS Cassette License Agreement for Duplicators (USA), dated July
1, 1991, between Victor Company of Japan, Limited and Allied Digital
Technologies Corp. (and executed by the parties on November 9, 1995 and October
11, 1995, respectively).
(ii) Addendum, dated January 1, 1995, between Allied Digital
Technologies Corp. and Victor Company of Japan, Limited.
(iii) License Extension Addendum, dated July 1, 1996, between Allied
Digital Technologies Corp. and Victor Company of Japan, Limited.
(10)(g) Licensed Duplicator Agreement for the United States and Canada, dated
June 1, 1993, between Macrovision Corporation and Allied Film & Video (herein
incorporated by reference to Exhibit (99)(jj) filed as part of registrant's
Registration Statement on Form S-4, File No. 33-86530).
(10)(h) CD Disc License Agreement, dated January 1, 1996, between Hauppauge
Record Manufacturing Ltd. and U.S. Phillips Corporation.
(10)(i) Patent License Agreement for Disc Products, dated June 1, 1995, between
Hauppauge Record Manufacturing Ltd. and Discovision Associates.
(10)(j) (i) Lease Agreement, dated August 9, 1983, between Dallas
Communications Complex and Allied Film Laboratory, Inc. (for warehouse, office
and manufacturing facilities located in Irving, Texas) (herein incorporated by
reference to Exhibit (99)(u)(i) filed as part of registrant's Registration
Statement on Form S-4, File No. 33-86530).
(i)(a) Supplemental Lease Agreement, dated December 8, 1989,
between Dallas Communications Complex and Allied Film Laboratory, Inc. (amending
Lease Agreement, dated August 9, 1983, between Dallas Communications Complex and
Allied Film Laboratory, Inc.) (herein incorporated by reference to Exhibit
(99)(u)(i)(a) filed as part of registrant's Registration Statement on Form S-4,
File No. 33-86530).
(ii) Lease Agreement, dated September 7, 1989, between Dallas
Communications Complex and Allied Film Laboratory, Inc. (for manufacturing and
office facilities located in Irving, Texas) (herein incorporated by reference to
Exhibit (99)(u)(ii) filed as part of registrant's Registration Statement on Form
S-4, File No. 33-86530).
(iii) Lease Agreement, dated March 8, 1993, between Dallas
Communications Complex and Allied Film Laboratory, Inc. (for warehouse
facilities located in Irving, Texas) (herein incorporated by reference to
Exhibit (99)(u)(iii) filed as part of registrant's Registration Statement on
Form S-4, File No. 33-86530).
II-3
<PAGE>
Exhibit
No. Description of Exhibit
--- ----------------------
(10)(k) (i) Lease Agreement, dated December 1, 1986, between Greenfield Land
Company and Allied Film Laboratory, Inc. (for warehouse, office, manufacturing
facilities located in Detroit, Michigan) (herein incorporated by reference to
Exhibit (99)(v)(i) filed as part of registrant's Registration Statement on Form
S-4, File No. 33-86530).
(i)(a) Amendment, dated July 1, 1994, to Lease Agreement dated
December 1, 1986, between Greenfield Land Company and Allied Film Laboratory,
Inc. (for warehouse, office, manufacturing facilities located in Detroit,
Michigan) (herein incorporated by reference to Exhibit (99)(v)(i)(a) filed as
part of registrant's Registration Statement on Form S-4, File No. 33-86530).
(ii) Lease Agreement, dated January 2, 1987, between Greenfield Land
Company and Allied Film Laboratory, Inc. (for parking area facilities located in
Detroit, Michigan) (herein incorporated by reference to Exhibit (99)(v)(ii)
filed as part of registrant's Registration Statement on Form S-4, File No.
33-86530).
(iii) Lease Agreement, dated January 2, 1987, between American
National Bank and Trust Company of Chicago, as Trustee, under Trust Agreement
dated February 13, 1986, for the benefit of Greenfield Land Company and Allied
Film Laboratory, Inc. (for manufacturing, office and warehouse facilities
located in Chicago, Illinois) (herein incorporated by reference to Exhibit
(99)(v)(iii) filed as part of registrant's Registration Statement on Form S-4,
File No. 33-86530).
(iv) Lease Agreement, dated November 1, 1986, between American
National Bank and Trust Company of Chicago, as Trustee, under Trust Agreement
dated February 13, 1986, for the benefit of Greenfield Land Company and Allied
Film Laboratory, Inc. (for manufacturing, office and warehouse facilities
located in Chicago, Illinois) (herein incorporated by reference to Exhibit
(99)(v)(iv) filed as part of registrant's Registration Statement on Form S-4,
File No. 33-86530).
(v) Lease Agreement, dated November 1, 1986, between American National
Bank and Trust Company of Chicago, as Trustee, under Trust Agreement dated
February 13, 1986, for the benefit of Greenfield Land Company and Allied Film
Laboratory, Inc. (for manufacturing, office and warehouse facilities located in
Chicago, Illinois) (herein incorporated by reference to Exhibit (99)(v)(v) filed
as part of registrant's Registration Statement on Form S-4, File No. 33-86530).
(vi) Lease Agreement, dated November 1, 1986, between American
National Bank and Trust Company of Chicago, as Trustee, under Trust Agreement
dated February 13, 1986, for the benefit of Greenfield Land Company and Allied
Film Laboratory, Inc. (for manufacturing, office and warehouse facilities
located in Chicago, Illinois) (herein incorporated by reference to Exhibit
(99)(v)(vi) filed as part of registrant's Registration Statement on Form S-4,
File No. 33-86530).
(vii) Lease Agreement, dated March 1, 1989, between Greenfield Land
Company and Allied Film Laboratory, Inc. (for manufacturing, office and
warehouse facilities located in Orlando, Florida) (herein incorporated by
reference to Exhibit (99)(v)(vii) filed as part of registrant's Registration
Statement on Form S-4, File No. 33-86530).
(viii) Lease Agreement, dated January 1, 1995, between Greenfield Land
Company and Allied Film Laboratory, Inc. (for manufacturing, office and
warehouse facilities located in Clinton, Tennessee).
(10)(1) Form of Lease Agreement, dated March 1, 1993, between Zellerbach Family
Fund and Allied Film Laboratory, Inc. (for office and warehouse facilities
located in San Francisco, California) (herein incorporated by reference to
Exhibit (99)(w) filed as part of registrant's Registration Statement on Form
S-4, File No. 33-86530).
(10)(m) (i) Sublease Agreement, dated June 1, 1984, between William H. Smith
Living Trust Agreement dated November 13, 1978, William H. Smith, Trustee, and
Allied Film Laboratory, Inc. (for manufacturing, office and warehouse facilities
located in San Francisco, California) (herein incorporated by reference to
Exhibit (99)(x)(i) filed as part of registrant's Registration Statement on Form
S-4, File No. 33-86530).
II-4
<PAGE>
Exhibit
No. Description of Exhibit
--- ----------------------
(ii) Sublease Agreement, dated June 1, 1984, between William H. Smith,
Trustee, William H. Smith Living Trust dated November 13, 1978, and Leo Diner,
Inc. (Leo Diner, Inc. merged with Allied Film Laboratory, Inc. January 1, 1992)
(for manufacturing, office and warehouse facilities located in San Francisco,
California) (herein incorporated by reference to Exhibit (99)(x)(ii) filed as
part of registrant's Registration Statement on Form S-4, File No. 33-86530).
(10)(n) Lease Agreement, dated November 29, 1994, between The Prudential
Insurance Company of America and Allied Film Laboratory, Inc.
(10)(o) (i) Lease Agreement, dated April 10, 1989 (assigned to Allied Film
Laboratory, Inc. 1/12/93), between Elk Grove Village Industrial Park Ltd. and
VCA Teletronics, Inc. (for warehouse facilities located in Elk Grove Village,
Illinois) (herein incorporated by reference to Exhibit (99)(aa)(i) filed as part
of registrant's Registration Statement on Form S-4, File No. 33-86530).
(ii) Assignment and Assumption of Lease Agreement, dated January 12,
1993, between VCA/Teletronics, Inc. and Allied Film Laboratory, Inc. (for
warehouse facilities located in Elk Grove Village, Illinois) (herein
incorporated by reference to Exhibit (99)(aa)(ii) filed as part of registrant's
Registration Statement on Form S-4, File No. 33-86530).
(10)(p) Lease Agreement, dated July 1, 1994, between Security Trust Company,
N.A. and Allied Film Laboratory, Inc. (for manufacturing and office facilities
located in Landover, Maryland) (herein incorporated by reference to Exhibit
(99)(bb) filed as part of registrant's Registration Statement on Form S-4, File
No. 33-86530).
(10)(q) Form of Lease Agreement, dated June 18, 1993, between HomeCrest
Corporation and Allied Film Laboratory, Inc. (for warehouse facilities located
in Clinton, Tennessee) (herein incorporated by reference to Exhibit (99)(dd)
filed as part of registrant's Registration Statement on Form S-4, File No.
33-86530).
(10)(r) (i) Agreement of Lease, dated December 15, 1994, between HMG Digital
Technologies Corp. and Keelson Associates (herein incorporated by reference to
an Exhibit filed as part of HMG Digital Technologies Corp. Quarterly Report on
Form 10-Q for the period ended April 30, 1995, Commission File No. 0-20014).
(ii) Indenture of Lease, dated February 1, 1987, between Lee Halpern
and Larry Halpern and HMG (herein incorporated by reference to an Exhibit filed
as part of Registration Statement of HMG Digital Technologies Corp. on Form S-4,
File No. 33-66486).
(10)(s) Lease Agreement, dated September 16, 1996, between Allied Digital
Technologies Corp. and Shivom Enterprises LLC (for office facilities in
Hauppauge, New York).
(10)(t) Allied Film Laboratory, Inc. Employees' Profit Sharing Plan. National
Bank of Detroit -- Trustee under the Allied Film Laboratory, Inc. Amended Profit
Sharing Retirement Trust Agreement between Allied Film Laboratory, Inc. and
National Bank of Detroit, dated February 24, 1994. (herein incorporated by
reference to Exhibit (99)(ff) filed as part of registrant's Registration
Statement on Form S-4, File No. 33-86530).
(10)(u) Allied Film Laboratory, Inc. Five Year Bonus Program for Fiscal Year
1992 through Fiscal Year 1996 (includes management, supervisory and stock bonus
plans) (herein incorporated by reference to Exhibit (99)(gg) filed as part of
registrant's Registration Statement on Form S-4, File No. 33-86530).
(10)(v) Amended and Restated 1994 Long-Term Stock Incentive Plan of Allied
Digital Technologies Corp. (herein incorporated by reference to Exhibit (4)(i)
filed as part of registrant's Registration Statement on Form S-4, File No.
33-86530).
(10)(w) Indemnification Agreements between Allied Digital Technologies Corp. and
each of William H. Smith, James A. Merkle, Werner Jean, Jerry Stone, Eugene
Gargaro, Jr., George N. Fishman, Seymour Leslie, H. Sean Mathis, Donald L.
Olesen, Charles
II-5
<PAGE>
Exhibit
No. Description of Exhibit
--- ----------------------
Kavanagh and Judith A. Szidik (herein incorporated by reference to Exhibit 10(y)
to registrant's Transition Report on Form 10-K for the period from January 1,
1994 to July 31, 1994).
(10)(x) Allied Digital Stockholders Agreement, dated January 11, 1995, among
Allied Digital Technologies Corp.; William H. Smith; William H. Smith Trust,
William H. Smith as Trustee under agreement dated November 13, 1978, as amended;
Patricia M. Smith; Patricia M. Smith Trust, Patricia M. Smith as Trustee under
agreement dated November 13, 1978, as amended; George N. Fishman; Donald L.
Olesen; The Donald L. Olesen Annuity Trust, Donald L. Olesen, co-trustee;
Leslie/Linton Entertainment, Inc.; and Venture Partners (herein incorporated by
reference to Exhibit 3 filed as a part of a Schedule 13D filed February 7, 1995,
by William H. Smith; William H. Smith Trust, William H. Smith as Trustee under
agreement dated November 13, 1978, as amended; Patricia M. Smith; Patricia M.
Smith Trust, Patricia M. Smith as Trustee under agreement dated November 13,
1978, as amended; George N. Fishman; Donald L. Olesen; The Donald L. Olesen
Annuity Trust, Donald L. Olesen, co-trustee; Leslie/Linton Entertainment, Inc.;
and Venture Partners.)
(10)(y) Form of Employment Agreements between Hauppauge Record Manufacturing,
Ltd. and each of: (i) George Fishman, (ii) Charles Kavanagh, (iii) Donald
Olesen, (iv) Brian Wilson and (v) Philip Gouldstone (herein incorporated by
reference to Exhibit (99)(hh) filed as part of registrant's Registration
Statement on Form S-4, File No. 33-86530).
(10)(z) Smith Family Shareholders Agreement, dated January 11, 1995, among
Allied Digital Technologies Corp.; William H. Smith; William H. Smith Trust,
William H. Smith as Trustee under agreement dated November 13, 1978, as amended;
Patricia M. Smith; Patricia M. Smith Trust, Patricia M. Smith as Trustee under
agreement dated November 13, 1978, as amended; Kendall Allen Smith; Scott
Douglas Smith; and Wendy Allison Kubitskey (herein incorporated by reference to
Exhibit 2 filed as a part of a Schedule 13D filed January 20, 1995, by William
H. Smith; William H. Smith Trust, William H. Smith as Trustee under agreement
dated November 13, 1978, as amended; Patricia M. Smith; Patricia M. Smith Trust,
Patricia M. Smith as Trustee under agreement dated November 13, 1978, as
amended; Kendall Allen Smith; Scott Douglas Smith; and Wendy Allision
Kubitskey).
(10)(aa) (i) Consulting Agreement, dated June 16, 1994, between HMG Digital
Technologies Corp. and Seymour W. Zises (herein incorporated be reference to
Exhibit 10.22(i) of HMG Digital Technologies Corp. Annual Report on Form 10-K
for the fiscal year ended July 31, 1994, Commission File No. 0-20014).
(ii) Consulting Agreement, dated June 16, 1994, between HMG Digital
Technologies Corp. and H. Sean Mathis (herein incorporated be reference to
Exhibit 10.22(ii) of HMG Digital Technologies Corp. Annual Report on Form 10-K
for the fiscal year ended July 31, 1994, Commission File No. 0-20014).
(iii) Consulting Agreement, dated June 16, 1994, between HMG Digital
Technologies Corp. and Mark L. Freidman (herein incorporated be reference to
Exhibit 10.22(iii) of HMG Digital Technologies Corp. Annual Report on Form 10-K
for the fiscal year ended July 31, 1994, Commission File No. 0-20014).
10(bb) (i) Agreement between HTM Ltd. (a predecessor in interest to HMG) and
Local 810, Steel, Metals, Alloys and Hardware Fabricators and Warehousemen,
affiliated with the International Brotherhood of Teamsters, dated as of January
22, 1994 (herein incorporated by reference to Exhibit 10.15(i) of HMG Digital
Technologies Corp. Annual Report on Form 10-K for the fiscal year ended July 31,
1994, Commission File No. 0-20014).
(ii) Agreement between HVM Ltd. (a predecessor in interest to HMG) and
Local 810, Steel, Metals, Alloys and Hardware Fabricators and Warehousemen,
affiliated with the International Brotherhood of Teamsters, dated as of January
22, 1994 (herein incorporated by reference to Exhibit 10.15(ii) of HMG Digital
Technologies Corp. Annual Report on Form 10-K for the fiscal year ended July 31,
1994, Commission File No. 0-20014).
(iii) Agreement between HCDM Ltd. (a predecessor in interest to HMG)
and Local 810, Steel, Metals, Alloys and Hardware Fabricators and Warehousemen,
affiliated with the International Brotherhood of Teamsters, dated as of January
22, 1994
II-6
<PAGE>
Exhibit
No. Description of Exhibit
--- ----------------------
(herein incorporated by reference to Exhibit 10.15(iii) of HMG Digital
Technologies Corp. Annual Report on Form 10-K for the fiscal year ended July 31,
1994, Commission File No. 0-20014).
(10)(cc) Form of Indemnification Agreements, dated July 1, 1992, between HMG
Digital Technologies Corp. and each of Seymour Zises, Wilmer J. Thomas, Jr.,
Thomas E. Constance, Alan I. Annex and Mark L. Freidman (herein incorporated by
reference to Exhibit 10.7 of HMG Digital Technologies Corp. Registration
Statement on Form S-1, File No. 33-44942).
(10)(dd) Form of Indemnification Agreement, dated September 20, 1993, between
HMG Digital Technologies Corp. and each of Michael Delany, Brian Wilson, Philip
Gouldstone, Joel Ziegler and Frederick R. Cummings, Jr. (herein incorporated by
reference to Exhibit 10.6 of HMG Digital Technologies Corp. Annual Report on
Form 10-K for the fiscal year ended July 25, 1993, Commission File No. 0-20014).
(10)(ee) (i) Subordinated Promissory Note dated October 30, 1996, made by HMG
Digital Technologies Corp. in favor of George N. Fishman in the principal amount
of $200,000.
(ii) Subordinated Promissory Note dated October 30, 1996, made by HMG
Digital Technologies Corp. in favor of Donald L. Olesen in the principal amount
of $200,000.
(iii) Subordinated Promissory Note dated October 30, 1996, made by HMG
Digital Technologies Corp. in favor of William H. Smith, Trustee, in the
principal amount of $1,600,000.
(10)(ff) Agreement between Anchor Bay Entertainment and Allied Digital
Technologies Corp. for Videotape Duplication and Order Fulfillment, dated une
16, 1995.
(11) Statement re Computation of Per Share Earnings
No statement is required to be filed because the computations can be
clearly determined from the materials contained in the Report.
(21) Subsidiaries of registrant
(23)(a) Consent of Arthur Anderson LLP
(23)(b) Consent of Grant Thornton LLP (Item 14(a) of this Report on Form
10-K).
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: November 13, 1996 ALLIED DIGITAL TECHNOLOGIES CORP.
By: /s/ George N. Fishman
------------------------------
George N. Fishman
Co-Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1996 By: /s/ Charles P. Kavanagh
------------------------------
Charles P. Kavanagh
Secretary
(Principal Financial Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of November 13, 1996, by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Date: November 13, 1996 /s/ William H. Smith
------------------------------
William H. Smith, Co-Chairman,
President & Director
Date: November 13, 1996 /s/ George N. Fishman
------------------------------
George N. Fishman, Co-Chairman, Chief
Executive Officer & Director
Date: November 13, 1996 /s/ Donald L. Olesen
------------------------------
Donald L. Olesen, Director
Date: November 13, 1996 /s/ Eugene L. Gargaro, Jr.
------------------------------
Eugene L. Gargaro, Jr., Director
Date: November 13, 1996 /s/ Werner H. Jean
------------------------------
Werner H. Jean, Director
Date: November 13, 1996 /s/ Seymour Leslie
------------------------------
Seymour Leslie, Director
Date: November 13, 1996 /s/ H. Sean Mathis
------------------------------
H. Sean Mathis, Director
Date: November 13, 1996 /s/ John A. Morgan
------------------------------
John A. Morgan, Director
Date: November 13, 1996 /s/ Jerry E. Stone
------------------------------
Jerry E. Stone, Director
II-8
Exhibit (10)(a)(i)
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
by and between
HAUPPAUGE RECORD MANUFACTURING LTD.
and
AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO
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TABLE OF CONTENTS
Page No.
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1. DEFINITIONS............................................... 1
1.1 General Terms....................................... 1
1.2 Accounting Terms.................................... 17
1.3 Other Terms Defined in Illinois Uniform
Commercial Code 18
1.4 Other Definitional Provisions....................... 18
2. CREDIT.................................................... 18
2.1 Term Loan and Additional Loan....................... 18
2.2 Revolving Loan...................................... 18
2.3 Payments and Prepayments............................ 19
2.4 Borrower's Loan Account............................. 21
2.5 Statements.......................................... 22
2.6 Interest and Fees................................... 22
2.7 Method for Making Payments.......................... 24
2.8 Term of this Agreement.............................. 24
2.9 Capital Adequacy.................................... 25
2.10 Certificate......................................... 26
3. REPORTING AND ELIGIBILITY REQUIREMENTS.................... 26
3.1 Monthly Reports and Collateral Reports.............. 26
3.2 Eligible Accounts................................... 28
3.3 Account Warranties.................................. 29
3.4 Verification of Accounts............................ 30
3.5 Account Covenants................................... 30
3.6 Collection of Accounts and Payments................. 30
3.7 Appointment of Lender as Borrower's
Attorney-in-Fact 32
3.8 Instruments and Chattel Paper....................... 32
3.9 Notice to Account Debtors........................... 32
3.10 Eligible Inventory.................................. 32
3.11 Inventory Warranties................................ 33
3.12 Inventory Records................................... 33
3.13 Safekeeping of Inventory and Inventory Covenants.... 33
3.14 Equipment Warranties................................ 34
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3.15 Equipment Records................................... 34
3.16 Safekeeping of Equipment............................ 35
3.17 Third Party Goods................................... 35
3.18 Appraisals.......................................... 35
4. CONDITIONS OF ADVANCES.................................... 36
4.1 Borrower's Written Request - Revolving Loan and
Letters of Credit 36
4.2 Financial Condition................................. 36
4.3 No Default.......................................... 36
4.4 Representations and Warranties True and Correct..... 36
4.5 Other Requirements.................................. 37
5. COLLATERAL................................................ 37
5.1 Security Interest................................... 37
5.2 Preservation of Collateral and Perfection of
Security Interests Therein........................ 37
5.3 Real Property and Leaseholds........................ 38
5.4 Loss of Value of Collateral......................... 39
5.5 Setoff.............................................. 39
5.6 Cash Collateral..................................... 39
6. WARRANTIES................................................ 40
6.1 Corporate Existence; Capitalization................. 40
6.2 Corporate Authority................................. 41
6.3 Binding Effect...................................... 41
6.4 Financial Data...................................... 41
6.5 Collateral.......................................... 42
6.6 Solvency............................................ 42
6.7 Chief Place of Business............................. 43
6.8 Other Corporate Names............................... 43
6.9 Tax Liabilities..................................... 43
6.10 Loans............................................... 43
6.11 Margin Stock........................................ 44
6.12 Subsidiaries........................................ 44
6.13 Litigation and Proceedings.......................... 44
6.14 Other Agreements.................................... 44
6.15 Employee Controversies.............................. 44
6.16 Compliance with Laws and Regulations;
Environmental Matters 44
6.17 Patents, Trademarks and Licenses.................... 45
6.18 ERISA............................................... 45
6.19 Condition of Collateral............................. 47
6.20 Series A Note and Guarantee......................... 47
6.21 Merger.............................................. 47
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6.22 Survival of Warranties.............................. 47
7. AFFIRMATIVE COVENANTS..................................... 47
7.1 Financial Statements................................ 47
7.2 Inspection.......................................... 52
7.3 Conduct of Business................................. 52
7.4 Claims and Taxes.................................... 53
7.5 Closing Costs and Expenses.......................... 53
7.6 Borrower's Liability Insurance...................... 53
7.7 Borrower's Property Insurance and Business
Interruption Insurance 54
7.8 ERISA Reporting..................................... 55
7.9 Notice of Suit or Adverse Change in Business........ 56
7.10 Supervening Illegality.............................. 56
7.11 Environmental Safety and Health Laws................ 57
7.12 Landlord Consents and Waivers....................... 57
7.13 Key Man Life Insurance.............................. 58
8. NEGATIVE COVENANTS........................................ 58
8.1 Encumbrances........................................ 58
8.2 Indebtedness........................................ 59
8.3 Consolidations, Mergers or Acquisitions............. 59
8.4 Investments or Loans................................ 59
8.5 Guarantees.......................................... 60
8.6 Disposal of Property................................ 60
8.7 Compensation to Officers and Others................. 60
8.8 Dividends and Stock Redemptions..................... 61
8.9 Issuance of Stock................................... 64
8.10 Amendment of Articles of Incorporation or
By-Laws; Corporate Name; Places of Business....... 64
8.11 Transactions with Affiliates........................ 65
8.12 ERISA............................................... 65
8.13 Financial Covenants................................. 66
8.14 Environmental....................................... 67
8.15 Fiscal Year......................................... 67
8.16 Subsidiaries........................................ 67
8.17 Amendment of Various Documents...................... 67
8.18 Smith Subordinated Notes............................ 68
8.19 VCA Note............................................ 69
9. DEFAULT, RIGHTS AND REMEDIES OF LENDER.................... 69
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9.1 Defaults............................................ 69
9.2 Rights and Remedies Generally....................... 74
9.3 Entry Upon Premises and Access to Information....... 74
9.4 Sale or Other Disposition of Collateral by Lender... 74
9.5 Waiver of Demand.................................... 75
9.6 Waiver of Notice.................................... 75
10. MISCELLANEOUS............................................. 75
10.1 Waiver.............................................. 75
10.2 Costs and Attorneys' Fees........................... 76
10.3 Expenditures by Lender.............................. 76
10.4 Custody and Preservation of Collateral.............. 76
10.5 Reliance by Lender.................................. 76
10.6 Parties............................................. 77
10.7 CHOICE OF LAW....................................... 77
10.8 CONSENT TO JURISDICTION............................. 77
10.9 SERVICE OF PROCESS.................................. 78
10.10 WAIVER OF JURY TRIAL AND BOND....................... 78
10.11 ADVICE OF COUNSEL................................... 79
10.12 SEVERABILITY........................................ 79
10.13 Application of Payments............................. 79
10.14 Marshalling; Payments Set Aside..................... 79
10.15 Titles.............................................. 80
10.16 Continuing Effect................................... 80
10.17 Notices............................................. 80
10.18 Equitable Relief.................................... 81
10.19 Indemnification..................................... 81
10.20 Effectiveness....................................... 82
10.21 Counterparts........................................ 82
10.22 Amendment and Restatement........................... 82
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AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This Amended and Restated Loan and Security Agreement (this
"Agreement"), dated as of the 30th day of October, 1996, by and between
HAUPPAUGE RECORD MANUFACTURING LTD., a New York corporation with its principal
place of business and chief executive office at 15 Gilpin Avenue, Hauppauge, New
York 11788 ("Borrower"), and AMERICAN NATIONAL BANK AND TRUST COMPANY OF
CHICAGO, a national banking association with its chief executive office in
Chicago, Illinois ("Lender").
W I T N E S S E T H:
WHEREAS, Lender entered into that certain Amended and Restated Loan
and Security Agreement dated as of September 20, 1993 (as heretofore amended,
the "Hauppauge LSA") with Borrower and that certain Loan and Security Agreement
dated as of January 24, 1995 (as heretofore amended, the "AFL LSA") with Allied
Film Laboratory, Inc., a Michigan corporation ("AFL"); and
WHEREAS, AFL has merged with and into Borrower in accordance with
the laws of the States of Michigan and New York and Borrower now wishes to amend
and restate the Hauppauge LSA and the AFL LSA in their entirety as hereinafter
set forth;
NOW, THEREFORE, in consideration of the terms and conditions
contained herein, and of any loans or extensions of credit heretofore, now or
hereafter made to or for the benefit of Borrower by Lender, the parties hereto
hereby agree that effective as of the "Effective Time" (as hereinafter defined)
the Hauppauge LSA and the AFL LSA are amended and restated in their entirety as
follows:
1. DEFINITIONS.
1.1 General Terms. When used herein, the following terms shall have
the following meanings:
"Additional Loan" shall have the meaning set forth in subsection
2.1.
"Additional Term Note" shall have the meaning set forth in
subsection 2.1.
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"Account Debtor" shall mean the party who is obligated on or under
an Account.
"Accounting Systems Letters" shall have the meaning set forth in
subsection 7.1.
"Accounts" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not they have
been earned by performance.
"Accounts Trial Balance" shall have the meaning set forth in
subsection 3.1.
"Additional Reserve" shall have the meaning set forth in subsection
2.2.
"Affiliate" shall mean any Person (a) that directly or indirectly,
through one or more intermediaries, controls or is controlled by, or is
under common control with Borrower or any other Credit Party, (b) that
directly or beneficially owns or holds 5% or more of any class of the
voting stock of Borrower or any other Credit Party, or (c) 5% or more of
the voting stock (or in the case of a Person which is not a corporation,
5% or more of the equity interest) of which is owned directly or
beneficially or held by Borrower or any other Credit Party. GLC shall be
deemed to be an Affiliate of Borrower.
"Affiliated Leases" shall mean, collectively, the GLC Leases and the
Smith Leases and other leases of property between Borrower and any
Affiliate or any Person that, directly or indirectly, through one or more
intermediaries, controls or is controlled by or is under common control
with an Affiliate.
"AFL" shall mean Allied Film Laboratory, Inc., a Michigan
corporation.
"Allied" shall mean Allied Digital Technologies Corp., a Delaware
corporation.
"Allied Common Stock" shall mean the common stock of Allied, par
value $.01 per share and any other common stock of Allied authorized at
any time.
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"Allied Guaranty" shall mean that certain Amended and Restated
Guaranty Agreement dated as of October 30, 1996 made by Allied in favor of
Lender, as the same may be amended, modified or supplemented from time to
time.
"Allied Security Agreement" shall mean that certain Security
Agreement dated as of October 30, 1996 among Allied, HMG, Holdings and
Lender, as the same may be amended, modified or supplemented from time to
time.
"Allied Series A Note Guarantee" shall mean that certain Guarantee
dated as of January 11, 1995 made by Allied in favor of Venture Partners,
which Guarantee became null and void and of no further force and effect
upon the Release Time.
"Allied Tax Sharing Agreement" shall mean that certain Tax
Allocation Agreement dated as of January 11, 1995 among Allied, AFL, HMG,
Holdings and Borrower.
"Allied Warrants" shall mean, collectively, the Class A Redeemable
Common Stock Purchase Warrants of Allied, the Class B Redeemable Common
Stock Purchase Warrants of Allied, and the warrants to purchase certain
units at an exercise price of $9.90 per unit, held by certain underwriters
of HMG's initial public offering of equity securities or their assignees.
"Appraisal Adjustment Amount" at any time shall mean the amount, if
any, by which (i) the sum of the outstanding principal balance of the Term
Loan and the Additional Loan at such time minus the SOFA Amount at such
time exceeds (ii) the amount equal to sixty-five percent of the Appraised
FS Amount at such time. The Appraisal Adjustment Amount shall not be less
than zero.
"Appraised FS Amount" at any time shall mean (without duplication)
the aggregate "orderly liquidation value," as determined by Lender in its
discretion based on appraisals which are satisfactory to Lender in its
sole discretion (including without limitation as to the type and method of
appraisal) and performed at Borrower's expense, of Borrower's Equipment
(which is other than fixtures) in which, at the time of such
determination, Lender has a perfected, first priority security interest
and lien to secure the Liabilities pursuant to the Financing Agreements
and which property in each case is acceptable to Lender for purposes of
determining the Appraised FS Amount; provided, however, that there shall
be excluded in determining the Appraised FS Amount any such property which
Lender in Good Faith believes either is not in existence or in the same
condition
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(ordinary wear and tear excepted) as when appraised or is not subject to a
perfected, first priority security interest and lien in favor of Lender to
secure the Liabilities. Appraisals after the date of this Agreement shall
be conducted by an Appraiser.
"Appraiser" shall mean an appraiser selected by Borrower from an
approved list of appraisers provided to Borrower by Lender for purposes of
determining the Appraised FS Amount or, if Borrower fails to engage an
appraiser which will complete the required appraisal within thirty (30)
days of Lender's request for an appraisal, an appraiser selected by
Lender.
"A/R%" shall have the meaning set forth in subsection 2.2.
"Authorized Officer" shall mean, at any time, an individual whose
signature has been certified to Lender on behalf of Borrower pursuant to a
Signature Authorization Certificate actually received by Lender at such
time and whose authority has not been revoked prior to such time in the
manner prescribed in such Signature Authorization Certificate.
"Availability" means for any day, the amount available to Borrower
to borrow at the end of the immediately preceding day (or if such day is
not a Business Day, on the next preceding Business Day) on the Revolving
Loan after giving effect to all conditions applicable thereto (including
the amount of the Current Asset Base).
"Base Rate" shall mean the per annum rate of interest announced or
published from time to time by Lender at its principal place of business
in Chicago, Illinois as its base or equivalent rate of interest, which
rate is not necessarily the lowest rate of interest charged by Lender with
respect to commercial loans. Any change in the Base Rate shall be
effective as of the effective date stated in the announcement by Lender of
such change.
"Benefit Plan" shall mean, with respect to any Person, a defined
benefit plan as defined in Section 3(35) of ERISA (other than a
Multiemployer Plan) in respect of which such Person or an ERISA Affiliate
of such Person is, or within the immediately preceding six (6) years was,
an "employer" as defined in Section 3(5) of ERISA.
"Bill-and-Hold Agreement" shall have the meaning set forth in
subsection 3.2.
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"Blocked Accounts" shall have the meaning set forth in subsection
3.6.
"Business Day" shall mean a day, other than a Saturday or Sunday, on
which banks in Chicago, Illinois are open for the transaction of banking
business.
"Business Plan" shall mean (i) Borrower's 1997 fiscal business plan
dated October 24, 1996 in the form furnished to Lender on or about October
24, 1996 for the Fiscal Year of Borrower ending on or about July 31, 1997
and (ii) for any subsequent Fiscal Year such financial projections as to
Borrower as to which Lender notifies Borrower in writing are acceptable to
Lender in its discretion for purposes of this definition.
"Capital Expenditures" shall mean, with respect to any Person, all
expenditures of such Person for fixed or capital assets, including,
without limitation, the incurrence of Capitalized Lease Obligations, all
as determined in accordance with GAAP.
"Capitalized Lease" shall mean, as to any Person at any time, any
lease which, in accordance with GAAP, is required to be capitalized on the
balance sheet of such Person at such time, and "Capitalized Lease
Obligations" of such Person at any time shall mean the aggregate amount
which, in accordance with GAAP, is required to be reported as a liability
on the balance sheet of such Person at such time as lessee under
Capitalized Leases.
"Change of Control" shall mean at any time that (a) any individual
or entity, either individually or as part of a "person" (as such term is
used in Section 13(d)(3) of the Exchange Act ) shall own, beneficially or
of record, 30% or more of the issued and outstanding Allied Common Stock
and such percentage ownership is greater than the percentage ownership,
beneficially or of record, of the holdings of William H. Smith personally
and as trustee of any trust held for the benefit of himself and/or his
family (including without limitation any shares of Allied Common Stock
held of record by Patricia M. Smith, individually and as trustee of any
trust held for the benefit of herself and/or her family, in each case
which are beneficially owned by William H. Smith), or the estate of
William H. Smith if William H. Smith is deceased or (b) George N. Fishman
(or another person reasonably acceptable to Lender who is appointed to
such position within 120 days following the date on which the person
holding such position ceases to hold such position) shall cease to be the
Co-Chairman and Chief Executive Officer of Allied and the Chairman and
Chief Executive Officer of HMG, Holdings and Borrower or perform
comparable duties to those performed by such officer on October 30,
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1996. For purposes of this definition, "beneficial ownership" shall have
the meaning set forth in Rule 13d-3 of the Exchange Act.
"Code" shall mean the Uniform Commercial Code of the State of
Illinois.
"Collateral" shall mean, collectively, all property and interests in
property now owned or hereafter acquired by Borrower in or upon which a
Lien is granted to Lender by Borrower, whether under this Agreement, the
other Financing Agreements, or under any other documents, instruments or
writings executed by Borrower and delivered to Lender.
"Collateral Assignment" shall mean that certain Collateral Patent,
Trademark, Copyright and License Assignment dated as of October 30, 1996
made by Borrower in favor of the Lender, as the same may be amended,
modified or supplemented from time to time.
"Collateral Documents" shall mean all contracts, agreements,
instruments and other documents heretofore, now or hereafter executed and
delivered in connection with this Agreement or the other Financing
Agreements, pursuant to which Liens are granted to Lender in the
Collateral.
"Collateral Report" shall have the meaning set forth in subsection
3.1.
"Collecting Banks" shall have the meaning set forth in subsection
3.6.
"Commitment Fee Base" shall mean (a) the Maximum Revolving Facility
Amount minus (b) the sum of (i) the aggregate outstanding principal
balance of the Revolving Loan and (ii) the sum of the undrawn face amount
of any Letters of Credit outstanding.
"Common Stock" shall mean the common stock, no par value, of
Borrower.
"Credit Parties" shall mean, collectively, Borrower, Holdings, HMG,
Allied and GLC and any other party that at any time guarantees, or
provides security or credit support for, all or any portion of the
Liabilities.
"Current Asset Base" shall have the meaning set forth in subsection
2.2.
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"CVC Credit Agreement" shall mean that certain Amended and Restated
Credit Agreement dated November 1, 1990, as amended and restated through
September 20, 1993, between 399 Venture Partners, Inc. and Holdings and
subsequently terminated by the parties thereto.
"Default" shall mean the occurrence or existence of any one or more
of the events described in subsection 9.1.
"Distributed Amount" shall have the meaning set forth in subsection
8.8.
"Distributed Interest Amount" shall have the meaning set forth in
subsection 8.18.
"DOL" shall have the meaning set forth in subsection 7.8.
"Effective Time" shall have the meaning set forth for such term in
that certain Agreement and Consent dated as of October 30, 1996 between
Lender, Borrower, AFL and GLC (as amended, modified or supplemented from
time to time, the "Agreement and Consent").
"Eligible Accounts" shall have the meaning set forth in subsection
3.2.
"Eligible Inventory" shall have the meaning set forth in subsection
3.10.
"Environmental Lien" shall mean a Lien in favor of any Governmental
Authority for (a) any liability under federal, state or local
environmental laws or regulations or (b) damages arising from, or costs
incurred by such Governmental Authority in response to, a release or
threatened release of a hazardous or toxic waste, substance or
constituent, or other substance into the environment.
"Environmental Agreement" shall mean that certain Amended and
Restated Environmental Indemnity Agreement dated as of October 30, 1996
made by Borrower in favor of Lender, as the same may be amended, modified
or supplemented from time to time.
"Equipment" shall mean, collectively, all of the equipment and
fixtures (as such terms are defined in the Code) of Borrower, together
with any and all accessions, parts and appurtenances thereto, whether
presently owned or hereafter acquired by Borrower.
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"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, and any successor statute.
"ERISA Affiliate" shall mean, with respect to any Person, any (i)
corporation which is a member of the same controlled group of corporations
(within the meaning of Section 414(b) of the Internal Revenue Code) as
such Person; (ii) partnership, trade or business under common control
(within the meaning of Section 414(c) of the Internal Revenue Code) with
such Person; and (iii) solely for purposes of liability under Section
412(c) (11) of the Internal Revenue Code, for the lien created under
Section 412(n) of the Internal Revenue Code or for a tax imposed for
failure to meet minimum funding standards under Section 4971 of the
Internal Revenue Code, member of the same affiliated service group (within
the meaning of Section 414(m) of the Internal Revenue Code) as such
Person, any corporation described in clause (i) above or any partnership,
trade or business described in clause (ii) above.
"Event of Default" shall mean an event which through the passage of
time or the giving of notice or both would mature into a Default.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Facility Fee" shall have the meaning set forth in subsection 2.6.
"Fee Letter" shall mean that certain letter dated October 30, 1996
between Lender and Borrower providing for, among other things, the payment
of certain fees in connection with this Agreement, as the same may be
amended, modified or supplemented from time to time.
"Financials" shall have the meaning set forth in subsection 6.4.
"Financing Agreements" shall mean, collectively, all agreements,
instruments and documents, including, without limitation, this Agreement
and any security agreements, loan agreements, notes, guarantees,
mortgages, deeds of trust, leasehold mortgages, leasehold deeds of trust,
subordination agreements, pledges, powers of attorney, consents,
assignments, intercreditor agreements, mortgagee waivers, reimbursement
agreements, contracts, notices, leases, financing statements and all other
written matter whether heretofore (other than any of the foregoing which
prior to the date hereof have been expressly terminated by Lender and are
no longer in effect), now or hereafter executed by or on behalf of
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Borrower or any other Credit Party and delivered to Lender, together with
all agreements, documents and instruments referred to therein or
contemplated thereby, and further including without limitation the Fee
Letter, the Collateral Assignment, the Guaranty, the GLC Guaranty, the
Holdings Guaranty, the Allied Guaranty, the Allied Security Agreement, the
Environmental Agreement, the GLC Environmental Agreement, the Mortgages,
the Holdings Subordination Agreement, the Smith Subordination Agreement
and any other Collateral Documents.
"Fiscal Year" shall mean, with respect to any Person, the fiscal
year of such Person and, in the case of Borrower, such fiscal year shall
begin on August 1 of each year and end on July 31 of the following
calendar year or, if Borrower notifies Lender after the date of this
Agreement of its intent to so change its fiscal year, such fiscal year
shall instead end on the Sunday of each year closest to July 31 of such
year and represent the 52 or 53 week period then ending on such date.
"Free Cash Flow" shall have the meaning set forth in subsection
8.13.
"Free Cash Flow Available for Dividends" shall have the meaning set
forth in subsection 8.8.
"Funded Debt" shall mean all Capitalized Lease Obligations and all
indebtedness for borrowed money (including without limitation the
Liabilities) or which has been incurred for the deferred purchase price
of, or in connection with the acquisition of, property or services (other
than trade obligations incurred in the ordinary course of business which
are not past due).
"Funded Debt Service" shall have the meaning set forth in subsection
8.13.
"GAAP" shall mean generally accepted accounting principles as in
effect on the date hereof and as applied in preparation of the Financials.
"General Intangibles" shall mean all general intangibles (as such
term is defined in the Code), choses in action, causes of action and all
other intangible personal property of Borrower of every kind and nature
(other than Accounts) now owned or hereafter acquired by Borrower
including, without limitation, corporate, partnership or other business
records, inventions, designs, patents, patent applications, service marks,
trademarks, trademark applications, trade names, trade styles, trade
secrets, goodwill, registrations, computer software, operational manuals,
product formulas, blueprints, drawings, copyrights, copyright
applications, licenses, franchises, customer lists, tax refunds, tax
refund claims,
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rights and claims against carriers and shippers, rights to indemnification
and the like, wherever located, proceeds of insurance covering the lives
of key employees on which Borrower is beneficiary, and any letter of
credit, guaranty, security interest, lien rights or other security held by
or granted to Borrower to secure payment by an Account Debtor.
"GLC" shall mean Greenfield Land Company, a Michigan co-partnership,
and if such partnership is converted into a limited liability company in
accordance with the provisions of the GLC Term Loan Agreement, such term
shall mean such successor limited liability company.
"GLC Environmental Agreement" shall mean that certain Amended and
Restated Environmental Indemnity Agreement dated as of October 30, 1996
between GLC and Lender, as the same may be amended, modified or
supplemented from time to time.
"GLC Financing Agreements" shall mean, collectively, the "Financing
Agreements" (as such term is defined in the GLC Term Loan Agreement).
"GLC Guaranty" shall mean that certain Amended and Restated Guaranty
Agreement dated as of October 30, 1996 made by GLC in favor of Lender, as
the same may be amended, modified or supplemented from time to time.
"GLC Leases" shall mean, collectively, the agreements set forth on
Schedule 1.1(A), in each case as the same may be amended, modified or
supplemented from time to time in accordance with the provisions of the
Financing Agreements and the GLC Financing Agreements.
"GLC Liabilities" shall mean the "Liabilities" (as such term is
defined in the GLC Term Loan Agreement).
"GLC Term Loan Agreement" shall mean that certain Amended and
Restated Loan and Security Agreement dated as of October 30, 1996 between
GLC and Lender, as the same may be amended, modified or supplemented from
time to time.
"Good Faith" shall have the meaning set forth for that term in
Section 1-201(19) of the Code on the date of this Agreement.
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"Governmental Authority" shall mean any nation or government, any
state, local or other political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Guaranty" shall mean that certain Amended and Restated Guaranty
Agreement dated as of October 30, 1996 made by Borrower in favor of
Lender, as the same may be amended, modified or supplemented from time to
time.
"HMG" shall mean HMG Digital Technologies Corp., a Delaware
corporation formerly known as RCL Acquisition Corp.
"HMG Consulting Agreements" shall mean those certain letter
agreements dated June 16, 1994 between HMG and each of Seymour W. Zises,
A. Sean Mathis and Mark L. Friedman as originally in effect.
"HMG Note Dividends" shall mean any dividends paid pursuant to
clause (b) or (d) of the proviso in subsection 8.8.
"HMG Notes" shall mean, collectively, the promissory notes in the
aggregate principal amount of $2,000,000 issued by HMG to George Fishman,
Donald Olesen and William H. Smith, as Trustee, as the same may be
amended, modified or supplemented from time to time in accordance with the
provisions of this Agreement and the other Financing Agreements.
"HMG Notes Maturity Date" shall mean December 31, 1998 and if the
maturity of the HMG Notes is extended pursuant to Section 2.1 of the HMG
Notes as originally in effect, each last day in March, June, September or
December thereafter to which such date is extended.
"Holder" shall have the meaning set forth in subsection 8.8.
"Holdings" shall mean HRM Holdings Corp., a Delaware corporation.
"Holdings Guaranty" shall mean that certain Amended and Restated
Guaranty Agreement dated as of October 30, 1996 made by Holdings in favor
of Lender, as the same may be amended, modified or supplemented from time
to time.
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"Holdings Subordinated Debt" shall mean the outstanding principal
balance of the Subordinated Note which on the Effective Time was
$1,639,000.
"Holdings Subordination Agreement" shall mean that certain Amended
and Restated Subordination Agreement dated as of October 30, 1996 between
the Lender and Holdings, as the same may be amended, modified or
supplemented from time to time.
"Indebtedness" shall mean (i) all obligations on account of money
borrowed by, or credit extended to or on behalf of, or for or on account
of Borrower; (ii) all obligations of Borrower evidenced by bonds,
debentures, notes or similar instruments, whether or not representing
obligations for borrowed money; (iii) all obligations of Borrower for the
deferred purchase price of, or incurred in connection with the acquisition
of, property or services; (iv) all obligations created or arising under
any conditional sale agreement or other title retention agreement; (v) all
Capitalized Lease Obligations; (vi) all obligations secured by a Lien on
property owned by Borrower (whether or not such obligations have been
assumed by Borrower); (vii) the face amount of all letters of credit
issued for the account of Borrower, the unreimbursed amount of all drafts
drawn thereunder, and all other obligations of Borrower associated with
such letters of credit or draws thereon; (viii) all obligations of
Borrower in respect of acceptances or similar obligations issued for the
account of Borrower; (ix) all obligations of Borrower under any interest
rate swap, "cap," or "collar," any currency or equity swaps or any other
hedging or similar agreement; and (x) all direct or indirect guaranties,
endorsements and other contingent obligations in respect of, and
obligations to purchase or otherwise acquire or otherwise insure a
creditor against loss in respect of, Indebtedness of any Person and any
other guaranty, maintenance, support or similar obligations in respect of
the performance of others, contingent or otherwise.
"Indemnified Matters" shall have the meanings set forth in
subsection 10.19.
"Indemnitees" shall have the meaning set forth in subsection 10.19.
"Initial Distribution" shall have the meaning set forth in
subsection 8.8.
"Internal Revenue Code" shall mean the Internal Revenue Code of
1986, as amended from time to time, and any successor statute.
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"INV %" shall have the meaning set forth in subsection 2.2.
"Inventory" shall mean any and all goods, including, without
limitation, goods in transit, wheresoever located, whether now owned or
hereafter acquired by Borrower, which are held for sale or lease,
furnished under any contract of service or held as raw materials, work in
process or supplies, and all materials used or consumed in Borrower's
business, and shall include such property the sale or other disposition of
which has given rise to Accounts and which has been returned to or
repossessed or stopped in transit by Borrower.
"Inventory Sublimit" shall mean $3,500,000.
"IRS" shall have the meaning set forth in subsection 7.8.
"L/C Facility" shall have the meaning set forth in subsection 2.2.
"Lending Affiliate" shall mean, as to any Person, (a) each office
and branch of such Person, and (b) each entity which, directly or
indirectly, is controlled by or under common control with such Person or
controls such Person and each office and branch thereof.
"Letters of Credit" shall mean any letters of credit which
heretofore were, or now, or at any time hereafter are issued by Lender at
the request of and for the account of Borrower (or AFL prior to the
Merger) and which have not expired, been revoked or terminated and all
amendments, renewals, extensions or replacements thereof and shall include
without limitation all such letters of credit issued by Lender pursuant to
the terms of the Hauppauge LSA or the AFL LSA.
"Liabilities" shall mean all of Borrower's liabilities, obligations
and indebtedness to Lender of any and every kind and nature, whether
heretofore, now or hereafter owing, arising, due or payable and howsoever
evidenced, created, incurred, acquired or owing, whether primary,
secondary, direct, contingent, fixed or otherwise (including obligations
of performance) and whether arising or existing under written agreement,
oral agreement or operation of law, including, without limitation, all
"Liabilities" as such term was defined in the Hauppauge LSA or the AFL
LSA, all of Borrower's reimbursement obligations, whether contingent or
liquidated, with respect to any Letters of Credit, and all of Borrower's
other indebtedness and obligations to Lender under this Agreement and the
other Financing Agreements.
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"Lien(s)" shall mean any lien, claim, charge, pledge, security
interest, deed of trust, mortgage, other encumbrance or other arrangement
having the practical effect of the foregoing or other preferential
arrangement of any other kind and shall include the interest of a vendor
or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
"Loan Account" shall have the meaning set forth in subsection 2.4
"Loans" shall mean, collectively, the Revolving Loan, the Term Loan
and the Additional Loan.
"Lock Box Accounts" shall have the meaning set forth in subsection
3.6.
"Loss" shall have the meaning set forth in subsection 9.1.
"Management Letter" shall have the meaning set forth in subsection
7.1.
"Maximum Bill-and-Hold Amount" shall mean (i) at any time during
September 1 to December 31 in each year, $8,000,000, and (ii) at any other
time during any year, $5,000,000.
"Maximum Revolving Facility Amount" shall mean $22,000,000.
"Measurement Period" shall have the meaning set forth in subsection
8.8.
"Merger" shall mean the merger of AFL with and into Borrower
pursuant to the Merger Documents in accordance with the laws of Michigan
and New York.
"Merger Documents" shall mean the plans of merger adopted by
Borrower and AFL and the Certificate of Merger and Certificate of
Merger/Consolidation filed with the Department of State of New York and
Michigan Department of Commerce - Corporation and Securities Bureau,
respectively, to effect the Merger.
"Monthly Report" shall have the meaning set forth in subsection 3.1.
"Mortgages" shall have the meaning set forth in subsection 5.3.
"Multiemployer Plan" shall mean, with respect to any Person, an
employee benefit plan defined in Section 4001(a) (3) of ERISA which is, or
within the
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immediately preceding six (6) years was, contributed to by such Person or
an ERISA Affiliate of such Person.
"Net Worth" shall have the meaning set forth in subsection 8.13.
"Note Holder" shall have the meaning set forth in subsection 8.18.
"Notes" shall mean, collectively, the Revolving Note, the Term Note
and the Additional Term Note.
"Obsolete Equipment" shall mean Equipment which is reasonably
determined by Borrower to be obsolete or unusable by Borrower.
"Participant" shall mean any Person who purchases a participation
from Lender in any of the Liabilities.
"PBGC" shall mean the Pension Benefit Guaranty Corporation and any
Person succeeding to the functions thereof.
"Permitted Public Offering" shall mean a public offering by Allied
of shares of Allied Common Stock to the public pursuant to a underwriting
under the Securities Act of 1933, as amended, at any time during which
Allied is required to file periodic reports under the Exchange Act.
"Permitted Tax Sharing Payments" shall mean payments required to be
made by Borrower under the Allied Tax Sharing Agreement.
"Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, entity,
party or government (whether national, federal, state, provincial, county,
city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
"Plan" shall mean, with respect to any Person, any employee benefit
plan defined in Section 3(3) of ERISA in respect of which such Person or
any ERISA Affiliate of such Person is, or at any time within the
immediately preceding six (6) years was, an "employer" as defined in
Section 3(5) of ERISA.
"Prepayment Fee" shall have the meaning set forth in subsection 2.6.
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"Pro Forma" shall mean have the meaning set forth in subsection 6.4.
"Project X Partnership" shall mean Project X Marketing Co., a
general partnership with Borrower and H&S Marketing, Inc., a New York
corporation ("H&S"), as its partners, formed pursuant to that certain
Joint Venture Agreement dated August ___, 1996 between Borrower and H&S.
"Release Time" shall have the meaning set forth for such term in the
Agreement and Consent.
"Required Tax Amount" shall have the meaning set forth in subsection
8.18.
"Retained Earnings Amount" shall have the meaning set forth in
subsection 8.8.
"Revolving Loan" shall have the meaning set forth in subsection 2.2.
"Revolving Note" shall have the meaning set forth in subsection 2.2.
"Selected Bill and Hold Accounts" shall have the meaning set forth
in subsection 3.2.
"Series A Note" shall mean the Series A Note dated January 11, 1995,
in the principal amount of $3,500,000, issued by HMG to the order of
Venture Partners, as amended by Amendment No. 1 to Series A Note dated
August 31, 1995 between HMG and Venture Partners, which Series A Note was
paid in full at the Release Time and surrendered to HMG.
"Series B Notes" shall mean, collectively, the promissory notes in
the aggregate principal amount of $916,659, issued by HMG to the order of
the Persons set forth on Schedule 1.1(B), as the same may be amended,
modified or supplemented from time to time in accordance with the
provisions of this Agreement and the other Financing Agreements.
"Signature Authorization Certificate" shall mean a certificate
substantially in the form of Exhibit I now or hereafter executed on behalf
of Borrower and delivered to Lender.
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"Smith Interest/HMG Note Dividend Conditions" shall mean the
conditions set forth in clause (ii) in the proviso of subsection 8.8 and
clauses (iv) and (v) of subsection 8.18.
"Smith Interest Payments" shall mean payments of interest on the
Smith Subordinated Notes pursuant to subsection 8.18.
"Smith Leases" shall mean, collectively, the agreements set forth on
Schedule 1.1(C), in each case as the same may be amended, modified or
supplemented from time to time in accordance with the provisions of the
Financing Agreements.
"Smith Subordinated Notes" shall mean that certain Amended and
Restated Promissory Note dated October 30, 1996 made by Borrower to
William H. Smith, as Trustee, in the principal amount of $4,000,000 (and
amending and restating in its entirety that certain Promissory Note dated
January 24, 1995 originally made by AFL to William H. Smith, as Trustee,
in the original principal amount of $4,000,000), and that certain Amended
and Restated Promissory Note dated October 30, 1996 made by Borrower to
William H. Smith, in the original principal amount of $2,000,000 (and
amending and restating in its entirety that certain Promissory Note dated
November 8, 1995 originally made by Borrower to William H. Smith, in the
original principal amount of $2,000,000).
"Smith Subordination Agreement" shall mean that certain Amended and
Restated Subordination Agreement dated as of October 30, 1996 between
William H. Smith, individually and as Trustee, and Lender, as the same may
be amended, modified or supplemented from time to time.
"SOFA Amount" shall mean (i) on or before October 31, 1996,
$8,657,518, (ii) on November 1, 1996 to and including November 30, 1996,
$6,962,056, (iii) on December 1, 1996 to and including December 31, 1996,
$6,414,003, (iv) on January 1, 1997 to and including January 31, 1997,
$5,805,950, (v) during each month after January 31, 1997 and prior to
November 1, 1997 the amount of the SOFA Amount for the prior month minus
$608,053, and (vi) on and after November 1, 1997, zero.
"SP Agent" shall have the meaning set forth in subsection 10.9.
"Special Dividend Amount" shall have the meaning set forth in
subsection 8.8.
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"Special Interest Amount" shall have the meaning set forth in
subsection 8.18.
"Subordinated Note" shall mean that certain Promissory Note dated
September 20, 1993 made by Borrower to Holdings in the principal amount of
$1,639,000, as the same may be amended, modified or supplemented from time
to time in accordance with the provisions of this Agreement and the other
Financing Agreements.
"Subsidiary" shall mean, with respect to any Person, any corporation
of which more than fifty percent (50%) of the outstanding capital stock
having ordinary voting power to elect a majority of the board of directors
of such corporation (irrespective of whether at the time stock 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 by such Person.
"Tax Amount" shall have the meaning set forth in subsection 8.8.
"Term" shall have the meaning set forth in subsection 2.8.
"Term Loan" shall have the meaning set forth in subsection 2.1.
"Term Loan Reserve" shall mean at any time the aggregate amount of
all payments of principal and interest due and payable on the Term Loan or
the Additional Loan during the next thirty (30) days, including without
limitation all regularly scheduled payments of principal and interest
required under the Term Note or the Additional Term Note and all payments
required pursuant to subsection 2.3(F) or 2.3(G) or permitted (and for
which notice has been given) pursuant to subsection 2.3(H).
"Term Note" shall have the meaning set forth in subsection 2.1.
"Termination Charge" shall have the meaning set forth in subsection
2.6.
"Termination Event" shall mean (i) a reportable event described in
Section 4043 of ERISA or the regulations promulgated thereunder (other
than the reportable event described in Section 4043.20 of such
regulations) occurring with respect to any Benefit Plan of Borrower or any
ERISA Affiliate of Borrower, or (ii) the withdrawal of Borrower or any
ERISA Affiliate of Borrower from a Benefit
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Plan during a plan year in which it was a "substantial employer" as
defined in Section 4001(a)(2) of ERISA or the cessation of operations
which results in the termination of employment of 20% of Benefit Plan
participants who are employees of Borrower or any ERISA Affiliate of
Borrower, or (iii) the occurrence of an obligation of Borrower or any
ERISA Affiliate of Borrower arising under Section 4041 of ERISA to provide
affected parties with a written notice of an intent to terminate a Benefit
Plan in a distress termination described in Section 4041(c) of ERISA, or
(iv) PBGC's institution of proceedings to terminate a Benefit Plan of
Borrower or any ERISA Affiliate of Borrower, or (v) any event or condition
which might constitute grounds under Section 4041A or 4042 of ERISA for
the termination of, or the appointment of a trustee to administer any
Benefit Plan or Multiemployer Plan of Borrower or any ERISA Affiliate of
Borrower, or (vi) the partial or complete withdrawal (as defined in
Section 4203 and 4205 of ERISA) of Borrower or any ERISA Affiliate of
Borrower from a Multiemployer Plan, or (vii) the existence in a
Multiemployer Plan of a potential withdrawal liability in excess of
$100,000 of Borrower or any ERISA Affiliate of Borrower, or (viii) the
occurrence of any nonexempt "prohibited transaction" with respect to any
plan under Section 406 of ERISA or Section 4975 of the Internal Revenue
Code or (ix) as of the last day of any plan year, the present value of the
benefits of any Benefit Plan of Borrower or any ERISA Affiliate of
Borrower, as determined by the plan's independent actuaries,h date, as
determined by such actuaries, of all assets of such plan.
"Third Party Goods" shall have the meaning set forth in subsection
3.1.
"Third Party Financed Equipment" shall have the meaning set forth in
subsection 8.2.
"Trustee" shall mean William H. Smith in his capacity as trustee
under that certain William H. Smith Trust Agreement dated December 27,
1978 (and given an effective date as of November 13, 1978), as amended and
restated on September 2, 1992, and as amended, modified or supplemented
thereafter.
"VCA Note" shall mean that certain 12% Promissory Note dated March
31, 1993, originally made by AFL in favor of VTC, Inc., in an original
principal amount of $1,570,315, and assumed by Borrower in connection with
the Merger as amended, modified or supplemented from time to time in
accordance with the provisions of this Agreement and the other Financing
Agreements.
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"Venture Partners" shall mean 399 Venture Partners, Inc., a Delaware
corporation, and shall include any other holder or holders of the Series A
Note or any portion thereof.
1.2 Accounting Terms. Calculations and determinations of financial
and accounting terms used and not otherwise specifically defined hereunder shall
be made and determined, both as to classification of items and as to amount, in
accordance with GAAP. If any changes in accounting principles or practices from
GAAP are occasioned by the promulgation of rules, regulations, pronouncements
and opinions by or required by the Financial Accounting Standards Board or the
American Institute of Certified Public Accountants (or any successor thereto or
agencies with similar functions), which results in a change in the method of
accounting in the calculation of financial covenants, standards or terms
contained in this Agreement or any other Financing Agreement, the parties hereto
agree to enter into negotiations to amend such provisions so as equitably to
reflect such changes to the end that the criteria for evaluating Borrower's
financial condition and performance will be the same after such changes as they
were before such changes; and if the parties fail to agree on the amendment of
such provisions, Borrower shall continue to provide calculations for all
financial covenants, perform all financial covenants and otherwise observe all
financial standards and terms in accordance with applicable accounting
principles and practices in effect immediately prior to such changes.
Calculations with respect to financial covenants required to be stated in
accordance with applicable accounting principles and practices in effect
immediately prior to such changes shall be reviewed and reported on in
accordance with Statement on Auditing Statements No. 62 by Borrower's
independent certified public accountants.
1.3 Other Terms Defined in Illinois Uniform Commercial Code. All
other terms contained in this Agreement (and which are not otherwise
specifically defined herein) shall have the meanings provided in Article 9 of
the Code on the date hereof to the extent the same are used or defined therein.
1.4 Other Definitional Provisions. Whenever the context so requires,
the neuter gender includes the masculine and feminine, the singular number
includes the plural, and vice versa. The words "hereof," "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement, and references to Sections, subsections, Annexes, Schedules, Exhibits
and like references are references to this Agreement unless otherwise specified.
References in this Agreement to any Person shall include such Person's
successors and permitted assigns.
2. CREDIT.
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2.1 Term Loan and Additional Loan.
(A) Term Loan. Lender has heretofore extended certain loans
described on Schedule 2.1, which loans have outstanding principal balances as of
the date hereof as set forth on Schedule 2.1, to Borrower or AFL (and which, in
the case of the loans extended by Lender to AFL, were assumed by Borrower in
connection with the Merger) (collectively, the "Term Loan"). The Term Loan
shall, after the date hereof, be evidenced, in part, by and repayable in
accordance with the terms of a promissory note made by Borrower in favor of
Lender (the "Term Note") in the form of Exhibit A with the blanks appropriately
filled. The provisions of the Term Note notwithstanding, the Liabilities
evidenced by the Term Note shall become immediately due and payable as provided
in subsection 9.1, and, without notice or demand, upon the termination of this
Agreement pursuant to subsection 2.8.
(B) Additional Loan. Subject to the provisions of Section 4 below,
Lender shall extend at the Release Time an additional loan to Borrower in the
principal amount of $1,500,000 (the "Additional Loan"). The Additional Loan
shall be evidenced, in part, by and repayable in accordance with the terms of a
promissory note made by Borrower in favor of Lender (the "Additional Term Note")
in the form of Exhibit B with the blanks appropriately filled. The provisions of
the Additional Term Note notwithstanding, the Liabilities evidenced by the
Additional Term Note shall become immediately due and payable as provided in
subsection 9.1, and without notice or demand, upon the termination of this
Agreement pursuant to subsection 2.8.
2.2 Revolving Loan Facility.
(A) Revolving Loan Facility. Subject to the provisions of Section 4
below, Lender shall advance to Borrower on a revolving credit basis (the
"Revolving Loan"), the lesser of (i) the Maximum Revolving Facility Amount minus
the sum of the undrawn face amount of all Letters of Credit outstanding at the
time any particular advance is made or (ii) the "Current Asset Base" (as defined
below). As used herein, "Current Asset Base" shall mean the amount equal to (i)
up to eighty-five percent (85%) (the "A/R%") of the face amount (less maximum
discounts, credits and allowances which may be taken by or granted to Account
Debtors in connection therewith) then outstanding under existing Eligible
Accounts, less such reserves as Lender in its sole discretion exercised in Good
Faith elects to establish; plus (ii) the lesser of the Inventory Sublimit and an
amount equal to up to sixty percent (60%) (the "Inv %")of Borrower's existing
Eligible Inventory valued at the lower of cost, determined on a first-in,
first-out basis, or market, less such reserves as Lender in its sole discretion
exercised in Good Faith elects to establish; minus
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(iii) the sum of the undrawn face amount of any Letters of Credit outstanding;
and minus (iv) at any time prior to the making of the payments required by
subsection 2.3(E) an amount equal to the Additional Reserve. The term
"Additional Reserve" shall mean $1,136,000. Without in any way limiting the
rights or discretion of Lender hereunder, in the event Lender fails to receive a
satisfactory landlord's waiver with respect to any premises leased by Borrower,
Lender shall have the right to establish such reserves with respect thereto as
Lender elects to establish in its sole discretion exercised in Good Faith.
Lender, in its sole and absolute discretion, may elect to make advances to
Borrower in excess of the amounts available pursuant to the advance rates set
forth above. Lender shall not apply a percentage less than the A/R % or the Inv
% except in the exercise of its Good Faith discretion. Each advance to Borrower
shall be in integral multiples of $5,000 and shall, on the day of such advance,
be deposited, in immediately available funds, in Borrower's demand deposit
account with Lender. The Liabilities constituting the Revolving Loan shall,
after the date hereof, be evidenced, in part, by a promissory note made by
Borrower in favor of Lender (the "Revolving Note") in the form of Exhibit C with
the blanks appropriately filled and shall become immediately due and payable as
provided in subsection 9.1 hereof, and, without notice or demand, upon the
termination of this Agreement pursuant to subsection 2.8 hereof.
(B) Letter of Credit Facility. Subject to the provisions of Section
4 hereof, Lender may in its sole discretion and at Borrower's request and for
the account of Borrower, issue one or more Letters of Credit in an aggregate
undrawn face amount outstanding at any one time of up to $1,500,000 (the "L/C
Facility"). The Letters of Credit shall be in form and substance acceptable to
Lender. Borrower shall reimburse Lender, immediately upon demand, for any
payments made by Lender to any Person with respec-of-pocket costs, fees and
expenses incurred by Lender in connection with the application for, issuance of
or amendment to any Letter of Credit, and until Lender shall be so reimbursed by
Borrower, such payments by Lender shall be deemed to be part of the Revolving
Loan. Borrower shall execute Lender's standard form of application and
reimbursement agreement for each Letter of Credit.
2.3 Payments and Prepayments.
(A) The aggregate outstanding principal balance of the Revolving
Loan shall not exceed at any time the lesser of (a) the Maximum Revolving
Facility Amount minus the sum of the undrawn face amount of all Letters of
Credit outstanding or (b) the amount of the Current Asset Base. The aggregate
outstanding principal balance of the Revolving Loan based on Inventory shall not
at any time exceed the Inventory Sublimit. Borrower shall, if at any time any
such excess shall arise, promptly pay to Lender such amount for application to
the Liabilities as may be necessary to eliminate such excess.
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(B) Subject to the terms and conditions set forth in subsection 2.8,
Borrower may terminate this Agreement and prepay the Liabilities in full during
the Term, upon not less than thirty (30) Business Days' prior irrevocable
written notice to Lender, provided that upon the effective date of such
termination, Borrower shall pay Lender, as liquidated damages and compensation
for the costs of being prepared to make funds available to Borrower under this
Agreement, the amounts provided for under subsection 2.6(E). Borrower may from
time to time make partial prepayments, without penalty or additional fee (except
as provided in subsections 2.6(D), 2.6(E) or 2.6(G)), of the Revolving Loan;
provided, however, Borrower may not reduce the Maximum Revolving Facility
Amount.
(C) Borrower may prepay all or part of the Term Loan upon at least
thirty (30) Business Days' prior irrevocable written notice to Lender of the
amount of the principal prepayment and the Business Day for prepayment, provided
that upon the date for such prepayment, Borrower shall pay to Lender a
Prepayment Fee in the amount required by subsection 2.6(D). Any such prepayments
to the principal balance of the Term Loan shall be applied to reduce the
regularly scheduled principal installments of the Term Note in the inverse order
of their maturity.
(D) In the event Borrower is permitted to sell or otherwise dispose
of any Equipment pursuant to clause (ii) of subsection 8.6, Borrower shall
forthwith after consummation of such sale or other disposition prepay, without
payment of any Prepayment Fee, the Term Loan (or, if the Term Loan has been paid
in full, the Additional Loan) by an amount equal to the proceeds from such sale,
net of reasonable expenses and taxes incurred incidental to such sale; provided,
however, that amounts used to pay any third party financing which was incurred
to purchase the Third Party Financed Equipment which is so sold and the first
$25,000 of aggregate net proceeds in each Fiscal Year from such sales shall not
be treated as proceeds in determining the amount of any such prepayments. Any
such prepayments of the Term Loan or the Additional Loan shall be applied to
reduce the regularly scheduled principal installments of the Note evidencing
such Loan in the inverse order of their maturity.
(E) On October 31, 1996, Borrower shall make a prepayment of
principal on the Term Loan in an amount equal to $1,139,000, which prepayment
shall be in addition to the other payments on the Term Loan required to be made
pursuant to this Agreement or the Term Note. No Prepayment Fee shall be due and
payable as a result of such prepayment. Such prepayment shall be applied to
reduce the regularly scheduled principal ins On October 31, 1997, Borrower shall
make a prepayment of principal on the Term Loan in an amount equal to
$2,000,000, which prepayment shall be in addition to the other payments on the
Term Loan required to be made pursuant to this Agreement
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or the Term Note. No Prepayment Fee shall be due and payable as a result of such
prepayment. Such prepayment shall be applied to reduce the regularly scheduled
principal installments of the Term Note in the inverse order of their maturity.
(G) On October 31, 1998, Borrower shall make a prepayment of
principal on the Term Loan in an amount equal to $5,000,000, which prepayment
shall be in addition to the other payments on the Term Loan required to be made
pursuant to this Agreement or the Term Note. No Prepayment Fee shall be due and
payable as a result of such prepayment. Such prepayment shall be applied to
reduce the regularly scheduled principal installments of the Term Note in the
inverse order of their maturity.
(H) Borrower may prepay all or part of the Additional Loan upon at
least thirty (30) Business Day' prior irrevocable written notice to Lender of
the amount of the principal prepayment and the Business Day for prepayment. No
Prepayment Fee shall be due and payable as a result of such prepayment. Any such
prepayments shall be applied to reduce the regularly scheduled principal
installments of the Additional Term Note in the inverse order of their maturity.
(I) If Lender determines that an Appraisal Adjustment Amount exists
at any time, Borrower shall upon notice from Lender immediately pay to Lender
the amount of the Appraisal Adjustment Amount for application to the principal
of Term Loan and the Additional Loan. No Prepayment Fee shall be due and payable
as a result of any such prepayment. Any such prepayments shall be applied to the
Term Loan and the Additional Loan in such amounts as are determined by Lender in
its sole discretion and shall reduce the regularly scheduled principal
installments of the Note (or Notes) evidencing the Loan (or Loans) to which the
prepayment is applied by Lender in the inverse order of their maturity.
2.4 Borrower's Loan Account.
Lender shall maintain a loan account (the "Loan Account") on its
internal data control systems in which shall be recorded (i) all loans and
advances (except for the principal amount of the Term Loan and the Additional
Loan) made by Lender to Borrower or for Borrower's account pursuant to this
Agreement, including without limitation all payments made by Lender under any
Letters of Credit, (ii) all payments made by Borrower or for Borrower's account
on all such loans and advances, and (iii) all other appropriate debits and
credits as provided in this Agreement, including, without limitation, all fees,
charges, expenses and interest. All entries in Borrower's Loan Account shall be
made in accordance with Lender's customary accounting practices as in effect
from time to time. Borrower promises to pay to Lender the amount reflected as
owing by it under
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its Loan Account and all of its other obligations hereunder and under any
of the other Financing Agreements as such amounts become due or are declared due
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) pursuant to the terms of this Agreement and the other Financing
Agreements. The foregoing sentence shall not be deemed to limit Borrower's
rights set forth in subsection 2.5.
2.5 Statements. All advances and other financial accommodations to
Borrower, and all other debits and credits provided for in this Agreement, may
be evidenced by entries made by Lender in its internal data control systems
showing the date, amount and reason for each such debit or credit. Until such
time as Lender shall have rendered to Borrower written statements of account as
provided herein, the balance in Borrower's Loan Account, as set forth on
Lender's most recent printout, shall be rebuttably presumptive evidence of the
amounts due and owing to Lender by Borrower (other than the unpaid principal
balance of the Term Loan and the Additional Loan). Not more than twenty (20)
days after the last day of each calendar month, Lender shall render to Borrower
a statement setting forth the balance of Borrower's Loan Account, including
principal, interest, expenses and fees. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors or omissions,
be presumed correct and binding upon Borrower and shall constitute an account
stated unless, within thirty (30) days after receipt of any statement from
Lender, Borrower shall deliver to Lender written objection thereto specifying
the error or errors, if any, contained in such statement.
2.6 Interest and Fees.
(A) Borrower shall pay to Lender interest on the outstanding
principal balance of (i) the Term Loan and the Additional Loan at a fluctuating
rate per annum equal to the Base Rate as from time to time in effect plus one
and one-half of one percent (1.50%) and (ii) the Revolving Loan and all other
Liabilities at a fluctuating rate per annum equal to the Base Rate as from time
to time in effect plus one and one-quarter of one percent (1.25%); provided,
however, that following the occurrence and during the continuance of a Default,
Borrower shall pay interest from the date of such Default (or, in the event of a
Default other than as described in subsection 9.1(A), (H) or (I), from the date
of notice to such effect from Lender) at the rate set forth above for each of
the Liabilities plus an additional three percent (3.00%) per annum. Interest
shall be payable (i) monthly in arrears not later than the first day of each
calendar month, (ii) on the termination of this Agreement, and (iii) upon and
during the continuance of a Default or after maturity, as provided above or, if
sooner, upon demand of Lender. Interest shall be computed on the basis of a
360-day year for the actual number of days elapsed.
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(B) Borrower shall pay to Lender a facility fee (the "Facility Fee")
on the average daily amount of the Commitment Fee Base for each month (or
portion thereof) from and after October 30, 1996 at the rate of one-half of one
percent (.50%) per annum, payable monthly in arrears on the first day of each
calendar month for the preceding calendar month (or portion thereof), and on the
termination of this Agreement, the first such payment to be made on November 1,
1996. Such fee shall be computed on the basis of a 360-day year for the actual
number of days elapsed.
(C) Borrower shall pay to Lender on the last day of each calendar
month during which an audit, inventory analysis or other business analysis is
performed by or for the benefit of Lender, or, if earlier, upon the completion
of such audit or analysis, an audit fee in an amount equal to $500.00 per day
for each person employed to perform such audit or analysis, each which person
may be an employee of Lender or an independent contractor, plus all reasonable
costs or expenses incurred by Lender or such person or persons in the
performance of such audit or analysis.
(D) In addition to any other fee required to be paid hereunder, in
the event of (i) any reduction or payment of the Liabilities at any time other
than the end of the Term and if such payment or reduction is a direct or
indirect result of Borrower's receipt of the proceeds of other funded
indebtedness or similar financing (e.g., lease financing), sale of stock,
capital contribution or any other financing or capital of any kind (except for
loans, extensions of credit or other financing provided by Lender, cash
generated from operations of Borrower and indebtedness permitted by clauses
(iii) and (iv) of subsection 8.2), or (ii) in the event of any prepayment of the
Term Loan pursuant to subsection 2.3(C), then Borrower shall pay to Lender, in
addition to any other amounts under this Agreement, a prepayment fee
("Prepayment Fee") equal to two percent (2.00%) of the amount of such reduction
or payment or prepayment, such fee to be due and payable on the date of the
initial application thereof to the Liabilities. Notwithstanding anything herein
or in the Term Note or the Additional Term Note to the contrary, Borrower may
not, except as permitted pursuant to subsection 2.3, prepay any portion of the
Term Loan or the Additional Loan without Lender's consent; any such purported
prepayments of the Term Loan or Additional Loan that are received by Lender may
be applied to Borrower's Loan Account and any of the Liabilities at the sole
election of Lender. Notwithstanding the foregoing, no Prepayment Fee shall be
required to be paid under this subsection 2.6(D) with respect to any reduction,
payment or prepayment of the Term Loan made out of the proceeds of a Permitted
Public Offering or the proceeds from the exercise of Allied Warrants to the
extent that the aggregate amount of all such reductions, payments or prepayments
of the Term Loan made by Borrower out of the proceeds of such Permitted Public
Offering and the proceeds from the exercise of A
(E) If Borrower terminates this Agreement at any time other than at
the end of the Term, then Borrower
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shall pay to Lender, in addition to Borrower's payment of the then outstanding
principal and accrued interest and payment and performance of all other
Liabilities (including without limitation any other fees due under this
subsection 2.6 and any other fees owed to Lender), a termination charge (the
"Termination Charge") in an amount equal to two percent (2.00%) of the amount
which is equal to (a) $48,910,168.93 minus (b) the aggregate amount of all
principal payments received by Lender on the Term Loan or the Additional Loan
which are required to be made by Borrower as regularly scheduled principal
payments pursuant to the Term Note or the Additional Term Note or which are
required (or permitted) and made pursuant to subsection 2.3(E), 2.3(F), 2.3(G),
2.3(H) or 2.3(I), in each case on which no Prepayment Fee is required to be
paid, minus (c) the amount of any reduction or payment of the Liabilities after
October 30, 1996 on which Borrower has paid a Prepayment Fee (including any
final payment of the Liabilities in connection with the termination of this
Agreement on which Borrower pays a Prepayment Fee).
(F) For each Letter of Credit, Borrower shall pay to Lender a fee
(the "L/C Fee") in an amount equal to one and one-half percent (1.50%) per annum
of the undrawn face amount of such Letter of Credit, provided that the L/C Fee
shall not be less than $500 for any such Letter of Credit. The L/C Fee shall be
payable (i) in advance upon the issuance of each Letter of Credit for the number
of days remaining in the month during which such Letter of Credit was issued and
(ii) thereafter, monthly in arrears on the first day of each month during which
each such Letter of Credit remains outstanding. The L/C Fee shall be computed on
the basis of a 360-day year for the actual number of days elapsed. In addition
to the L/C Fee, Borrower shall pay to Lender all of Lender's customary charges
for out-of-pocket and administrative expenses upon the issuance of any Letter of
Credit.
(G) Borrower shall pay to Lender the fees required to be paid in the
Fee Letter at the times specified therein.
(H) This Agreement and the Notes are hereby limited by this
subsection 2.6(H). In no contingency, whether by reason of acceleration of the
maturity of the amounts due hereunder or otherwise, shall interest and fees
contracted for, charged, received, paid or agreed to be paid to Lender exceed
the maximum amount permissible under applicable law. If, from any circumstance
whatsoever, interest and fees would otherwise be payable to Lender in excess of
the maximum amount permissible under applicable law, the interest and fees shall
be reduced to the maximum amount permitted under applicable law. If from any
circumstance, Lender shall have received anything of value deemed interest by
applicable law in excess of the maximum lawful amount, an amount equal to any
excess of interest shall be applied to the reduction of the principal
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amount of the Liabilities and not to the payment of fees or interest, or if such
excessive interest exceeds the unpaid balance of the principal amount of
Liabilities, such excess shall be refunded to Borrower.
2.7 Method for Making Payments. Unless otherwise agreed in writing
from time to time hereafter, all payments which Borrower is required to make to
Lender under this Agreement or under any of the other Financing Agreements shall
be made by appropriate debits to Borrower's Loan Account. Lender may in its sole
discretion elect to bill Borrower for such amounts, in which case such billed
amounts shall be immediately due and payable with interest thereon as provided
herein.
2.8 Term of this Agreement. This Agreement shall be effective until
November 30, 2000 (the "Term"). This Agreement shall terminate at the end of the
Term; provided, however, that Lender shall retain the right to terminate this
Agreement at any time upon the occurrence and during the continuance of a
Default and, after or concurrently with the termination of the GLC Term Loan
Agreement and payment in full of the GLC Liabilities, Borrower may upon at least
thirty (30) Business Days' prior written notice, terminate this Agreement at any
time other than at the end of the Term upon the payment by Borrower to Lender,
in addition to the then outstanding principal and accrued interest and payment
and performance of all other Liabilities (including without limitation any fees
due under subsection 2.6 and any other fees owed to Lender), of the Termination
Charge; provided further, however, that notwithstanding any termination of this
Agreement, all of Lender's rights and remedies under this Agreement and the
other Financing Agreements and all of Lender's security interests shall survive
any such termination until all of the Liabilities have been fully paid and
satisfied and all Letters of Credit have expired, been canceled or terminated.
Upon the effective date of any termination of this Agreement, all of the
Liabilities shall become immediately due and payable without notice or demand.
Notwithstanding any termination, until all of the Liabilities shall have been
fully paid and satisfied, and all Letters of Credit shall have expired, been
cancelled or terminated, and all financing agreements between Borrower and
Lender shall have been terminated, all of Lender's rights and remedies under
this Agreement and the other Financing Agreements shall survive, Lender shall be
entitled to retain its security interest in and to all existing and future
Collateral, and Borrower shall continue to remit collections of Accounts and
proceeds as provided herein.
2.9 Capital Adequacy. If either (i) the introduction of or any
change in or in the interpretation of any law or regulation, or (ii) compliance
by Lender or any Participant or any of their Lending Affiliates with any
guideline or request from any central bank or Governmental Authority (whether or
not having the force of law) has or would have the effect of reducing the rate
of return on the capital or assets of Lender, any
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Participant or any Lending Affiliate as a consequence of, as
determined by Lender or such Participant in its sole discretion, the existence
of Lender's commitments or obligations under this Agreement or any of the other
Financing Agreements, or in the case of any Participant any obligations of such
Participant under its participation agreement with Lender, then, upon demand by
Lender or such Participant, Borrower immediately shall pay to Lender or such
Participant, from time to time as specified by Lender or such Participant,
additional amounts sufficient to compensate Lender or such Participant in light
of such circumstances. Borrower shall not be required to so compensate Lender,
except to the extent such reduced rate of return relates to the existence of
Lender's commitments or obligations under this Agreement or any of the other
Financing Agreements, or so compensate any Participant, except to the extent
such reduced rate of return relates to the existence of such Participant's
participation in the Liabilities. Lender or such Participant will exercise
reasonable efforts to notify Borrower promptly after it obtains actual knowledge
of any such reduced rate of return, but the failure of Lender or such
Participant to so notify Borrower shall not limit or otherwise affect the
obligations of Borrower under this subsection 2.9. If Lender or any Participant
demands any payment under this subsection 2.9, Borrower may prepay the
Liabilities and terminate this Agreement as provided in and subject to the
conditions set forth in subsection 2.8 (including the requirement therein that
terminated and the GLC Liabilities be paid in full) during the 90-day period
following such initial demand without payment of a Prepayment Fee or Termination
Charge. The obligations of Borrower under this subsection 2.9 shall survive the
payment of the Liabilities and termination of this Agreement.
2.10 Certificate. A certificate signed by an officer of Lender or
any Participant (or any of their respective Lending Affiliates, as the case may
be), setting forth any additional amount required to be paid by Borrower to
Lender or such Participant (or Lending Affiliate, as the case may be) under
subsection 2.9 and the computations made by Lender or such Participant (or
Lending Affiliate, as the case may be), to determine such additional amount,
shall be submitted by Lender or such Participant (or Lending Affiliate, as the
case may be) to Borrower in connection with each demand made at any time by
Lender or any such Participant (or Lending Affiliate, as the case may be) upon
Borrower under said provision. Such certificate, in the absence of manifest
error, shall be conclusive as to the additional amount owed.
3. REPORTING AND ELIGIBILITY REQUIREMENTS.
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3.1 Monthly Reports and Collateral Reports.
(A) Monthly Reports.
Borrower shall submit to Lender not later than the twentieth (20th)
day of each month, a monthly report (the "Monthly Report"), accompanied by a
certificate in the form of Exhibit D-1, which shall be signed by an Authorized
Officer. The Monthly Report shall include, as of the last Business Day of the
preceding month:
(i) an aged trial balance of Borrower's Accounts ("Accounts Trial
Balance") prepared in a manner reasonably acceptable to Lender and
separately identifying each Account Debtor with a Bill-and-Hold Agreement
and the Accounts of such Account Debtor relating to such agreements;
(ii) a schedule of Inventory owned by Borrower and in Borrower's
possession or otherwise, by location, valued at the lesser of cost,
determined on a first-in, first-out basis, or market, and adjusted for
such reserves as Lender has previously indicated to Borrower (or prior to
the Merger had indicated to AFL) are deemed by Lender, to be appropriate,
in its sole determination made in Good Faith and including a report of any
variances or other results of inventory counts performed by Borrower since
the date of the last Monthly Report;
(iii) an aged trial balance of Borrower's accounts payable prepared
in a manner reasonably acceptable to Lender and showing the name of each
party to whom a payable is due and the amounts, including an aging
thereof, in such form as Lender may reasonably request;
(iv) a reconciliation of Borrower's Accounts and Inventory between
the amount shown on Borrower's books and Borrower's collateral reports
delivered to Lender in the form of Exhibit D-2 and D-3 attached hereto,
respectively;
(v) the outstanding principal balance of the Liabilities (other than
the Term Loan and the Additional Loan and Borrower's reimbursement
obligations with respect to then outstanding Letters of Credit) and the
aggregate undrawn face amount of all Letters of Credit outstanding;
(vi) a statement that there exists no Default or Event of Default,
or, if any Default or Event of Default exists, a specific description of
the nature and the period of existence thereof and the action Borrower has
taken and proposes to take with respect thereto;
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(vii) a statement that no Equipment has been sold, damaged,
destroyed, abandoned, become obsolete or has otherwise diminished in value
and no Equipment has not been used or operated for its originally intended
purpose for more than 30 consecutive days or has been used to provide
parts for other Equipment (except for (a) ordinary depreciation and wear
and tear and (b) damage to or the destruction, retirement (including
Equipment retired from service but used for parts) or abandonment of
Equipment with a book value not in excess of $50,000 in the aggregate in
any one Fiscal Year) since the later of the date of the last Monthly
Report or the schedule of Equipment most recently delivered to Lender by
Borrower or, if any such events have occurred, describing the same with
such specificity as is satisfactory to Lender; and
(viii) together with the Monthly Report furnished to Lender as of
the end of each quarter of each Fiscal Year of Borrower, a listing of all
Third Party Goods in Borrower's possession showing the amount and quantity
thereof by the owner thereof for each location of Borrower in form and
substance satisfactory to Lender.
(B) Collateral Reports.
In addition, Borrower shall provide Lender with a written report on
at least a weekly basis reflecting activity for each week, unless requested more
often by Lender (the "Collateral Report"), substantially in the form of Exhibit
D-4 describing or including, in a form and with such specificity as is
reasonably satisfactory to Lender:
(i) all Eligible Accounts created or acquired by Borrower subsequent
to the immediately preceding Collateral Report and specifically
identifying those Accounts of Account Debtors with Bill-and-Hold
Agreements (using, for purposes of determining whether an Account is an
Eligible Account, the criteria set forth in subsection 3.2 and such other
criteria as Lender has previously indicated to Borrower (or prior to the
Merger had indicated to AFL) are deemed by Lender to be appropriate in its
sole determination made in Good Faith); together with copies of any other
reports or information, in a form and with such specificity as is
reasonably satisfactory to Lender, concerning Accounts included, described
or referred to in the Collateral Reports and any other documents in
connection therewith requested by Lender, including, without limitation,
but only if specifically requested by Lender, copies of all invoices and
bills of lading prepared in connection with such Accounts;
(ii) information in connection with (a) any Account which, to the
best of Borrower's knowledge, has ceased to be an Eligible Account since
the most
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recent Collateral Report and (b) any other Account with respect to which
any setoff, counterclaim or dispute has been asserted by any Account
Debtor or any allegation of delayed performance or nonperformance has been
made by any Account Debtor accompanied by a statement of any modification,
adjustment or compromise with respect to any such Account which affects
the amount due or the time when payment of such Account is to be made;
(iii) information on all amounts collected by Borrower on Accounts
subsequent to the immediately preceding Collateral Report;
(iv) a calculation of Borrower's Current Asset Base, including
information on all sales of or other reductions of and all additions to
Inventory, all returns of Inventory, all credits issued by Borrower and
all written and all material, verbal complaints and claims against
Borrower; and
(v) such additional information as Lender shall reasonably require,
including without limitation, but only if requested by Lender, an itemized
statement of the amount of raw materials, work in process or finished
goods owned by other Persons in Borrower's possession ("Third Party
Goods").
3.2 Eligible Accounts. Lender shall have the sole right, in its
discretion exercised in Good Faith, to determine which Accounts are eligible
(the "Eligible Accounts"). Without limiting Lender's discretion, the following
Accounts shall not be Eligible Accounts: (i) Accounts which remain unpaid ninety
(90) days after the original date of the applicable invoice; (ii) all Accounts
owing by a single Account Debtor, including a currently scheduled Account, if
twenty-five percent (25%) or more of the balance of the Accounts owing by such
Account Debtor to Borrower are not, or would not be, Eligible Accounts as a
result of the application of the provisions of the preceding clause (i); (iii)
Accounts with respect to
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which the Account Debtor is a director, officer, employee, Subsidiary or
Affiliate of Borrower; (iv) Accounts with respect to which the Account Debtor is
the United States of America or any department, agency or instrumentality
thereof, unless with respect to any such Account, Borrower has complied to
Lender's satisfaction with the provisions of the Federal Assignment of Claims
Act of 1940, including, without limitation, executing and delivering to Lender
all statements of assignment and/or notification which are in form and substance
acceptable to Lender and which are deemed necessary by Lender to effectuate the
assignment to Lender of such Accounts; (v) Accounts with respect to which the
Account Debtor is not a resident of the United States unless the Account Debtor
has supplied Borrower with an irrevocable letter of credit, issued by a
financial institution satisfactory to Lender, sufficient to cover such Account
and in form and substance satisfactory to Lender; (vi) Accounts with respect to
which the Account Debtor has asserted a counterclaim or has a right of setoff
(provided, however, that in the case of a setoff the amount to be eliminated
from the balance of an otherwise Eligible Account under this clause shall be
limited to the amount of the offsetting claim unless the Account Debtor is
contesting the Account or refusing to pay the same); (vii) Accounts for which
the prospect of payment or performance by the Account Debtor is or may be
impaired as determined by Lender in its sole discretion exercised in Good Faith;
(viii) Accounts with respect to which Lender does not have a first and valid
fully perfected security interest; (ix) Accounts with respect to which the
Account Debtor is the subject of bankruptcy or a similar insolvenc an assignment
for the benefit of creditors or whose assets have been conveyed to a receiver or
trustee; (x) Accounts with respect to which the Account Debtor's obligation to
pay the Account is conditional upon the Account Debtor's approval or is
otherwise subject to any repurchase obligation or return right, as with sales
made on a bill-and-hold (except with respect to Selected Bill and Hold Accounts
to the extent the aggregate unpaid principal amount of all Selected Bill and
Hold Accounts as to all Account Debtors do not exceed the Maximum Bill-and-Hold
Amount), guaranteed sale, sale-or-return, sale on approval or consignment basis;
(xi) Accounts to the extent that the Account Debtor's indebtedness to Borrower
exceeds a credit limit determined by Lender in Lender's sole discretion; and
(xii) Accounts from Account Debtors located in a state where Borrower has failed
to file any required notice of business activities or similar notice or failed
to qualify to do business if one or both of such actions is a condition to
Borrower's enforcement or collection of such Accounts under state law. In the
event that a previously scheduled Eligible Account ceases to be an Eligible
Account under the above described criteria, Borrower shall notify Lender thereof
immediately after Borrower has obtained knowledge thereof.
For purposes of this subsection 3.2, the term "Selected Bill and
Hold Accounts" shall mean Accounts generated from bill-and-hold arrangements
which are subject to an agreement from Borrower and the Account Debtor upon
which the Lender is authorized to rely and in the form attached hereto as
Exhibit E or otherwise satisfactory in form and substance to Lender in its sole
discretion, with respect to the terms of such sales, which agreement is
enforceable, has not been breached by Borrower or such Account Debtor or been
revoked or terminated or the subject of any attempt by any party thereto to
revoke or terminate such agreement (each, a "Bill-and-Hold Agreement") and which
do not exceed a limit set in Lender's sole discretion as to the applicable
Account Debtor.
3.3 Account Warranties. With respect to Accounts scheduled, listed
or referred to on the initial Accounts Trial Balance or on any subsequent
Accounts Trial Balance, Borrower warrants and represents to Lender that: (i)
they are genuine, are in all respects what they purport to be, and are not
evidenced by a judgment; (ii) they represent
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undisputed, bona fide transactions, completed in accordance with the terms and
provisions contained in the documents, if any, delivered to Lender with respect
thereto; (iii) the amounts shown on the respective Accounts Trial Balance,
Borrower's books and records and all invoices and statements which may be
delivered to Lender with respect thereto are actually and absolutely owing to
Borrower and are not in any way contingent; (iv) no payments have been or shall
be made thereon except payments immediately deposited into Lock Box Accounts or
Blocked Accounts or delivered to Lender pursuant to this Agreement; (v) to the
best of Borrower's knowledge, there are no setoffs, counterclaims or disputes
existing or asserted with respect thereto and Borrower has not made any
agreement with any Account Debtor for any deduction therefrom except a discount
or allowance allowed by Borrower in the ordinary course of its business for
prompt payment; (vi) there are no facts, events or occurrences known to Borrower
which in any way impair the validity or enforcement thereof or tend to reduce
the amount payable thereunder as shown on the Accounts Trial Balance, Borrower's
books and records and all invoices and statements delivered to Lender with
respect thereto; (vii) to the best of Borrower's knowledge, all Account Debtors
have the capacity to contract and are solvent; (viii) the services furnished
and/or goods sold giving rise thereto are not subject to any Lien except that of
Lender and except as specifically permitted in subsection 8.1 below; (ix)
Borrower has no knowledge of any fact or circumstance which would impair the
validity or collectibility thereof; and (x) to the best of Borrower's
knowproceedings or actions which are threatened or pending against any Account
Debtor which might result in any material adverse change in such Account
Debtor's financial condition. Borrower agrees to notify Lender with respect to
any Accounts scheduled on the Accounts Trial Balance with respect to which the
warranties in this subsection 3.3 are not true and which Borrower, therefore,
does not want Lender to consider as Eligible Accounts.
3.4 Verification of Accounts. Lender shall have the right, at any
time or times hereafter, in the name of a nominee of Lender (and at any time or
times after the occurrence and during the continuance of any Event of Default or
Default, in Lender's name or in the name of a nominee of Lender), to verify the
validity, amount or any other matter relating to any Accounts, by mail,
telephone, telegraph or otherwise and in any event to sign Borrower's name on
any verification of Accounts and notices thereof to Account Debtors.
3.5 Account Covenants. Borrower shall promptly upon learning
thereof: (i) inform Lender in writing of any material delay in Borrower's
performance of any of its obligations to any Account Debtor or of any assertion
of any claims, offsets or counterclaims by any Account Debtor (provided,
however, that Borrower shall not be deemed to be in breach of clause (i) hereof
unless the aggregate amount of Accounts as to which Borrower has failed to
inform Lender as required above exceeds $50,000); (ii)
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furnish to and inform Lender of all material adverse information relating to the
financial condition of any Account Debtor; and (iii) notify Lender in writing if
any of its then existing Accounts scheduled to Lender with respect to which
Lender has made an advance are no longer Eligible Accounts as to which Lender
has not previously received notice from Borrower that the same have ceased to be
Eligible Accounts hereunder.
3.6 Collection of Accounts and Payments. Borrower shall establish
blocked accounts (the "Blocked Accounts") and, upon Lender's request, lock box
accounts (the "Lock Box Accounts") with Lender and with such banks as are
acceptable to Lender (collectively, the "Collecting Banks") to which all Account
Debtors shall directly remit all payments on Accounts and in which Borrower will
immediately deposit all cash and other payments made for Inventory and other
payments constituting proceeds of Collateral in the identical form in which such
payment was made, whether by cash or check. If Lender has not requested that
Borrower establish Lock Box Accounts, Borrower may receive payments from Account
Debtors and shall immediately deposit all such payments on Accounts, cash and
other payments made for Inventory and other payments constituting proceeds of
Collateral, in the identical form in which payment was made, whether by cash or
check or otherwise, in the Blocked Accounts or by daily delivery to Lender.
Lender may request that Borrower establish Lock Box Accounts at any time after
either (i) a Default or Event of Default has occurred or (ii) Lender believes in
Good Faith that the payments required to be deposited in Blocked Accounts
pursuant to this Agreement exceed the amount of the deposits so made or that the
prospect for payment or performance of any of the Liabilities is otherwise
impaired. The Collecting Banks shall acknowledge and agree, in a manner
satisfactory to Lender, that all payments made to the Blocked Accounts or Lock
Box Accounts, as applicable, are the sole and exclusive property of Lender, that
the Collecting Banks have no right to setoff against the Blocked Accounts or
Lock Box Accounts and that the Collecting Banks will wire or otherwise transfer
immediately available funds in a manner satisfactory to Lender, funds deposited
into the Blocked Accounts or Lock Box Accounts, as applicable, to Lender on a
daily basis as soon as such funds are collected. Borrower hereby agrees that all
payments made to the Locks or otherwise received by the Collecting Banks or
Lender, whether on the Accounts or as proceeds of Borrower's other Collateral or
otherwise, will be the sole and exclusive property of Lender and will be applied
on account of Borrower's Liabilities as follows: (i) when collected, for
collection of checks and other instruments (including automatic clearing house
electronic funds transfers and depository transfer checks) received by Lender at
its offices in Chicago, Illinois, Lender will credit (conditional upon final
collection) all such payments to Borrower's Loan Account and (ii) all cash
payments received by Lender at its offices in Chicago, Illinois, including,
without limitation, payments made by wire transfer of immediately available
funds received by Lender in time for posting to the account of Lender on the
date received, will be credited to Borrower's
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Loan Account immediately upon receipt. Borrower and each of its Affiliates,
Subsidiaries, shareholders, directors, officers, employees, agents or those
Persons acting for or in concert with Borrower shall, acting as trustee for
Lender, receive, as the sole and exclusive property of Lender, any monies,
checks, notes, drafts or any other payment relating to and/or proceeds of
Borrower's Accounts or other Collateral which come into the possession or under
the control of Borrower or any of its Affiliates, Subsidiaries, shareholders,
directors, officers, employees, agents or those Persons acting for or in concert
with Borrower and immediately upon receipt thereof, Borrower shall remit the
same or cause the same to be remitted, in kind, to Lender, at Lender's address
set forth below. Borrower agrees to pay to Lender any and all fees, costs and
expenses which Lender incurs in connection with opening and maintaining the Lock
Box Accounts and Blocked Accounts and depositing for collection by Lender any
check or item of payment received and/or delivered to any Collecting Bank or
Lender, respectively, on account of the Liabilities and Borrower further rse
Lender for any claims asserted by the Collecting Banks in connection with
Borrower's Blocked Accounts or Lock Box Accounts and any amounts paid to any
Collecting Bank arising out of Lender's indemnification of such Collecting Bank
against damages incurred by the Collecting Bank in the operation of a Blocked
Account or Lock Box Account.
3.7 Appointment of Lender as Borrower's Attorney-in-Fact. Borrower
hereby irrevocably designates, makes, constitutes and appoints Lender (and all
officers, employees, agents and other Persons designated by Lender) as
Borrower's true and lawful attorney-in-fact, and authorizes Lender, in
Borrower's or Lender's name, to: (a) following the occurrence and during the
continuance of a Default (i) demand payment of Accounts; (ii) enforce payment of
Accounts by legal proceedings or otherwise; (iii) exercise all of Borrower's
rights and remedies with respect to proceedings brought to collect an Account;
(iv) sell or assign any Account upon such terms, for such amount and at such
time or times as Lender deems advisable; (v) settle, adjust, compromise, extend
or renew any Account; (vi) discharge and release any Account; (vii) prepare,
file and sign Borrower's name on any proof of claim in bankruptcy or other
similar document against an Account Debtor; (viii) notify the post office
authorities to change the address for delivery of Borrower's mail to an address
designated by Lender, and open and deal with all mail addressed to Borrower; and
(ix) do all acts and things which are necessary, in Lender's sole discretion, to
fulfill Borrower's obligations under this Agreement; and (b) at any time (i)
take control in any manner of any item of payment or proceeds thereof; (ii) have
access to any lockbox or postal box into which Borrower's mail is deposited;
(iii) endorse Borrower's name upon any items of payment or proceeds thereof and
deposit the same in Lender's account on account of the Liabilities; (iv) endorse
Borrower's name upon any chattel paper, document, instrument, invoice, or
similar document or agreement relating to any Account
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or any goods pertaining thereto; and (v) sign Borrower's name on any
verification of Accounts and notices thereof to Account Debtors.
3.8 Instruments and Chattel Paper. Immediately upon Borrower's
receipt thereof, Borrower shall deliver or cause to be delivered to Lender, with
appropriate endorsement and assignment to vest title and possession in Lender,
with full recourse to Borrower, all chattel paper and instruments which Borrower
now owns or may at any time or times hereafter acquire.
3.9 Notice to Account Debtors. Lender may, in its sole discretion,
at any time or times following the occurrence and during the continuance of a
Default, and without prior notice to Borrower, notify any or all Account Debtors
that the Accounts have been assigned to Lender and that Lender has a security
interest therein. Lender may direct any or all Account Debtors to make all
payments upon the Accounts directly to Lender. Lender shall furnish Borrower
with a copy of any such notice.
3.10 Eligible Inventory. Lender shall have the sole right, in its
discretion exercised in Good Faith, to determine which Inventory is eligible
(the "Eligible Inventory"). Without limiting Lender's discretion, the following
Inventory shall not be Eligible Inventory: (i) Inventory which is obsolete, not
in good condition, or not either currently usable or currently salable in the
ordinary course of Borrower's business; (ii) Inventory which Lender determines,
in Lender's discretion exercised in Good Faith and in accordance with Lender's
customary business practices, to be unacceptable due to age, type, category
and/or quantity; (iii) Inventory which is work in process; (iv) Inventory which
is not subject to internal control and management procedures acceptable to
Lender, in Lender's sole discretion exercised in Good Faith; (v) Inventory with
respect to which Lender does not have a first and valid fully perfected security
interest; (vi) Inventory which is stored or placed with a bailee, consignee,
warehouseman, supplier, lessor or similar party other than Inventory with
warehousemen, bailees or lessors as to which Borrower has notified Lender and
which have signed an agreement in favor of Lender in form and substance
satisfactory to Lender; (vii) Inventory delivered to Borrower on consignment;
and (viii) Inventory which is not located at one of the locations owned or
leased by Borrower listed on Schedule 6.5. In the event that previously
scheduled Inventory ceases to be Eligible Inventory under the above-described
criteria, Borrower shall notify Lender thereof immediately after Borrower has
obtained knowledge thereof. Notwithstanding the foregoing, Inventory which is
physically located at a location designated as a leased sales office on Schedule
6.5 shall not be Eligible Inventory.
3.11 Inventory Warranties. With respect to Inventory scheduled,
listed or referred to in any Monthly Report or Collateral Report, Borrower
warrants that (i) it
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is located at one of the premises listed for Borrower on Schedule 6.5 and is not
in transit; (ii) it is located at the location shown thereon for it; (iii) it is
not subject to any Lien whatsoever except for the security interest granted to
Lender hereunder and except as specifically permitted in subsection 8.1; and
(iv) it is of good and merchantable quality, free from any defects which would
affect the market value of such Inventory. Borrower agrees to notify Lender with
respect to any of its Inventory with respect to which the warranties in this
subsection 3.11 are not true and which Borrower, therefore, does not want Lender
to consider as Eligible Inventory.
3.12 Inventory Records. Borrower shall at all times hereafter
maintain a perpetual inventory, keeping correct and accurate records itemizing
and describing the kind, type, quality and quantity of Inventory, Eligible
Inventory, Borrower's cost therefor and daily withdrawals therefrom and
additions thereto, all of which records shall be available during Borrower's
usual business hours at the request of any of Lender's officers, employees or
agents. Borrower shall conduct a physical count of the Inventory at least once
each year (and, following the occurrence of an Event of Default or a Default, at
such other intervals as may be requested by Lender, and promptly following each
such physical inventory shall supply Lender with a report in a form and with
such specificity as may be reasonably satisfactory to Lender concerning such
physical count of the Inventory.
3.13 Safekeeping of Inventory and Inventory Covenants. Lender shall
not be responsible for: (i) the safekeeping of the Inventory; (ii) any loss of
or damage to the Inventory; (iii) any diminution in the value of the Inventory;
or (iv) any act or default of any carrier, warehouseman, bailee, forwarding
agency or any other Person. As between Borrower and Lender, all risk of loss,
damage, destruction or diminution in value of the Inventory shall be borne by
Borrower. No Inventory shall be, without Lender's prior written consent, at any
time or times hereafter stored with a bailee, warehouseman, consignee or similar
third party, other than warehousemen or bailees as to which Borrower has
notified Lender and which have signed an agreement in favor of Lender in form
and substance satisfactory to Lender. Borrower shall not sell any of its
Inventory on a bill-and-hold, guaranteed sale, sale-or-return, sale on approval
or consignment basis or any other basis subject to a repurchase obligation or
return right, except that Borrower may sell Inventory on a bill-and-hold basis
to the Persons set forth on Schedule 3.13 as to which Borrower has provided
Lender with an accurate description of such arrangements and agreements (if not
reduced to writing) and true, correct and complete copies of all written
agreements, instruments and
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documents with respect to such arrangements and to
such other Persons as to which Borrower has written bill-and-hold arrangements
and as to which Lender has received prior written notice from Borrower, together
with true, correct and complete copies (and descriptions) of all agreements,
instruments and documents with respect to such arrangements; provided however,
that the following conditions shall be met:
(a)(i) Lender is in receipt of a Bill-and-Hold Agreement from
Borrower and such Account Debtor which indicates that,
notwithstanding any failure of the Account Debtor to receive
the goods with respect to any invoice, title to such goods has
passed to the Account Debtor and each such invoice evidences a
definitive and final sale; and (ii) either the Account Debtor
bears the entire risk of loss with respect to such goods or
Borrower maintains insurance with respect to such goods which
is satisfactory in form and substance to Lender in its sole
discretion exercised in Good Faith; provided, however, that
Borrower shall not be deemed to have failed to satisfy this
condition (a) unless the aggregate face amount of all Accounts
with respect to which the conditions have not been satisfied
exceeds $50,000; and
(b) the aggregate outstanding amount of all Accounts sold on a
bill-and-hold basis shall not exceed at any time the amount
set forth on Schedule 3.13 as to any Account Debtor listed
thereon, $250,000 with respect to any Account Debtor not
listed on such Schedule, and the Maximum Bill-and-Hold Amount
with respect to all Account Debtors;
provided further, however, if any of the arrangements, instruments, documents or
agreements referred to in this paragraph (a) of this subsection 3.13 are
amended, modified or supplemented, Borrower shall promptly provide Lender with
notice thereof and copies (and descriptions) of such amendments, modifications
or supplements.
3.14 Equipment Warranties. With respect to Equipment scheduled,
listed or referred to in any Monthly Report or Collateral Report or which is the
subject of any Loan, Borrower warrants that (i) it is the lawful owner of the
Equipment and it has the right to subject the same to a security interest in
favor of Lender; (ii) it is not subject to any Lien except for the security
interest granted to Lender hereunder and except as specifically permitted in
subsection 8.1; and (iii) at the time of the execution of this Agreement
substantially all of such Equipment is in good condition and repair and is
currently used or usable in Borrower's business.
3.15 Equipment Records. Borrower shall at all times hereafter keep
correct and accurate records itemizing and describing the location, the kind,
type, age and condition of its Equipment, Borrower's cost therefor and
accumulated depreciation thereof,
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and retirements, sales, or other dispositions thereof, all of which records
shall be available during Borrower's usual business hours on demand to any of
Lender's officers, employees or agents. All Equipment is and shall be kept at
the locations for Borrower specified on Schedule 6.5.
3.16 Safekeeping of Equipment. Lender shall not be responsible for:
(i) the safekeeping of the Equipment; (ii) any loss or damage to the Equipment;
(iii) any diminution in the value of the Equipment; or (iv) any act or default
of any repairman, bailee or any other Person with respect to the Equipment. As
between Borrower and Lender, all risk of loss, damage, destruction or diminution
in value of the Equipment shall be borne by Borrower.
3.17 Third Party Goods. Borrower shall not hold or accept any Third
Party Goods, whether on a consignment basis or otherwise, except (i)
consignments from a Person listed on Schedule 3.17 or such other Person
consented to by Lender, provided that, with respect to any such Person, Lender
has been furnished with an accurate description of the arrangements and
agreements (if not reduced to writing) with respect to such Third Party Goods,
(ii) equipment permitted to be leased by Borrower pursuant to this Agreement,
and (iii) masters, finishing supplies, cassettes and tapes owned by customers
provided in the case of this clause (iii) that (w) the owner bears the entire
risk of loss with respect to such Third Party Goods or Borrower maintains
insurance with respect thereto comparable to that covering Borrower's own goods,
(x) such Third Party Goods are either physically distinguishable from similar
property of Borrower or identified by Borrower as belonging to another Person in
a manner reasonably satisfactory to Lender, (y) if requested by Lender, Borrower
maintains accurate records and an inventory of such Third Party Goods, and (z)
such Third Party Goods are segregated from Borrower's property in a manner
reasonably satisfactory to Lender. Borrower shall furnish to Lender a true,
correct and complete copy of all instruments, documents and agreements with
respect to the arrangements referred to in this subsection 3.17 and if any of
the arrangements or instruments, documents or agreements referred to in this
subsection 3.17 are amended, modified or supplemented, Borrower promptly shall
provide Lender with notice thereof and copies of such amendment, modification or
supplement. Schedule 3.17 sets forth a complete listing of all Persons described
in clause (i) of the first sentence of this subsection 3.17) now having an
interest in any Third Party Goods and the amount thereof. Borrower shall take
such action as Lender may from time to time reasonably require to assure Lender
that no Personrrower has any interest in the Collateral.
3.18 Appraisals. At Borrower's expense, Lender, or any Person
designated by Lender in writing, shall have the right, from time to time
hereafter to call at Borrower's place or places of business (or any other place
where any Equipment or
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other property which may be included in calculating the Appraised FS Amount or
any information relating thereto is kept or located), during reasonable business
hours and without hindrance or delay to inspect, audit, check and make copies
and extracts of any books, records, journals, orders receipts and any
correspondence or other data relating to, the Equipment or other property which
may be included in calculating the Appraised FS Amount, to confirm that the
conditions to any loan or advance under this Agreement have been fully satisfied
and to perform any appraisals of any property to determine the Appraised FS
Amount. Lender shall use reasonable efforts to give Borrower oral notice prior
to its exercise of its rights under this subsection 3.18 and at least
twenty-four hours prior to its exercise of its rights to perform any appraisals
under this subsection 3.18.
4. CONDITIONS OF ADVANCES.
Notwithstanding any other provisions contained in this Agreement,
the making of any loan or advance and the issuance of any Letter of Credit
provided for in this Agreement shall be conditioned upon the satisfaction of the
following:
4.1 Borrower's Written Request - Revolving Loan and Letters of
Credit. Lender shall have received (a) with respect to a request by Borrower for
an advance to be made under subsection 2.2 hereof, no later than 11:00 A.M.,
Chicago time, on the Business Day an advance is to be made, a telephonic request
from an Authorized Officer of Borrower (promptly thereafter confirmed by
Borrower in writing) for an advance in a specific amount, and (b) with respect
to a request by Borrower for a Letter of Credit to be issued hereunder, not
later than two (2) Business Days prior to the Business Day the Letter of Credit
is to be issued, a written request therefor from an Authorized Officer of
Borrower in a specific amount accompanied by Lender's form of application and
reimbursement agreement, duly completed and executed by Borrower. In addition,
prior to making any advance or issuing any Letter of Credit, Lender shall have
received copies of all other documents required to be delivered to Lender under
subsection 5.2 and 7.1 , all Monthly Reports and Collateral Reports required to
be delivered to Lender under subsection 3.1 and all documents required to be
delivered to Lender under paragraph 3.A of the Holdings Guaranty.
4.2 Financial Condition. No material adverse change, as determined
by Lender in its discretion exercised in Good Faith, in the financial condition
or operations of Borrower shall have occurred (a) at any time or times
subsequent to the most recent annual financial statements provided pursuant to
subsection 7.1(B), and (b) prior to the receipt of the first of such statements,
at any time subsequent to most recent annual audited financial statements
provided pursuant to the Hauppauge LSA.
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4.3 No Default. There shall not have occurred any Default or Event
of Default which is then continuing, nor shall any such Default or Event of
Default occur after giving effect to the making of such loan or advance or
issuance of such Letter of Credit, as the case may be.
4.4 Representations and Warranties True and Correct. The
representations and warranties of Borrower contained in this Agreement shall be
true and correct in all material respects on and as of the date of any advance,
loan or issuance of any Letter of Credit, as the case may be, as though made on
and as of such date.
4.5 Other Requirements. Lender shall have received, in form and
substance reasonably satisfactory to Lender, all drafts, certificates, orders,
authorizations, consents, opinions, affidavits, applications, schedules,
instruments, security agreements, financing statements, mortgages and other
documents which are provided for hereunder or under the other Financing
Agreements, or which Lender may at any time reasonably request.
5. COLLATERAL.
5.1 Security Interest. To secure payment and performance of the
Liabilities (including without limitation Borrower's liabilities, obligations
and indebtedness under the Guaranty), Borrower hereby grants to Lender a right
of setoff against and a continuing security interest in and to all of the
following property, and interests in the following property, of Borrower,
whether now owned or hereafter acquired by Borrower and wheresoever located: (i)
Accounts, contract rights, General Intangibles, tax refunds, chattel paper,
instruments, notes, letters of credit, documents, and documents of title; (ii)
Inventory; (iii) Equipment and fixtures; (iv) Borrower's deposit accounts
(general or special) with and credits and other claims against Lender, or any
other financial institution with which Borrower maintains deposits; (v)
Borrower's monies, and any and all other property and interests in property of
Borrower now or hereafter coming into the actual possession, custody or control
of Lender or any agent or affiliate of Lender in any way or for any purpose
(whether for safekeeping, deposit, custody, pledge, transmission, collection or
otherwise); (vi) insurance proceeds of or relating to any of the foregoing;
(vii) insurance proceeds relating to any key man life insurance policy covering
the life of any director, officer, employee or former director, officer or
employee of Borrower; (viii) insurance proceeds relating to business
interruption insurance; (ix) books and records relating to any of the foregoing;
and (x) all accessions and additions to, substitutions for, and replacements,
products and proceeds, of any of the foregoing. Borrower acknowledges and agrees
that the security interests granted in the Hauppauge LSA and the AFL LSA and
restated in this Agreement secure the Revolving Loan, the Term Loan, the
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Additional Loan and the other Liabilities, including without limitation all of
the "Liabilities" as such term was defined in the Hauppauge LSA or the AFL LSA.
5.2 Preservation of Collateral and Perfection of Security Interests
Therein. Borrower shall execute and deliver to Lender, concurrently with the
execution of this Agreement, and at any time or times hereafter at the
reasonable request of Lender, all financing statements, instruments or other
documents (and pay the cost of filing or recording the same in all public
offices deemed necessary by Lender), as Lender may request, in a form reasonably
satisfactory to Lender, to perfect and keep perfected the security interest and
Liens in the Collateral granted by Borrower to Lender, or to otherwise protect
and preserve the Collateral and Lender's security interest and Liens therein or
to enforce Lender's security interests and Liens in the Collateral. Should
Borrower fail to do so, Lender is authorized to sign any such financing
statements as Borrower's agent. Borrower further agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement.
5.3 Real Property and Leaseholds. Borrower, at its own expense, will
(except that with respect to deliveries relating to Borrower's leaseholds
existing on September 1, 1996 which are with Persons which are not Affiliates
which require the consent or cooperation of the landlords or fee mortgagees of
such leaseholds, Borrower shall only be required to use its best efforts (but
not requiring litigation) to), upon Lender's request therefor (i) as soon as
practicable and in any event within thirty (30) days of such request, duly
execute and deliver to Lender any and all mortgages, trust deeds, deeds of
trust, leasehold mortgages, leasehold deeds of trust, pledges, assignments and
other security agreements (collectively, the "Mortgages") as specified by and in
form and substance satisfactory to Lender, securing payment and performance of
the Liabilities in an amount not to exceed the fair market value of the real
property and constituting Liens in and to the real properties owned by Borrower
and the leaseholds of Borrower as may be designated by Lender, (ii) as soon as
practicable and in any event within ten (10) days of such request, deliver to
Lender a description of such properties and leaseholds in detail sufficient for
recordation and otherwise satisfactory to Lender, (iii) as soon as practicable
and in any event within thirty (30) days of such request, deliver to Lender an
ALTA survey of said real estate in form and substance acceptable to Lender and
certified to Lender, showing no encroachments or other exceptions to title which
affect marketability of title other than those permitted in writing by Lender
and stating that said real estate is located in an area of minimal flooding or
accompanied by evidence that flood insurance to cover any flood risk has been
obtained; (iv) as soon as practicable and in any event within thirty (30) days
of such request, deliver to Lender an environmental survey with respect to said
real estate in form and substance satisfactory to Lender and made by an
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engineer reasonably satisfactory no environmental risk not reasonably acceptable
to Lender; (v) as soon as practicable and in any event within thirty (30) days
of such request, if the interest is a leasehold interest, deliver to Lender the
lease (and a recorded memorandum of the lease or short form lease sufficient to
constitute constructive notice of such lease if such lease is not recorded), and
an agreement from the landlord to Lender as to the matters required in
subsection 7.12 and such other matters as Lender may reasonably request, in each
case in form and substance satisfactory to Lender; (vi) as soon as practicable
and in any event within thirty (30) days of such request, deliver to Lender an
ALTA loan policy in form and substance reasonably satisfactory to Lender and
from a title insurance company reasonably satisfactory to Lender insuring that
the Lien of the Mortgages delivered pursuant to this subsection 5.3 is a valid,
first priority Lien on such interest in real estate (but subject to the lien of
any encumbrance permitted pursuant to subsection 8.1 then of record against the
property upon which any such Mortgage is sought) with the following endorsements
if such endorsements are available from such title insurance company (or, if
not, comparable endorsements available from such title insurance company):
revolving credit, contiguity, 3.1 zoning, encroachments, comprehensive mortgage,
usury, doing business, location, last dollar, tying and such other endorsements
as Lender may require and if such a provision is in the loan policy, waiver of
compulsory arbitration; (vii) as soon as practicable and in any event within
thirty (30) days of such request, deliver to Lender an opinion of counsel
authorized to practice law in the state in which such real estate is located, as
to such matters and in form and substance reasonably satisfactory to Lender;
(viii) as soon as practicable and in any event within thirty (30) days of such
request, take whatever action (including, without limitation, the recording of
financing statements, the giving of notices and the endorsement of notices on
title documents) as may be necessary or advisable in the reasonable opinion of
Lender to vest in Lender (or in any representative of Lender designated by it),
valid and subsisting Liens and valid and perfected security interests in and to
the properties purported to be subject to the Mortgages delivered pursuant to
this subsection 5.3, enforceable in accordance with their terms (but subject to
the lien of any encumbrance permitted pursuant to subsection 8.1 then of record
against the property upon which any such Mortgage is sought). At any time and
from time to time, Borrower shall promptly execute and deliver any and all
further financing statements, instruments and documents (and pay the cost of
filing or recording the same in all places reasonably deemed necessary by
Lender) and take all such other action as Lender may reasonably deem desirable
in obtaining the full benefits of, or in preserving the Liens of, the Mortgages
delivered pursuant to this subsection 5.3.
5.4 Loss of Value of Collateral. Promptly upon becoming aware
thereof, Borrower shall immediately notify Lender of any loss, damage,
destruction or
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depreciation (other than ordinary wear and tear), in excess of $50,000 in the
aggregate in the value of the Collateral in any Fiscal Year.
5.5 Setoff. Borrower agrees that Lender has all rights of setoff and
banker's lien provided by applicable law and, in addition thereto, Borrower
agrees that (in addition to Lender's rights with respect to proceeds of
Collateral) at any time (a) any amount owing by Borrower under this Agreement or
any other Financing Agreement is then due or (b) any Default exists, Lender may
apply to the payment of the Liabilities, any and all balances, credits,
deposits, accounts or moneys of Borrower then or thereafter with Lender. Without
limitation of the foregoing and in addition to Lender's rights with respect to
the proceeds of the Collateral, Borrower agrees that upon and after the
occurrence and during the continuance of a Default, Lender and each of its
branches and offices is hereby authorized, at any time and from time to time,
without notice, (i) to setoff against, and to appropriate and apply to the
payment of, the Liabilities (whether matured or unmatured, fixed or contingent
or liquidated or unliquidated) any and all amounts owing by Lender or any such
office or branch to Borrower (whether matured or unmatured, and, in the case of
deposits, whether general or special, time or demand and however evidenced) and
(ii) pending any such action, to the extent necessary, to hold such amounts as
collateral to secure such Liabilities and to return as unpaid for insufficient
funds any and all checks and other items drawn against any deposits so held as
Lender may elect in its sole discretion exercised in Good Faith.
5.6 Cash Collateral. In the event that Lender has issued any Letters
of Credit, at any time after (i) the occurrence and during the continuance of a
Default, (ii) demand by Lender for payment of the Liabilities as provided in
subsection 9.1, (iii) there exists no unpaid principal balance of the Revolving
Loan, (iv) this Agreement shall terminate for any reason, or (v) the amount of
(a) the aggregate outstanding principal balance of the Revolving Loan plus the
sum of the undrawn face amount of any Letters of Credit outstanding shall exceed
the amount of (b) the Current Asset Base plus the sum of the undrawn face amount
of any Letters of Credit outstanding, Lender may request of Borrower, and
Borrower thereupon shall deliver to Lender, cash collateral for any Letter of
Credit. If Borrower fails to deliver such cash collateral to Lender promptly
upon Lender's request therefor, Lender may, without limiting Lender's rights or
remedies arising from such failure to deliver cash, retain, as cash collateral,
cash proceeds of the Collateral in an amount equal to the aggregate undrawn face
amount of all Letters of Credit then outstanding. Lender may at any time apply
any or all of such cash and cash collateral to the payment of any or all of the
Liabilities, including, without limitation, to the payment of any or all of
Borrower's reimbursement obligations with respect to any Letter of Credit.
Pending such application, Lender may (but shall not
be obligated to) (i) invest the same in a savings account, under which deposits
are available for immediate
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withdrawal, with Lender or such other bank as Lender may in its sole discretion
select, or (ii) hold the same as a credit balance in an account with Lender in
Borrower's name. Interest payable on any such savings account described in the
foregoing sentence shall be collected by Lender and shall be paid to Borrower as
it is received by Lender, less any fees or other amounts owing by Borrower to
Lender with respect to any Letter of Credit and less any amounts necessary to
lities which may be due and payable at such time. Lender shall have no
obligation to pay interest on any credit balances in any account opened for
Borrower pursuant to this Agreement.
6. WARRANTIES.
Borrower represents and warrants that as of the date of the
execution of this Agreement, and continuing so long as any Liabilities remain
outstanding, and (even if there shall be no Liabilities outstanding) so long as
this Agreement remains in effect:
6.1 Corporate Existence; Capitalization.
(A) Borrower is a corporation duly organized and in good standing
under the laws of the State of New York and is duly qualified as a foreign
corporation and in good standing in all of the jurisdictions where the nature
and extent of the business transacted by it or the ownership of its assets makes
such qualification necessary, except for those jurisdictions in which the
failure so to qualify would not, individually or in the aggregate, have a
material adverse effect on Borrower's financial condition, results of operations
or business or the ability of Borrower to perform its obligations hereunder or
under any of the other Financing Agreements to which it is a party. Without
limiting the generality of the foregoing, Borrower is qualified as a foreign
corporation and in good standing in each of the states set forth on Schedule
6.1.
(B) The authorized capital stock of Borrower consists of 200 shares
of Common Stock, of which 200 shares of Common Stock are outstanding, all of
which outstanding shares are duly and validly issued, fully paid and
nonassessable and all of which outstanding shares are owned of record by
Holdings, free and clear of any Lien. The authorized capital stock of Holdings
consists of 1,000 shares of Class A common stock, $.001 par value, 1,000 of
Class B common stock, $.001 par value, and one share of Class C common stock,
$.001 par value, of which 100 shares of Class A common stock are outstanding,
all of which outstanding shares are duly and validly issued, fully paid and
nonassessable and all of which outstanding shares are owned of record by HMG,
free and clear of any Lien. The authorized capital stock of HMG consists of 100
shares of capital stock, $1.00 par value, of which 100 shares of such capital
stock are outstanding, all of which shares are duly and validly issued, fully
paid and nonassessable and all of which
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shares are owned of record by Allied, free and clear of any Lien. None of such
shares have btion rights and there are no outstanding rights, options, warrants
or agreements for the purchase from, or sale or issuance by, Borrower, Holdings
or HMG of any capital stock of Borrower or securities convertible into or
exchangeable for capital stock of Borrower, Holdings or HMG.
6.2 Corporate Authority. The execution and delivery by Borrower of
this Agreement and of each of the other Financing Agreements to which it is a
party and the performance of Borrower's obligations hereunder and thereunder,
and the making of the Initial Distribution: (i) are within Borrower's corporate
powers; (ii) are duly authorized by Borrower's Board of Directors and, if
necessary, Borrower's stockholders; (iii) are not in contravention of the terms
of Borrower's Articles or Certificate of Incorporation, or By-Laws, or of any
indenture, or other agreement or undertaking to which Borrower is a party or by
which Borrower or any of its property is bound or any judgment, decree or order
applicable to Borrower; (iv) do not, as of the execution hereof or thereof,
require any governmental consent, registration or approval; (v) do not
contravene any contractual or governmental restriction binding upon Borrower;
and (vi) will not, except as contemplated herein, result in the imposition of
any Lien upon any property of Borrower under any existing indenture, mortgage,
deed of trust, loan or credit agreement or other material agreement or
instrument to which Borrower is a party or by which it or any of its property
may be bound or affected.
6.3 Binding Effect. This Agreement and all of the other Financing
Agreements to which Borrower is a party have been duly executed and delivered by
Borrower and constitute the legal, valid and binding obligations of Borrower,
enforceable against Borrower in accordance with their terms, except as the
enforceability thereof may be limited by applicable bankruptcy, reorganization
or similar laws affecting the enforcement of creditor's rights generally and
except as limited by general principles of equity.
6.4 Financial Data. Borrower has furnished to Lender a pro forma
balance sheet of Borrower as of the Effective Time, which balance sheet is
attached hereto as Schedule 6.4 (the "Pro Forma"), and the historical financial
statements required under the Hauppauge LSA and the AFL LSA which were required
to be delivered thereunder prior to the Effective Time (the "Financials"). The
Pro Forma and the Financials are in accordance with the books and records of
Borrower and fairly present the financial condition of Borrower and such other
Persons covered thereby at the dates thereof and the results of operations of
Borrower and such other Persons covered thereby for the periods indicated (and
in the case of the Pro Forma, as if the Merger and the transactions contemplated
to occur in connection therewith had occurred on the date thereof, but
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subject to changes in the ordinary course of Borrower's business since July 31,
1996). The Pro Forma and the Financials have been prepared in accordance with
GAAP. The historical financial statements to be furnished to Lender in
accordance with subsection 7.1 will be in accordance with the books and records
of Borrower and the other Persons covered thereby and will fairly present the
financial condition of Borrower and Allied and its Subsidiaries at the dates
thereof and the results of operations of Borrower and Allied and its
Subsidiaries for the periods indicated (subject, in the case of unaudited
financial statements, to lack of footnotes and normal year-end adjustments) and
such financial statements will be prepared in conformity with GAAP consistently
applied throughout the periods involved, except for such changes therein with
which the independent certified public accountants issuing the opinion on the
financial statements delivered pursuant to subsection 7.1(B) have previously
concurred in writing. Since the last day of the Fiscal Year of Borrower ending
on or about July 31, 1996, there have been no changes in the condition,
financial or otherwise, of Borrower or Allied and its other Subsidiaries as
shown on the Financials, except (a) as contemplated herein, and (b) for changes
in the ordinary course of business (none of which individually or in the
aggregate has been materially adverse). All information, reports and other
papers and data furnished to Lender are or will be, at the time the same are so
furnished to Lender, accurate and correct in all material respects and complete
insofar as completeness may be necessary to give Lender a true and accurate
knowledge of the subject matter thereof.
6.5 Collateral. Except as permitted pursuant to subsection 8.1, all
of the Collateral and other property and interests in property of Borrower is
and (except as permitted pursuant to subsection 8.6) will continue to be owned
by Borrower, has been fully paid for (except for indebtedness with respect
thereto which is permitted pursuant to subsection 8.2) and is free and clear of
all Liens. The Collateral and all other property and interests in property of
Borrower is located at the locations set forth on Schedule 6.5 (which Schedule
sets forth all bailment, warehouse and other third party locations where any
Collateral or other property is permitted to be located pursuant to this
Agreement), except for Inventory in transit. Borrower does not lease any
personal property from GLC (other than equipment which constitutes fixtures
leased to Borrower pursuant to the GLC Leases).
6.6 Solvency. Borrower (i) is not "insolvent" as that term is
defined in Section 101(32) of the Federal Bankruptcy Code (the "Bankruptcy
Code") (11 U.S.C. ss. 101 et seq.), Section 2 of the Uniform Fraudulent Transfer
Act ("UFTA"), Section 2 of the Uniform Fraudulent Conveyance Act ("UFCA") or
Section 271 of the New York Debtor and Creditor Law ("NYDCL"), (ii) does not
have "unreasonably small capital," as that term is used in Section
548(a)(2)(B)(ii) of the Bankruptcy Code, Section 5 of the UFCA or Section 274 of
the NYDCL, (iii) is not engaged or about to engage in a business
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or a transaction for which its remaining property is "unreasonably small" in
relation to the business or transaction as that term is used in Section 4 of the
UFTA, (iv) is able to pay its debts as they mature or become due, within the
meaning of Section 548(a)(2)(B)(iii) of the Bankruptcy Code, Section 4 of the
UFTA, Section 6 of the UFCA and Section 275 of NYDCL, and (v) now owns assets
having a value both at "fair valuation" and at "present fair salable value"
greater than the amount required to pay Borrower's "debts" as such terms are
used in Section 2 of the UFTA, Section 2 of the UFCA and Section 271 of the
NYDCL. Borrower shall not be rendered insolvent (as defined above) by the
execution, delivery or performance of this Agreement or any of the other
Financing Agreements to which it is a party or by the transactions contemplated
hereunder or thereunder, including without limitation the Merger or the Initial
Distribution
6.7 Chief Place of Business. As of the execution hereof, the
principal place of business and chief executive office of Borrower is located at
the location set forth in the preamble to this Agreement. If any change in any
such location occurs, Borrower promptly shall notify Lender thereof in
accordance with subsection 8.10. As of the execution hereof, the books and
records of Borrower, all records of account and all chattel paper (to the extent
the same have not been delivered to Lender) are located at the principal place
of business and chief executive office of Borrower (or prior to November 30,
1996 at the locations expressly identified as such locations on Schedule 6.5),
and if any change in such location occurs, Borrower promptly shall notify Lender
thereof in accordance with subsection 8.10.
6.8 Other Corporate Names. Except as disclosed on Schedule 6.8,
Borrower has not used any corporate or fictitious name other than the corporate
name shown on such Borrower's Articles or Certificate of Incorporation.
6.9 Tax Liabilities. Borrower has filed all federal, state and local
tax reports and returns required by any law or regulation to be filed by it
except for extensions duly obtained, and has either duly paid all taxes, duties
and charges indicated due on the basis of such returns and reports, or made
adequate provision for the payment thereof, and the assessment of any material
amount of additional taxes in excess of those paid and reported is not
reasonably expected. Except as set forth on Schedule 6.9, no federal income tax
returns of Borrower (or, in the case of federal income tax returns of AFL, for
periods after March 31, 1980) have been audited by the Internal Revenue Service.
The reserves for taxes reflected on the Pro Forma and balance sheets included in
the Financials are, and the reserves for taxes reflected on the balance sheets
submitted to Lender in accordance with the terms of subsection 7.1 will be,
adequate in amount for the payment of all liabilities for all federal, state and
local taxes (whether or not disputed) of all Persons covered thereby accrued
through the date of such balance sheets. There are no material
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unresolved questions or claims concerning any tax liability of Borrower raised
by any Governmental Authority or of which Borrower is otherwise aware.
6.10 Loans. Except as disclosed in the most recent balance sheet of
Borrower and AFL included in the Financials, and for trade payables arising in
the ordinary course of Borrower's business since the date of such financial
statements, there currently are no loans or other indebtedness for borrowed
money of Borrower or any guaranties made by Borrower, except loans and other
indebtedness owed to, and guaranties made in favor of Lender pursuant to the
Financing Agreements or as permitted pursuant to subsection 8.2 or 8.3. Schedule
6.10 sets forth as of the date hereof all loans or other indebtedness for
borrowed money of Borrower or guaranties made by Borrower or assumed by Borrower
which are other than loans owed to or guaranties in a favor of Lender and the
amounts thereof.
6.11 Margin Stock. Borrower does not own any margin security and
none of the loans advanced or other credit provided to Borrower hereunder will
be used for the purpose of purchasing or carrying any margin security or for the
purpose of reducing or retiring any indebtedness which was originally incurred
to purchase any margin security or for any other purpose not permitted by
Regulation G, T, U or X of the Board of Governors of the Federal Reserve System.
6.12 Subsidiaries. Borrower has no Subsidiaries.
6.13 Litigation and Proceedings. There are no judgments, orders,
writs or decrees outstanding against Borrower nor is there now pending or, to
the best of Borrower's knowledge after diligent inquiry, threatened, any
litigation, investigation, contested claim, arbitration or governmental
proceeding by or against Borrower, except judgments, orders, writs and decrees
and pending or threatened litigation, investigations, contested claims,
arbitrations and governmental proceedings which are not, individually or in the
aggregate, material to Borrower's financial condition, results of operations or
business. The amount of liability set forth on Schedule 6.13 as to each matter
listed thereon is the maximum amount of Borrower's liability under such matter.
6.14 Other Agreements. Borrower is not in default under any
contract, lease, or commitment to which it is a party or by which it is bound,
except for such defaults which could not, individually or in the aggregate, have
a material adverse effect on the Borrower's properties, condition (financial or
otherwise), business, operations or prospects or the ability of Borrower to
perform its obligations under this Agreement or any of the other Financing
Agreements. Borrower knows of no dispute regarding any contract,
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lease, or commitment which is material to the continued financial success and
well-being of Borrower.
6.15 Employee Controversies. There are no controversies pending or,
to the best of Borrower's knowledge after diligent inquiry, threatened or
anticipated, between Borrower and any of its employees, other than employee
grievances arising in the ordinary course of business which are not,
individually or in the aggregate, material to the continued financial success
and well being of Borrower. Borrower has no accrued and unpaid liability to any
of its employees arising under the Federal Fair Labor Standards Act, as amended.
The maximum liability of Borrower as to the employee dispute set forth on
Schedule 6.15 is set forth thereon.
6.16 Compliance with Laws and Regulations; Environmental Matters.
(A) General Compliance. The execution and delivery by Borrower of
this Agreement and all of the other Financing Agreements to which it is a party
and the performance of Borrower's obligations hereunder and thereunder are not
in contravention of any law or laws. Borrower is in compliance with all laws,
orders, regulations and ordinances of all Governmental Authorities relating to
its business, operations and assets, except for laws, orders, regulations and
ordinances the violation of which would not, individually or in the aggregate,
have a material adverse effect on Borrower's financial condition, results of
operations or business or the value of any material portion of the property or
assets leased or owned by Borrower.
(B) Health and Safety Compliance. The operations of Borrower comply
with all applicable federal, state or local environmental, health and safety
statutes and regulations except where the failure to comply with such statutes
and regulations would not, individually or in the aggregate, have a material
adverse effect on Borrower's financial condition, results of operations or
business or the value of any material portion of the property or assets owned or
leased by Borrower. None of the operations of Borrower is subject to any pending
or, to the knowledge of Borrower, threatened judicial or administrative
proceeding alleging the violation of any federal, state or local environmental,
health or safety statute or regulation or to the knowledge of Borrower is the
subject of any federal or state investigation evaluating whether any remedial
action is needed to respond to a release of any hazardous or toxic waste,
substance or constituent, or other substance into the environment or to remedy
any occupational safety or health condition except to the extent arising after
the date hereof where the same could not, individually or in the aggregate, have
a material adverse effect on Borrower's financial condition, results of
operations or business or the value of any material portion of the properties or
assets owned or leased by Borrower. Borrower has not filed any notice
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under any federal or state law or regulation indicating past or present
treatment, storage or disposal of a hazardous waste or reporting a spill or
release of a hazardous or toxic waste, substance or constituent, or other
substance into the environment. Borrower has no contingent liability of which
Borrower has knowledge or reasonably should have knowledge in connection with
any release of any hazardous or toxic waste, substance or constituent, or any
other substance into the environment except to the extent the same could not,
individually or in the aggregate, have a material adverse effect on Borrower's
financial condition, results ofess or the value of any material portion of the
properties or assets owned or leased by Borrower.
6.17 Patents, Trademarks and Licenses. Borrower possesses adequate
assets, licenses, permits, patents, patent applications, copyrights, service
marks, trademarks, trademark applications, trade styles and trade names,
governmental approvals or other authorizations and other rights that are
necessary for Borrower to continue to conduct its business as heretofore
conducted by it or contemplated to be conducted by it and all such licenses,
permits, patents, patent applications, copyrights, service marks, trademarks,
trademark applications, trade styles, trade names, governmental approvals or
authorizations and other rights are listed on Schedule 6.17, except for
immaterial licenses, permits and governmental approvals and authorizations.
6.18 ERISA. Neither Borrower nor any ERISA Affiliate of Borrower
maintains or contributes to any Plan other than a Plan listed on Schedule 6.18.
Each Plan which is intended to be a qualified plan under Section 401(a) of the
Internal Revenue Code has been determined by the Internal Revenue Service to be
so qualified and each trust related to any such Plan has been determined to be
exempt from federal income tax under Subsection 501(a) of the Internal Revenue
Code. Except as otherwise disclosed on Schedule 6.18, neither Borrower nor any
ERISA Affiliate of Borrower maintains or contributes to any employee welfare
benefit plan within the meaning of Subsection 3(1) of ERISA which provides
lifetime medical benefits to retirees. Each Plan has been administered in all
material respects in accordance with its terms and the terms of ERISA, the
Internal Revenue Code and all other statutes and regulations applicable thereto.
Neither Borrower nor any ERISA Affiliate of Borrower has breached in any
material respect any of the responsibilities, obligations or duties imposed on
it by ERISA or regulations promulgated thereunder with respect to any Plan. No
accumulated funding deficiency (as defined in Section 302(a)(2) of ERISA and
Section 412(a) of the Internal Revenue Code) exists in respect to any Benefit
Plan. Neither Borrower nor any ERISA Affiliate of Borrower, nor any fiduciary of
any Plan which is not a Multiemployer Plan (i) has engaged in a nonexempt
"prohibited transaction" described in Section 406 of ERISA or Section 4975 of
the Internal Revenue Code which could result in any material liability to
Borrower, or (ii) has taken any action which would constitute or result in a
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Termination Event with respect to any Plan which could result in any
material liability to Borrower. Schedule B, if any, to the most recent annual
report filed with the Internal Revenue Service with respect to each Benefit Plan
has been furnished to Lender and is complete and accurate; since the date of
each such Serial adverse change in the funding status or financial condition of
the Benefit Plan relating to such Schedule B. Neither Borrower nor any ERISA
Affiliate of Borrower has incurred any liability to the PBGC which remains
outstanding. Neither Borrower nor any ERISA Affiliate of Borrower has (i) failed
to make a required contribution or payment to a Multiemployer Plan, or (ii) made
or expects to make a complete or partial withdrawal under Sections 4203 or 4205
of ERISA from a Multiemployer Plan for which Borrower or any ERISA Affiliate of
Borrower has any material liability which has not been satisfied. Neither
Borrower nor any ERISA Affiliate of Borrower has failed to make a required
installment under subsection (m) of Section 412 of the Internal Revenue Code or
any other payment required under Section 412 of the Internal Revenue Code on or
before the due date for such installment or other payment. Neither Borrower nor
any ERISA Affiliate of Borrower is required to provide security to a Plan under
Section 401(a)(29) of the Internal Revenue Code due to a Plan amendment that
results in an increase in current liability for the plan year. The present value
of the benefits of each Benefit Plan of Borrower and each ERISA Affiliate of
Borrower as of the last day of the year for such plan, as determined by such
Benefit Plan's independent actuaries, does not exceed the aggregate value, as
determined by such actuaries, of all assets under such Benefit Plan. Borrower is
not required to contribute to any Multiemployer Plan except the Multiemployer
Plan specifically identified on Schedule 6.18. Borrower has given to Lender all
of the following: copies, if any, of each Benefit Plan and related trust
agreement (including all amendments to such Plan and trust) in existence or
committed to as of the date of the execution of this Agreement and the most
recent summary plan description, actuarial report, determination letter issued
by the Internal Revenue Service and Form 5500 filed in respect of each suisting
of all of the Multiemployer Plans with the aggregate amount of the most recent
annual contributions required to be made by Borrower and all ERISA Affiliates of
Borrower to each such Multiemployer Plan; copies of any information which has
been provided to Borrower or any ERISA Affiliate of Borrower regarding
withdrawal liability under any Multiemployer Plan and all collective bargaining
agreements pursuant to which such contributions are required to be made; and
copies of each employee welfare benefit plan within the meaning of Subsection
3(1) of ERISA which provides lifetime medical benefits to employees, the most
recent summary plan description for such plan and the aggregate amount of the
most recent annual payments made to terminated employees under each such plan.
6.19 Condition of Collateral. There has been no material adverse
change, as determined by Lender in its sole discretion, in Borrower's financial
condition, results of operations or business or in the value of Borrower's
Collateral or the other assets and
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properties owned or leased by Borrower (a) since the date of the most recently
delivered Monthly Report or (b) prior to the receipt of the first such Monthly
Report, since the date of the most recently delivered monthly report required
under subsection 3.1(A) of the Hauppauge LSA.
6.20 Series A Note and Guarantee. At the Effective Time, the Series
A Note was paid in full and surrendered to HMG and the Allied Series A Note
Guarantee became null and void and of no further force and effect.
6.21 Merger. The Merger has been consummated and Borrower is the
surviving corporation of the Merger. The Merger Documents constitute all of the
documents, agreements and instruments executed and delivered by AFL, Borrower or
Borrower's Affiliates in connection with the Merger (other than the Financing
Agreements).
6.22 Survival of Warranties. All representations and warranties
contained in this Agreement or any of the other Financing Agreements shall
survive the execution and delivery of this Agreement.
7. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any Liabilities
remain outstanding, and (even if there shall be no Liabilities outstanding) so
long as this Agreement remains in effect:
7.1 Financial Statements. Borrower shall, and shall cause Allied and
each of its Subsidiaries to, keep proper books of record and account in which
full and true entries will be made of all dealings or transactions of or in
relation to the business and affairs of such Person, in accordance with GAAP,
and Borrower shall cause to be furnished to Lender:
(A) Monthly. As soon as practicable, and in any event within twenty
(20) days (provided that such period shall be forty-five (45) days for the month
ending concurrently with the end of each Fiscal Year) after the end of each
fiscal month (including each fiscal month occurring during the 90-day delivery
period applicable to the delivery of annual financial statements furnished to
Lender pursuant to subsection 7.1(B)):
(i) consolidated and consolidating statements of income, retained
earnings and cash flow of Allied and its Subsidiaries and statements of
income, retained earnings and cash flow of Borrower for such fiscal month
and for the
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period from the beginning of the then current Fiscal Year to the end of
such fiscal month and a consolidated and consolidating balance sheet of
Allied and its Subsidiaries and a balance sheet of Borrower as of the end
of such fiscal month, setting forth in each case, in comparative form,
figures (which comparative figures in the case of the statements and
balance sheet of Borrower shall be to the combined figures of AFL and
Borrower for corresponding periods and dates prior to the Merger) (1) in
the case of statements, for the corresponding periods in the preceding
Fiscal Year and (2) in the case of balance sheets, as of a date one year
earlier, all in reasonable detail and certified as accurate by an
Authorized Officer pursuant to a certificate in the form of Exhibit D-5,
subject to changes resulting from normal year-end adjustments;
(ii) consolidated and consolidating statements in which the actual
cash flow and income for Allied and its Subsidiaries and statements in
which the actual cash flow and income for Borrower for such fiscal month
and for the period from the start of the then current Fiscal Year to the
end of such fiscal month, and the actual consolidated and consolidating
balance sheet of Allied and its Subsidiaries and the actual balance sheet
of Borrower at the end of such fiscal month (in each case as required to
be delivered pursuant to subsection 7.1(A)(i)) are compared with the
corresponding projected statements of income and cash flow and balance
sheets for such periods and time furnished to Lender pursuant to
subsection 7.1(C) below, in each case in the same format as the audited
statements of income and cash flow and the audited balance sheets;
(iii) (a) copies of all operating statements for such fiscal month
prepared by Borrower, Allied or any of Allied's other Subsidiaries for
internal use, including, without limitation, statements of cash flow,
purchases and sales of inventory and other similar data as Lender may
reasonably request, and (b) a comparison of actual cash flow and capital
expenditures for Borrower, Allied and Allied's other Subsidiaries with
amounts budgeted for such fiscal month;
(iv) calculations setting forth the compliance with the financial
covenants set forth in subsection 8.13, calculations of Free Cash Flow
Available for Dividends and the Retained Earnings Amount through the
period ending on the last day of the most recently completed month and so
long as any of the Smith Subordinated Notes or HMG Notes are outstanding,
beginning with the monthly report for the month ending in November 1996
and all months thereafter, calculations showing whether or not the Smith
Interest/HMG Note Dividend Conditions have been satisfied for all periods
through the period ending on the last day of the most recently completed
month;
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(v) in the event that any of the foregoing statements indicate that
Borrower, Allied or any of Allied's other Subsidiaries has varied in any
material respect from any financial projections provided to Lender, a
statement of explanation of such deviation from an Authorized Officer; and
(vi) a report identifying in detail reasonably acceptable to Lender
all intercompany accounts and transactions with Allied and Allied's other
Subsidiaries.
Notwithstanding the foregoing, the consolidated and consolidating
statements as to Allied and its Subsidiaries required pursuant to this
subsection 7.1(A) shall only be required to be delivered on a quarterly basis as
soon as practicable and in any event within forty-five (45) days of the end of
each fiscal quarter of each Fiscal Year.
(B) Annual. As soon as practicable and in any event within ninety
(90) days after the end of each Fiscal Year, audited consolidated and unaudited
consolidating statements of income, retained earnings and cash flow of Allied
and its Subsidiaries and audited statements of income, retained earnings and
cash flow of Borrower for such Fiscal Year and an audited consolidated and
unaudited consolidating balance sheet of Allied and its Subsidiaries and audited
balance sheet of Borrower as of the end of such Fiscal Year, setting forth in
each case, in comparative form, corresponding figures (which corresponding
figures in the case of statements and the balance sheet of Borrower shall be to
the combined figures of AFL and Borrower for corresponding periods and dates
prior to the Merger) for the period covered by the preceding annual audit (in
the case of statements) and as of the end of the preceding Fiscal Year (in the
case of balance sheets), all in reasonable detail and satisfactory in scope to
Lender and audited by independent certified public accountants selected by
Borrower and reasonably satisfactory to Lender, whose opinion shall be in scope
and substance satisfactory to Lender and Borrower shall use its best efforts to
cause such opinion to be addressed on its face to Lender or to be the subject of
a reliance letter from such accountants permitting Lender to rely on the
contents thereof as if prepared specifically for use by Lender (provided that
the unaudited consolidating financial statements required by this subsection
7.1(B) shall be included in the auditor's report required hereunder and referred
to as the information used by such auditors in preparing the audited
consolidated financial statements and the auditors may refer to such
consolidating statements as for information purposes only and may refrain from
expressing an opinion thereon);
(C) Budget. As soon as practicable and in any event within thirty
(30) days before the start of each Fiscal Year, an annual consolidated budget of
Allied and its Subsidiaries for such succeeding Fiscal Year in reasonable detail
(on a fiscal month basis), including balance sheets and statements of
anticipated income and cash flow on a
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consolidated basis for Allied and its Subsidiaries for such succeeding Fiscal
Year (on a fiscal month basis) in reasonable detail, and a detailed statement of
the methods and assumptions used in the preparation of such budget;
(D) Letters from Accountants and Consultants. As soon as practicable
and in any event within ten (10) days of delivery to Borrower or Allied or any
of Allied's other Subsidiaries, a copy of (i) each "Management Letter" prepared
by Borrower's, Allied's or any of Allied's other Subsidiaries' independent
certified public accountants in connection with the financial statements
referred to in subsection 7.1(B) and (ii) to the extent that such letters may
from time to time be issued by Borrower's, Allied's or any of Allied's other
Subsidiaries' independent certified public accountants or other management
consultants (collectively, "Accounting Systems Letters"), any letter issued by
any such independent certified public accountants or other management
consultants with respect to recommendations relating to Borrower's, Allied's or
any of Allied's other Subsidiaries' financial or accounting systems or controls;
(E) Default Notices. As soon as practicable (but in any event not
more than five (5) days) after any officer of Borrower or Allied or any of
Allied's other Subsidiaries obtains knowledge of the occurrence of an event or
the existence of a circumstance giving rise to an Event of Default or a Default,
notice of any and all such Events of Default or Defaults;
(F) List of Account Debtors. At the request of Lender, names,
addresses and phone numbers of Borrower's Account Debtors;
(G) Other Defaults and Material Information. As soon as practicable
(but in any event not more than five (5) days) after any officer of Borrower or
Allied or any of Allied's other Subsidiaries obtains knowledge of the occurrence
of an event or the existence of a circumstance giving rise to a default under,
or which with the passage of time, notice or both would constitute a default
under (a "potential default"), or a material violation of any term of, the HMG
Notes, the Series B Notes, the VCA Note, the Smith Subordinated Notes, the
Subordinated Note, the Affiliated Leases or any documents relating to any credit
facilities maintained by Borrower, Allied, or any of Allied's other Subsidiaries
or any other Credit Party (or any Subsidiary of any Credit Party), notice of
such default, potential default or violation, and immediately upon the receipt
thereof, copies of any notice of any default, potential default or material
violation and any other material correspondence received or information known by
Borrower or Allied or any of Allied's other Subsidiaries relating to the HMG
Notes, the Series B Notes, the VCA Note, the Smith Subordinated Notes, the
Subordinated Note, the Affiliated Leases or any credit
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facilities maintained by Borrower, Allied, or any of Allied's other Subsidiaries
or any other Credit Party (or any Subsidiary of any Credit Party);
(H) Reports and Other Information. Promptly upon the transmission
thereof, copies of all such financial statements, proxy statements, notices and
reports as Borrower or Allied or any of Allied's other Subsidiaries may send to
Allied's public stockholders and copies of all registration statements (without
exhibits) and all reports which Borrower or Allied or any of Allied's other
Subsidiaries files with the Securities and Exchange Commission (or any
governmentalion), including without limitation Allied's Annual Report on Form
10K and Allied's Quarterly Report on Form 10Q; and
(I) Other Information. With reasonable promptness, such other
business or financial data as Lender may reasonably request.
Borrower further agrees that upon receipt by Borrower or Allied or
any of Allied's other Subsidiaries of any Accounting Systems Letters wherein
such accountants or consultants have made recommendations for improvements to
the financial or accounting systems or controls of Borrower or Allied or any of
Allied's other Subsidiaries, Borrower promptly shall, and shall promptly cause
Allied or any such other Subsidiary to, commence actions to correct any material
defects in or make improvements to such financial or accounting systems or
controls unless Lender otherwise consents or Borrower, Allied or such other
Subsidiary reasonably disagrees with the need for such actions.
All financial statements delivered to Lender pursuant to the
requirements of this subsection 7.1 (except where otherwise expressly indicated)
shall be prepared in accordance with GAAP (subject in the case of interim
financial statements to the lack of footnotes and normal year-end adjustments)
consistently applied, except for changes therein with which the independent
certified public accountants issuing the opinion on the financial statements
delivered pursuant to subsection 7.1(B) have previously concurred in writing.
Together with each delivery of financial statements required by subsections
7.1(A) and 7.1(B), Borrower shall deliver to Lender a certificate of an
Authorized Officer of Borrower in the form attached hereto as Exhibit D-5
setting forth in such detail as is reasonably acceptable to Lender calculations
with respect to Borrower's compliance with each of the financial covenants
contained in this Agreement (including without limitation subsection 8.13),
calculations of Free Cash Flow Available for Dividends and the Retained Earnings
Amount through the periods covered by such financial statements and so long as
any of the Smith Subordinated Notes or HMG Notes are outstanding, calculations
showing whether or not the Smith Interest/HMG Note Dividend Conditions have been
met through the periods covered by such financial statements and stating that
there exists no Default or Event of Default, or, if any Default or Event of
Default exists, specifying the nature
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and the period of existence thereof and what action Borrower and any of its
Affiliates proposes to take with respect thereto. Together with each delivery of
financial statements required by subsection 7.1(B), Borrower shall deliver to
Lender a certificate of the independent certified public accountants who
performed the audit in connection with such statements stating that in making
the audit necessary to the issuance of a report on such financial statements,
they have obtained no knowledge of any Default or Event of Default, or, if such
accountants have obtained knowledge of a Default or Event of Default, specifying
the nature and period of existence thereof. Such accountants shall not be liable
by reason of any failure to obtain knowledge of any Default or Event of Default
which would not be disclosed in the ordinary course of an audit.
Lender shall exercise reasonable efforts to keep such information,
and all information acquired as a result of any inspection conducted in
accordance with subsection 7.2, confidential, provided that Lender may
communicate such information (a) to any other Person in accordance with the
customary practices of commercial banks or financial institutions relating to
routine trade inquiries, (b) to any regulatory authority having jurisdiction
over Lender, (c) subject to the provisions of subsection 10.6, to any other
Person in connection with Lender's sale of any participations in the Liabilities
or assignment of any rights and obligations of Lender under this Agreement or
any of the other Financing Agreements or in connection with any refinancing of
all or any portion of the Liabilities, (d) to any other Person in connection
with the exercise of Lender's rights hereunder or under any of the other
Financing Agreements, (e) to any Person in any litigation in which Lender is a
party, (f) to any other Person if Lender believes in Good Faith that disclosure
is necessary or appropriate to comply with any applicable law, rule or
regulation or in response to a subpoena, order or other legal process or
informal investigative demand, whether issued by a court, judicial or
administrative or legislative body or committee or other governmental authority
or (g) to any Affiliate of Borrower. If Lender proposes to disclose any
confidential information in response to a subpoena, order or other legal process
or informal investigative demand, Lender shall endeavor, to the extent permitted
by law, to notify Borrower of the same prior to complying therewith; provided,
however, that Lender shall not incur any liability to Borrower or any other
Person for the failure or any delay in so notifying Borrower. Notwithstanding
the foregoing, information shall not be deemed to be confidential to the extent
such information (i) was already lawfully in the possession of Lender prior to
March 31, 1994 with ro August 31, 1993 with respect to HMG or prior to August
31, 1992 with respect to Hauppauge or Holdings, (ii) is available in the public
domain, (iii) becomes available in the public domain other than as a result of
unauthorized disclosure by Lender or (iv) is acquired from a Person not known by
Lender to be in breach of an obligation of secrecy to Borrower. Borrower
authorizes, and shall cause each of Allied and its other Subsidiaries to
authorize Lender to discuss the financial condition of Borrower, Allied and
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each of Allied's other Subsidiaries with such Person's independent certified
public accountants and agrees and shall cause Allied and its other Subsidiaries
to agree that such discussion or communication shall be without liability to
either Lender or Borrower's independent certified public accountants.
7.2 Inspection. Lender, or any Person designated by Lender
(including without limitation any Participant) in writing, shall have the right,
from time to time hereafter, to call at Borrower's place or places of business
(or any other place where the Collateral or any information relating thereto is
kept or located) during reasonable business hours, and, without hindrance or
delay, (i) to inspect, audit, check and make copies of and extracts from
Borrower's books, records, journals, orders, receipts and any correspondence and
other data relating to Borrower's business or to any transactions between the
parties hereto, (ii) to make such verification concerning the Collateral as
Lender may consider reasonable under the circumstances, and (iii) to discuss the
affairs, finances and business of Borrower with any officers, employees or
directors of Borrower. Borrower shall pay on demand all photocopying expenses
incurred by Lender under this subsection 7.2.
7.3 Conduct of Business. Borrower shall (i) maintain its corporate
existence, (ii) maintain in full force and effect all licenses, bonds,
franchises, leases, patents, permits, contracts and other rights necessary or
desirable to the profitable conduct of its business, and (iii) continue in, and
limit its operations to, the same general line of business as that presently
conducted by it. Borrower shall comply with all laws, orders, regulations and
ordinances of any federal, foreign, state, local or other Governmental
Authority, except for such laws, orders, regulations and ordinances the
violation of which would not, individually or in the aggregate, have a material
adverse effect on Borrower's financial condition, results of operations or
business or Borrower's ability to perform its obligations hereunder or under any
of the other Financing Agreements. Borrower shall pay promptly all liabilities
to all of its employees arising under the minimum wage and maximum hour
provisions of the Fair Labor Standards Act, as the same may be amended from time
to time.
7.4 Claims and Taxes. Borrower agrees to indemnify and hold Lender
and each Participant and each of their respective officers, directors,
employees, attorneys and agents harmless from and against any and all claims,
demands, liabilities, losses, damages, penalties, costs, and expenses (including
without limitation reasonable attorneys' and consultants' fees) relating to or
in any way arising out of the possession, use, operation or control of any of
Borrower's assets, except to the extent arising directly from the gross
negligence or willful misconduct of Lender. Borrower shall pay or cause to be
paid all license fees, bonding premiums and related taxes and charges, and shall
pay or
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cause to be paid all of Borrower's real and personal property taxes, assessments
and charges and all of Borrower's franchise, income, unemployment, use, excise,
old age benefit, withholding, sales and other taxes and other governmental
charges assessed against Borrower, or payable by Borrower, at such times and in
such manner as to prevent any penalty from accruing or any Lien from attaching
to its property, provided that Borrower shall have the right to contest in good
faith, by an appropriate proceeding promptly initiated and diligently conducted,
the validity, amount or imposition of any such tax, assessment or charge, and
during the pendency of such good faith contest to delay or refuse payment
thereof, if (i) Borrower establishes adequate reserves to cover such contested
taxes, assessments or charges, and (ii) such contest does not have a material
adverse effect on Borrower's financial condition, results of operations or
business, the ability of Borrower to pay or perform any of the Liabilities or
the priority or value of Lender's security interest in the Collateral or any
collateral or other security under any other Financing Agreement. The
obligations of Borrower under this subsection 7.4 shall survive payment of the
Liabilities and termination of this Agreement.
7.5 Closing Costs and Expenses. Borrower shall reimburse Lender on
demand for all reasonable expenses and fees paid or incurred in connection with
the documentation, negotiation and closing of this Agreement and the Financing
Agreements and the Loans, Letters of Credit and other extensions of credit
described herein, including, without limitation, lien search, filing and
recording fees and taxes and the reasonable fees and expenses of any attorneys
and paralegals of Lender (whether such attorneys and paralegals are employees of
Lender or are separately engaged by Lender), whether such expenses and fees are
incurred prior to or after the date hereof. All reasonable costs and expenses
incurred by Lender with respect to the negotiation, documentation and closing of
this Agreement and the Financing Agreements and the Loans, Letters of Credit and
other extensions of credit described herein and the enforcement, collection and
protection of Lender's interest in the Collateral shall be additional
Liabilities, payable on demand, repaid as provided in subsection 2.7, and
secured by the Collateral.
7.6 Borrower's Liability Insurance. In addition to insurance
required by subsection 7.7, Borrower shall maintain, at Borrower's expense, such
public liability, third party property damage and other insurance, in such
amounts and with such deductibles as is ordinarily carried by other companies
engaged in the same or similar businesses and similarly situated and as is
reasonably acceptable to Lender. Lender shall be named as an additional insured
on all such insurance.
7.7 Borrower's Property Insurance and Business Interruption
Insurance. Borrower shall, at its expense, keep and maintain the Collateral
insured against loss or damage by fire, theft, burglary, pilferage, loss in
transit, explosion, spoilage and all other
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hazards and risks ordinarily insured against by other owners or users of such
properties in similar businesses, and shall maintain business interruption
insurance, in each case in an amount at least equal to the lesser of (i) the
outstanding principal balance of the Liabilities and (ii) the full insurable
value of all such property, and with such deductibles as are ordinarily carried
by other businesses engaged in the same or similar businesses and as are
reasonably acceptable to Lender. All such policies of insurance shall be in form
and substance satisfactory to Lender and issued by an insurance carrier or
carriers satisfactory to Lender. Borrower shall deliver to Lender the original
(or a certified copy) of each of its policies of insurance and evidence of
payment of all premiums therefor. Such policies of insurance shall contain an
endorsement, substantially in the form attached hereto as Exhibit F or otherwise
reasonably acceptable to Lender. Borrower hereby directs all insurers under such
policies of insurance to pay all proceeds of insurance policies directly to
Lender. Lender is authorized to collect all insurance proceeds and, at Lender's
option: (1) apply the proceeds to the reduction of the Liabilities, whether due
or not then due or (2) allow Borrower to use such money, or a part thereof, to
repair any damage or restore or replace the property that was the subject of
such proceeds; provided that if (i) no Default or Event of Default has occurred
and is continuing, (ii) in the reasonable judgment of Lender the damaged
Collateral can be repaired, restored or rebuilt to an architectural and
economical unit of the same character and not less valuable than such Collateral
was prior to such damage and destruction, (iii) Borrower has delivered to Lender
a business plan in form and substance reasonably satisfactory to Lender
demonstrating, to Lender's reasonable satisfaction, that Borrower will be able
to continue to operate its business at the same level in all material respects
as operated prior to such damage and destruction and that the Liabilities will
at all times be collateralized to the same extent as prior to such damage and
destruction, and (iv) such proceeds are greater in the aggregate than $50,000
and do not exceed in the aggregate more than $250,000, Lender shall hold the
proceeds of such insurance as to Equipment or real estate as Collateral and
(provided that no Event of Default or Default has occurred and is continuing or
occurs, at which time Lender may in its discretion apply such proceeds to the
Liabilities) make them available to Borrower for repair, restoration or
replacement of such property on such terms and conditions as Lender may
determine in its sole discretion exercised in Good Faith; and further provided
that while in possession of such funds Lender shall not be required to invest
the same or to hold such funds separate and apart from Lender's other fundscably
makes, constitutes and appoints Lender (and all officers, employees or agents
designated by Lender) as Borrower's true and lawful attorney-in-fact for the
purpose of making, settling and adjusting claims under all such policies of
insurance, endorsing the name of Borrower on any check, draft, instrument or
other item of payment received by Borrower or Lender pursuant to any such
policies of insurance and for making all determinations and decisions with
respect to such policies of insurance. If Borrower at any time or times
hereafter shall fail to obtain or maintain any of the policies of insurance
required above or to pay any
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premium in whole or in part relating thereto, then Lender, without waiving or
releasing any obligation of Borrower or any Default, may at any time or times
thereafter (but shall be under no obligation to do so) obtain and maintain such
policies of insurance and pay such premiums and take any other action with
respect thereto which Lender deems advisable.
7.8 ERISA Reporting. Borrower shall deliver to Lender, at Borrower's
expense, the following information as and when provided below:
(i) as soon as possible, and in any event within twenty (20) days
after Borrower or any ERISA Affiliate of Borrower knows or has reason to
know that a Termination Event has occurred, a written statement of an
Authorized Officer of Borrower describing such Termination Event and the
action, if any, which Borrower or such ERISA Affiliate of Borrower has
taken, is taking or proposes to take with respect thereto, and when known,
any action taken or threatened by the Internal Revenue Service ("IRS"),
the Department of Labor ("DOL") or PBGC with respect thereto;
(ii) as soon as possible, and in any event within thirty (30) days
after Borrower or any ERISA Affiliate of Borrower knows or has reason to
know that a prohibited transaction (defined in Section 406 of ERISA and
Section 4975 of the Internal Revenue Code) for which a statutory or class
exemption is not available or a private exemption has not previously been
obtained from the DOL has occurred, a written statement of an Authorized
Officer of Borrower describing such transaction;
(iii) promptly after the filing thereof with the DOL, IRS or PBGC,
copies of each annual report, including schedule B thereto, filed with
respect to each Benefit Plan;
(iv) promptly after the filing thereof with the IRS, a copy of each
funding waiver request filed with respect to any Benefit Plan and all
communications received by Borrower or any ERISA Affiliate of Borrower
with respect to such request;
(v) promptly upon the occurrence thereof, notification of any
increases in the benefits of any existing Benefit Plan or the
establishment of any new Plan or the commencement of contributions to any
Plan to which Borrower or any ERISA Affiliate of Borrower was not
previously contributing;
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(vi) promptly upon, and in any event within ten (10) Business Days
after, receipt by Borrower or any ERISA Affiliate of Borrower of notice of
the PBGC's intention to terminate a Benefit Plan or to have a trustee
appointed to administer a Benefit Plan or notice is given by Borrower or
any ERISA Affiliate of Borrower to terminate any Benefit Plan or freeze or
suspend benefits thereunder, copies of each such notice;
(vii) promptly upon, and in any event within ten (10) Business Days
after, receipt by Borrower or any ERISA Affiliate of Borrower of an
unfavorable determination letter from the IRS regarding the qualification
of a Plan under Section 401(a) of the Internal Revenue Code, copies of
such letter;
(viii) promptly upon, and in any event within ten (10) Business Days
after, receipt by Borrower or any ERISA Affiliate of Borrower of a notice
from a Multiemployer Plan regarding the imposition of withdrawal
liability, copies of such notice; and
(ix) promptly upon, and in any event within twenty (20) Business
Days after, Borrower or any ERISA Affiliate of Borrower fails to make a
required installment under subsection (m) of Section 412 of the Code or
any other payment required under Section 412 on or before the due date for
such installment or payment, a notification of such failure.
7.9 Notice of Suit or Adverse Change in Business. Borrower shall, as
soon as possible, and in any event within five (5) Business Days after any
officer of Borrower learns of the following, give written notice to Lender of
(i) any material proceeding(s) (including without limitation litigation,
investigations, arbitration or governmental proceedings) being instituted or
threatened to be instituted by or against Borrower or Allied or any of Allied's
other Subsidiaries in any federal, state, local or foreign court or before any
commission or other regulatory body (federal, state, local or foreign), (ii)
notice that the operations of Borrower or Allied or any of Allied's other
Subsidiaries are not in full compliance with all requirements of applicable
federal, state or local environmental, health and safety statutes and
regulations, except for notices as to matters which, individually and in the
aggregate, could not have a material adverse effect on such Person's financial
condition, results of operations or business or on the value of any material
portion of the Collateral or assets of such Person, (iii) notice that Borrower
or Allied or any of Allied's other Subsidiaries is subject to a federal or state
investigation evaluating whether any remedial action is needed to respond to the
release of any hazardous or toxic waste, substance or constituent, or other
substance into the environment, (iv) notice that any properties or assets of
Borrower or Allied or any of
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Allied's other Subsidiaries are subject to an Environmental Lien, (v) any
material adverse change in the financial condition, results of operations or
business of Borrower or Allied or any of Allied's other Subsidiaries, and (vi)
any changes in the locations of any Collateral or assets of Borrower from the
locations listed on Schedule 6.5.
7.10 Supervening Illegality. If, at any time or times hereafter,
there shall become effective any amendment to, deletion from or revision,
modification or other change in any provision of any statute, or any rule,
regulation or interpretation thereunder or any similar rule or regulation,
adversely affecting, in Lender's reasonable determination, Lender's extension of
credit described in this Agreement and/or the selling of participations therein,
Borrower shall, at Borrower's option, either (i) pay to Lender the then
outstanding balance of the Liabilities, and hold Lender harmless from and
against any and all obligations, fees, liabilities, losses, penalties, costs,
expenses and damages, of every kind and nature, imposed upon or incurred by
Borrower by reason of Lender's failure or inability to comply with the terms of
this Agreement or any of the other Financing Agreements, or (ii) indemnify and
hold Lender harmless from and against any and all obligations, fees,
liabilities, losses, penalties, costs, expenses and damages, of every kind and
nature, imposed upon or incurred by Lender by reason of such amendment,
deletion, revision, modification, or other change. The obligations of Borrower
under this subsection 7.10 (other than the obligation to pay the Liabilities
referred to in clause (i) above) shall survive payment of the Liabilities and
termination of this Agreement.
7.11 Environmental Safety and Health Laws. If Borrower shall (a)
receive any written or material, verbal notice that any violation of any
federal, state or local environmental law or regulation may have been committed
or is about to be committed by Borrower, (b) receive any written or material,
verbal notice that any administrative or judicial complaint or order has been
filed or is about to be filed against Borrower alleging a violation of any
federal, state or local environmental law or regulation or requiring Borrower to
take any action in connection with the release of toxic or hazardous substances
into the environment, or (c) receive any written or material, verbal notice from
any federal, state or local governmental agency or other Governmental Authority
or private party alleging that Borrower may be liable or potentially responsible
for costs associated with a response to or cleanup of a release of a toxic or
hazardous substance into the environment or any damages caused thereby, Borrower
shall provide Lender with a copy of such notice or, in the event of any such
verbal notice, a written description of such communication within fifteen (15)
days of the receipt thereof. Within fifteen (15) days of Borrower having learned
of the enactment or promulgation of any federal, state or local environmental
law or regulation which may result in any material adverse change in the
Borrower's financial condition, results of operations, Borrower shall provide
Lender with notice thereof.
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7.12 Landlord Consents and Waivers. Borrower shall deliver to
Lender, on or before the date of the execution of this Agreement with respect to
each lease of premises then in effect (except with respect to the leases with
Persons which are not Affiliates for which Borrower and AFL were unable to
obtain landlord's waivers for Lender under the Hauppauge LSA and the AFL LSA
before the date of the execution of this Agreement) and on or before the date of
execution of any lease of premises to Borrower with respect any lease in effect
thereafter, a landlord's waiver (including, upon Lender's request therefor, a
consent to a leasehold mortgage, except that Borrower shall only be required to
use its best efforts (but not requiring litigation) to obtain a consent to a
leasehold mortgage with respect to the leases of Borrower in effect on the date
hereof which are other than with Affiliates) executed by the lessor of each
location leased to Borrower. At Lender's request, Borrower shall use its best
efforts (but not requiring litigation) to obtain and deliver to Lender a
landlord's waiver (including upon Lender's request therefor, a consent to a
leasehold mortgage) with respect to any leases for which Borrower and AFL were
unable to obtain landlord's waivers before the date of the execution of this
Agreement. Each landlord's waiver so delivered shall be in form and substance
satisfactory to Lender. Borrower shall pay all of its obligations under such
leases of real property when due and promptly shall notify Lender of any breach
of, or default under, any such lease.
7.13 Key Man Life Insurance. Borrower has obtained, and at all times
shall maintain in effect a life insurance policy or policies insuring the life
of Donald Olesen in the aggregate amount of $1,000,000, which policy or policies
of insurance shall be in form and substance reasonable satisfactory to Lender
and issued by an insurance carrier or carriers satisfactory to Lender. Borrower
shall deliver to Lender the original of each of such policies of insurance and
evidence of payment of all premiums therefor. Borrower shall assign each such
policy to Lender pursuant to such form of assignment as Lender shall require and
shall take such other action with respect thereto as Lender shall require. Each
such policy of insurance shall name Borrower as the sole named beneficiary
thereof and shall contain endorsements providing that (i) such policy may not be
canceled except after 30 days' prior written notice to Lender, and (ii) the
beneficiary of such policy may not be changed, or additional beneficiaries
named, without Lender's prior written consent. If Borrower at any time or times
hereafter shall fail to obtain or maintain any of the policies of insurance
required above or to pay any premium in whole or in part relating thereto, then
Lender, without waiving or releasing any obligation of Borrower hereunder or any
Default, may at any time or times thereafter (but shall be under no obligation
to do so) obtain and maintain such policies of insurance and pay such premiums
and take any other action with respect thereto which Lender deems advisable.
8. NEGATIVE COVENANTS.
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Borrower covenants and agrees that so long as any Liabilities remain
outstanding, and (even if there shall be no Liabilities outstanding) so long as
this Agreement remains in effect (unless Lender shall give its prior written
consent thereto):
8.1 Encumbrances. Except as set forth in Schedule 8.1, Borrower
shall not create, incur, assume or suffer to exist any Lien of any nature
whatsoever on any of its assets, including, without limitation, the Collateral,
other than: (i) liens securing the payment of taxes, either not yet due or the
validity of which is being contested in good faith by appropriate proceedings,
and as to which Borrower, if appropriate under generally accepted accounting
principles, shall have set aside on its books and records adequate reserves;
(ii) deposits under workmen's compensation, unemployment insurance, social
security and other similar laws, or to secure the performance of bids, tenders
or contracts (other than for the repayment of borrowed money) or to secure
indemnity, performance or other similar bonds for the performance of bids,
tenders or contracts (other than for the repayment of borrowed money) or to
secure statutory obligations or surety or appeal bonds, or to secure indemnity,
performance or other similar bonds in the ordinary course of business; (iii)
liens and security interests in favor of Lender; (iv) liens which arise by
operation of law, other than Environmental Liens; (v) zoning restrictions,
easements, licenses, covenants and other restrictions affecting the use of real
property; (vi) liens on Equipment securing purchase money security indebtedness
permitted under clause (iv) of the first sentence of subsection 8.2; (vii) liens
arising as a result of any judgments or orders requiring payment of not more
than $100,000 in the aggregate, provided (a) such judgments and orders are being
contested or appealed by Borrower in good faith, by appropriate proceedings
promptly initiated and diligently conducted, (b) Borrower has established
adequate reserves to cover such judgments and orders and (c) the enforcement of
any such lien has been stayed during the pendency of such contest or appeal; and
(viii) other liens and encumbrances on property, which do not, in Lender's sole
determination, (a) mateuch property, or (b) materially lessen the value of such
property for the purposes for which the same is held by Borrower. Borrower shall
not permit the filing of any financing statement naming Borrower as debtor,
except for financing statements filed with respect to liens or security
interests expressly permitted by this Agreement.
8.2 Indebtedness. Except as set forth on Schedule 8.2, Borrower
shall not incur, create, assume, become or be liable in any manner with respect
to, or permit to exist, any obligations of a type which would appear on a
balance sheet of Borrower prepared in accordance with GAAP, Capitalized Lease
Obligations or other Indebtedness, except (i) the Liabilities; (ii) trade
obligations and normal accruals in the ordinary course of business not yet due
and payable, or with respect to which Borrower is contesting in good faith the
amount or validity thereof by appropriate proceedings, and then only to the
extent that Borrower has set aside on its books adequate reserves therefor, if
appropriate
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under generally accepted accounting principles; (iii) indebtedness in connection
with leases of vehicles from time to time by Borrower which are used by Borrower
in the ordinary course of its business; (iv) indebtedness not to exceed $200,000
in the aggregate incurred in any Fiscal Year in connection with the purchase of
any Equipment or other Capital Expenditures so long as such indebtedness is not
used to finance more than eighty percent (80%) of the purchase price of such
property (the "Third Party Financed Equipment"); and (v) Capital Leases entered
into after the date hereof so long as the aggregate amount of all Capitalized
Lease Obligations (including those listed on Schedule 8.2) do not exceed
$1,400,000. Except for (a) prepayments made in the ordinary course of business
to obtain prompt payment discounts offered on trade obligations incurred in the
ordinary course of business; (b) immaterial prepayments of obligations incurred
in the ordinary course (other than Funded Debt or obligations owed to any
Affiliate within the meaning of subsection 8.11 hereof); (c) prepayments of the
Subordinated Note resulting from payments in lieu of dividends as permitted
pursuant to subsection 8.8; and (d) prepayments otherwise expressly permitted by
this Agreement, Borrower shall not pay any obligation or 8.3 Consolidations,
Mergers or Acquisitions. Borrower shall not recapitalize, consolidate with,
merge with, or otherwise acquire all or substantially all of the assets or
properties of any other Person or enter into any agreement with respect to any
of the foregoing.
8.4 Investments or Loans. Borrower shall not make or permit to exist
investments or loans in or to any other Person, except (i) investments in
short-term direct obligations of the United States Government; (ii) investments
in negotiable certificates of deposit maturing within thirty (30) days from the
date of issuance, issued by Lender or an affiliate of Lender or by any other
federally insured bank (provided that any such investments do not exceed the
limit of any such federal insurance) satisfactory to Lender, in its reasonable
discretion, and payable to the order of Borrower or to bearer and delivered to
Lender; (iii) investments in commercial paper issued by companies organized
under the laws of the United States or any state thereof, maturing in ninety
(90) days or less from the date of issuance, which at the time of acquisition by
Borrower is rated A-1/P-1 by Standard & Poor's Corporation or Moody's Investors
Services, Inc. (unless issued by the parent of Lender), and pledged to
Lender;(iv) advances to Borrower's officers, directors and employees permitted
by clause (i) or (iii) of subsection 8.7; and (v) Borrower's existing investment
of $10,000 in the Project X Partnership plus an additional investment therein of
an aggregate amount not to exceed $10,000.
8.5 Guarantees. Borrower shall not, directly or indirectly,
guarantee, endorse or otherwise in any way become or be responsible for
obligations of any other Person or otherwise ensure a creditor against loss in
respect of indebtedness of any other Person, whether by agreement to purchase
the indebtedness of any other Person, or
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through the purchase of goods, supplies or services, or maintenance of working
capital or other balance sheet covenants or conditions, or by way of stock
purchase, capital contribution, advance or loan for the purpose of paying or
discharging any indebtedness or obligation of such other Person or otherwise,
except (i) endorsements of negotiable instruments for collection in the ordinary
course of business and (ii) the Guaranty.
8.6 Disposal of Property. Borrower shall not sell, lease, transfer
or otherwise dispose of any of the Collateral or any of its other properties,
assets and rights to any Person, except for (i) sales of Inventory to customers
in the ordinary course of business; and (ii) the sale of Obsolete Equipment by
Borrower provided that (a) the aggregate value of all such Equipment sold
pursuant to clause (ii) of this subsection 8.6 during the Fiscal Year does not
exceed $25,000, (b) as to any such Equipment with a value in excess of $5,000,
at least ten (10) Business Days prior written notice of such sale shall have
been given to Lender, which notice shall include a brief description of the
Equipment to be sold, the consideration to be received for the Equipment to be
sold, the value of all Equipment sold pursuant to clause (ii) of this subsection
8.6 during the Fiscal Year (including the value of the Equipment proposed to be
sold), and (c) immediately upon the sale of any such Equipment, Borrower shall
make a prepayment on the Term Loan (or, if the Term Loan has been paid in full,
the Additional Loan) as required by subsection 2.3(D). The term "value" as used
in this subsection 8.6 shall mean the greater of fair market value or the
appraised value as set forth on the most recent appraisal.
8.7 Compensation to Officers and Others. Borrower shall not make any
loans to, or pay any bonuses, fees or other amounts to, any officers, directors
or employees of Borrower or to stockholders of Borrower except for (i) advances
and reimbursements for travel and expenses to Borrower's officers, directors or
employees in the ordinary course of business and consistent with past practices;
(ii) reasonable compensation, payments and bonuses to all salaried personnel
that are not Affiliates (other than John Mangini, Grant Ireland, George Fishman,
Donald Olesen and William H. Smith who may receive payments subject to the
proviso set forth in this clause (ii)) for services rendered in the ordinary
course and pursuant to the reasonable requirements of Borrower's business and in
amounts substantially in accord with industry and prior practices, provided that
payments, salaries and bonuses to the persons listed on Schedule 8.7 shall not
exceed the amounts set forth for such persons in such Schedule; (iii) loans made
to employees of Borrower who are not also officers or directors or former
officers or directors of Borrower or of any Affiliate which are made on terms
and in amounts consistent with Borrower's past practices and which do not exceed
at any time $150,000 in the aggregate for all such employees; and (iv) dividends
to Borrower's sole stockholder permitted pursuant to subsection 8.8.
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8.8 Dividends and Stock Redemptions. Borrower shall not, directly or
indirectly, (i) redeem, purchase or otherwise retire any of its shares of
capital stock, (ii) declare or pay any dividends on any class or classes of
capital stock, (iii) return capital of Borrower to its stockholders, or (iv)
make any other distribution on or in respect of any shares of any class of
capital stock of Borrower; provided, however, that if no Default or Event of
Default has occurred and is continuing or would occur as a result thereof and
provided further that:
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(i) except in the case of Special Dividend Amount, after giving effect to the
payment of any such dividend the cumulative amount of all dividends
described in clauses (b), (c), (d) and (e) below paid after the date
hereof does not exceed the Retained Earnings Amount for the period from
July 31, 1996 to the date of the financial statements most recently
received by Lender pursuant to subsection 7.1(A)(the "Measurement
Period");
(ii) in the case of a dividend under clause (b) (which is other than a Special
Dividend Amount) or (d) below, Borrower's net income and Free Cash Flow
for all monthly periods beginning on August 1, 1996 through and including
the end of the most recent month ending prior to the date of the proposed
dividend, as reflected by the financial statements required to be
delivered by Borrower to Lender pursuant to subsection 7.1, are each equal
to or greater than the comparable amounts set forth in the Business Plans
covering such periods;
(iii) in the case of a dividend under clause (b) (which is other than a Special
Dividend Amount), (c), (d) or (e) below, Borrower's average Availability
on such day and for the preceding sixty (60) days was not less than
$2,000,000 plus the amount of any such dividend and any other dividends
paid under this subsection 8.8 during such period;
(iv) in the case of a dividend under clause (b) (which is other than a Special
Dividend Amount), (c), (d) or (e) below, after giving effect to the
payment of any such dividend Borrower's Availability is not on the
succeeding day, and reasonably is not expected to be at any time during
the following sixty (60) days, less than $2,000,000;
(v) in the case of a dividend under clause (d) or (e) below, after giving
effect to any such dividend, the cumulative amount of all dividends
described under clauses (b), (c), (d) and (e) below paid after the date
hereof does not
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exceed 75% of Borrower's Free Cash Flow Available for Dividends accruing
in the Measurement Period; and
(vi) in the case of a dividend described in clause (b), (c), (d) or (e) below,
at least two (2) Business Days prior to making or declaring such dividend,
Lender shall have received a certificate of an Authorized Officer of
Borrower in the form attached hereto as Exhibit G acceptable in form and
substance to Lender and setting forth in detail Borrower's compliance with
each of the requirements contained in this subsection for such dividend
and detailed calculations with respect thereto,
then, to the extent otherwise permitted by law:
(a) Borrower may declare and pay at the Release Time cash dividends in
an amount equal to $1,535,540.10 (plus the amount of accrued but
unpaid interest on the Series A Note after October 30, 1996 not to
exceed $1,666.67 per day) with respect to its shares of Common
Stock, to enable Holdings to make a dividend with respect to the
shares of its common stock in such aggregate amount, and which will
be used by HMG together with the proceeds of the HMG Notes to pay
the Series A Note in full (the "Initial Distribution");
(b) Borrower may declare and pay cash dividends with respect to shares
of its Common Stock in the amount equal to the aggregate amount of
regularly scheduled payments of interest on Schedule 8.8 which are
due and payable under any outstanding HMG Notes on the dates set
forth for payment of such interest payments on said Schedule;
provided, however, that if in any calendar year the Tax Amount with
respect to any Holder for such calendar year is greater than the
Distributed Amount for such Holder for such calendar year, Borrower
may declare and pay a cash dividend as and when the Tax Amount
becomes due and payable for such calendar year in the amount of the
Special Dividend Amount for such Holder, so long as such Special
Dividend Amount is distributed by Holdings to HMG and used by HMG to
pay interest accruing on such Holder's HMG Note (provided, however,
that estimated portions of the Special Dividend Amount may be
declared and paid in the amount of and as and when reasonable
estimated payments of the Tax Amount are due and payable, but such
payments shall be used by HMG to advance interest which is payable
upon the HMG Notes upon the final determination of the Special
Dividend Amount (which shall be calculated based upon the actual Tax
Amount) and if such amounts
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exceed the actual Special Dividend Amount permitted to be paid, such
dividends shall instead be credited and reduce subsequent dividends
permitted to be paid under this clause and likewise shall be
credited and reduce subsequent interest payments permitted to be
paid on the HMG Notes);
(c) Borrower may declare and pay cash dividends with respect to the
shares of its Common Stock in the amount equal to the aggregate
amount of regularly scheduled payments of interest on Schedule 8.8
which are due and payable under any outstanding Series B Notes on
the dates set forth for payment of such interest payments on said
Schedule, so long as such amounts are distributed by Holdings to HMG
and used by HMG to pay interest accruing on the Series B Notes;
(d) Borrower may declare and pay cash dividends on any HMG Notes
Maturity Date with respect to shares of its Common Stock in an
amount not to exceed the aggregate unpaid principal amount of the
HMG Notes on such date, provided that after giving effect thereto
the aggregate amount of all cash dividends paid pursuant to this
clause (d) for all such HMG Notes Maturity Dates does not exceed
$2,000,000; and
(e) Borrower may declare and pay cash dividends on January 1, 1999 with
respect to shares of its Common Stock in an amount not to exceed to
the aggregate unpaid principal amount of the Series B Notes on such
date, provided that after giving effect thereto, the aggregate
amount of all cash dividends paid pursuant to this clause (e) does
not exceed $916,659.
As used herein, the following terms shall have the following meanings:
"Distributed Amount" shall mean with respect to any Holder for any
period, the amount of interest paid to such Holder on the HMG Notes from
dividends declared pursuant to clause (b) of the proviso in this
subsection 8.8 during such period (other than amounts finally determined
to be Special Dividend Amounts), assuming that all such dividends under
such clause (b) are distributed to pay interest to all Holders pro rata in
proportion to the principal amount of each Holder's HMG Notes.
"Free Cash Flow Available for Dividends" shall mean for any period,
without duplication, an amount equal to the following for such period: (i)
net income; plus (ii) the sum of the following amounts, to the extent
deducted in
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determining net income: (A) depreciation expense, (B) amortization
expense, and (C) interest expense; minus (iii) the sum of the following
amounts (X) Capital Expenditures paid by Borrower (except for Capital
Expenditures paid for with the proceeds of Funded Debt (including Capital
Lease Obligations)), and (Y) required payments of principal and interest
on Funded Debt (including all amounts paid on any Capitalized Lease
Obligations), other than required principal payments on the Revolving
Loan; all as determined in accordance with GAAP.
"Holder" shall mean William H. Smith, as Trustee, George Fishman and
Don Olesen in their capacities as holders of an HMG Note.
"Retained Earnings Amount" shall mean for any period, the amount of
the net increase, if any, to retained earnings during such period as
determined in accordance with GAAP, plus (to the extent deducted in
determining such net increase in retained earnings) the sum of the
aggregate amount of dividends paid under this subsection 8.8 during such
period under clause (b), (c), (d) or (e) above.
"Special Dividend Amount" shall mean with respect to any Holder for
any period, the amount, if any, by which the Tax Amount exceeds the
Distributed Amount for such Holder for such period.
"Tax Amount" shall mean with respect to any Holder for any period,
the amount required to be paid by such Holder to satisfy such Holder's
federal, state and local tax liability resulting solely from income taxes
due to interest paid or deemed to have been paid on such Holder's HMG Note
during such period, but in any event not more than 45% of interest
accruing on such HMG Note during such period at the rate applicable to
such HMG Note on the date hereof.
No payment shall be made of any dividend under clauses (d) or (e) above unless
all amounts permitted to be paid by clause (b) and (c) above through such time
have been paid. The Initial Distribution shall be paid instead as a prepayment
of the Holdings Subordinated Debt and upon such payment the Holdings
Subordinated Debt shall be paid in full and the Subordinated Note shall be
cancelled.
8.9 Issuance of Stock. Borrower shall not issue or distribute any
capital stock or other securities (or any warrants or rights for the purchase of
any capital stock or other securities ) for consideration or otherwise.
8.10 Amendment of Articles of Incorporation or By-Laws; Corporate
Name; Places of Business. Borrower shall not amend its Articles or Certificate
of
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Incorporation or By-Laws, except that Borrower may amend its Articles or
Certificate of Incorporation to effect a change in its corporate name, provided
that Borrower furnishes to Lender such financing statements executed by Borrower
which Lender may request prior to the filing of such amendment and furnishes to
Lender a copy of such amendment, certified by the Secretary of State of its
jurisdiction of incorporation, within ten (10) days of the date such amendment
is filed with such Secretary of State. Borrower shall not make any change to the
location of its principal place of business, chief executive office, books and
records, chattel paper or records of account unless prior to the effective date
of such change in location, Borrower delivers to Lender such financing
statements executed by Borrower which Lender may request to reflect such change
in location; provided, however, that Borrower shall change the location of any
of its books and records, chattel paper and records of account not currently
located at Borrower's chief executive office to Borrower's chief executive
office on or before November 30, 1996. Borrower shall deliver such other
documents and instruments as Lender may request in connection with such change
in name or location within ten (10) days of the effectiveness of such change or
Lender's request therefor.
8.11 Transactions with Affiliates. Except as set forth on Schedule
8.11, Borrower shall not enter into any transaction with any Affiliate,
including, without limitation: (a) the making of any loans to, or the payment of
any bonuses, fees or other money to, any Affiliate; and (b) the purchase, sale
or exchange of property or the rendering of any service to or by any Affiliate.
Borrower shall not amend any employment agreements referred to on Schedule 8.11
except upon 10 days prior written notice to Lender of the amendment contemplated
and to the extent that Lender has consented thereto; provided that Lender shall
not unreasonably withhold its consent to any such amendment that is not adverse
to the position of Lender. Borrower shall not prepay any Permitted Tax Sharing
Payments, and Borrower shall not amend, modify or supplement the Allied Tax
Sharing Agreement or waive any of its rights thereunder. The term "Affiliate" as
used in this subsection 8.11 shall have the meaning given in subsection 1.1 and
also shall include any executive officer, director, employee or stockholder of
any Affiliate of Borrower or any Person related to any such Person within the
third degree of consanguinity.
8.12 ERISA. Borrower shall not:
(A) engage, or permit any ERISA Affiliate of Borrower to engage, in
any prohibited transaction described in Section 406 of ERISA or Section 4975 of
the Internal Revenue Code for which a statutory or class exemption is not
available or a private exemption has not been previously obtained from the DOL;
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(B) permit to exist any accumulated funding deficiency for any
Benefit Plan (as defined in Subsection 302 of ERISA and Section 412 of the
Internal Revenue Code), whether or not waived;
(C) fail, or permit any ERISA Affiliate of Borrower to fail, to pay
timely required contributions or annual installments due with respect to any
Plan including without limitation any installments due with respect to any
waived funding deficiency to any Benefit Plan;
(D) terminate, or permit any ERISA Affiliate of Borrower to
terminate, any Benefit Plan which would result in any liability of Borrower or
any ERISA Affiliate of Borrower under Title IV of ERISA;
(E) fail, or permit any ERISA Affiliate of Borrower to fail, to pay
to any Benefit Plan any required installment under section (m) of Section 412 of
the Internal Revenue Code or any other payment required under Section 412 of the
Internal Revenue Code on or before the due date for such installment or other
payment;
(F) amend, or permit any ERISA Affiliate of Borrower to amend, a
Benefit Plan resulting in an increase in current liability for the plan year
such that either Borrower or any ERISA Affiliate is required to provide security
to such Plan under Section 401(a) (29) of the Internal Revenue Code;
(G) withdraw from, or permit an ERISA Affiliate of Borrower to
withdraw from any Benefit Plan during a plan year for which Borrower or any
ERISA Affiliate of Borrower is a "substantial employer" with respect to such
Benefit Plan if Borrower or any such ERISA Affiliate would incur liability to
the PBGC with respect to such Benefit Plan under Sections 4063 or 4064 of ERISA;
or
(H) withdraw from or permit any ERISA Affiliate of Borrower to
withdraw from any Multiemployer Plan if a withdrawal liability would result to
Borrower or any ERISA Affiliate of Borrower pursuant to Section 4201 of ERISA.
8.13 Financial Covenants.
(A) Net Worth. Borrower shall not permit its Net Worth at any time
to be less than (i) prior to the last day of the Fiscal Year of Borrower ending
on or about July 31, 1997 $41,000,000, (ii) from and including the last day of
the Fiscal Year of Borrower ending on or about July 31, 1997 to and including
the day before the last day of the Fiscal Year of Borrower ending on or about
July 31, 1998, $42,000,000, (iii) from and including
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the last day of the Fiscal Year of Borrower ending on or about July 31, 1998 to
and including the day before the last day of the Fiscal Year of Borrower ending
on or about July 31,1999 $44,000,000, and (iv) on the last day of the Fiscal
Year of Borrower ending on or about July 31, 1999 and at all times thereafter,
$46,000,000.
(B) Coverage Ratio. Borrower shall not permit the ratio of Free Cash
Flow to Funded Debt Service for (i) the fiscal quarter of Borrower ending on or
about October 31, 1996, the two fiscal quarters of Borrower ending on or about
January 31,1997, the three fiscal quarters of Borrower ending on or about April
30, 1997 or the Fiscal Year of Borrower ending on or about July 31, 1997 to be
less than 1.00 to 1.0 or (ii) any consecutive twelve calendar month period
(commencing with the twelve calendar month period ending August 31, 1997 and
measured as of the last day of each month thereafter for the twelve month period
then ending) to be less than 1.10 to 1.0.
(C) Capital Expenditures. Borrower shall not incur Capital
Expenditures in any Fiscal Year in excess of $1,750,000.
As used herein the following terms shall have the following
meanings:
"Free Cash Flow" shall mean for any period, without duplication, an
amount equal to the following for such period: (i) net income; plus (ii)
the sum of the following amounts, to the extent deducted in determining
net income: (A) depreciation expense, (B) amortization expense, and (C)
interest expense; minus (iii) the aggregate amount of Capital Expenditures
paid by Borrower (except for Capital Expenditures paid for with the
proceeds of Funded Debt (including Capital Lease Obligations)); all as
determined in accordance with GAAP.
"Funded Debt Service" shall mean, for any period, the sum of (a) all
required payments by Borrower of principal, interest and fees on Funded
Debt (including any Capital Lease Obligations), other than required
principal payments on the Revolving Loan, and (b) any dividend payments
made during such period in accordance with clause (b), (c), (d) or (e) of
the proviso of subsection 8.8; all as determined in accordance with GAAP.
"Net Worth" shall mean the amount of stockholder's equity of
Borrower (less the amount of any treasury stock), determined in accordance
with GAAP.
8.14 Environmental. Borrower shall not fail to conduct its business
so as to comply in all respects with all federal, state or local environmental
laws and regulations, including, without limitation, environmental or land use
requirements or
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permits or occupational safety or health laws, rules or regulations,
requirements or permits in all jurisdictions in which it is or may at any time
be doing business, including, without limitation, the Federal Resource
Conservation and Recovery Act, the Federal Comprehensive Environmental Response,
Compensation and Liability Acts, the Federal Clean Water Act, the Federal Clean
Air Act and the Federal Occupational Safety and Health Act, as the same may be
amended from time to time, and any successor statutes, except where the failure
to so comply could not individually or in the aggregate have a material adverse
effect on Borrower's financial condition, results of operations or business; and
provided, however, that nothing contained in this subsection 8.14 shall prevent
Borrower from contesting, in good faith by appropriate legal proceedings, any
such law, regulation, interpretation thereof or application thereof; provided,
further, that Borrower shall comply with the order of any court or other
governmental body of applicable jurisdiction relating to such laws unless
Borrower shall currently be prosecuting an appeal or proceedings for review and
shall have secured a stay of enforcement or execution or other arrangement
postponing enforcement or execution pending such appeal or proceedings for
review.
8.15 Fiscal Year. Borrower shall not change its Fiscal Year.
8.16 Subsidiaries. Borrower shall not form or acquire any
Subsidiaries or permit any Subsidiaries to exist.
8.17 Amendment of Various Documents. Borrower shall not, and
Borrower shall not permit any of its Subsidiaries or Affiliates to, enter into
or consent to any modification or alteration of any of the Merger Documents, the
Allied Tax Sharing Agreement, the Affiliated Leases, the Smith Subordinated
Notes, the Subordinated Note, the VCA Note, the HMG Notes or the Series B Notes,
or the rights of Borrower, any of its Affiliates or any other party thereto or
waive or consent to any failure to perform obligations under any of the
foregoing except that HMG may enter into or consent to modifications or
alterations of the HMG Notes or Series B Notes which extend the maturity of, or
decrease the rate of interest payable under, the HMG Notes or the Series B Notes
or modify covenants or agreements therein to make them less burdensome to HMG.
8.18 Smith Subordinated Notes. Borrower shall not, directly or
indirectly, make any payment or distribution on or in respect of the Smith
Subordinated Notes, whether for interest or principal or otherwise; provided,
however that if no Default or Event of Default has occurred and is continuing or
would occur as a result thereof, Borrower may pay the regularly scheduled
payments of interest due and payable under the
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Smith Subordinated Notes set forth on Schedule 8.18 (but only as to interest
accruing after, and not on or before, July 31, 1997), provided that:
(i) the applicable interest rate under each of the Smith Subordinated Notes is
10% per annum or less;
(ii) there is no prepayment due and payable under subsection 2.3(I) which has
not yet been paid;
(iii) Borrower's Availability on such day and on each of the preceding sixty
(60) days was not less than (A) $2,000,000 plus (B) the amount of the ----
proposed interest payment, plus (C) the amount of the Term Loan ----
Reserve on such day; and after giving effect to the payment, Borrower's
Availability is not on the succeeding day, and reasonably is not expected
to be at any time during the following sixty (60) days, less then (A)
$2,000,000, plus (B) the amount of the Term Loan ---- Reserve at such
time;
(iv) Borrower's net income and Free Cash Flow for all monthly periods during
the Fiscal Year ending on or about July 31, 1997, as reflected by the
financial statements required to be delivered by Borrower to Lender
pursuant to subsection 7.1, are each equal to or greater than the
comparable amounts set forth in the Business Plan covering such Fiscal
Year;
(v) Borrower's net income and Free Cash Flow for all monthly periods beginning
on the first day of the Fiscal Year ending on or about July 31, 1998
through the end of the most recent month ending prior to the date of the
proposed interest payment, as reflected by the financial statements
required to be delivered by Borrower to Lender pursuant to subsection 7.1,
are each equal to or greater than the comparable amounts set forth in the
Business Plans covering such periods; and
(vi) at least five but not more than ten Business Days prior to making such
payment, Lender shall have received a certificate of an Authorized Officer
of Borrower in the form attached hereto as Exhibit H, acceptable in form
and substance to Lender and setting forth in detail Borrower's compliance
with each of the requirements contained in this subsection for such
payment and detailed calculations with respect thereto;
Notwithstanding the foregoing, so long as no Default or Event of Default has
occurred and is continuing or would occur as a result thereof, if during the
period from the Effective
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Time to December 31, 1996 or any calendar year thereafter, the Required Tax
Amount with respect to any Note Holder for such period is greater than such Note
Holder's Distributed Interest Amount for such period, Borrower may pay interest
to such Note Holder as and when such Required Tax Amount becomes due and payable
in the amount of the Special Interest Amount for such Note Holder (provided,
however, that estimated portions of the Special Interest Amount may be paid in
the amount of and as and when reasonable estimated payments of the Required Tax
Amount are due and payable, but such payments shall be deemed to be advances by
Borrower of the interest which is payable upon the Smith Subordinated Notes upon
the final determination of the Special Interest Amount (which shall be
calculated based upon the actual Tax Amount) and if such amounts exceed the
actual Special Interest Amount permitted to be paid, such interest shall instead
be credited and reduce subsequent interest payments permitted to be paid on the
Smith Subordinated Notes).
As used herein the following terms shall have the following
meanings:
"Distributed Interest Amount" shall mean with respect to any Note
Holder for any period, the amount of interest paid to such Note Holder
during such period (other than any amounts finally determined to be
Special Interest Amounts).
"Note Holder" shall mean Smith and the Trustee in their capacities
as the holders of the Smith Subordinated Notes.
"Required Tax Amount" shall mean with respect to any Note Holder for
any period, the amount required to be paid by such Note Holder to satisfy
such Note Holder's federal, state and local tax liability resulting solely
from income taxes due to interest paid or deemed to have been paid on such
Note Holder's Smith Subordinated Notes during such period, but in any
event not more than 45% of interest accruing on such Smith Subordinated
Notes during such period at the rate (not to exceed 10% per annum)
applicable to such Smith Subordinated Notes on the date hereof.
"Special Interest Amount" shall mean with respect to any Note Holder
for any period, the amount, if any, by which the Required Tax Amount
exceeds the Distributed Interest Amount for such Note Holder for such
period.
8.19 VCA Note. Borrower shall not, directly or indirectly, make any
prepayment, payment or distribution on or in respect of the VCA Note, except for
regularly scheduled payments of interest and principal due and payable under the
VCA Note as in effect on the date hereof.
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9. DEFAULT, RIGHTS AND REMEDIES OF LENDER.
9.1 Defaults. If any of the following events ("Defaults") shall
occur:
(A) Borrower fails to pay (i) any of its Liabilities (other than
interest or fees) when such Liabilities are due or are declared due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise) or
(ii) any of its Liabilities consisting of interest or fees within two days of
the date such Liabilities are due or declared due (whether by scheduled
maturity, required prepayment, acceleration, demand or otherwise);
(B) Borrower or any other Credit Party (i) fails or neglects to
perform, keep or observe any of its covenants, conditions or agreements
contained in any of the subsections of this Agreement or any of the other
Financing Agreements other than subsection 7.3 or 7.4 of this Agreement or
paragraphs 3.C or 3.D of the Holdings Guaranty or (ii) fails or neglects to
perform, keep or observe any of the covenants, conditions or agreements
contained in subsection 7.3 or 7.4 of this Agreement or paragraphs 3.C or 3.D of
the Holdings Guaranty and such failure shall continue for thirty (30)
consecutive days, provided that such grace period shall not apply and a Default
shall be deemed to have occurred promptly upon such breach if (x) such breach
cannot, in Lender's reasonable determination, be cured by Borrower or Holdings
during such period, or (y) such breach shall be deemed by Lender (in its
reasonable discretion) to have a material adverse effect on the Collateral (or
Lender's interest or rights therein or with respect thereto), the Current Asset
Base or the other rights of Lender under this Agreement or any other Financing
Agreement;
(C) any warranty or representation now or hereafter made by Borrower
or any other Credit Party to Lender or in any of the Financing Agreements is
untrue or incorrect in any material respect when made, or any schedule,
certificate, statement, report, financial data, notice, or writing furnished at
any time by Borrower or any other Credit Party to Lender is untrue or incorrect
in any material respect on the date as of which the facts set forth therein are
stated or certified or any of the foregoing omits to state a fact necessary to
make the statements therein contained not misleading in any material respect;
(D) a judgment or order requiring payment in excess of $100,000
shall be rendered against Borrower or any other Credit Party and such judgment
or order shall remain unsatisfied or undischarged and in effect for forty-five
(45) consecutive days without a stay of enforcement or execution, provided that
this subsection 9.1(D) shall not apply to any judgment for which Borrower or
such other Credit Party is fully insured
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(except for normal deductibles in connection therewith), and with respect to
which the insurer has assumed the defense and is not defending under reservation
of right, and with respect to which Lender reasonably believes the insurer will
pay the full amount thereof (except for normal deductibles in connection
therewith);
(E) a notice of lien, levy or assessment is filed or recorded with
respect to all or a substantial part of the assets of Borrower or any other
Credit Party by the United States, or any department, agency or instrumentality
thereof, or by any state, county, municipality or other governmental agency or
any taxes or debts owing at any time or times hereafter to any one or more of
them become a Lien upon all or a substantial part of Borrower's Collateral or
the assets of or collateral provided by any such Credit Party, and (i) such
lien, levy or assessment is not discharged or released or the enforcement
thereof is not stayed within forty-five (45) days of the notice or attachment
thereof, or (ii) if the enforcement thereof is stayed, such stay shall cease to
be in effect, provided that this subsection 9.1(E) shall not apply to any liens,
levies or assessments requiring payments in the aggregate for all such liens,
levies or assessments of less than $50,000 or which relate to current taxes not
yet due and payable;
(F) there shall occur any loss, theft, substantial damage or
destruction of any item or items of Borrower's Collateral or any assets of or
collateral provided by any other Credit Party for which Borrower or such Credit
Party is not fully insured as required by this Agreement or any of the other
Financing Agreements (a "Loss"), if the amount of such Loss not fully covered by
insurance (including any deductible in connection therewith), together with the
amount of all other Losses incurred by Borrower and the other Credit Parties not
fully covered by insurance (including any deductibles in connection therewith)
occurring in the same Fiscal Year, exceeds $250,000;
(G) all or any part of Borrower's Collateral or the assets of or
collateral provided by any other Credit Party is attached, seized, subjected to
a writ or distress warrant, or is levied upon, or comes within the possession of
any receiver, trustee, custodian or assignee for the benefit of creditors and on
or before the thirtieth (30th) day thereafter such assets are not returned to
Borrower or such Credit Party and/or such writ, distress warrant or levy is not
dismissed, stayed or lifted if the amount of such Collateral or assets or
collateral, together with any other such Collateral, assets and collateral that
is so attached, seized, subjected to writ or distress warrant or levied upon,
exceeds $100,000 at any time;
(H) a proceeding under any bankruptcy, reorganization, arrangement
of debt, insolvency, readjustment of debt or receivership law or statute is
filed (i) against Borrower and an adjudication or appointment is made or order
for relief is entered, or
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such proceeding remains undismissed for a period in excess of sixty (60) days,
or (ii) by Borrower or Borrower makes an assignment for the benefit of creditors
or Borrower takes any corporate action to authorize any of the foregoing;
(I) a proceeding under any bankruptcy, reorganization, arrangement
of debt, insolvency, readjustment of debt or receivership law or statute is
filed (i) against any Credit Party (other than Borrower) and an adjudication or
appointment is made or order for relief is entered, or such proceeding remains
undismissed for a period in excess of sixty (60) days, or (ii) by any Credit
Party (other than Borrower) or any such Credit Party makes an assignment for the
benefit of creditors or any such Credit Party takes any corporate action to
authorize any of the foregoing;
(J) Borrower or any other Credit Party voluntarily or involuntarily
dissolves or is dissolved, terminates or is terminated;
(K) Borrower or any other Credit Party becomes insolvent or fails
generally to pay its debts as they become due;
(L) Borrower or any other Credit Party is enjoined, restrained, or
in any way prevented by the order of any court or any administrative or
regulatory agency from conducting all or any material part of its business
affairs;
(M) a breach by Borrower or any other Credit Party shall occur under
any agreement, document or instrument (other than a Financing Agreement or an
agreement, document or instrument evidencing the lending of money described in
subsection 9.1(N)), whether heretofore, now or hereafter existing between
Borrower or such other Credit Party and any other Person, and such breach is of
a type which Lender believes in Good Faith, individually or when taken together
with all other breaches described above, may have a material adverse effect on
the properties, business, condition (financial or otherwise), results of
operation or prospects of Borrower or any other Credit Party, and such breach
continues unwaived for more than thirty (30) days after such breach first
becomes known to Borrower or such Credit Party, provided that such grace period
shall not apply, and a Default shall be deemed to have occurred promptly upon
such breach, if such breach may not, in Lender's reasonable determination, be
cured by Borrower or such other Credit Party during such thirty (30) day grace
period;
(N) as to more than $100,000 in indebtedness in the aggregate at any
time (other than with respect to the Liabilities), (i) Borrower or any other
Credit Party shall fail to make any payment due (whether by scheduled maturity,
required prepayment, acceleration, demand or otherwise) on or in respect of any
obligation for borrowed money
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and such failure shall continue after the applicable grace period, if any,
specified in the agreement or instrument relating to such indebtedness; (ii) any
other default under any agreement or instrument relating to any such
indebtedness, or any other event, shall occur and shall continue after the
applicable grace period, if any, specified in such agreement or instrument if
the effect of such default or event is to accelerate, or to permit the
acceleration of, the maturity of such indebtedness; or (iii) any such
indebtedness shall be declared to be due and payable or required to be prepaid
(other than by a regularly scheduled required prepayment) prior to the stated
maturity thereof;
(O) any Credit Party shall, or shall attempt to, terminate or revoke
any of its obligations under the applicable guarantee agreement or other
Financing Agreement to which it is a party or breach any of the terms of such
guarantee agreement or any Person executing a fidelity guaranty in favor of
Lender in connection with the Liabilities shall, or shall attempt to, terminate
or revoke such fidelity guaranty;
(P) a material and adverse change shall occur (i) in the present or
reasonably foreseeable prospective business, operations or condition (financial
or otherwise), properties or prospects of Borrower or any other Credit Party or
in the value of any material portion of the Collateral of Borrower or any assets
of or collateral provided by any other Credit Party or (ii) which materially
impairs the ability of Borrower to perform Borrower's obligations under this
Agreement and the other Financing Agreements or of any other Credit Party to
perform its obligations under the Financing Agreements to which it is a party,
in each case as determined by Lender in its sole discretion exercised in Good
Faith;
(Q) Holdings shall cease to own, beneficially and of record, all of
the issued and outstanding capital stock of Borrower; or HMG shall cease to own,
beneficially and of record, all of the issued and outstanding capital stock of
Holdings; or Allied shall cease to own, beneficially and of record, all of the
outstanding capital stock of HMG;
(R) A Change of Control shall occur;
(S) the Person who is currently holding the positions of Co-
Chairman and Chief Executive Officer of Allied and Chairman and Chief Executive
Officer of Borrower, HMG and Holdings (or another Person reasonably acceptable
to Lender who is appointed to such positions within 120 days following the date
on which the Person holding such positions on the date hereof ceases to hold
such positions) shall cease to hold such positions or perform comparable duties
to those currently performed by such officer;
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(T) the plan administrator of any Benefit Plan applies under Section
412(d) of the Internal Revenue Code for a waiver of the minimum funding
standards of Section 412(a) of the Internal Revenue Code and Lender in Good
Faith believes that the approval of such waiver could subject Borrower or any
ERISA Affiliate of Borrower to liability in excess of $250,000;
(U) a Termination Event occurs which Lender in Good Faith believes
could individually, or together with any other Termination Events subject either
Borrower or any ERISA Affiliate of Borrower to liability in excess of $100,000;
(V) any breach or violation of any term or provision of the Holdings
Subordination Agreement, the VP Subordination Agreement or the Smith
Subordination Agreement shall occur or any Person shall, or shall attempt to,
terminate or revoke any of its obligations thereunder;
(W) HMG shall amend or modify the terms of the HMG Notes or the
Series B Notes, except for amendments or modifications which extend the maturity
of, or decrease the rate of interest payable under, the HMG Notes or Series B
Notes or modify or amend covenants to make them less burdensome to HMG; or
(X) any "Default" as such term is defined in the GLC Term Loan
Agreement shall have occurred; or any "Event of Default" as such term is defined
in either of the Smith Subordinated Notes or event which through the passage of
time or the giving of notice or both would mature into such an "Event of
Default" shall have occurred; or any "Event of Default" as such term is defined
in the VCA Note or event which through the passage of time or the giving of
notice or both would mature into such an "Event of Default" shall have occurred;
then Lender may, upon notice to Borrower (i) terminate Lender's obligation to
make advances to Borrower or to issue Letters of Credit at Borrower's request
pursuant to subsection 2.2, and/or (ii) declare all of the Liabilities,
including without limitation all of Borrower's contingent liabilities with
respect to any Letters of Credit, to be immediately due and payable, whereupon
all of the Liabilities, including without limitation all of Borrower's
contingent liabilities with respect to any Letters of Credit, shall become
immediately due and payable; provided, howev limitation, all of Borrower's
contingent liabilities with respect to any Letters of Credit, shall
automatically, without notice of any kind, be immediately due and payable.
9.2 Rights and Remedies Generally. In the event of a Default, Lender
shall have, in addition to any other rights and remedies contained in this
Agreement or in
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any of the other Financing Agreements, all of the rights and remedies of a
secured party under the Code or other applicable laws. All of the rights and
remedies of Lender, whether under this Agreement, the other Financing
Agreements, the Code or other applicable laws or otherwise, shall be cumulative,
and non-exclusive, to the extent permitted by law. In addition to all such
rights and remedies, the sale, lease or other disposition of the Collateral, or
any part thereof, by Lender after Default may be for cash, credit or any
combination thereof, and Lender may purchase all or any part of the Collateral
at public or, if permitted by law, private sale, and in lieu of actual payment
of such purchase price, may set-off the amount of such purchase price against
the Liabilities then owing. Any sales of the Collateral may be adjourned from
time to time with or without notice. Lender may, in its sole discretion, cause
the Collateral to remain on premises of Borrower, at Borrower's expense, pending
sale or other disposition of the Collateral. Lender shall have the right to
conduct such sales on such premises, at Borrower's expense, or elsewhere, on
such occasion or occasions as Lender may see fit.
9.3 Entry Upon Premises and Access to Information. In the event of a
Default, Lender shall have the right to enter upon the premises of Borrower
where the Collateral is located (or is believed to be located) without any
obligation to pay rent to Borrower, or any other place or places where the
Collateral is believed to be located and kept, and render the Collateral
unusable or remove the Collateral therefrom to the premises of Lender or any
agent of Lender, for such time as Lender may desire, in order effectively to
collect or liquidate the Collateral, and/or Lender may require Borrower to
assemble the Collateral and make it available to Lender at a place or places to
be designated by Lender. In the event of a Default, Lender shall have the right
to obtain access to Borrower's data processing equipment, computer hardware and
software relating to the Collateral and to use all of the foregoing and the
information contained therein in any manner Lender deems appropriate; and Lender
shall have the right to notify post office authorities to change the address for
delivery of Borrower's mail to an address designated by Lender and to receive,
open and deal with all mail addressed to Borrower.
9.4 Sale or Other Disposition of Collateral by Lender. Any notice
required to be given by Lender of a sale, lease or other disposition or other
intended action by Lender with respect to any of the Collateral which is
deposited in the United States mails, postage prepaid and duly addressed to
Borrower at the address specified in subsection 10.17, at least ten (10)
Business Days prior to such proposed action shall constitute fair and reasonable
notice to Borrower of any such action. The net proceeds realized by Lender upon
any such sale or other disposition, after deduction for the expense of retaking,
holding, preparing for sale, selling or the like and the reasonable attorneys'
fees and legal expenses incurred by Lender in connection therewith, shall be
applied as provided herein toward satisfaction of the Liabilities, including,
without limitation, the
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Liabilities described in subsections 7.5 and 10.2. Lender shall account to
Borrower for any surplus realized upon such sale or other disposition, and
Borrower shall remain liable for any deficiency. The commencement of any action,
legal or equitable, or the rendering of any judgment or decree for any
deficiency shall not affect Lender's security interest in the Collateral until
the Liabilities are fully paid. Borrower agrees that Lender has no obligation to
preserve rights to the Collateral against any other parties. Lender is hereby
granted a license or other right to use, without charge, Borrower's labels,
patents, copyrights, rights of use of any name, trade secrets, trade names,
trademarks, service marks and advertising matter, or any property of a similar
nature, as it pertains to the Collateral, in completing production of,
advertising for sale and selling any Collateral and Borrower's rights under all
licenses and all franchise agreements shall inure to Lender's benefit until the
Liabilities are paid.
9.5 Waiver of Demand. Demand, presentment, protest and notice of
nonpayment are hereby waived by Borrower. Borrower also waives the benefit of
all valuation, appraisal and exemption laws.
9.6 Waiver of Notice. UPON THE OCCURRENCE AND DURING THE CONTINUANCE
OF A DEFAULT, BORROWER (PURSUANT TO AUTHORITY GRANTED BY ITS BOARD OF DIRECTORS)
HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE
BY LENDER OF ITS RIGHTS TO REPOSSESS THE COLLATERAL WITHOUT JUDICIAL PROCESS OR
TO REPLEVY, ATTACH OR LEVY UPON THE COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.
BORROWER ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY COUNSEL OF ITS CHOICE WITH
RESPECT TO THIS TRANSACTION AND THIS AGREEMENT.
10. MISCELLANEOUS.
10.1 Waiver. Lender's failure, at any time or times hereafter, to
require strict performance by Borrower of any provision of this Agreement or any
of the other Financing Agreements 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 a Default under this Agreement or any of the
other Financing Agreements shall not suspend, waive or affect any other Default
under this Agreement or any of the other Financing Agreements, whether the same
is prior or subsequent thereto and whether of the same or of a different kind or
character. None of the undertakings, agreements, warranties, covenants and
representations of Borrower contained in this Agreement or any of the other
Financing Agreements and no Default under this Agreement or any of the other
Financing Agreements shall be deemed to have been suspended or waived by Lender
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unless such suspension or waiver is in writing signed by an officer of Lender,
and directed to Borrower specifying such suspension or waiver. All Defaults
shall continue until the same are waived by Lender in accordance with the
preceding sentence.
10.2 Costs and Attorneys' Fees. If at any time or times hereafter
Lender employs counsel in connection with protecting or perfecting Lender's
security interest in the Collateral or in connection with any matters
contemplated by or arising out of this Agreement or any of the other Financing
Agreements, whether (a) to prepare, negotiate or execute (i) any amendment to or
modification or extension of this Agreement, any other Financing Agreements or
any instrument, document or agreement executed by any Person in connection with
the transactions contemplated by this Agreement, (ii) any new or supplemental
Financing Agreements, or any instrument, document or agreement to be executed by
any Person in connection with the transactions contemplated by this Agreement,
or (iii) any instrument, document or agreement in connection with any sale or
attempted sale of any interest herein to any participant, (b) to commence,
defend, or intervene in any litigation or to file a petition, complaint, answer,
motion or other pleadings, (c) to take any other action in or with respect to
any suit or proceeding (bankruptcy or otherwise), (d) to consult with officers
of Lender or to advise Lender, (e) to protect, collect, lease, sell, take
possession of, release or liquidate any of the Collateral, or (f) to attempt to
enforce or to enforce any security interest in any of the Collateral, or to
enforce any rights of Lender, including, without limitation, Lender's rights to
collect any of the Liabilities, then in any of such events, all of the
reasonable attorneys' fees arising from such services, and any expenses, costs
and charges relating thereto, including, without limitation, all reasonable fees
of all paralegals and other staff employed by such attorneys, together with
interest following demand for payment thereof at the rate applicable to
Liabilities constituting part of the Revolving Loan, shall be part of the
Liabilities, payable on demand and secured by the Collateral.
10.3 Expenditures by Lender. In the event Borrower shall fail to pay
taxes, insurance, assessments, costs or expenses which Borrower is, under any of
the terms hereof, required to pay or caused to be paid, or fails to keep the
Collateral or its other property free from other Liens, except as permitted
herein, Lender may, in its sole discretion, make expenditures for any or all of
such purposes, and the amount so expended, together with interest thereon at the
rate applicable to Liabilities constituting part of the Revolving Loan, shall be
part of the Liabilities, payable on demand and secured by the Collateral.
10.4 Custody and Preservation of Collateral. Lender shall be deemed
to have exercised reasonable care in the custody and preservation of any of the
Collateral in its possession if it takes such action for that purpose as
Borrower shall request in writing,
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but failure by Lender to comply with any such request shall not of itself be
deemed a failure to exercise reasonable care, and no failure by Lender to
preserve or protect any right with respect to such Collateral against prior
parties, or to do any act with respect to the preservation of such Collateral
not so requested by Borrower shall of itself be deemed a failure to exercise
reasonable care in the custody or preservation of such Collateral.
10.5 Reliance by Lender. All covenants, agreements, representations
and warranties made herein by Borrower shall, notwithstanding any investigation
by Lender, be deemed to be material to and to have been relied upon by Lender.
10.6 Parties. Whenever in this Agreement there is reference made to
any of the parties hereto, such reference shall be deemed to include, wherever
applicable, a reference to the successors and assigns of Borrower and the
successors and assigns of Lender, as the case may be, and the provisions of this
Agreement shall be binding upon and shall inure to the benefit of said
successors and assigns. Notwithstanding anything herein to the contrary,
Borrower may not assign or otherwise transfer its rights or obligations under
this Agreement without the prior written consent of Lender. Without in any way
limiting Lender's rights, Lender may sell participations in the Liabilities or
sell or assign its rights hereunder and under the other Financing Agreements, in
whole or in part, on such terms as Lender may determine. In connection with any
such proposed participations or assignments, Lender may disclose information
required to be kept confidential hereunder provided such disclosure shall not be
made unless the party to whom it is disclosed shall have agreed to keep such
information confidential to the same extent as set forth herein. Participants
shall be entitled to the benefits of subsections 10.2, 10.3 and 10.19 with
respect to any participation by Lender of any of the Liabilities.
10.7 CHOICE OF LAW. THIS AGREEMENT SHALL BE DEEMED TO BE EXECUTED
AND HAS BEEN DELIVERED AND ACCEPTED IN CHICAGO, ILLINOIS. ANY DISPUTE BETWEEN
THE PARTIES HERETO ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO
THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, AND
WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN
ACCORDANCE WITH THE INTERNAL LAWS AND NOT THE CONFLICTS OF LAW PROVISIONS OF THE
STATE OF ILLINOIS.
10.8 CONSENT TO JURISDICTION.
(A) EXCLUSIVE JURISDICTION. EXCEPT AS PROVIDED IN SUBSECTION
10.8(B), LENDER AND BORROWER AGREE THAT ALL DISPUTES BETWEEN THEM ARISING OUT
OF, CONNECTED WITH, RELATED TO OR
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INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS, AND WHETHER ARISING IN
CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE OR FEDERAL
COURTS LOCATED IN COOK COUNTY, ILLINOIS, BUT LENDER AND BORROWER ACKNOWLEDGE
THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED
OUTSIDE OF COOK COUNTY, ILLINOIS. BORROWER WAIVES IN ALL DISPUTES ANY OBJECTION
THAT IT MAY HAVE TO THE LOCATION OF THE COURT CONSIDERING THE DISPUTE.
(B) OTHER JURISDICTIONS. BORROWER AGREES THAT LENDER SHALL HAVE THE
RIGHT TO PROCEED AGAINST BORROWER OR ITS PROPERTY ("PROPERTY") IN A COURT IN ANY
LOCATION TO ENABLE LENDER TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR
THE LIABILITIES, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR
OF LENDER. BORROWER AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIM
IN ANY PROCEEDING BROUGHT BY LENDER TO REALIZE ON PROPERTY, COLLATERAL OR ANY
OTHER SECURITY FOR THE LIABILITIES, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER IN FAVOR OF LENDER. BORROWER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE
LOCATION OF THE COURT IN WHICH LENDER HAS COMMENCED A PROCEEDING DESCRIBED IN
THIS SUBSECTION 10.8(B).
10.9 SERVICE OF PROCESS. BORROWER HEREBY WAIVES PERSONAL SERVICE OF
ANY AND ALL PROCESS UPON IT AND IRREVOCABLY APPOINTS CT CORPORATION SYSTEM, 208
SOUTH LASALLE, CHICAGO, ILLINOIS 60604, BORROWER'S AGENT, AS BORROWER'S AGENT
FOR THE PURPOSE OF ACCEPTING SERVICE OF PROCESS WITHIN THE STATE OF ILLINOIS
(THE "SP AGENT"). LENDER AGREES TO PROMPTLY FORWARD BY REGISTERED MAIL (NO
RETURN RECEIPT REQUIRED) A COPY OF ANY PROCESS SO SERVED BY IT UPON THE SP AGENT
TO BORROWER AT ITS ADDRESS SET FORTH IN SUBSECTION 10.17. BORROWER HEREBY
CONSENTS TO SERVICE OF PROCESS AS AFORESAID. BORROWER FURTHER IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS OUT OF THE COURTS REFERRED TO IN SUBSECTION
10.8 IN ANY SUCH ACTION OR PROCEEDING BY MAILING COPIES OF SUCH SERVICE BY
REGISTERED MAIL, POSTAGE PREPAID TO BORROWER AT SAID ADDRESS. NOTHING IN THIS
AGREEMENT SHALL AFFECT THE RIGHT OF LENDER TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW BUT ANY FAILURE TO RECEIVE
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SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS.
10.10 WAIVER OF JURY TRIAL AND BOND.
(A) WAIVER OF JURY TRIAL. BORROWER AND LENDER WAIVE ANY RIGHT TO
HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT,
TORT, OR OTHERWISE, BETWEEN LENDER AND BORROWER ARISING OUT OF, CONNECTED WITH,
RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT
EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO
OR THERETO. BORROWER AND LENDER HEREBY AGREE AND CONSENT THAT ANY SUCH CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY
AND THAT ANY PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT
WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(B) WAIVER OF BOND. BORROWER WAIVES THE POSTING OF ANY BOND
OTHERWISE REQUIRED OF LENDER IN CONNECTION WITH ANY JUDICIAL PROCESS OR
PROCEEDING TO OBTAIN POSSESSION OF, REPLEVY, ATTACH OR LEVY UPON COLLATERAL OR
ANY OTHER SECURITY FOR THE LIABILITIES, TO ENFORCE ANY JUDGMENT OR OTHER COURT
ORDER ENTERED IN FAVOR OF LENDER, OR TO ENFORCE BY SPECIFIC PERFORMANCE,
TEMPORARY RESTRAINING ORDER, PRELIMINARY OR PERMANENT INJUNCTION, THIS
AGREEMENT, OR ANY OTHER AGREEMENT OR DOCUMENT BETWEEN LENDER AND BORROWER.
10.11 ADVICE OF COUNSEL. BORROWER ACKNOWLEDGES AND REPRESENTS TO
LENDER THAT IT HAS DISCUSSED THIS AGREEMENT WITH ITS LAWYERS.
10.12 SEVERABILITY. WHEREVER POSSIBLE, EACH PROVISION OF THIS
AGREEMENT SHALL BE INTERPRETED IN SUCH MANNER AS TO BE EFFECTIVE AND VALID UNDER
APPLICABLE LAW, BUT IF ANY PROVISION OF THIS AGREEMENT SHALL BE PROHIBITED BY OR
INVALID UNDER APPLICABLE LAW, SUCH PROVISION SHALL BE INEFFECTIVE ONLY TO THE
EXTENT OF SUCH PROHIBITION OR INVALIDITY, WITHOUT INVALIDATING
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THE REMAINDER OF SUCH PROVISION OR THE REMAINING PROVISIONS OF THIS AGREEMENT.
10.13 Application of Payments. Notwithstanding any contrary
provision contained in this Agreement or in any of the other Financing
Agreements, Borrower irrevocably waives the right to direct the application of
any and all payments at any time or times hereafter received by Lender from
Borrower or with respect to any of the Collateral, and Borrower does hereby
irrevocably agree that Lender shall have the continuing exclusive right to apply
and reapply any and all payments received at any time or times hereafter,
whether with respect to the Collateral or otherwise, against the Liabilities in
such manner as Lender may deem advisable, notwithstanding any entry by Lender
upon any of its books and records.
10.14 Marshalling; Payments Set Aside. Lender shall be under no
obligation to marshall any assets in favor of Borrower or any other party or
against or in payment of any or all of the Liabilities. To the extent that
Borrower makes a payment or payments to Lender or Lender enforces its security
interests or exercises its rights of set off, and such payment or payments or
the proceeds of such enforcement or set off or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then, to
the extent of such recovery, the obligation or part thereof originally intended
to be satisfied shall be revived and continued in full force and effect as if
such payment had not been made or such enforcement or set off had not occurred.
10.15 Titles. The section and subsection titles contained in this
Agreement shall be without substantive meaning or content of any kind whatsoever
and are not a part of the agreement between the parties.
10.16 Continuing Effect. This Agreement, Lender's security interests
in the Collateral, and all of the other Financing Agreements shall continue in
full force and effect so long as any Liabilities or any GLC Liabilities
guarantied by Borrower shall be owed to Lender, and (even if there shall be no
Liabilities or guarantied GLC Liabilities outstanding) so long as this Agreement
has not been terminated as provided in subsection 2.8 and the Guaranty has not
been terminated as provided therein.
10.17 Notices. Except as otherwise expressly provided herein, any
notice required or desired to be served, given or delivered hereunder shall be
in writing, and shall be deemed to have been validly served, given or delivered
(i) three (3) days after deposit in the United States mails, with proper postage
prepaid, (ii) when sent after receipt
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of confirmation or answer back if sent by telecopy, or other similar facsimile
transmission, (iii) one (1) Business Day after deposited with a reputable
overnight courier with all charges prepaid, or (iv) when delivered, if
hand-delivered by messenger, all of which shall be properly addressed to the
party to be notified and sent to the address or number indicated as follows:
(i) If to Lender at:
American National Bank and
Trust Company of Chicago
33 North LaSalle Street
Chicago, Illinois 60690
Attention: Dennis E. Harrison
Telecopy: 312/661-6929
Confirmation: 312/661-5707
(ii) If to Borrower at:
Hauppauge Record Manufacturing, Ltd.
15 Gilpin Avenue
Hauppauge, New York 11788
Attention: George Fishman
Telecopy: 516/234-0346
Confirmation: 516/234-0200
with, in the case of any notice provided to Borrower pursuant to
subsection 9.1, a copy of such notice to:
Warshaw Burstein Cohen Schlesinger & Kuh, LLP
555 Fifth Avenue
New York, New York 10017
Attention: Frederick R. Cummings, Jr., Esq.
Telecopy: 212/972-9150
Confirmation: 212/984-7807
or to such other address or number as each party designates to the other in the
manner herein prescribed.
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10.18 Equitable Relief. Borrower recognizes that, in the event
Borrower fails to perform, observe or discharge any of its obligations or
liabilities under this Agreement, any remedy at law may prove to be inadequate
relief to Lender; therefore, Borrower agrees that Lender, if Lender so requests,
shall be entitled to temporary and permanent injunctive relief in any such case
without the necessity of proving actual damages and the granting of any such
relief shall not preclude Lender from pursuing any other relief or remedies for
such breach.
10.19 Indemnification. Borrower agrees to defend, protect, indemnify
and hold harmless Lender and each of its officers, directors, employees,
attorneys, consultants and agents (collectively, the "Indemnitees") from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses and disbursements of any kind
or nature whatsoever (including, without limitation, the reasonable fees and
disbursements of counsel for and consultants of such Indemnitees in connection
with any investigative, administrative or judicial proceeding, whether or not
such Indemnitees shall be designated a party thereto), which may be imposed on,
incurred by, or asserted against such Indemnitees (whether direct, indirect, or
consequential and whether based on any federal or state laws or other statutory
regulations, including, without limitation, securities, environmental and
commercial laws and regulations, under common law or at equitable cause or on
contract or otherwise) in any manner relating to or arising out of this
Agreement or the other Financing Agreements, or any act, event or transaction
related or attendant thereto, the agreements of Lender contained herein, the
making of any Loans or any other advances, the issuance of any Letter of Credit,
the management of such Loans, advances or Letters of Credit or the Collateral
(including any liability under federal, state or local environmental laws or
regulations) or the use or intended use of the proceeds of such Loans, advances
or Letters of Credit (collectively, the "Indemnified Matters"); provided that
Borrower shall have no obligation to any Indemnitee hereunder with respect to
Indemnified Matters caused by or resulting from the willful misconduct or gross
negligence of such Indemnitee. To the extent that the undertaking to indemnify,
pay and hold harmless set forth in this subsection 10.19 may be unenforceable
because it is violative of any law or public policy, Borrower shall contribute
the maximum portion and satisfy under applicable law to the payment and
satisfaction of all Indemnified Matters incurred by the Indemnitees. Borrower's
obligations hereunder shall survive any termination of this Agreement and the
other Financing Agreements and the payment in full of the Liabilities, and are
in addition to, and not in substitution of, any of Borrower's other obligations
set forth in this Agreement or the other Financing Agreements.
10.20 Effectiveness. This Agreement shall become effective at the
Effective Time.
-93-
<PAGE>
10.21 Counterparts. This Agreement may be executed and accepted in
any number of counterparts, each of which shall be an original with the same
effect as if the signatures were on the same instrument. The delivery of an
executed counterpart of a signature page to this Agreement by telecopier shall
be effective as delivery of a manually executed counterpart of this Agreement.
10.22 Amendment and Restatement. The Hauppauge LSA and the AFL LSA
are amended and restated in their entirety in the form hereof as of the
effectiveness of this Agreement; provided, however, any representations and
warranties made by Borrower or AFL to Lender shall survive the execution and
delivery hereof and any existing "Defaults" or "Events of Default" (as such
terms are defined in either the Hauppauge LSA or the AFL LSA) not expressly
waived by Lender pursuant to the terms of the Hauppauge LSA and the AFL LSA
shall be Defaults hereunder.
-94-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as of the
day and year first above written.
HAUPPAUGE RECORD
MANUFACTURING LTD.
By: /s/ Charles Kavanagh
-------------------------
Title: Vice President-Finance
Accepted and agreed to in
Chicago, Illinois as of this
30th day of October, 1996
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/ Catherine Saccany
-------------------------
Title: Vice President
-95-
Exhibit (10)(a)(ii)
AMENDED AND RESTATED
REVOLVING NOTE
$22,000,000 Chicago, Illinois
October 30, 1996
FOR VALUE RECEIVED, the undersigned, HAUPPAUGE RECORD MANUFACTURING LTD.,
a New York corporation ("Borrower"), hereby unconditionally promises to pay to
the order of AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO ("Lender") at
the office of Lender at 33 North LaSalle Street, Chicago, Illinois 60690 or at
such other place as the holder of this Note may from time to time designate in
writing, in lawful money of the United States of America and in immediately
available funds, the principal sum of TWENTY-TWO MILLION AND 00/100 DOLLARS
($22,000,000), or, if less, the aggregate unpaid principal amount of the
Revolving Loan (as defined in the Loan Agreement (as defined below)). This Note
is referred to in and was executed and delivered pursuant that certain Amended
and Restated Loan and Security Agreement dated as of October 30, 1996 between
Borrower and Lender (as amended, modified or supplemented from time to time, the
"Loan Agreement"), to which reference is hereby made for a statement of the
terms and conditions under which the loans evidenced hereby were made and are to
be repaid. All terms which are capitalized and used herein (which are not
otherwise specifically defined herein) and which are defined in the Loan
Agreement shall be used in this Note as defined in the Loan Agreement.
Borrower further promises to pay interest on the unpaid principal amount
hereof from time to time outstanding at a fluctuating rate per annum equal to
the Base Rate as from time to time in effect plus one and one-quarter of one
percent (1.25%), provided that following the occurrence and during the
continuance of a Default, Borrower shall pay interest from the date of such
Default (or, in the event of a Default other than as described in subsections
9.1(A), (H), or (I) of the Loan Agreement, from the date of notice to such
effect from Lender) at the rate set forth above plus an additional three percent
(3.00%) per annum. Interest shall be payable on the dates provided for in the
Loan
<PAGE>
Agreement, and shall be calculated on the basis of a 360-day year for the
actual number of days elapsed.
If any payment hereunder becomes due and payable on a day other than a
Business Day, the due date thereof shall be extended to the next succeeding
Business Day, and interest shall be payable thereon during such extension at the
applicable rate specified above. In no contingency or event whatsoever shall
interest charged hereunder, however such interest may be characterized or
computed, exceed the highest rate permissible under any law which a court of
competent jurisdiction shall, in a final determination, deem applicable hereto.
In the event that such a court determines that Lender has received interest
hereunder in excess of the highest rate applicable hereto, Lender shall promptly
refund such excess interest to Borrower.
Payments received by Lender on this Note shall be applied as provided in
the Loan Agreement and may be applied to the payment of interest which is due
and payable before application to the outstanding principal balance hereof,
subject to Lender's rights to otherwise apply such payments as provided in the
Loan Agreement.
Upon and after the occurrence of a Default or as otherwise provided in the
Loan Agreement, this Note may, at the option of Lender, and without prior
demand, notice or legal process of any kind (except as otherwise expressly
required in the Loan Agreement), be declared, and thereupon immediately shall
become, due and payable. This Note shall also become immediately due and payable
upon the termination of the Loan Agreement.
Borrower, and all endorsers and other persons obligated hereon, hereby
waive presentment, demand, protest, notice of demand, notice of protest and
notice of nonpayment and agree to pay all costs of collection, including
reasonable attorneys' fees and expenses.
-2-
<PAGE>
This Note has been delivered at and shall be deemed to have been made at
Chicago, Illinois and shall be interpreted and the rights and liabilities of the
parties hereto determined in accordance with the internal laws (as opposed to
conflicts of law provisions) of the State of Illinois. Whenever possible each
provision of this Note shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Note shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Note.
Whenever in this Note reference is made to Lender or Borrower, such
reference shall be deemed to include, as applicable, a reference to their
respective successors and assigns. The provisions of this Note shall be binding
upon and shall inure to the benefit of said successors and assigns. Borrower's
successors and assigns shall include, without limitation, a receiver, trustee or
debtor in possession of or for Borrower.
The unpaid balance of the indebtedness hitherto evidenced by that certain
Amended and Restated Revolving Note dated January 10, 1995 made by Borrower to
the order of Lender in the principal amount of $14,000,000 and that certain
Revolving Note dated January 24, 1995 made by AFL to the order of Lender in the
principal amount of $20,000,000 which was assumed by Borrower as a result of the
Merger (collectively, the "Original Notes"), and evidencing part of the
obligations under the Hauppauge LSA and the AFL LSA, remains outstanding as of
the date hereof and shall continue to be secured pursuant to the terms of the
Loan Agreement and the other agreements executed in connection therewith or in
connection with the Hauppauge LSA or the AFL LSA. To the extent that the
principal balance of this Note includes the indebtedness hitherto evidenced by
the Original Notes, this
-3-
<PAGE>
Note (i) merely re-evidences the indebtedness hitherto evidenced by the Original
Notes, (ii) is given in substitution for, and not as payment of, the Original
Notes and (iii) is in no way intended to constitute a novation of any of the
Original Notes.
HAUPPAUGE RECORD
MANUFACTURING LTD.
By: /s/ Charles Kavanagh
-------------------------------
Name: Charles Kavanagh
-----------------------------
Title: Vice President-Finance
----------------------------
-4-
Exhibit (10)(a)(iii)
AMENDED AND RESTATED
TERM NOTE
$25,410,168.93 Chicago, Illinois
October 30, 1996
FOR VALUE RECEIVED, the undersigned, HAUPPAUGE RECORD MANUFACTURING LTD.,
a New York corporation ("Borrower"), hereby unconditionally promises to pay to
the order of AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO ("Lender") at
the office of Lender at 33 North LaSalle Street, Chicago, Illinois 60690 or at
such other place as the holder of this Note may from time to time designate in
writing, in lawful money of the United States of America and in immediately
available funds, the principal sum of TWENTY-FIVE MILLION FOUR HUNDRED TEN
THOUSAND ONE HUNDRED SIXTY-EIGHT AND 93/100 DOLLARS ($25,410,168.93). This Note
is referred to in and was executed and delivered pursuant to that certain
Amended and Restated Loan and Security Agreement dated as of October 30, 1996
between Borrower and Lender (as amended, modified or supplemented from time to
time, the "Loan Agreement"), to which reference is hereby made for a statement
of the terms and conditions under which the loans evidenced hereby were made and
are to be repaid. All terms which are capitalized and used herein (which are not
otherwise specifically defined herein) and which are defined in the Loan
Agreement shall be used in this Note as defined in the Loan Agreement.
Borrower further promises to pay interest on the unpaid principal amount
hereof from time to time outstanding at a fluctuating rate per annum equal to
the Base Rate as from time to time in effect plus one and one-half of one
percent (1.50%), provided that following the occurrence and during the
continuance of a Default, Borrower shall pay interest from the date of such
Default (or, in the event of a Default other than as described in subsections
9.1(A), (H), or (I)
<PAGE>
of the Loan Agreement, from the date of notice to such effect from Lender) at
the rate set forth above plus an additional three percent (3.00%) per annum.
Interest shall be payable on the dates provided for in the Loan Agreement, and
shall be calculated on the basis of a 360-day year for the actual number of days
elapsed.
If any payment hereunder becomes due and payable on a day other than a
Business Day, the due date thereof shall be extended to the next succeeding
Business Day, and interest shall be payable thereon during such extension at the
rate specified above. In no contingency or event whatsoever shall interest
charged hereunder, however such interest may be characterized or computed,
exceed the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. In the
event that such a court determines that Lender has received interest hereunder
in excess of the highest rate applicable hereto, Lender shall promptly refund
such excess interest to Borrower.
The principal indebtedness evidenced hereby shall be payable in
consecutive monthly installments commencing on October 31, 1996 and continuing
on the last day of each calendar month thereafter until this Note is paid in
full, each such installment to be in the amount set forth opposite the date
scheduled for payment on Schedule 1 attached hereto.
Under certain circumstances described in the Loan Agreement, Borrower is
required to make certain prepayments on this Note. The principal amount hereof
may not be prepaid at any time in whole or in part, except as provided in the
Loan Agreement.
Payments received by Lender on this Note shall be applied as provided in
the Loan Agreement and may be applied to the payment of interest which is due
and payable before application to the outstanding principal balance hereof,
-2-
<PAGE>
subject to Lender's rights to otherwise apply such payments as provided in the
Loan Agreement.
Upon and after the occurrence of a Default or as otherwise provided in the
Loan Agreement, this Note may, at the option of Lender, and without prior
demand, notice or legal process of any kind (except as otherwise expressly
required in the Loan Agreement), be declared, and thereupon immediately shall
become, due and payable. This Note shall also become immediately due and payable
upon the termination of the Loan Agreement.
Borrower, and all endorsers and other persons obligated hereon, hereby
waive presentment, demand, protest, notice of demand, notice of protest and
notice of nonpayment and agree to pay all costs of collection, including
reasonable attorneys' fees and expenses.
This Note has been delivered at and shall be deemed to have been made at
Chicago, Illinois and shall be interpreted and the rights and liabilities of the
parties hereto determined in accordance with the internal laws (as opposed to
conflicts of law provisions) of the State of Illinois. Whenever possible each
provision of this Note shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Note shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Note.
Whenever in this Note reference is made to Lender or Borrower, such
reference shall be deemed to include, as applicable, a reference to their
respective successors and assigns. The provisions of this Note shall be binding
upon and shall inure to the benefit of said successors and assigns. Borrower's
successors and assigns shall include, without limitation, a receiver, trustee or
debtor in possession of or for Borrower.
-3-
<PAGE>
The unpaid balance of the indebtedness hitherto evidenced by that certain
Amended and Restated Term Note dated January 10, 1995 made by Borrower to the
order of Lender in the principal amount of $13,277,571, that certain Additional
CAPEX Note dated January 10, 1995 made by Borrower to the order of Lender in the
principal amount of $2,000,000, that certain New CAPEX Note dated August 31,
1995 made by Borrower to the order of Lender in the principal amount of
$5,600,000, that certain Term Note dated January 24, 1995 made by AFL to the
order of Lender in the principal amount of $14,625,000 which was assumed by
Borrower as a result of the Merger and that certain CAPEX Note dated January 24,
1995 made by AFL to the order of Lender in the principal amount of $3,000,000
which was assumed by Borrower as a result of the Merger (collectively, the
"Original Notes"), and evidencing part of the obligations under the Hauppauge
LSA and the AFL LSA, remains outstanding as of the date hereof and shall
continue to be secured pursuant to the terms of the Loan Agreement and the other
agreements executed in connection therewith or in connection with the Hauppauge
LSA or the AFL LSA. The principal balance of this Note evidences indebtedness
hitherto evidenced by the Original Notes and this Note (i) merely re-evidences
the indebtedness hitherto evidenced by the Original Notes, (ii) is given in
substitution for, and not as payment of, the Original Notes and (iii) is in no
way intended to constitute a novation of the Original Notes.
HAUPPAUGE RECORD
MANUFACTURING LTD.
By: /s/ Charles Kavanagh
-------------------------------
Name: Charles Kavanagh
-----------------------------
Title: Vice President-Finance
----------------------------
-4-
<PAGE>
SCHEDULE 1
TO
AMENDED AND RESTATED
TERM NOTE
- - --------------------------------------------------------------------------------
Payment Date Amount
- - --------------------------------------------------------------------------------
10/31/96 $556,462.01
- - --------------------------------------------------------------------------------
11/30/96 $548,053.68
- - --------------------------------------------------------------------------------
12/31/96 $548,053.68
- - --------------------------------------------------------------------------------
01/31/97 $548,053.68
- - --------------------------------------------------------------------------------
02/28/97 $548,053.68
- - --------------------------------------------------------------------------------
03/31/97 $548,053.68
- - --------------------------------------------------------------------------------
04/30/97 $548,053.68
- - --------------------------------------------------------------------------------
05/31/97 $548,053.68
- - --------------------------------------------------------------------------------
06/30/97 $548,053.68
- - --------------------------------------------------------------------------------
07/31/97 $548,053.68
- - --------------------------------------------------------------------------------
08/31/97 $548,053.68
- - --------------------------------------------------------------------------------
09/30/97 $548,053.68
- - --------------------------------------------------------------------------------
10/31/97 $548,053.68
- - --------------------------------------------------------------------------------
11/30/97 $548,053.68
- - --------------------------------------------------------------------------------
12/31/97 $548,053.68
- - --------------------------------------------------------------------------------
01/31/98 $548,053.68
- - --------------------------------------------------------------------------------
02/28/98 $548,053.68
- - --------------------------------------------------------------------------------
03/31/98 $548,053.68
- - --------------------------------------------------------------------------------
04/30/98 $548,053.68
- - --------------------------------------------------------------------------------
05/31/98 $548,053.68
- - --------------------------------------------------------------------------------
06/30/98 $548,053.68
- - --------------------------------------------------------------------------------
<PAGE>
- - --------------------------------------------------------------------------------
07/31/98 $548,053.68
- - --------------------------------------------------------------------------------
08/31/98 $548,053.68
- - --------------------------------------------------------------------------------
09/30/98 $548,053.68
- - --------------------------------------------------------------------------------
10/31/98 $548,053.68
- - --------------------------------------------------------------------------------
11/30/98 $548,053.68
- - --------------------------------------------------------------------------------
12/31/98 $548,053.68
- - --------------------------------------------------------------------------------
01/31/99 $548,053.68
- - --------------------------------------------------------------------------------
02/28/99 $548,053.68
- - --------------------------------------------------------------------------------
03/31/99 $548,053.68
- - --------------------------------------------------------------------------------
04/30/99 $548,053.68
- - --------------------------------------------------------------------------------
05/31/99 $548,053.68
- - --------------------------------------------------------------------------------
06/30/99 $548,053.68
- - --------------------------------------------------------------------------------
07/31/99 $548,053.68
- - --------------------------------------------------------------------------------
08/31/99 $548,053.68
- - --------------------------------------------------------------------------------
09/30/99 $548,053.68
- - --------------------------------------------------------------------------------
10/31/99 $548,053.68
- - --------------------------------------------------------------------------------
11/30/99 $548,053.68
- - --------------------------------------------------------------------------------
12/31/99 $548,013.68
- - --------------------------------------------------------------------------------
01/31/00 $372,290.68
- - --------------------------------------------------------------------------------
02/28/00 $294,719.68
- - --------------------------------------------------------------------------------
03/31/00 $294,719.68
- - --------------------------------------------------------------------------------
04/30/00 $294,719.68
- - --------------------------------------------------------------------------------
05/31/00 $281,711.57
- - --------------------------------------------------------------------------------
06/30/00 $277,141.35
- - --------------------------------------------------------------------------------
07/31/00 $277,141.15
- - --------------------------------------------------------------------------------
-2-
<PAGE>
- - --------------------------------------------------------------------------------
08/31/00 $263,274.48
- - --------------------------------------------------------------------------------
09/30/00 $227,608.01
- - --------------------------------------------------------------------------------
10/31/00 $227,608.01
- - --------------------------------------------------------------------------------
11/30/00 $1,216,772.79
- - --------------------------------------------------------------------------------
-3-
Exhibit (10(a)(iv)
ADDITIONAL TERM NOTE
$1,500,000 Chicago, Illinois
October 30, 1996
FOR VALUE RECEIVED, the undersigned, HAUPPAUGE RECORD MANUFACTURING LTD.,
a New York corporation ("Borrower"), hereby unconditionally promises to pay to
the order of AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO ("Lender") at
the office of Lender at 33 North LaSalle Street, Chicago, Illinois 60690 or at
such other place as the holder of this Note may from time to time designate in
writing, in lawful money of the United States of America and in immediately
available funds, the principal sum of ONE MILLION FIVE HUNDRED THOUSAND DOLLARS
($1,500,000). This Note is referred to in and was executed and delivered
pursuant to that certain Amended and Restated Loan and Security Agreement dated
as of October 30, 1996 between Borrower and Lender (as amended, modified or
supplemented from time to time, the "Loan Agreement"), to which reference is
hereby made for a statement of the terms and conditions under which the loans
evidenced hereby were made and are to be repaid. All terms which are capitalized
and used herein (which are not otherwise specifically defined herein) and which
are defined in the Loan Agreement shall be used in this Note as defined in the
Loan Agreement.
Borrower further promises to pay interest on the unpaid principal amount
hereof from time to time outstanding at a fluctuating rate per annum equal to
the Base Rate as from time to time in effect plus one and one-half of one
percent (1.50%), provided that following the occurrence and during the
continuance of a Default, Borrower shall pay interest from the date of such
Default (or, in the event of a Default other than as described in subsections
9.1(A), (H), or (I) of the Loan Agreement, from the date of notice to such
effect from Lender) at the rate set forth above plus an additional three percent
(3.00%) per annum. Interest shall be payable on the dates provided for in the
Loan Agreement, and shall be calculated on the basis of a 360-day year for the
actual number of days elapsed.
-1-
<PAGE>
If any payment hereunder becomes due and payable on a day other than a
Business Day, the due date thereof shall be extended to the next succeeding
Business Day, and interest shall be payable thereon during such extension at the
rate specified above. In no contingency or event whatsoever shall interest
charged hereunder, however such interest may be characterized or computed,
exceed the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. In the
event that such a court determines that Lender has received interest hereunder
in excess of the highest rate applicable hereto, Lender shall promptly refund
such excess interest to Borrower.
The principal indebtedness evidenced hereby shall be payable in
twenty-five (25) consecutive monthly installments commencing on December 31,
1996 and continuing on the last day of each calendar month thereafter through
and including December 31, 1998, each in an amount equal to $60,000.
Under certain circumstances described in the Loan Agreement, Borrower is
required to make certain prepayments on this Note. The principal amount hereof
may not be prepaid at any time in whole or in part, except as provided in the
Loan Agreement.
Payments received by Lender on this Note shall be applied as provided in
the Loan Agreement and may be applied to the payment of interest which is due
and payable before application to the outstanding principal balance hereof,
subject to Lender's rights to otherwise apply such payments as provided in the
Loan Agreement.
Upon and after the occurrence of a Default or as otherwise provided in the
Loan Agreement, this Note may, at the option of Lender, and without prior
demand, notice or legal process of any kind (except as otherwise expressly
required in the Loan Agreement), be declared, and thereupon immediately shall
become, due and payable. This Note shall also become immediately due and payable
upon the termination of the Loan Agreement.
-2-
<PAGE>
Borrower, and all endorsers and other persons obligated hereon, hereby
waive presentment, demand, protest, notice of demand, notice of protest and
notice of nonpayment and agree to pay all costs of collection, including
reasonable attorneys' fees and expenses.
This Note has been delivered at and shall be deemed to have been made at
Chicago, Illinois and shall be interpreted and the rights and liabilities of the
parties hereto determined in accordance with the internal laws (as opposed to
conflicts of law provisions) of the State of Illinois. Whenever possible each
provision of this Note shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Note shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Note.
Whenever in this Note reference is made to Lender or Borrower, such
reference shall be deemed to include, as applicable, a reference to their
respective successors and assigns. The provisions of this Note shall be binding
upon and shall inure to the benefit of said successors and assigns. Borrower's
successors and assigns shall include, without limitation, a receiver, trustee or
debtor in possession of or for Borrower.
HAUPPAUGE RECORD
MANUFACTURING LTD.
By: /s/ Charles Kavanagh
-------------------------------
Name: Charles Kavanagh
-----------------------------
Title: Vice President-Finance
----------------------------
-3-
Exhibit (10)(a)(v)
AMENDED AND RESTATED
GUARANTY AGREEMENT
THIS AMENDED AND RESTATED GUARANTY AGREEMENT dated as of October 30 , 1996
("Guaranty") and made by HRM Holdings Corp., a Delaware corporation, with an
office located at 15 Gilpin Avenue, Hauppauge, New York 11788 (the "Guarantor"),
in favor of American National Bank and Trust Company of Chicago, with an office
at 33 North LaSalle Street, Chicago, Illinois 60690 (together with its
successors and assigns, the "Lender").
W I T N E S S E T H:
A. The Guarantor entered into that certain Amended and Restated Guaranty
Agreement dated as of September 20, 1993 in favor of the Lender (as heretofore
amended, the "Original Guaranty").
B. Hauppauge Record Manufacturing Ltd., a New York corporation (the
"Borrower"), is entering into that certain Amended and Restated Loan and
Security Agreement dated as of October 30, 1996 with the Lender (such agreement,
as it may hereafter be amended or otherwise modified from time to time, being
hereinafter referred to as the "Loan Agreement"; capitalized terms used herein
but not otherwise defined herein are used herein as defined in the Loan
Agreement).
C. The Guarantor owns all of the common stock of the Borrower and, as a
result of the intercorporate and other relationships between the Guarantor and
the Borrower, the Guarantor will benefit from the advances and financial
accommodations provided by the Lender and the Loan Agreement, including without
limitation by any distributions permitted to be made, subject to the terms and
conditions of the Loan Agreement, by the Borrower with respect to its shares of
common stock.
D. As a condition precedent to the effectiveness of the Loan Agreement and
any extensions of credit pursuant thereto, the Lender has required, among other
things, that the Guarantor amend and restate the Original Guaranty in the form
of this Guaranty.
NOW, THEREFORE, in consideration of the above premises and any loans and
other financial accommodations heretofore, now or hereafter made
<PAGE>
to or for the benefit of Borrower by the Lender, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Guarantor hereby agrees that, effective as of the Effective Time, the Original
Guaranty is amended and restated as follows:
1. Guaranty.
A. The Guarantor hereby absolutely, unconditionally and irrevocably
guarantees the full and prompt payment when due, whether at maturity or earlier,
by reason of acceleration, mandatory prepayment or otherwise, and at all times
thereafter, and the due and punctual performance, of all of the Liabilities
(including without limitation any and all "Liabilities" as such term was defined
in the Hauppauge LSA or the AFL LSA), including, without limitation, all sums
which may become due under the terms and provisions of the Notes or the Loan
Agreement, whether for principal, interest (including, without limitation,
interest accruing before, during or after any bankruptcy, insolvency,
reorganization, arrangement, readjustment of debt, liquidation or dissolution
proceeding, and, if interest ceases to accrue by operation of law by reason of
any such proceeding, interest which otherwise would have accrued in the absence
of such proceeding), premium, fees, expenses or otherwise, whether or not from
time to time reduced or extinguished or hereafter increased or incurred, whether
or not recovery may be or hereafter may become barred by any statute of
limitations, whether enforceable or unenforceable as against the Borrower, now
or hereafter existing, or due or to become due (all Liabilities together with
the Costs (as hereinafter defined), collectively, the "Guaranteed Obligations").
This is a continuing guaranty of payment and not of collection.
B. The Guarantor further agrees to pay, upon demand, all costs and expenses
("Costs"), including, without limitation, all court costs and reasonable
attorneys' and paralegals' fees and expenses, paid or incurred by the Lender (i)
in endeavoring to collect all or any part of the Guaranteed Obligations from, or
in pursuing any action against, the Borrower, the Guarantor or any other
guarantor of all or any part of the Guaranteed Obligations or (ii) in
endeavoring to realize upon (whether by judicial, non-judicial or other
proceedings) any collateral securing the Guarantor's liabilities under this
Guaranty.
C. The Guarantor further agrees that, if any payment made by the Borrower
or any other Person is applied to the Guaranteed Obligations and is at any time
annulled, set aside, rescinded, invalidated, declared to be fraudulent or
preferential or otherwise required to be refunded or repaid, or the proceeds of
Collateral or any other security are required to be returned by the Lender to
the Borrower, its estate, trustee, receiver or any other Person, including,
without
-2-
<PAGE>
limitation, the Guarantor, under any bankruptcy law, state or federal law,
common law or equitable cause, then, to the extent of such payment or repayment,
the Guarantor's liability hereunder (and any lien, security interest or other
collateral securing such liability) shall be and remain in full force and
effect, as fully as if such payment had never been made, or, if prior thereto
this Guaranty shall have been cancelled or surrendered (and if any lien,
security interest or other collateral securing Guarantor's liability hereunder
shall have been released or terminated by virtue of such cancellation or
surrender), this Guaranty (and such lien, security interest or other collateral)
shall be reinstated in full force and effect, and such prior cancellation or
surrender shall not diminish, release, discharge, impair or otherwise affect the
obligations of the Guarantor in respect of the amount of such payment (or any
lien, security interest or other collateral securing such obligation).
2. Representations and Warranties. The Guarantor represents and warrants
that as of the Effective Time, and continuing so long as any Guaranteed
Obligations remain outstanding, and (even if there shall be no Guaranteed
Obligations outstanding) so long as this Guaranty remains in effect:
A. Corporate Existence. Each of Allied, HMG and the Guarantor is a
corporation duly organized and in good standing under the laws of the state of
its incorporation as set forth opposite its name on Exhibit A attached hereto
and is duly qualified as a foreign corporation and in good standing in the
states set forth on Exhibit A which are all of the states where the nature and
extent of the business transacted by it or the ownership of its assets makes
such qualification necessary, except for those jurisdictions in which the
failure so to qualify would not, in the aggregate, have a material adverse
effect on such Person's financial condition, results of operations or business
or the ability of such Person to perform its obligations under any of the
Financing Agreements to which it is a party.
B. Corporate Authority. As to Allied, HMG and the Guarantor, the execution
and delivery by such Person of each Financing Agreement to which it is a party
and the performance of such Person's obligations hereunder and thereunder: (i)
are within the corporate powers of such Person; (ii) are duly authorized by the
Board of Directors of such Person and, if necessary, the stockholders of such
Person; (iii) are not in contravention of the terms of such Person's Certificate
or Articles of Incorporation, or By-Laws, or of any indenture, or other
agreement or undertaking to which such Person is a party or by which such Person
or any of its property is bound or any judgment, decree or order applicable to
such Person; (iv) do not require any governmental consent, registration or
approval; (v) do not contravene any contractual or governmental restriction
binding upon such Person; and (vi) will not, except for
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security interests in favor of Lender under the Financing Agreements, result in
the imposition of any Lien upon any property of such Person under any existing
indenture, mortgage, deed of trust, loan or credit agreement or other material
agreement or instrument to which such Person is a party or by which it or any of
its property may be bound or affected.
C. Binding Effect. Each of this Guaranty and all of the other Financing
Agreements have been duly executed and delivered by each of Borrower, the
Guarantor, HMG and Allied that is a party thereto and constitute the legal,
valid and binding obligations of each such other Person that is a party thereto,
enforceable against such Person in accordance with their respective terms.
D. Financial Data. The Guarantor has furnished to the Lender the financial
statements required to be delivered pursuant to the Original Guaranty prior to
the Effective Time (the "Financials"). The Financials are in accordance with the
books and records of the Guarantor and the other Persons covered thereby and
fairly present the financial condition of the Guarantor and the other Persons
covered thereby at the dates thereof and the results of operations of the
Guarantor and the other Persons covered thereby and for the periods indicated.
The Financials have been prepared in accordance with GAAP. The historical
financial statements to be furnished to the Lender in accordance with paragraph
3.A hereof will be in accordance with the books and records of the Guarantor and
the other Persons covered thereby and aries, HMG and its Subsidiaries and Allied
and its Subsidiaries, as the case may be, at the dates thereof and the results
of operations for the periods indicated (subject, in the case of unaudited
financial statements, to normal year-end adjustments), and such financial
statements will be prepared in conformity with generally accepted accounting
principles consistently applied throughout the periods involved. Since June 30,
1996, there have been no changes in the condition, financial or otherwise, of
the Guarantor or the other Persons as shown on the Financials, except (a) as
contemplated herein or in the Loan Agreement, and (b) for changes in the
ordinary course of business (none of which individually or in the aggregate has
been materially adverse). All information, reports and other papers and data
furnished to the Lender are or will be, at the time the same are so furnished to
the Lender, accurate and correct in all material respects and complete insofar
as completeness may be necessary to give the Lender a true and accurate
knowledge of the subject matter thereof.
E. Tax Liabilities. As of the Effective Time, each of Allied, HMG, the
Guarantor and Borrower has filed all federal, state and local tax reports and
returns required by any law or regulation to be filed by them except for
extensions duly obtained, and has either duly paid all taxes, duties and charges
indicated due on the
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basis of such returns and reports, or made adequate provision for the payment
thereof, and the assessment of any material amount of additional taxes in excess
of those paid and reported is not reasonably expected. As of the Effective Date,
except as set forth on Schedule 6.9 to the Loan Agreement hereto, no federal
income tax returns of Allied, HMG, Guarantor or Borrower (or in the case of
Borrower's predecessor, AFL, no federal income tax returns of AFL for periods
after March 31, 1980) have been audited by the Internal Revenue Service. As of
the Effective Time, the reserves for taxes reflected on the balance sheets
included in the Financials are, and the reserves for taxes reflected on the
balance sheets submitted to the Lender in accordance with the terms of paragraph
3.A hereof will be as of the dof all liabilities for all federal, state and
local taxes (whether or not disputed) of all Persons covered thereby accrued
through the date of such balance sheets. As of the Effective Time, there are no
material unresolved questions or claims concerning any tax liability of Allied,
HMG or the Guarantor.
F. Loans. Except as disclosed on Exhibit B attached hereto, as of the
Effective Time there are no loans or other indebtedness for borrowed money of
the Guarantor, HMG or Allied or any guaranties made by the Guarantor, HMG or
Allied, except in favor of the Lender.
G. Subsidiaries. As of the Effective Time, the Guarantor has no
Subsidiaries except for the Borrower; HMG has no Subsidiaries other than the
Guarantor and the Borrower; and Allied has no Subsidiaries other than AFL, HMG,
the Guarantor and the Borrower.
H. Litigation and Proceedings. As of the Effective Time, there are no
judgments outstanding against Allied, HMG or the Guarantor nor is there now
pending or, to the best of the Guarantor's knowledge after diligent inquiry,
threatened, any litigation, investigation, contested claim, arbitration or
governmental proceeding by or against Allied, HMG or the Guarantor, except
judgments and pending or threatened litigation, investigations, contested claims
and governmental proceedings which are not, in the aggregate, material to
Allied's, HMG's, the Guarantor's or Borrower's financial condition, results of
operations or business.
I. Other Agreements. As of the Effective Time, none of Allied, HMG nor the
Guarantor is in default under any material contract, lease, or commitment to
which it is a party or by which it is bound. As of the Effective Time, the
Guarantor knows of no dispute regarding any contract, lease, or commitment which
is material to the continued financial success and well-being of Allied, HMG,
the Guarantor or the Borrower.
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<PAGE>
J. Employee Controversies. As of the Effective Time, there are no
controversies pending or, to the best of the Guarantor's knowledge after
diligent inquiry, threatened or anticipated, between Allied, HMG, the Guarantor
or the Borrower and any of their employees, other than employee grievances
arising in the ordinary course of business which are not, individually or in the
aggregate, material to the continued financial success and well-being of Allied,
HMG, the Guarantor or the Borrower. None of Allied, HMG, the Guarantor or the
Borrower has any accrued and unpaid liability to any of its employees arising
under the Federal Fair Labor Standards Act, as amended.
K. Compliance with Laws and Regulations. The execution and delivery by
Allied, HMG, the Guarantor and the Borrower of the Financing Agreements to which
it is a party and the performance of such Person's obligations hereunder and
thereunder are not in contravention of any law or laws. As of the Effective
Time, Allied, HMG, the Guarantor and Borrower are in compliance with all laws,
orders, regulations and ordinances of all Governmental Authorities relating to
its respective business, operations and assets, except for laws, orders,
regulations and ordinances the violation of which would not, individually or in
the aggregate, have a material adverse effect on its respective financial
condition, results of operations or business.
L. Financial Condition. There has been no material adverse change in the
financial condition, results of operations or business of Allied, HMG or the
Guarantor since the last day of their Fiscal Year ending on or about July 31,
1996.
M. Survival of Warranties. All representations and warranties contained in
this Guaranty shall survive the execution and delivery of this Guaranty.
3. Affirmative Covenants. The Guarantor covenants and agrees that, so long
as any Guaranteed Obligations remain outstanding, and (even if there shall be no
Guaranteed Obligations outstanding) so long as this Guaranty remains in effect:
A. Financial Statements. The Guarantor shall, and shall cause Allied and
each of its Subsidiaries to, keep proper books of record and account in which
full and true entries will be made of all dealings or transactions of or in
relation to the business and affairs of such Person in accordance with GAAP, and
the Guarantor shall cause to be furnished to the Lender:
(i) Monthly. At the request of Lender, as soon as practicable, and in
any event within twenty (20) days (provided such
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period shall be forty-five (45) days for each month ending concurrently
with the end of each Fiscal Year) after the end of each fiscal month
(including each fiscal month occurring during the 90-day delivery period
applicable to the delivery of annual financial statements furnished to the
Lender pursuant to paragraph 3.A(ii) hereof):
(a) consolidated and consolidating statements of income, retained
earnings and cash flow of the Guarantor and its Subsidiaries, HMG and its
Subsidiaries and Allied and its Subsidiaries for such fiscal month and for
the period from the beginning of the then current Fiscal Year to the end of
such fiscal month and consolidated and consolidating balance sheets of the
Guarantor and its Subsidiaries, HMG and its Subsidiaries and Allied and its
Subsidiaries as of the end of such fiscal month, setting forth in each
case, in comparative form, figures (1) in the case of statements, for the
corresponding periods in the preceding Fiscal Year and (2) in the case of
balance sheets, as of a date one year earlier, all in reasonable detail and
certified as accurate by the chief financial officer, chief executive
officer or president of the Guarantor pursuant to a certificate in the form
of Exhibit C attached hereto, subject to changes resulting from normal
year-end adjustments;
(b) consolidated and consolidating statements in which the actual cash
flow and income for Guarantor and its Subsidiaries, HMG and its
Subsidiaries and Allied and its Subsidiaries for such fiscal month and for
the period from the start of the then current Fiscal Year to the end of
such fiscal month, and the actual balance sheets at the end of such fiscal
month (in each case as required to be delivered pursuant to paragraph
3.A(i)(a) hereof) are compared with the corresponding projected statements
of income and cash flow and balance sheets for such periods and time
furnished to the Lender pursuant to paragraph 3.A(iii) below, in each case
in the same format as the audited statements of income and cash flow and
the audited balance sheets;
(c) (I) copies of all operating statements for such fiscal month
prepared by Allied or any of its Subsidiaries for internal use, including,
without limitation, statements of cash flow, purchases and sales of
inventory and other similar data as the Lender may reasonably request, and
(II) a comparison of actual cash flow and capital expenditures for
Guarantor and its Subsidiaries, HMG and its Subsidiaries and Allied and its
Subsidiaries with amounts budgeted for such fiscal month; and
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<PAGE>
(d) in the event that any of the foregoing statements indicate that
Allied or any of its Subsidiaries has varied in any material respect from
any financial projections provided to the Lender, a statement of
explanation of such deviation from the chief financial officer, chief
executive officer or president of the Guarantor;
(notwithstanding the foregoing, consolidated and consolidating statements as to
Allied and its Subsidiaries (but not HMG or the Guarantor or their respective
Subsidiaries) shall only be required to be delivered on a quarterly basis as
soon as practicable and in any event within forty-five (45) days of the end of
each quarter of each Fiscal Year of such Persons);
(ii) Annual. At the request of Lender, as soon as practicable and in
any event within ninety (90) days after the end of each Fiscal Year of any
of the Guarantor, HMG or Allied, audited consolidated and unaudited
consolidating statements of income, retained earnings and cash flow of the
Guarantor and its Subsidiaries, HMG and its Subsidiaries or Allied and its
Subsidiaries, as the case may be, for such Fiscal Year, and an audited
consolidated and unaudited consolidating balance sheet of the Guarantor and
its Subsidiaries, HMG and its Subsidiaries or Allied and its Subsidiaries,
as the case may be, as of the end of such Fiscal Year, setting forth in
each case, in comparative form, corresponding figures for the period
covered by the preceding annual audit (in the case of statements) and as of
the end of the preceding Fiscal Year (in the case of balance sheets), all
in reasonable detail and satisfactory in scope to the Lender and audited by
independent certified public accountants selected by the Guarantor and
reasonably satisfactory to the Lender (the "Auditors"), whose opinion shall
be in scope and substance satisfactory to the Lender and the Guarantor
shall use its best efforts to cause such opinion to be addressed on its
face to the Lender or to be the subject of a reliance letter from such
accountants permitting the Lender to rely on the contents thereof as if
prepared specifically for use by the Lender (provided the unaudited
consolidating financial statements required by this paragraph 3.A(ii) shall
be included in the Auditor's report required hereunder and referred to as
the information used by the Auditors in preparing the consolidated
financial statements and the Auditors may refer to such consolidating
statements as for information purposes only and refrain from expression of
an opinion thereon);
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<PAGE>
(iii) Budget. At the request of Lender, as soon as practicable and in
any event within thirty (30) days before the start of each Fiscal Year of
the Guarantor, HMG or Allied, an annual consolidated budget of Allied and
its Subsidiaries for the succeeding Fiscal Year in reasonable detail (on a
fiscal month basis), including balance sheets, statements of anticipated
income and cash flow on a consolidated basis for the succeeding Fiscal Year
(on a fiscal month basis) in reasonable detail, and a detailed statement of
the methods and assumptions used in the preparation of such budget;
(iv) Letters from Accountants and Consultants. As soon as practicable
and in any event within ten (10) days of delivery to Allied or any of its
Subsidiaries, a copy of (i) each "Management Letter" prepared by Allied's
or any of its Subsidiaries' independent certified public accountants in
connection with the financial statements referred to in paragraph 3.A(ii)
hereof and (ii) to the extent that such letters may from time to time be
issued by Allied's or any of its Subsidiaries' independent certified public
accountants or other management consultants (collectively, "Accounting
Systems Letters"), any letter issued by any such independent certified
public accountants or other management consultants with respect to
recommendations relating to Allied's or any of its Subsidiaries' financial
or accounting systems or controls;
(v) Default Notices. As soon as practicable (but in any event not more
than five (5) days) after any officer of Allied or any of its Subsidiaries
obtains knowledge of the occurrence of an event or the existence of a
circumstance giving rise to an Event of Default or a Default, notice of any
and all Events of Default or Defaults;
(vi) [INTENTIONALLY OMITTED]
(vii) Other Defaults and Material Information. As soon as practicable
(but in any event not more than five (5) days) after any officer of Allied
or any of its Subsidiaries obtains knowledge of the occurrence of an event
or the existence of a circumstance giving rise to a default under, or which
with the passage of time, notice or both would constitute a default under
(a "potential default"), or a material violation of any term of the HMG
Notes, the Series B Notes, the VCA Note, the Smith Subordinated Notes, the
Subordinated Note, the Affiliated Leases or any other documents relating to
any credit facilities maintained by
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<PAGE>
Allied or any of its Subsidiaries or any Credit Party (or any Subsidiary of
any Credit Party), notice of such default, potential default or violation,
and immediately upon the receipt thereof, copies of any notices of any
default, potential default or material violation and any other material
correspondence received or information known by Allied or any of its
Subsidiaries relating to the HMG Notes, the Series B Notes, the VCA Note,
the Smith Subordinated Notes, the Subordinated Note, the Affiliated Leases
or any other documents relating to any credit facilities maintained by
Allied or any of its Subsidiaries or any Credit Party (or any Subsidiary of
any Credit Party);
(viii) Reports and Other Information. Promptly upon the transmission
thereof, copies of all such financial statements, proxy statements, notices
and reports as Allied or any of its Subsidiaries may send to Allied's
public stockholders and copies of all registration statements (without
exhibits) and all reports which Allied or any of its Subsidiaries files
with the Securities and Exchange Commission (or any governmental body or
agency succeeding to the functions of the Securities and Exchange
Commission), including without limitation Allied's Annual Report on Form
10K and Allied's Quarterly Report on Form 10Q; and
(ix) Other Information. With reasonable promptness, such other
business or financial data as the Lender may reasonably request.
The Guarantor further agrees that upon the receipt by Allied or any of its
Subsidiaries of any Accounting Systems Letters wherein such accountants or
consultants have made recommendations for improvements to the financial or
accounting systems or controls of the Allied or any of its Subsidiaries, the
Guarantor shall, and shall cause Allied and its Subsidiaries to, promptly
commence actions to correct any material defects in or make improvements to such
financial or accounting systems or controls unless the Lender otherwise consents
or Allied or such Subsidiary reasonably disagrees with the need for such
actions.
All financial statements delivered to the Lender pursuant to the
requirements of this paragraph 3.A (except where otherwise expressly indicated)
shall be prepared in accordance with GAAP (subject in the case of interim
financial statements to the lack of footnotes and normal year-end adjustments)
consistently applied, except for changes therein with which the independent
certified public accountants issuing the opinion on the financial statements
delivered pursuant to
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paragraph 3.A(ii) hereof have previously concurred in writing. Together with
each delivery of financial statements required by paragraph 3.A(i) and 3.A(ii)
hereof, the Guarantor shall deliver to the Lender a certificate of the chief
financial officer, chief executive officer or president of the Guarantor in the
form attached hereto as Exhibit C stating that there exists no Default or Event
of Default, or, if any Default or Event of Default exists, specifying the nature
and the period of existence thereof and what action the Guarantor and any of its
Affiliates proposes to take with respect thereto. Together with each delivery of
financial statements required by paragraph 3.A(ii) hereof, the Guarantor shall
deliver to the Lender a certificate of the independent certified public
accountants who performed the audit in connection with such statements stating
that in making the audit necessary to the issuance of a report on such financial
statements, they have obtained no knowledge of any Default or Event of Default,
or, if such accountants have obtained knowledge of a Default or Event of
Default, specifying the nature and period of existence thereof. Such accountants
shall not be liable by reason of any failure to obtain knowledge of any Default
or Event of Default which would not be disclosed in the ordinary course of an
audit.
The Lender shall exercise reasonable efforts to keep such information, and
all information acquired as a result of any inspection conducted in accordance
with paragraph 3.B hereof, confidential, provided that the Lender may
communicate such information (a) to any other Person in accordance with the
customary practices of commercial banks relating to routine trade inquiries, (b)
to any regulatory authority having jurisdiction over theLender's sale of any
participations in the Liabilities or assignment of any rights and obligations of
the Lender under the Loan Agreement, this Guaranty or any other Financing
Agreements or in connection with any refinancing of all or any portion of the
Liabilities, and, provided such Person agrees to keep such information
confidential to the extent set forth herein, to any Person to whom Lender
proposes to sell such participations or proposes to make such an assignment, (d)
to any other Person in connection with the exercise of the Lender's rights under
this Guaranty or under any of the Financing Agreements, (e) to any Person in any
litigation in which the Lender is a party, (f) to any Person if the Lender
believes in good faith that disclosure is necessary or appropriate to comply
with any applicable law, rule or regulation or in response to a subpoena, order
or other legal process or informal investigative demand, whether issued by a
court, judicial or administrative or legislative body or committee or other
governmental authority, or (g) to any Affiliate of the Borrower. Notwithstanding
the foregoing, information shall not be deemed to be confidential to the extent
such information (i) was already lawfully in the possession of the Lender prior
to August 31, 1992 with respect to the Guarantor or Borrower, prior to August
31, 1993 with respect to HMG or prior to March 31, 1994 with respect to Allied
or AFL, (ii) is available in the public domain, (iii) becomes available in the
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public domain other than as a result of unauthorized disclosure by the Lender or
(iv) is acquired from a Person not known by the Lender to be in breach of an
obligation of secrecy to Allied or its Subsidiaries. The Guarantor authorizes
Lender, and shall cause HMG and each of its Subsidiaries and Allied and each of
its Subsidiaries to authorize the Lender, to discuss the financial condition of
the Guarantor and its Subsidiaries, HMG and its Subsidiaries and Allied and each
of its Subsidiaries with each such Person's independent certified public
accountants and agrees that such discussion or communication shall be without
liability to either the Lender or such independent certified public accountants.
B. Inspection. The Lender, or any Person designated by the Lender
(including without limitation any Participant) in writing, shall have the right,
from time to time hereafter, to call at Allied's or any of its Subsidiaries'
place or places of business (or any other place where the Collateral or any
information relating thereto is kept or located) during reasonable business
hours, and, without hindrance or delay, (i) to inspect, audit, check and make
copies of and extracts from Allied's and each of its Subsidiaries' books,
records, journals, orders, receipts and any correspondence and other data
relating to the business of Allied and its Subsidiaries or to any transactions
between Allied or any of its Subsidiaries and the Lender, (ii) to make such
verification concerning the Collateral as the Lender may consider reasonable
under the circumstances, and (iii) to discuss the affairs, finances and business
of Allied and its Subsidiaries with any officers, employees or directors of
Allied or its Subsidiaries (including without limitation the Guarantor). The
Guarantor shall pay on demand all photocopying expenses incurred by the Lender
under this paragraph 3.B.shall engage in no business and shall have no assets
(other than (i) the capital stock of Borrower, (ii) cash received as dividends
from the Borrower pursuant to subsection 8.8 of the Loan Agreement and payments
on the Subordinated Note permitted under the Loan Agreement, (iii) intangible
assets representing capitalized financing costs arising in connection with the
CVC Credit Agreement or any future financing. The Guarantor shall, and shall
cause HMG to, (i) maintain its corporate existence, (ii) maintain in full force
and effect all licenses, bonds, franchises, leases, patents, permits, contracts
and other rights necessary or desirable to the profitable conduct of its
business, (iii) continue in, and limit its operations to, the same general line
of business as that presently conducted by it and (iv) comply with all laws,
orders, regulations and ordinances of any Governmental Authority, except for
such laws, orders, regulations and ordinances the violation of which would not,
individually or in the aggregate, have a material adverse effect on such
Person's financial condition, results of operations or business or such Person's
ability to perform its obligations under the Financing Agreements to which it is
a party. The Guarantor shall, and shall cause HMG to, pay promptly all
liabilities to all of its employees arising under the minimum wage and
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maximum hour provisions of the Fair Labor Standards Act, as the same may be
amended from time to time.
D. Claims and Taxes. The Guarantor agrees to indemnify and hold the Lender
and each Participant and each of their respective officers, directors,
employees, attorneys and agents harmless from and against any and all claims,
demands, liabilities, losses, damages, penalties, costs, and expenses (including
without limitation reasonable attorneys' and consultants' fees) relating to or
in any way arising out of the possession, use, operation or control of any of
the assets of Allied or any of its Subsidiaries (includ the extent directly
arising from the gross negligence or willful misconduct of the Lender. The
Guarantor shall, and shall cause Allied and each of its Subsidiaries to, pay or
cause to be paid all license fees, bonding premiums and related taxes and
charges, and pay or cause to be paid all of such Person's real and personal
property taxes, assessments and charges and all of such Person's franchise,
income, unemployment, use, excise, old age benefit, withholding, sales and other
taxes and other governmental charges assessed against such Person, or payable by
such Person, at such times and in such manner as to prevent any penalty from
accruing or any Lien from attaching to the property of such Person, provided
that such Person shall have the right to contest in good faith, by an
appropriate proceeding promptly initiated and diligently conducted, the
validity, amount or imposition of any such tax, assessment or charge, and during
the pendency of such good faith contest to delay or refuse payment thereof, if
(i) such Person establishes adequate reserves to cover such contested taxes,
assessments or charges, and (ii) such contest does not have a material adverse
effect on the financial condition, results of operations or business of such
Person, the ability of such Person to pay its indebtedness or satisfy its
obligations to the Lender, or the priority or value of the Lender's security
interest in the Collateral or any collateral or other security provided to the
Lender.
E. Notice of Suit or Adverse Change in Business. The Guarantor shall as
soon as possible, and in any event within five (5) Business Days after any
officer of Allied or any of its Subsidiaries learns of the following, give
written notice to the Lender of (i) any material proceeding(s) (including
without limitation litigation, investigations, arbitration or governmental
proceedings) being instituted or threatened to be instituted by or against any
of the foregoing entities in any federal, state, local orther regulatory body
(federal, state, local or foreign), (ii) notice that the operations of any of
the foregoing entities are not in full compliance with all requirements of
applicable federal, state or local environmental, health and safety statutes and
regulations, except for notices as to matters which, either individually or in
the aggregate, could not have a material adverse effect on such Person's
financial condition, results of operations or business or on the value of any
material portion of
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the Collateral, (iii) notice that any of the foregoing entities is subject to
federal or state investigation evaluating whether any remedial action is needed
to respond to the release of any hazardous or toxic waste, substance or
constituent, or other substance into the environment, (iv) notice that any
properties or assets of any of the foregoing entities are subject to an
Environmental Lien, and (v) any material adverse change in any of the foregoing
entities' financial condition, results of operations or business.
4. Negative Covenants. The Guarantor covenants and agrees that so long as
any Guaranteed Obligations remain outstanding, and (even if there shall be no
Guaranteed Obligations outstanding) so long as this Guaranty remains in effect
(unless the Lender shall give its prior written consent thereto):
A. Encumbrances. The Guarantor will not, and will not permit HMG to,
create, incur, assume or suffer to exist any security interest, mortgage,
pledge, lien or other encumbrance of any nature whatsoever on any of such
Person's assets, other than liens and security interests in favor of the Lender.
The Guarantor shall not, and shall not permit HMG to, permit the filing of any
financing statement naming the Guarantor or HMG as debtor, except for financing
statements filed with respect to liens or security interests expressly permitted
by this Guaranty.
B. Indebtedness. The Guarantor shall not, and shall not permit HMG to,
incur, create, assume, become or be liable in any manner with respect to, or
permit to exist, any obligations of a type which would appear on a balance sheet
of such Person in accordance with GAAP, Capitalized Lease Obligations or
indebtedness, except (i) with respect to the Guarantor or HMG, liabilities
associated with its organization and maintenance of its corporate existence,
(ii) with respect to HMG, indebtedness of HMG under the HMG Notes and the Series
B Notes and other funded indebtedness on terms and subject to agreements in form
and substance, and from financial institutions, satisfactory to Lender in its
sole discretion exercised in Good Faith the proceeds of which are contributed to
the capital of the Guarantor and then contributed by the Guarantor to the
capital of the Borrower and (iii) with respect to the Guarantor, funded
indebtedness of the Guarantor on terms and subject to agreements in form and
substance, and from financial institutions, satisfactory to Lender in its sole
discretion exercised in Good Faith the proceeds of which are contributed to the
capital of the Borrower. Except as otherwise permitted by this Guaranty, the
Guarantor shall not, and shall not permit HMG to, pay any obligations or
indebtedness before the same is due, except to the extent expressly permitted by
paragraph 4.O l not, and shall not permit HMG to, recapitalize, consolidate
with, merge with, or otherwise acquire all or substantially all of the assets or
properties of any other Person or enter into any agreement with respect to the
foregoing.
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D. Investments or Loans. The Guarantor shall not, and the Guarantor shall
not permit HMG to, make or permit to exist investments or loans in or to any
other Person, except (i) HMG's investment in the Guarantor, (ii) the Guarantor's
investment in the Borrower and the Subordinated Note and (iii) HMG and the
Guarantor may make investments of the types and subject to the limitations set
forth in clause (i), (ii) or (iii) of subsection 8.4 of the Loan Agreement.
E. Guarantees. The Guarantor shall not, and shall not permit HMG to,
guarantee, endorse or otherwise in any way become or be responsible for
obligations of any other Person, whether by agreement to purchase the
indebtedness of any other Person or through the purchase of goods, supplies or
services, or maintenance of working capital or other balance sheet covenants or
conditions, or by way of stock purchase, capital contribution, advance or loan
for the purpose of paying or discharging any indebtedness or obligation of such
other Person or otherwise, except (i) this Guaranty, (ii) endorsements of
negotiable instruments for collection in the ordinary course of business and
(iii) the Allied Security Agreement.
F. Disposal of Property. The Guarantor shall not, and shall not permit HMG
to, sell, lease, transfer or otherwise dispose of any of the Collateral or any
of its other properties, assets and rights to any Person.
G. Compensation to Officers and Others. Except as set forth on Exhibit E
attached hereto, the Guarantor shall not, and shall not permit HMG to, make any
loans to, or pay any bonuses, fees or other amounts to any officers, directors,
employees or stockholders of such Person or of Allied.
H. Dividends and Stock Redemptions. The Guarantor shall not, and the
Guarantor shall not permit any of its Subsidiaries or HMG to, directly or
indirectly, (i) redeem, purchase or otherwise retire any of its shares of
capital stock, (ii) declare or pay any dividends on any class or classes of
capital stock, (iii) return capital of such Person to its stockholders, or (iv)
make any other distribution on or in respect of any shares of any class of
capital stock of such Person; provided, however, that (a) the Borrower may
declare and pay dividends on its capital stock to the extent permitted by
subsection 8.8 of the Loan Agreement, (b) if no Default or Event of Default has
occurred and is continuing or would occur as a result thereof, the Guarantor may
declare and pay cash dividends on its shares of Class A Common Stock as follows:
(I) out of the dividends permitted and paid to Guarantor by Borrower
pursuant to clause (a) of the proviso of subsection 8.8 of the Loan Agreement
(or prepayments of the Subordinated Note permitted in lieu thereof), cash
dividends at the
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Effective Time in an amount equal to the aggregate amount of the dividends so
paid by Borrower (and prepayments on the Subordinated Note so made by Borrower)
which will be used by HMG, together with the proceeds of the HMG Notes, to pay
the principal and accrued interest on the Series A Note in full and terminate
the Series A N proviso of subsection 8.8 of the Loan Agreement, cash dividends
to enable HMG to pay the regularly scheduled payments of interest due and
payable under the HMG Notes and the Series B Notes, respectively, set forth on
Schedule 8.8 of the Loan Agreement, or pay interest or make advances of interest
on the HMG Notes as otherwise permitted pursuant to such clauses;
(III) out of the dividends permitted and paid to the Guarantor by Borrower
pursuant to clause (d) of the proviso of subsection 8.8 of the Loan Agreement,
cash dividends on any HMG Notes Maturity Date to enable HMG to pay the unpaid
principal amount of the HMG Notes on such date, provided that after giving
effect thereto the aggregate amount of all dividends paid on all HMG Notes
Maturity Dates pursuant to this clause (III) does not exceed $2,000,000; and
(IV) out of the dividends permitted and paid to the Guarantor by Borrower
pursuant to clause (e) of the proviso of subsection 8.8 of the Loan Agreement,
cash dividends on January 1, 1999 to enable HMG to pay the unpaid principal
amount of the Series B Notes on such date, provided that after giving effect
thereto the aggregate amount of all dividends paid pursuant to this clause (IV)
does not exceed $916,659.
I. Issuance of Stock. The Guarantor shall not, and shall not permit HMG to,
issue or distribute any capital stock or other securities (or any warrants or
rights for the purchase of any capital stock or other securities of such Person)
for consideration or otherwise.
J. Amendment of Articles of Incorporation or By-Laws; Corporate Name. The
Guarantor shall not, and shall not permit HMG to, amend such Person's Articles
or Certificate of Incorporation or By-Laws, except that the Guarantor or HMG may
amend its Articles or Certificate of Incorporation to effect a change in its
corporate name, provided that such Person furnishes to the Lender such financing
statements executed by the Borrower which the Lender may request prior to the
filing of such amendment and furnishes to the Lender a copy of such amendment,
certified by the Secretary of State of such Person's jurisdiction of
incorporation, within ten (10) days of the date such amendment is filed with
such Secretary of State.
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K. Transactions and Affiliates. Except as set forth on Exhibit D attached
hereto or as expressly permitted in the Loan Agreement, the Guarantor will not,
and will not permit HMG to, enter into any transaction with any Affiliate,
including, without limitation: (a) the making of any loans to, or the payment of
any bonuses, fees or other money to, any Affiliate, and (b) the purchase, sale
or exchange of property or the rendering of any service to any Affiliate, except
as contemplated by paragraphs 4.H, 4.N and 4.O hereof. The term "Affiliate" as
used in this paragraph 4.K shall have the meaning given in subsection 1.1 of the
Loan Agreement and also shall include any executive officer, director, employee
or stockholder of the Guarantor or any Affiliate of the Borrower or any Person
related to any such Person within the third degree of consanguinity.
L. Fiscal Year. The Guarantor shall not, and shall not permit HMG to,
change such Person's Fiscal Year.
M. Subsidiaries. The Guarantor shall not, and shall not permit HMG to, form
or acquire any new Subsidiaries.
N. Amendment of Various Documents. The Guarantor shall not, and shall not
permit HMG to, enter into or consent to any modification or alteration of the
HMG Notes, the Series B Notes, the Merger Documents, the Allied Tax Sharing
Agreement, the Subordinated Note or the righny of the foregoing, except
modifications or alterations of the HMG Notes or the Series B Notes which extend
the maturity, or decrease the rate of interest payable under, the HMG Notes or
the Series B Notes or modify covenants or agreements contained in the HMG Notes
or the Series B Notes to make them less burdensome to HMG.
O. HMG Securities and Subordinated Note. The Guarantor shall not, and shall
not permit HMG or Borrower to, directly or indirectly, redeem, purchase or
otherwise retire, or make any payment with respect to, any of the HMG Notes, the
Series B Notes or the Subordinated Note, except that (i) dividends may be
declared and paid by Borrower to the extent permitted by the terms of subsection
8.8 of the Loan Agreement and by the Guarantor to the extent permitted by the
terms of Paragraph 4.H of this Guaranty which will enable HMG to make payments
on the HMG Notes and Series B Notes contemplated thereby and hereby and (ii)
prepayments of the Subordinated Note may be made to the extent permitted by the
Loan Agreement.
5. Waivers; Other Agreements.
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A. The Lender is hereby authorized, without notice to or demand upon the
Guarantor, which notice or demand is expressly waived hereby, and without
discharging or otherwise affecting the obligations of the Guarantor hereunder
(which shall remain absolute and unconditional notwithstanding any such action
or omission to act), from time to time, to:
(i) supplement, renew, extend, accelerate or otherwise change the time
for payment of, or other terms relating to, the Guaranteed Obligations, or
any portion thereof, or otherwise modify, amend or change the terms of any
promissory note or other agreement, document or instrument (including,
without limitation, the Loan Agreement and the other Financing Agreements)
now or hereafter executed by the Borrower and delivered to the Lender,
including, without limitation, any increase or decrease of the principal
amount thereof or the rate of interest thereon;
(ii) waive or otherwise consent to noncompliance with any provision of
any agreement, document or instrument (including, without limitation, the
Loan Agreement and the other Financing Agreements) evidencing or in respect
of the Guaranteed Obligations, or any part thereof, now or hereafter
executed by the Borrower and delivered to the Lender;
(iii) accept partial payments on the Guaranteed Obligations;
(iv) receive, take and hold security or collateral for the payment or
performance of the Guaranteed Obligations, or any part thereof, or for the
payment or performance of any guaranties of all or any part of the
Guaranteed Obligations, and exchange, enforce, waive, substitute,
liquidate, terminate, abandon, fail to perfect, subordinate, transfer,
otherwise alter and release any such security or collateral;
(v) apply any and all such security or collateral and direct the order
or manner of sale thereof as the Lender may determine in its sole
discretion;
(vi) settle, release, compromise, collect or otherwise liquidate the
Guaranteed Obligations, or any part thereof, or accept, substitute,
release, exchange or otherwise alter, affect or impair any security or
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collateral for the Guaranteed Obligations, or any part thereof, or any
other guaranty therefor, in any manner;
(vii) add, release or substitute any one or more other guarantors,
makers or endorsers of all or any part of the Guaranteed Obligations and
otherwise deal with the Borrower or any other guarantor, maker or endorser
as the Lender may elect in its sole discretion;
(viii) apply any and all payments or recoveries from the Guarantor,
from the Borrower or from any other guarantor, maker or endorser of all or
any part of the Guaranteed Obligations to the Guaranteed Obligations in
such order as the Lender in its sole discretion may determine, whether such
Guaranteed Obligations are secured or unsecured or guaranteed or not
guaranteed by others;
(ix) apply any and all payments or recoveries from the Guarantor or
any other guarantor, maker or endorser of all or any part of the Guaranteed
Obligations or sums realized from security furnished by any of them upon
any of their indebtedness or obligations to the Lender, as the Lender in
its sole discretion may determine, whether or not such indebtedness or
obligations relate to the Guaranteed Obligations; and
(x) refund at any time, at the Lender's sole discretion, any payment
received by the Lender in respect of any Guaranteed Obligations, and
payment to the Lender of the amount so refunded shall be fully guaranteed
hereby even though prior thereto this Guaranty shall have been cancelled or
surrendered (or any lien, security interest or other collateral shall have
been released or terminated by virtue thereof) by the Lender, and such
prior cancellation or surrender (or release or termination) shall not
diminish, release, discharge, impair or otherwise affect the obligations of
the Guarantor hereunder in respect of the amount so refunded (and any lien,
security interest or other collateral so released or terminated shall be
reinstated with respect to such obligations).
B. The Guarantor hereby agrees that its obligations under this Guaranty are
absolute and unconditional and shall not be discharged or otherwise affected as
a result of:
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(i) the invalidity or unenforceability of any security for or other
guaranty of all or any part of the Guaranteed Obligations or of any
promissory note or other agreement, document or instrument (including,
without limitation, the Loan Agreement and the Financing Agreements)
evidencing or in respect of all or any part of the Guaranteed Obligations,
or the lack of perfection or continuing perfection or failure of priority
of any security for all or any part of the Guaranteed Obligations or any
other guaranty therefor;
(ii) the absence of any attempt to collect the Guaranteed Obligations,
or any portion thereof, from the Borrower or any other guarantor or other
action to enforce the same;
(iii) any failure by the Lender to acquire, perfect and maintain any
security interest in, or to preserve any rights to, any security or
collateral for all or any part of the Guaranteed Obligations or any
guaranty therefor;
(iv) any election by the Lender in any proceeding instituted under
Chapter 11 of Title 11 of the United States Code (11 U.S.C. ss. 101 et
seq.) (the "Bankruptcy Code");
(v) any borrowing or grant of a security interest by the Borrower, as
debtor-in-possession, or extension of credit, under the Bankruptcy Code;
(vi) the disallowance, under the Bankruptcy Code, of all or any
portion of the Lender's claim(s) for repayment of the Guaranteed
Obligations;
(vii) any use of cash collateral under the Bankruptcy Code;
(viii) any agreement or stipulation as to the provision of adequate
protection in any bankruptcy proceeding;
(ix) the avoidance of any lien in favor of the Lender for any reason;
(x) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, liquidation or dissolution proceeding commenced
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by or against the Borrower, the Guarantor or any other guarantor, maker or
endorser, including without limitation, any discharge of, or bar or stay
against collecting or accelerating, all or any of the Guaranteed
Obligations (or any interest thereon) in or as a result of any such
proceeding;
(xi) any failure by the Lender to file or enforce a claim against the
Borrower or its estate in any bankruptcy or insolvency case or proceeding;
(xii) any action taken by the Lender that is authorized by this
Guaranty;
(xiii) any election by the Lender under Section 9-501(4) of the
Uniform Commercial Code as enacted in any relevant jurisdiction as to any
security for the Guaranteed Obligations or any guaranty of all or any part
of the Guaranteed Obligations; or
(xiv) any other circumstance which might otherwise constitute a legal
or equitable discharge or defense of a guarantor.
C. Until the Guaranteed Obligations shall have been paid and performed in
full and all of the Financing Agreements shall have been terminated, the
Guarantor shall have no right of subrogation and hereby waives any right to
enforce any remedy which the Lender now has or may hereafter have against the
Borrower or any guarantor of all or any part of the Guaranteed Obligations, and
the Guarantor hereby waives any benefit of, and any right to participate in, any
security or collateral given to the Lender to secure payment or performance of
any of the Guaranteed Obligations or any other liability of the Borrower to the
Lender. The Guarantor further agrees that any and all claims of the Guarantor
against the Borrower or any guarantor of all or any part of the Guaranteed
Obligations, or against any of their respective properties, arising by reason of
this Guaranty, including without limitation by reason of any payment by the
Guarantor to the Lender pursuant to the provisions hereof, shall be subordinate
and subject in right of payment to the prior payment, in full, of all principal
and interest, all reasonable costs of collection (including attorneys' and
paralegals' fees) and payment and performance in full of any other liabilities
or obligations to the Lender by the Borrower, including without limitation the
Liabilities, which may arise either with respect to or on any Financing
Agreement or any other note, instrument, document, item, agreement or other
writing heretofore, now or hereafter delivered to the Lender. The Guarantor
further waives:
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(i) any requirements of diligence or promptness on the part of the
Lender;
(ii) presentment, demand for payment or performance and protest and
notice of protest with respect to the Guaranteed Obligations or any
guaranty with respect thereto;
(iii) notices (a) of nonperformance, (b) of acceptance of this
Guaranty, (c) of default in respect of the Guaranteed Obligations, (d) of
the existence, creation or incurrence of new or additional indebtedness,
arising either from additional loans extended to the Borrower or otherwise,
(e) that the principal amount, or any portion thereof, and/or any interest
on any document or instrument evidencing all or any part of the Guaranteed
Obligations is due, (f) of any and all proceedings to collect from the
Borrower, any maker, endorser or any other guarantor of all or any part of
the Guaranteed Obligations, or from anyone else, and (g) of exchange, sale,
surrender or other handling of any security or collateral given to the
Lender to secure payment of the Guaranteed Obligations or any guaranty
therefor;
(iv) any right to require the Lender to (a) proceed first against the
Borrower, or any other Person whatsoever, (b) proceed against or exhaust
any security given to or held by the Lender in connection with the
Guaranteed Obligations, or (c) pursue any other remedy in the Lender's
power whatsoever;
(v) any defense arising by reason of (a) any disability or other
defense of the Borrower, (b) the cessation from any cause whatsoever of the
liability of the Borrower, (c) any act or omission of the Lender or others
which directly or indirectly, by operation of law or otherwise, results in
or aids the discharge or release of the Borrower or any security given to
or held by the Lender in connection with the Guaranteed Obligations;
(vi) any and all other suretyship defenses under applicable law; and
(vii) the benefit of any statute of limitations affecting the
Guaranteed Obligations or the Guarantor's liability hereunder or the
enforcement hereof.
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In connection with the foregoing, the Guarantor covenants that this Guaranty
shall not be discharged, except by complete performance of the obligations
contained herein and the payment and discharge in full of all of the Liabilities
and termination of all Financing Agreements (including without limitation any
commitments with respect to the Liabilities). All waivers granted by the
Guarantor hereunder shall be unconditional and irrevocable irrespective of
whether the Guaranteed Obligations have been paid in full by the Guarantor or
any other party.
D. The Guarantor hereby assumes responsibility for keeping itself informed
of the financial condition of the Borrower, of any and all endorsers and/or
other guarantors of all or any part of the Guaranteed Obligations and of all
other circumstances bearing upon the risk of nonpayment and nonperformance of
the Guaranteed Obligations, or any part thereof, and the Guarantor hereby agrees
that the Lender shall not have any duty to advise the Guarantor of information
known to the Lender regarding such condition or any such circumstances. In the
event the Lender, in its sole discretion, undertakes at any time or from time to
time to provide any such information to the Guarantor, the Lender shall not have
any obligation (i) to undertake any investigation, whether or not a part of its
regular business routine, (ii) to disclose any information which the Lender
wishes to maintain confidential or (iii) to make any other or future disclosures
of such information or any other information of the Guarantor.
E. The Guarantor shall not take any action which would, directly or
indirectly, result in an Event of Default or Default under the Loan Agreement.
6. Default; Remedies.
A. The obligationtor of the Guaranteed Obligations or any other
Person. If any of the Guaranteed Obligations are not paid when due (and the
applicable grace period has expired), or upon the occurrence and during the
continuance of any Default, the Lender may, at its sole election, proceed
directly and at once, without notice, against the Guarantor to collect and
recover the full amount or any portion of the Guaranteed Obligations, without
first proceeding against the Borrower, any other guarantor of all or part of the
Guaranteed Obligations or any other Person, or against any Collateral or any
other security for the Guaranteed Obligations or the obligations of the
Guarantor or any other guarantor under any guaranty; provided, however, if any
Default specified in Subsection 9.1(G), (H), (I) or (J) of the Loan Agreement
shall occur and be continuing, the Guarantor shall, at the option of the Lender,
pay to the
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Lender the full amount which would be payable under this Guaranty, if all of the
Liabilities were then due and payable.
B. To secure the full and prompt payment and performance of the Guaranteed
Obligations and the Guarantor's obligations under this Guaranty, the Guarantor
hereby grants to the Lender a right of setoff against and a continuing security
interest in all of the Guarantor's now or hereafter acquired balances, credits,
deposits, accounts, monies and any other property and interests in property of
every kind or description of or in the Guarantor's name now or hereafter coming
into the actual possession, custody or control of the Lender or any agent or
affiliate of the Lender in any way or for any purpose (whether for safekeeping,
deposit, custody, pledge, transmission, collection or otherwise). At any time
after any Default, the Lender may, without notice to the Guarantor and
regardless of the acceptance of any security or collateral for the payment
hereof, appropriate and apply toward the payment of the Guaranteed Obligations
(i) any indebtedness due or to become due frany balances, credits, deposits,
accounts, monies or other property of or in the name of the Guarantor at any
time held by or coming into the possession, custody or control of the Lender or
any agent or affiliate of the Lender.
C. The Guarantor hereby authorizes and empowers the Lender, in its sole
discretion, without any notice (except notices required by law to the extent
such notice as a matter of law may not be waived) or demand to the Guarantor
whatsoever and without affecting the obligations of the Guarantor hereunder, to
exercise any right or remedy which the Lender may have available to it,
including, but not limited to, foreclosure by one or more judicial or
nonjudicial sales, and to the extent permitted by applicable law, the Guarantor
hereby waives any defense to the recovery by the Lender against the Guarantor of
any deficiency after such action and the Guarantor expressly waives any defense
or benefits that may be derived from statutes and laws relating thereto. No
exercise by the Lender of, and no omission of the Lender to exercise, any power
or authority recognized herein and no impairment or suspension of any right or
remedy of the Lender against the Guarantor, any other guarantor, maker or
endorser or any security shall in any way suspend, discharge, release, exonerate
or otherwise affect any of the Guarantor's obligations hereunder or give to the
Guarantor any right of recourse against the Lender.
D. The Guarantor consents and agrees that the Lender shall not be under any
obligation to make any demand upon or pursue or exhaust any of its rights or
remedies against the Borrower or any guarantor or any other Person with respect
to the Guaranteed Obligations, or to pursue or exhaust any of its rights or
remedies with respect to any security therefor, or any direct or indirect
guaranty thereof or any
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security for any such guaranty, or to marshal any assets in favor of the
Guarantor or against or in payment of any or all of the Guaranty in any
particular order. All of Lender's rights and remedies provided for herein, in
the Loan Agreement and the other Financing Agreements or otherwise available to
the Lender under applicable law, shall be cumulative and non-exclusive to the
extent permitted by law. Without limiting the generality of the foregoing, to
the extent permitted by applicable law, the Guarantor hereby agrees that it will
not invoke or utilize any law which might cause delay in or impede the
enforcement of the rights under this Guaranty or any of the Financing
Agreements.
E. Demand, presentment, protest and notice of nonpayment are hereby waived
by the Guarantor. The Guarantor also waives the benefit of all valuation,
appraisal and exemption law.
7. Miscellaneous.
A. This Guaranty shall be irrevocable. If notwithstanding the provisions of
this Guaranty, the Guarantor is entitled by law to revoke or terminate this
Guaranty other than as is expressly provided for herein, the Guarantor agrees
that this Guaranty shall continue in full force and effect and any such
revocation or termination shall not become effective until at least thirty (30)
days after written notice of revocation of this Guaranty, specifically referring
hereto (and identifying the effective date (the "Revocation Date") of such
revocation which shall be at least thirty (30) days after the Lender's receipt
thereof), signed by the Guarantor, is given to the Lender and is actually
received by the Lender. Such revocation shall not affect the right and power of
the Lender to enforce rights arising prior to the Revocation Date. If, in
reliance on this Guaranty, the Lender makes loans or takes other action after
the revocation by the Guarantor but prior to the Revocation Date, the rights of
the Lender with respect thereto shall be the same as if such revocation had not
occurred.
B. This Guaranty shall be binding upon the Guarantor and upon its
successors and assigns and shall inure to the benefit of the Lender and its
successors and assigns; all references herein to the Borrower and to the
Guarantor shall be deemed to include their respective successors and assigns
andrs and assigns shall include, without limitation, a receiver, trustee or
debtor-in-possession of or for the Borrower. This Guaranty shall be enforceable
by Lender or any of Lender's successors or assigns and any such successors and
assigns shall have the same rights and benefits as the Lender hereunder.
Notwithstanding anything herein to the contrary, the Guarantor may not assign or
otherwise transfer its rights or obligations under this Guaranty without the
prior written consent of the Lender.
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<PAGE>
C. All references to the singular shall be deemed to include the plural
where the context so requires. All representations, warranties and covenants
contained herein shall survive the execution and delivery of this Guaranty, the
transfer by Lender of any interest in the Guaranteed Obligations or under the
Financing Agreements, and may be relied upon by any assignee or successor of
Lender regardless of any investigation made at any time by or on behalf of
Lender or any such assignee or successor. The Guarantor acknowledges the
Lender's acceptance hereof and reliance hereon.
D. No course of dealing and no delay on the part of the Lender in the
exercise of any right or remedy shall operate as a waiver thereof, and no single
or partial exercise by the Lender of any right or remedy shall preclude any
further exercise thereof, nor shall any modification or waiver of any of the
provisions of this Guaranty be binding upon the Lender, except as expressly set
forth in a writing duly signed and delivered by the Lender. The Lender's failure
at any time or times hereafter to require strict performance by the Borrower or
the Guarantor or any other Person of any of the provisions, warranties, terms
and conditions contained in the Loan Agreement, any of the other Financing
Agreements or any promissory note, security agreement, agreement, guaranty,
instrument or document now or at any time or times hereafter executed by the
Borrower or the Guarantor or any other Person and delivered to the Lender shall
not waive, affect or diminish any right of thance thereof and such right shall
not be deemed to have been waived by any act or knowledge of the Lender, its
agents, officers or employees, unless such waiver is contained in an instrument
in writing signed by an authorized officer or agent of the Lender and directed
to the Borrower or the Guarantor or other Person, as the case may be, specifying
such waiver. All Defaults under the Loan Agreement and all defaults under this
Guaranty shall continue until the same are waived in a writing directed to the
Guarantor in accordance with this paragraph. No waiver of any default shall
operate as a waiver of any other default or the same default on a future
occasion, and no action by the Lender permitted hereunder shall in any way
affect or impair the Lender's rights or the obligations of the Guarantor under
this Guaranty. Any determination by a court of competent jurisdiction of the
amount of any principal and/or interest owing by the Borrower to the Lender
shall be conclusive and binding on the Guarantor irrespective of whether it was
a party to the suit or action in which such determination was made.
E. THIS GUARANTY SHALL BE DEEMED TO HAVE BEEN EXECUTED, AND WAS DELIVERED
AND ACCEPTED, IN CHICAGO, ILLINOIS. THIS GUARANTY SHALL BE CONSTRUED IN ALL
RESPECTS IN ACCORDANCE WITH, AND GOVERNED BY, AND ANY DISPUTE BETWEEN THE
PARTIES HERETO ARISING OUT OF, CONNECTED WITH, RELATED TO
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OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH
THIS GUARANTY AND WHETHER ARISING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL
BE RESOLVED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS
OF LAW PROVISIONS) AND DECISIONS OF THE STATE OF ILLINOIS.
F. WHENEVER POSSIBLE, EACH PROVISION OF THIS GUARANTY SHALL BE INTERPRETED
IN SUCH A MANNER AS TO BE EFFECTIVE AND VALID UNDER APPLICABLE LAW, BUT IF ANY
PROVISION OF THIS GUARANTY SHALL BE PROHIBITED BY OR INVALID UNDER APPLICABLE
LAW, SUCH PROVISION SHALL BE
INEFFECTIVE ONLY TO TH THE REMAINDER OF SUCH PROVISION OR THE REMAINING
PROVISIONS OF THIS GUARANTY.
G. (i) EXCEPT AS PROVIDED IN SUBPARAGRAPH 7.G(ii) BELOW, THE LENDER AND THE
GUARANTOR AGREE THAT ALL DISPUTES BETWEEN THEM ARISING OUT OF, CONNECTED WITH,
RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS GUARANTY AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR
OTHERWISE, SHALL BE RESOLVED ONLY BY STATE OR FEDERAL COURTS LOCATED IN COOK
COUNTY, ILLINOIS, BUT RECOGNIZING THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO
BE BY A COURT LOCATED OUTSIDE OF COOK COUNTY, ILLINOIS. THE GUARANTOR WAIVES IN
ALL DISPUTES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT
CONSIDERING THE DISPUTE.
(ii) THE GUARANTOR AGREES THAT THE LENDER SHALL HAVE THE RIGHT TO PROCEED
AGAINST THE GUARANTOR OR ITS PROPERTY ("PROPERTY") IN A COURT IN ANY LOCATION TO
ENABLE THE LENDER TO REALIZE ON ANY SECURITY FOR THE GUARANTEED OBLIGATIONS OR
THE GUARANTOR'S OBLIGATIONS UNDER THIS GUARANTY, OR TO ENFORCE A JUDGMENT OR
OTHER COURT ORDER ENTERED IN FAVOR OF THE LENDER. THE GUARANTOR AGREES THAT IT
WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING BROUGHT BY THE
LENDER TO REALIZE ON THE PROPERTY, OR ANY SECURITY FOR THE GUARANTEED
OBLIGATIONS OR THE GUARANTOR'S OBLIGATIONS UNDER THIS GUARANTY, OR TO ENFORCE A
JUDGMENT OR OTHER
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COURT ORDER IN FAVOR OF THE LENDER. THE GUARANTOR WAIVES ANY OBJECTION THAT IT
MAY HAVE TO THE LOCATION OF THE COURT IN WHICH THE LENDER HAS COMMENCED A
PROCEEDING DESCRIBED IN THIS PARAGRAPH 7.G.
H. THE GUARANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON
IT AND IRREVOCABLY APPOINTS CT CORPORATION SYSTEM, 208 SOUTH LASALLE STREET,
CHICAGO, ILLINOIS 60604, ITS AGENT, AS THE GUARANTOR'S AGENT FOR THE PURPOSE OF
ACCEPTING ON BEHALF OF THE GUARANTOR SERVICE OF PROCESS WITHIN THE STATE OF
ILLINOIS (THE "SP AGENT"). THE LENDER AGREES TO PROMPTLY FORWARD BYAGENT TO THE
GUARANTOR AT ITS ADDRESS SET FORTH IN PARAGRAPH 7.O BELOW. THE GUARANTOR HEREBY
CONSENTS TO SERVICE OF PROCESS AS AFORESAID. THE GUARANTOR FURTHER IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS OUT OF THE COURTS REFERRED TO IN PARAGRAPH
7.G ABOVE IN ANY SUCH ACTION OR PROCEEDING BY MAILING COPIES OF SUCH SERVICE BY
REGISTERED MAIL, POSTAGE PREPAID TO THE GUARANTOR AT SAID ADDRESS. NOTHING IN
THIS GUARANTY SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW. ANY FAILURE TO RECEIVE SUCH COPY SHALL NOT AFFECT IN
ANY WAY THE SERVICE OF SUCH PROCESS.
I. THE GUARANTOR AND THE LENDER WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE
IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE,
BETWEEN THE LENDER AND THE GUARANTOR ARISING OUT OF, CONNECTED WITH, RELATED TO
OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH
THIS GUARANTY OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR
DELIVERED IN CONNECTION THEREWITH OR THE TRANSACTIONS RELATED THERETO. THE
GUARANTOR AND THE LENDER HEREBY AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND
THAT EITHER PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS GUARANTY
WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
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<PAGE>
J. THE GUARANTOR WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF THE
LENDER IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO OBTAIN
POSSESSION OF, REPLEVY, ATTACH, OR LEVY UPON ANY SECURITY FOR THE GUARANTEED
OBLIGATIONS OR THE GUARANTOR'S OBLIGATIONS UNDER THIS GUARANTY, TO ENFORCE ANY
JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF THE LENDER, OR TO ENFORCE BY
SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER, PRELIMINARY OR PERMANENT
INJUNCTION, THIS GUARANTY, OR ANY OF THE OTHER AGREEMENT OR DOCUMENT BETWEEN THE
LENDER ANDs of the agreement between the Lender and the Guarantor relating to
the subject matter hereof. The terms or provisions of this Guaranty may not be
waived, altered, modified or amended except in a writing duly executed by the
party to be charged thereby.
L. Neither the Lender nor any of its affiliates, directors, officers,
agents, attorneys or employees shall be liable to the Guarantor for any action
taken, or omitted to be taken, by it or them or any of them under this Guaranty,
the Loan Agreement or the Financing Agreements or in connection therewith.
M. The Guarantor warrants and agrees that each of the waivers set forth in
this Guaranty are made with full knowledge of their significance and
consequences and that, under the circumstances, the waivers are reasonable. If
any of said waivers are determined to be contrary to any applicable law or
public policy, such waivers shall be effective to the maximum extent permitted
by law. Should any one or more provisions of this Guaranty be determined to be
illegal or unenforceable, all other provisions hereof shall nevertheless remain
effective.
N. Captions are for convenience only and shall not affect the meaning of
any term or provision of this Guaranty.
O. Except as otherwise expressly provided herein, any notice required or
desired to be served, given or delivered hereunder shall be in writing, and
shall be deemed to have been validly served, given or delivered (i) three (3)
days after deposit in the United States mails, with proper postage prepaid, (ii)
when sent after receipt of confirmation or answerback if sent by telecopy, or
other similar facsimile transmission, (iii) one (1) Business Day after deposited
with a reputable overnight courier with all charges prepaid, or (iv) when
delivered, if hand-delivered by
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messenger, all of which shall be properly addressed to the Person to be
notified, and sent to the address or number indicated as follows:
(i) If to the Lender at:
American National Bank and
Trust Company of Chicago
33 North LaSalle Street
Chicago, Illinois 60690
Attention: Dennis E. Harrison
Telecopy: 312/661-6929
Confirmation: 312/661-5707
(ii) If to the Guarantor at:
HRM Holdings Corp.
15 Gilpin Avenue
Hauppauge, New York 11788
Attention: George Fishman
Telecopy: 516/234-0346
Confirmation: 516/234-0200
with a copy of such notice to:
Warshaw Burstein Cohen Schlesinger & Kuh, LLP
555 Fifth Avenue
New York, New York 10017
Attention: Frederick R. Cummings, Jr., Esq.
Telecopy: 212/972-9150
Confirmation: 212/984-7807
or to such other address or number as the Guarantor or the Lender designates to
the other in the manner herein prescribed.
P. The Guarantor acknowledges that any breach by the Guarantor of any of
the provisions of this Guaranty will cause irreparable injury to the Lender and
there is no adequate remedy at law for a breach of the provisions of this
Guaranty. The Guarantor agrees that the Lender will have the immediate right,
upon such breach, to obtain temporary and permanent injunctive relief in any
such case without the necessity of proving actual damages and that the granting
of any such relief shall not
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preclude the Lender from pursuing any other available relief or remedies for
such breach.
Q. This Guaranty may be executed and accepted in any number of counterparts
each of which shall be an original with the same effect as if the signatures
thereto and hereto were on the same instrument. The delivery of an executed
counterpart of a signature page or acceptance to this Guaranty by telecopier
shall be effective as delivery of a manually executed counterpart of this
Guaranty.
R. THE GUARANTOR ACKNOWLEDGES AND REPRESENTS TO THE LENDER THAT IT HAS BEEN
REPRESENTED AND ADVISED BY COUNSEL WITH RESPECT TO THIS GUARANTY AND THE OTHER
FINANCING AGREEMENTS TO WHICH IT IS A PARTY, THE TRANSACTIONS GOVERNED BY THIS
GUARANTY AND THE OTHER FINANCING AGREEMENTS.
S. This Guaranty shall become effective at the Effective Time.
T. The Original Guaranty is amended and restated in its entirety in the
form hereof as of the effectiveness of this Guaranty; provided, however, any
representations and warranties made by the Guarantor to the Lender shall survive
the execution and delivery hereof.
IN WITNESS WHEREOF, the Guarantor has made this Guaranty as of the date
first above written.
HRM HOLDINGS CORP.
By: /s/ Charles Kavanagh
---------------------------
Title: Vice President
-----------------------
Acknowledged and agreed to
in Chicago, Illinois, as of this
30th day of October, 1996:
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/ Catherine Saccany
-------------------------------
Title: Vice President
----------------------------
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Exhibit (10)(a)(vi)
AMENDED AND RESTATED
GUARANTY AGREEMENT
THIS AMENDED AND RESTATED GUARANTY AGREEMENT dated as of October 30, 1996
("Guaranty") and made by Hauppauge Record Manufacturing Ltd., a New York
corporation (the "Guarantor"), with an office located at 15 Gilpin Avenue,
Hauppauge, New York 11788, in favor of American National Bank and Trust Company
of Chicago, with an office at 33 North LaSalle Street, Chicago, Illinois 60690
(together with its successors and assigns, the "Lender").
RECITALS
A. Allied Film Laboratory, Inc., a Michigan corporation ("AFL"), entered
into that certain Guaranty Agreement dated as of January 24, 1995 in favor of
the Lender (as heretofore amended, the "Original Guaranty") with respect to
certain obligations of Greenfield Land Company, a Michigan co-partnership (the
"Borrower"), to Lender.
B. The Borrower is entering into that certain Amended and Restated Loan
and Security Agreement dated as of October 30, 1996 with the Lender (such
agreement, as it may hereafter be amended or otherwise modified from time to
time, being hereinafter referred to as the "Loan Agreement"; capitalized terms
used but not otherwise defined herein are used herein as defined in the Loan
Agreement).
C. AFL merged with and into the Guarantor and the Guarantor is entering
into the Hauppauge Loan Agreement.
D. As a condition precedent to the effectiveness of the Loan Agreement and
the Hauppauge Loan Agreement and any extensions of credit pursuant thereto, the
Lender has required, among other things, that the Guarantor amend and restate
the Original Guaranty in the form of this Guaranty and that the Borrower execute
and deliver the GLC Guaranty.
<PAGE>
E. The Guarantor is affiliated with the Borrower and the Guarantor leases
certain property from the Borrower pursuant to certain leases which were assumed
by the Guarantor in connection with the Merger. As a result of these and other
relationships between the Guarantor and the Borrower, the Guarantor will benefit
from the GLC Guaranty and the advances and financial accommodations provided
under the Loan Agreement and the Hauppauge Loan Agreement and the other
provisions of the Loan Agreement and the Hauppauge Loan Agreement.
NOW, THEREFORE, in consideration of the above premises and any loans and
other financial accommodations heretofore, now or hereafter made to or for the
benefit of Guarantor or Borrower by the Lender, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Guarantor hereby agrees that, effective as of the Effective Time, the Original
Guaranty is amended and restated as follows:
1. Guaranty.
A. The Guarantor hereby absolutely, unconditionally and irrevocably
guarantees the full and prompt payment when due, whether at maturity or earlier,
by reason of acceleration, mandatory prepayment or otherwise, and at all times
thereafter, and the due and punctual performance, of all of the Liabilities
(including without limitation any and all "Liabilities" as such term was defined
in the Original LSA), including, without limitation, all sums which may become
due under the terms and provisions of the Term Note or the Loan Agreement,
whether for principal, interest (including, without limitation, interest
accruing before, during or after any bankruptcy, insolvency, reorganization,
arrangement, readjustment of debt, liquidation or dissolution proceeding, and,
if interest ceases to accrue by operation of law by reason of any such
proceeding, interest which otherwise would have accrued in the absence of such
proceeding), premium, fees, expenses or otherwise, whether or not from time to
time reduced or extinguished or hereafter increased or incurred, whether or not
recovery may
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be or hereafter may become barred by any statute of limitations, whether
enforceable or unenforceable as against the Borrower, now or hereafter existing,
or due or to become due (all Liabilities together with the Costs (as hereinafter
defined), collectively, the "Guaranteed Obligations"). This is a continuing
guaranty of payment and not of collection.
B. The Guarantor further agrees to pay, upon demand, all costs and
expenses ("Costs"), including, without limitation, all court costs and
reasonable attorneys' and paralegals' fees and expenses, paid or incurred by the
Lender (i) in endeavoring to collect all or any part of the Guaranteed
Obligations from, or in pursuing any action against, the Borrower, the Guarantor
or any other guarantor of all or any part of the Guaranteed Obligations or (ii)
in endeavoring to realize upon (whether by judicial, non-judicial or other
proceedings) any collateral securing the Guarantor's liabilities under this
Guaranty.
C. The Guarantor further agrees that, if any payment made by the Borrower
or any other Person is applied to the Guaranteed Obligations and is at any time
annulled, set aside, rescinded, invalidated, declared to be fraudulent or
preferential or otherwise required to be refunded or repaid, or the proceeds of
Collateral or any other security are required to be returned by the Lender to
the Borrower, its estate, trustee, receiver or any other Person, including,
without limitation, the Guarantor, under any bankruptcy law, state or federal
law, common law or equitable cause, then, to the extent of such payment or
repayment, the Guarantor's liability hereunder (and any lien, security interest
or other collateral securing such liability) shall be and remain in full force
and effect, as fully as if such payment had never been made, or, if prior
thereto this Guaranty shall have been cancelled or surrendered (and if any lien,
security interest or other collateral securing Guarantor's liability hereunder
shall have been released or terminated by virtue of such cancellation or
surrender), this Guaranty (and such lien, security interest or other collateral)
shall be reinstated in full force and effect, and such prior
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<PAGE>
cancellation or surrender shall not diminish, release, discharge, impair or
otherwise affect the obligations of the Guarantor in respect of the amount of
such payment (or any lien, security interest or other collateral securing such
obligation).
D. Notwithstanding the foregoing, the Guarantied Obligations shall not
include any loans or advances made by Lender to Borrower after the date hereof;
provided, however, that none of the following items shall be deemed to be loans
and advances made by Lender after the date hereof or excluded from the
Guarantied Obligations by reason of arising after the date hereof: (i) all
Costs, (ii) all costs, expenses, charges and other expenditures made by Lender
pursuant to the Financing Agreements to pay taxes, insurance, assessments,
costs, expenses or other amounts which Borrower is required to pay or cause to
be paid pursuant to the Financing Agreements, or to perform obligations which
Borrower is required to perform pursuant to the Financing Agreements, or to keep
the Collateral free from Liens (except Liens permitted by the Financing
Agreements), or to protect or preserve the Collateral or to create, perfect or
preserve the Lender's Liens in the Collateral, including without limitation
under any of the foregoing arising pursuant to subsection 9.2 or 9.3 of the Loan
Agreement or pursuant to Section 19 of any of the Mortgages, or (iii)
obligations of Borrower arising as a result of Borrower's indemnification
obligations under the Financing Agreements.
2. Representations and Warranties. The Guarantor represents and warrants
that as of the Effective Time, and continuing so long as any Guaranteed
Obligations remain outstanding, and (even if there shall be no Guaranteed
Obligations outstanding) so long as this Guaranty remains in effect:
A. Corporate Existence. The Guarantor is a corporation duly organized and
in good standing under the laws of the
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State of New York and is duly qualified as a foreign corporation and in good
standing in the states set forth on Schedule 6.1 to the Loan Agreement, which
are all of the states where the nature and extent of the business transacted by
it or the ownership of its assets makes such qualification necessary, except for
those jurisdictions in which the failure so to qualify would not, in the
aggregate, have a material adverse effect on its financial condition, results of
operations or business or the ability of the Guarantor to perform its
obligations under this Guaranty or under any other Financing Agreement to which
it is a party.
B. Corporate Authority. The execution and delivery by the Guarantor of
this Guaranty and of each of the other Financing Agreements to which it is a
party and the performance of the Guarantor's obligations hereunder and
thereunder: (i) are within the Guarantor's corporate powers; (ii) are duly
authorized by the Board of Directors of the Guarantor and, if necessary, the
stockholders of the Guarantor; (iii) are not in contravention of the terms of
the Guarantor's Certificate or Articles of Incorporation, or By-Laws, or of any
indenture, or other agreement or undertaking to which the Guarantor is a party
or by which the Guarantor or any of its property is bound or any judgment,
decree or order applicable to the Guarantor; (iv) do not, as of the execution
hereof or thereof, require any governmental consent, registration or approval or
any filing with or notice to any governmental entity or agency; (v) do not
contravene any contractual or governmental restriction binding upon the
Guarantor; (vi) will not result in the imposition of any Lien upon any property
of the Guarantor under any existing indenture, mortgage, deed of trust, loan or
credit agreement or other material agreement or instrument to which the
Guarantor is a party or by which it or any of its property may be bound or
affected; and (vii) do not contravene or violate any laws or regulations
applicable to Guarantor.
C. Binding Effect. Each of this Guaranty and all of the other Financing
Agreements to which the Guarantor is a
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<PAGE>
party have been duly executed and delivered by the Guarantor and constitute the
legal, valid and binding obligations of the Guarantor, enforceable against the
Guarantor in accordance with their respective terms.
D. Survival of Warranties. All representations and warranties contained in
this Guaranty or any of the other Financing Agreements shall survive the
execution and delivery of this Guaranty.
3. Waivers; Other Agreements.
A. The Lender is hereby authorized, without notice to or demand upon the
Guarantor, which notice or demand is expressly waived hereby, and without
discharging or otherwise affecting the obligations of the Guarantor hereunder
(which shall remain absolute and unconditional notwithstanding any such action
or omission to act), from time to time, to:
(i) supplement, renew, extend, accelerate or otherwise change the
time for payment of, or other terms relating to, the Guaranteed
Obligations, or any portion thereof, or otherwise modify, amend or change
the terms of any promissory note or other agreement, document or
instrument (including, without limitation, the Loan Agreement and the
other Financing Agreements) now or hereafter executed by the Borrower and
delivered to the Lender, including, without limitation, any increase or
decrease of the principal amount thereof or the rate of interest thereon;
(ii) waive or otherwise consent to noncompliance with any provision
of any agreement, document or instrument (including, without limitation,
the Loan Agreement and the other Financing Agreements) evidencing or in
respect of the Guaranteed Obligations, or any part thereof,
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<PAGE>
now or hereafter executed by the Borrower and delivered to the Lender;
(iii) accept partial payments on the Guaranteed Obligations;
(iv) receive, take and hold security or collateral for the payment
or performance of the Guaranteed Obligations, or any part thereof, or for
the payment or performance of any guaranties of all or any part of the
Guaranteed Obligations, and exchange, enforce, waive, substitute,
liquidate, terminate, abandon, fail to perfect, subordinate, transfer,
otherwise alter and release any such security or collateral;
(v) apply any and all such security or collateral and direct the
order or manner of sale thereof as the Lender may determine in its sole
discretion;
(vi) settle, release, compromise, collect or otherwise liquidate the
Guaranteed Obligations, or any part thereof, or accept, substitute,
release, exchange or otherwise alter, affect or impair any security or
collateral for the Guaranteed Obligations, or any part thereof, or any
other guaranty therefor, in any manner;
(vii) add, release or substitute any one or more other guarantors,
makers or endorsers of all or any part of the Guaranteed Obligations and
otherwise deal with the Borrower or any other guarantor, maker or endorser
as the Lender may elect in its sole discretion;
(viii) apply any and all payments or recoveries from the Guarantor,
from the Borrower or from any other guarantor, maker or endorser of all or
any part of the Guaranteed Obligations to
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the Guaranteed Obligations in such order as the Lender in its sole
discretion may determine, whether such Guaranteed Obligations are secured
or unsecured or guaranteed or not guaranteed by others;
(ix) apply any and all payments or recoveries from the Guarantor or
any other guarantor, maker or endorser of all or any part of the
Guaranteed Obligations or sums realized from security furnished by any of
them upon any of their indebtedness or obligations to Lender, as Lender in
its sole discretion may determine, whether or not such indebtedness or
obligations relate to the Guaranteed Obligations; and
(x) refund to Borrower or any Person making any payment (or its
estate, a trustee or receiver) at any time, at the Lender's sole
discretion, any payment received by Lender in respect of any Guaranteed
Obligations, and payment to the Lender of the amount so refunded shall be
fully guaranteed hereby even though prior thereto this Guaranty shall have
been cancelled or surrendered (or any lien, security interest or other
collateral shall have been released or terminated by virtue thereof), and
such prior cancellation or surrender (or release or termination) shall not
diminish, release, discharge, impair or otherwise affect the obligations
of the Guarantor hereunder in respect of the amount so refunded (and any
lien, security interest or other collateral so released or terminated
shall be reinstated with respect to such obligations).
B. The Guarantor hereby agrees that its obligations under this Guaranty
are absolute and unconditional and shall not be discharged or otherwise affected
as a result of:
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<PAGE>
(i) the invalidity or unenforceability of any security for or other
guaranty of all or any part of the Guaranteed Obligations or of any
promissory note or other agreement, document or instrument (including,
without limitation, the Loan Agreement and the Financing Agreements)
evidencing or in respect of all or any part of the Guaranteed Obligations,
or the lack of perfection or continuing perfection or failure of priority
of any security for all or any part of the Guaranteed Obligations or any
other guaranty therefor;
(ii) the absence of any attempt to collect the Guaranteed
Obligations, or any portion thereof, from the Borrower or any other
guarantor or other action to enforce the same;
(iii) any failure by the Lender to acquire, perfect and maintain any
security interest in, or to preserve any rights to, any security or
collateral for all or any part of the Guaranteed Obligations or any
guaranty therefor;
(iv) any election by the Lender in any proceeding instituted under
Chapter 11 of Title 11 of the United States Code (11 U.S.C. ss. 101 et
seq.) (the "Bankruptcy Code");
(v) any borrowing or grant of a security interest by the Borrower,
as debtor-in-possession, or extension of credit, under the Bankruptcy
Code;
(vi) the disallowance, under the Bankruptcy Code, of all or any
portion of the Lender's claim(s) for repayment of the Guaranteed
Obligations;
(vii) any use of cash collateral under the Bankruptcy Code;
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(viii) any agreement or stipulation as to the provision of adequate
protection in any bankruptcy proceeding;
(ix) the avoidance of any lien in favor of the Lender for any
reason;
(x) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, liquidation or dissolution proceeding commenced by
or against the Borrower, the Guarantor or any other guarantor, maker or
endorser, including without limitation, any discharge of, or bar or stay
against collecting or accelerating, all or any of the Guaranteed
Obligations (or any interest thereon) in or as a result of any such
proceeding;
(xi) any failure by the Lender to file or enforce a claim against
the Borrower or its estate in any bankruptcy or insolvency case or
proceeding;
(xii) any action taken by the Lender that is authorized by this
Guaranty;
(xiii) any election by the Lender under Section 9-501(4) of the
Uniform Commercial Code as enacted in any relevant jurisdiction as to any
security for the Guaranteed Obligations or any guaranty of all or any part
of the Guaranteed Obligations; or
(xiv) any other circumstance which might otherwise constitute a
legal or equitable discharge or defense of a guarantor.
C. Until the Guaranteed Obligations shall have been paid and performed in
full and all of the Financing Agreements shall have been terminated, the
Guarantor shall have no right of subrogation and hereby waives any right to
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enforce any remedy which the Lender now has or may hereafter have against the
Borrower or any guarantor of all or any part of the Guaranteed Obligations, and
the Guarantor hereby waives any benefit of, and any right to participate in, any
security or collateral given to the Lender to secure payment or performance of
any of the Guaranteed Obligations or any other liability of the Borrower to the
Lender. The Guarantor further agrees that any and all claims of the Guarantor
against the Borrower or any guarantor of all or any part of the Guaranteed
Obligations, or against any of their respective properties, arising by reason of
this Guaranty, including without limitation by reason of any payment by the
Guarantor to the Lender pursuant to the provisions hereof, shall be subordinate
and subject in right of payment to the prior payment, in full, of all principal
and interest, all reasonable costs of collection (including attorneys' and
paralegals' fees) and payment and performance in full of any other liabilities
or obligations to the Lender by the Borrower, including without limitation the
Liabilities, which may arise either with respect to or on any Financing
Agreement or any other note, instrument, document, item, agreement or other
writing heretofore, now or hereafter delivered to the Lender. The Guarantor
further waives:
(i) any requirements of diligence or promptness on the part of the
Lender;
(ii) presentment, demand for payment or performance and protest and
notice of protest with respect to the Guaranteed Obligations or any
guaranty with respect thereto;
(iii) notices (a) of nonperformance, (b) of acceptance of this
Guaranty, (c) of default in respect of the Guaranteed Obligations, (d) of
the existence, creation or incurrence of new or additional indebtedness,
arising either from additional loans extended to the Borrower or
otherwise, (e) that the principal amount, or any
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portion thereof, and/or any interest on any document or instrument
evidencing all or any part of the Guaranteed Obligations is due, (f) of
any and all proceedings to collect from the Borrower, any maker, endorser
or any other guarantor of all or any part of the Guaranteed Obligations or
from anyone else, and (g) of exchange, sale, surrender or other handling
of any security or collateral given to the Lender to secure payment of the
Guaranteed Obligations or any guaranty therefor;
(iv) any right to require the Lender to (a) proceed first against
the Borrower or any other Person whatsoever, (b) proceed against or
exhaust any security given to or held by the Lender in connection with the
Guaranteed Obligations, or (c) pursue any other remedy in the Lender's
power whatsoever;
(v) any defense arising by reason of (a) any disability or other
defense of the Borrower, (b) the cessation from any cause whatsoever of
the liability of the Borrower, (c) any act or omission of the Lender or
others which directly or indirectly, by operation of law or otherwise,
results in or aids the discharge or release of the Borrower or any
security given to or held by the Lender in connection with the Guaranteed
Obligations;
(vi) any and all other suretyship defenses under applicable law; and
(vii) the benefit of any statute of limitations affecting the
Guaranteed Obligations or the Guarantor's liability hereunder or the
enforcement hereof.
In connection with the foregoing, the Guarantor covenants that this Guaranty
shall not be discharged, except by
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complete performance of the obligations contained herein and the payment and
discharge in full of all of the Liabilities and termination of all Financing
Agreements (including without limitation any commitments with respect to the
Liabilities). All waivers granted by the Guarantor hereunder shall be
unconditional and irrevocable irrespective of whether the Guaranteed Obligations
have been paid in full by the Guarantor or any other party.
D. The Guarantor hereby assumes responsibility for keeping itself informed
of the financial condition of the Borrower, of any and all endorsers and/or
other guarantors of all or any part of the Guaranteed Obligations and of all
other circumstances bearing upon the risk of nonpayment and nonperformance of
the Guaranteed Obligations, or any part thereof, and the Guarantor hereby agrees
that the Lender shall not have any duty to advise the Guarantor of information
known to the Lender regarding such condition or any such circumstances. In the
event the Lender, in its sole discretion, undertakes at any time or from time to
time to provide any such information to the Guarantor, the Lender shall not have
any obligation (i) to undertake any investigation, whether or not a part of its
regular business routine, (ii) to disclose any information which the Lender
wishes to maintain confidential or (iii) to make any other or future disclosures
of such information or any other information of the Guarantor.
E. The Guarantor shall not take any action which would, directly or
indirectly, result in an Event of Default or Default under the Loan Agreement.
4. Default; Remedies.
A. The obligations of the Guarantor hereunder are independent of and
separate from the Guaranteed Obligations and the obligations of any other
guarantor of the Guaranteed Obligations or any other Person. If any of the
Guaranteed Obligations are not paid when due, or upon the occurrence and during
the continuance of any Default, the Lender may,
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at its sole election, proceed directly and at once, without notice, against the
Guarantor to collect and recover the full amount or any portion of the
Guaranteed Obligations then due, without first proceeding against the Borrower,
any other guarantor of all or part of the Guaranteed Obligations or any other
Person, or against any Collateral or any other security for the Guaranteed
Obligations or the obligations of the Guarantor or any other guarantor under any
guaranty; provided, however, if any Default specified in Subsection 8.1(G), (H),
(I) or (J) of the Loan Agreement shall occur and be continuing, the Guarantor
shall, at the option of the Lender, pay to the Lender the full amount which
would be payable under this Guaranty, if all of the Liabilities were then due
and payable.
B. The Guarantor hereby authorizes and empowers the Lender, in its sole
discretion, without any notice (except notices required by law to the extent
such notice as a matter of law may not be waived) or demand to the Guarantor
whatsoever and without affecting the obligations of the Guarantor hereunder, to
exercise any right or remedy which the Lender may have available to it,
including, but not limited to, foreclosure by one or more judicial or
nonjudicial sales, and to the extent permitted by applicable law, the Guarantor
hereby waives any defense to the recovery by the Lender against the Guarantor of
any deficiency after such action and the Guarantor expressly waives any defense
or benefits that may be derived from statutes and laws relating thereto. No
exercise by the Lender of, and no omission of the Lender to exercise, any power
or authority recognized herein and no impairment or suspension of any right or
remedy of the Lender against the Guarantor, any other guarantor, maker or
endorser or any security shall in any way suspend, discharge, release, exonerate
or otherwise affect any of the Guarantor's obligations hereunder or give to the
Guarantor any right of recourse against the Lender.
C. The Guarantor consents and agrees that the Lender shall not be under
any obligation to make any demand upon or pursue or exhaust any of its rights or
remedies against the
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Borrower or any other guarantor or any other Person with respect to the
Guaranteed Obligations, or to pursue or exhaust any of its rights or remedies
with respect to any security therefor, or any direct or indirect guaranty
thereof or any security for any such guaranty, or to marshal any assets in favor
of the Guarantor or against or in payment of any or all of the Guaranteed
Obligations or to resort to any security or any such guaranty in any particular
order. All of the Lender's rights and remedies provided for herein, in the Loan
Agreement and the other Financing Agreements or otherwise available to the
Lender under app and non-exclusive to the extent permitted by law. Without
limiting the generality of the foregoing, to the extent permitted by applicable
law, the Guarantor hereby agrees that it will not invoke or utilize any law
which might cause delay in or impede the enforcement of the rights under this
Guaranty or any of the Financing Agreements.
D. Demand, presentment, protest and notice of nonpayment are hereby waived
by the Guarantor. The Guarantor also waives the benefit of all valuation,
appraisal and exemption laws.
5. Miscellaneous.
A. This Guaranty shall be irrevocable. If notwithstanding the provisions
of this Guaranty, the Guarantor is entitled by law to revoke or terminate this
Guaranty other than as is expressly provided for herein, the Guarantor agrees
that this Guaranty shall continue in full force and effect and any such
revocation or termination shall not become effective until at least thirty (30)
days after written notice of revocation of this Guaranty, specifically referring
hereto (and identifying the effective date (the "Revocation Date") of such
revocation which shall be at least thirty (30) days after the Lender's receipt
thereof), signed by the Guarantor, is given to the Lender and is actually
received by the Lender. Such revocation shall not affect the right and power of
the Lender to enforce rights arising prior to the Revocation Date. If, in
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reliance on this Guaranty, the Lender makes loans or takes other action after
the revocation by the Guarantor but prior to the Revocation Date, the rights of
the Lender with respect thereto shall be the same as if such revocation had not
occurred.
B. This Guaranty shall be binding upon the Guarantor and upon its
successors and assigns and shall inure to the benefit of the Lender and its
successors and assigns; all references herein to the Borrower and to the
Guarantor shall be deemed to include their respective successors and assigns and
all references herein to the Lender shall be deemed to include its successors
and assigns. The Borrower's successors and assigns shall include, without
limitation, a receiver, trustee or debtor-in-possession of or for the Borrower.
This Guaranty shall be enforceable by Lender or any of Lender's successors or
assigns and any such successors and assigns shall have the same rights and
benefits as the Lender hereunder. Notwithstanding anything herein to the
contrary, the Guarantor may not assign or otherwise transfer its rights or
obligations under this Guaranty without the prior written consent of the Lender.
C. All references to the singular shall be deemed to include the plural
where the context so requires. All representations, warranties and covenants
contained herein shall survive the execution and delivery of this Guaranty, the
transfer by the Lender of any interest in the Guaranteed Obligations or under
the Financing Agreements, and may be relied upon by any assignee or successor of
the Lender, regardless of any investigation made at any time by or on behalf of
the Lender or any such assignee or successor. The Guarantor acknowledges the
Lender's acceptance hereof and reliance hereon.
D. No course of dealing and no delay on the part of the Lender in the
exercise of any right or remedy shall operate as a waiver thereof, and no single
or partial exercise by the Lender of any right or remedy shall preclude any
further exercise thereof, nor shall any modification or
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waiver of any of the provisions of this Guaranty be binding upon the Lender,
except as expressly set forth in a writing duly signed and delivered by the
Lender. The Lender's failure at any time or times hereafter to require strict
performance by the Borrower or the Guarantor or any other Person of any of the
provisions, warranties, terms and conditions contained in the Loan Agreement,
any of the other Financing Agreements or any promissory note, security
agreement, agreement, guaranty, instrument or document now or at any time or
times hereafter executed by the Borrower or the Guarantor or any other Person
and delivered to the Lender shall not waive, affect or diminish any right of the
Lender at any time or times hereafter to demand strict performance thereof and
such right shall not be deemed to have been waived by any act or knowledge of
the Lender, or its agents, officers or employees, unless such waiver is
contained in an instrument in writing signed by any authorized officer or agent
of the Lender and directed to the Borrower or the Guarantor or other Person, as
the case may be, specifying such waiver. All Defaults under the Loan Agreement
and all defaults under this Guaranty shall continue until the same are waived in
a writing directed to the Guarantor in accordance with this paragraph 5.D. No
waiver of any default shall operate as a waiver of any other default or the same
default on a future occasion, and no action by the Lender permitted hereunder
shall in any way affect or impair the Lender's rights or the obligations of the
Guarantor under this Guaranty. Any determination by a court of competent
jurisdiction of the amount of any principal and/or interest owing by the
Borrower to the Lender shall be conon the Guarantor irrespective of whether it
was a party to the suit or action in which such determination was made (unless
such determination was made as a result of a default judgment in a proceeding in
which Borrower did not appear).
E. THIS GUARANTY SHALL BE DEEMED TO HAVE BEEN EXECUTED, AND WAS DELIVERED
AND ACCEPTED, IN CHICAGO, ILLINOIS. THIS GUARANTY SHALL BE CONSTRUED IN ALL
RESPECTS IN ACCORDANCE WITH, AND GOVERNED BY, AND ANY DISPUTE BETWEEN
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THE PARTIES HERETO ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO
THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS GUARANTY AND
WHETHER ARISING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED IN
ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW
PROVISIONS) AND DECISIONS OF THE STATE OF ILLINOIS.
F. WHENEVER POSSIBLE, EACH PROVISION OF THIS GUARANTY SHALL BE INTERPRETED
IN SUCH A MANNER AS TO BE EFFECTIVE AND VALID UNDER APPLICABLE LAW, BUT IF ANY
PROVISION OF THIS GUARANTY SHALL BE PROHIBITED BY OR INVALID UNDER APPLICABLE
LAW, SUCH PROVISION SHALL BE INEFFECTIVE ONLY TO THE EXTENT OF SUCH PROHIBITION
OR INVALIDITY, WITHOUT INVALIDATING THE REMAINDER OF SUCH PROVISION OR THE
REMAINING PROVISIONS OF THIS GUARANTY.
G. (I) EXCEPT AS PROVIDED IN SUBPARAGRAPH 5.G(II) BELOW, ALL DISPUTES
BETWEEN THE GUARANTOR AND THE LENDER ARISING OUT OF, CONNECTED WITH, RELATED TO,
OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH
THIS GUARANTY AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL
BE RESOLVED ONLY BY STATE OR FEDERAL COURTS LOCATED IN COOK COUNTY, ILLINOIS,
BUT RECOGNIZING THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE BY A COURT
LOCATED OUTSIDE OF COOK COUNTY, ILLINOIS. THE GUARANTOR WAIVES IN ALL DISPUTES
ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT CONSIDERING THE
DISPUTE.
(II) THE GUARANTOR AGREES THAT THE LENDER SHALL HAVE THE RIGHT TO PROCEED
AGAINST THE GUARANTOR OR ITS PROPERTY ("PROPERTY") IN A COURT IN ANY LOCATION TO
ENABLE THE LENDER TO REALIZE ON ANY SECURITY FOR THE GUARANTEED OBLIGATIONS OR
THE GUARANTOR'S OBLIGATIONS UNDER THIS GUARANTY, OR TO ENFORCE A JUDGMENT OR
OTHER COURT ORDER ENTERED IN FAVOR OF THE LENDER. THE GUARANTOR AGREES THAT IT
WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING BROUGHT BY THE
LENDER TO REALIZE ON THE PROPERTY OR ANY SECURITY FOR THE GUARANTEED OBLIGATIONS
OR THE GUARANTOR'S OBLIGATIONS UNDER THIS GUARANTY, OR TO ENFORCE A JUDGMENT OR
OTHER COURT
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<PAGE>
ORDER IN FAVOR OF THE LENDER. THE GUARANTOR WAIVES ANY OBJECTION THAT IT MAY
HAVE TO THE LOCATION OF THE COURT IN WHICH LENDER HAS COMMENCED A PROCEEDING
DESCRIBED IN THIS PARAGRAPH 5.G.
H. THE GUARANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS
UPON IT AND IRREVOCABLY APPOINTS CT CORPORATION SYSTEM, 208 S. LASALLE STREET,
CHICAGO, ILLINOIS 60604, GUARANTOR'S AGENT, AS THE GUARANTOR'S AGENT FOR THE
PURPOSE OF ACCEPTING ON BEHALF OF THE GUARANTOR SERVICE OF PROCESS WITHIN THE
STATE OF ILLINOIS (THE "SP AGENT"). THE LENDER AGREES TO PROMPTLY FORWARD BY
REGISTERED MAIL (NO RETURN RECEIPT REQUIRED) A COPY OF ANY PROCESS SO SERVED BY
IT UPON THE SP AGENT TO THE GUARANTOR AT ITS ADDRESS SET FORTH IN PARAGRAPH 5.O
BELOW. THE GUARANTOR HEREBY CONSENTS TO SERVICE OF PROCESS AS AFORESAID. THE
GUARANTOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF THE
COURTS REFERRED TO IN PARAGRAPH 5.G ABOVE IN ANY SUCH ACTION OR PROCEEDING BY
MAILING COPIES OF SUCH SERVICE BY REGISTERED MAIL, POSTAGE PREPAID TO THE
GUARANTOR AT SAID ADDRESS. NOTHING IN THIS GUARANTY SHALL AFFECT THE RIGHT OF
THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. ANY FAILURE TO
RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS.
I. THE GUARANTOR AND THE LENDER WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE
IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE,
BETWEEN THE GUARANTOR AND LENDER ARISING OUT OF, CONNECTED WITH, RELATED TO OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS
GUARANTY OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION THEREWITH OR THE TRANSACTIONS RELATED THERETO. ANY SUCH CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY
AND ANY PERSON MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS GUARANTY WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE OTHER TO THE WAIVER OF THEIR
RIGHT TO TRIAL BY JURY.
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<PAGE>
J. THE GUARANTOR WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF THE
LENDER IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO OBTAIN
POSSESSION OF, REPLEVY, ATTACH, OR LEVY UPON ANY SECURITY FOR THE GUARANTEED
OBLIGATIONS OR THE GUARANTOR'S OBLIGATIONS UNDER THIS GUARANTY, TO ENFORCE ANY
JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF THE LENDER, OR TO ENFORCE BY
SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER, PRELIMINARY OR PERMANENT
INJUNCTION, THIS GUARANTY, OR ANY OF THE OTHER AGREEMENT OR DOCUMENT BETWEEN THE
LENDER AND THE GUARANTOR.
K. This Guaranty contains all the terms and conditions of the agreement
between the Lender and the Guarantor relating to the subject matter hereof. The
terms or provisions of this Guaranty may not be waived, altered, modified or
amended except in a writing duly executed by the party to be charged thereby.
L. Neither the Lender nor any of its affiliates, directors, officers,
agents, attorneys or employees shall be liable to the Guarantor for any action
taken, or omitted to be taken, by it or them or any of them under this Guaranty,
the Loan Agreement or the Financing Agreements or in connection herewith or
therewith.
M. The Guarantor warrants and agrees that each of the waivers set forth in
this Guaranty are made with full knowledge of their significance and
consequences and that, under the circumstances, the waivers are reasonable. If
any of said waivers are determined to be contrary to any applicable law or
public policy, such waivers shall be effective to the maximum extent permitted
by law. Should any one or more provisions of this Guaranty be determined to be
illegal or unenforceable, all other provisions hereof shall nevertheless remain
effective.
N. Captions are for convenience only and shall not affect the meaning of
any term or provision of this Guaranty.
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<PAGE>
O. Except as otherwise expressly provided herein, any notice required or
desired to be served, given or delivered hereunder shall be in writing, and
shall be deemed to have been validly served, given or delivered (i) five (5)
days after deposit in the United States mails, with proper postage prepaid, (ii)
when sent after receipt of confirmation or answerback if sent by telecopy, or
other similar facsimile transmission, (iii) one (1) Business Day after deposited
with a reputable overnight courier with all charges prepaid, or (iv) when
delivered, if hand-delivered by messenger, all of which shall be properly
addressed to the Person to be notified and sent to the address or number
indicated as follows:
(i) If to the Lender at:
American National Bank and
Trust Company of Chicago
33 North LaSalle Street
Chicago, Illinois 60690
Attention: Dennis E. Harrison
Telecopy: 312/661-6929
Confirmation: 312/661-5707
(ii) If to the Guarantor at:
Hauppauge Record Manufacturing Ltd.
15 Gilpin Avenue
Hauppauge, New York 11788
Attention: George Fishman
Telecopy: 516/234-0346
Confirmation: 516/234-0200
with a copy of such notice to:
Warshaw Burstein Cohen Schlesinger
& Kuh, L.L.P
555 Fifth Avenue
New York, New York 10017
Attention: Frederick R. Cummings, Jr., Esq.
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<PAGE>
Telecopy: 212/972-9150
Confirmation: 212/984-7807
or to such other address or number as the Guarantor or the Lender designates to
the other in the manner herein prescribed.
P. The Guarantor acknowledges that any breach by the Guarantor of any of
the provisions of this Guaranty will cause irreparable injury to the Lender and
there is no adequate remedy at law for a breach of the provisions of this
Guaranty. The Guarantor agrees that the Lender will have the immediate right,
upon such breach, to obtain temporary and permanent injunctive relief in any
such case without the necessity of proving actual damages and that the granting
of any such relief shall not preclude the Lender from pursuing any other
available relief or remedies for such breach.
Q. This Guaranty may be executed and accepted in any number of
counterparts each of which shall be an original with the same effect as if the
signatures thereto and hereto were on the same instrument. The delivery of an
executed counterpart of a signature page or acceptance to this Guaranty by
telecopier shall be effective as delivery of a manually executed counterpart of
this Guaranty.
R. THE GUARANTOR ACKNOWLEDGES AND REPRESENTS TO THE LENDER THAT IT HAS
BEEN REPRESENTED AND ADVISED BY COUNSEL TO THE EXTENT GUARANTOR HAS DEEMED
ADVISABLE WITH RESPECT TO THIS GUARANTY AND THE OTHER FINANCING AGREEMENTS TO
WHICH IT IS A PARTY, THE TRANSACTIONS GOVERNED BY THIS GUARANTY AND THE OTHER
FINANCING AGREEMENTS.
S. This Guaranty shall become effective at the Effective Time.
T. The Original Guaranty is amended and restated in its entirety in the
form hereof as of the effectiveness of this Guaranty; provided, however, any
representations and
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warranties made by the Guarantor to the Lender shall survive the execution and
delivery hereof.
IN WITNESS WHEREOF, the Guarantor has made this Guaranty as of the date
first above written.
HAUPPAUGE RECORD MANUFACTURING LTD.
By: /s/ George Fishman
------------------
Title: Chief Executive Officer
Acknowledged and agreed to in Chicago,
Illinois, as of this 30th day of
October, 1996:
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/ Catherine Saccany
---------------------
Title: Vice President
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Exhibit (10)(a)(vii)
AMENDED AND RESTATED
SUBORDINATION AGREEMENT
This Amended and Restated Subordination Agreement ("Agreement") is entered
into as of the 30th day of October, 1996, by and between HRM Holdings Corp., a
Delaware corporation ("Creditor"), having a business address at 15 Gilpin
Avenue, Hauppauge, New York 11788 and American National Bank and Trust Company
of Chicago (the "Lender"), having a business address at 33 North LaSalle Street,
Chicago, Illinois 60690.
W I T N E S S E T H:
WHEREAS, Creditor previously entered into that certain Subordination
Agreement dated as of September 20, 1993 with the Lender (the "Original
Subordination Agreement");
WHEREAS, Creditor has made a loan to the Borrower in the amount of
$1,639,000, which loan is evidenced by that certain Note dated September 20,
1993 in the principal amount of $1,639,000 (the "Subordinated Note");
WHEREAS, Creditor and Hauppauge Record Manufacturing Ltd., a New York
corporation (the "Borrower"), desire that the Lender enter into that certain
Amended and Restated Loan and Security Agreement dated as of October 30, 1996
between Borrower and the Lender (as amended, modified or supplemented from time
to time, the "Loan Agreement"); and
WHEREAS, the Lender is willing to enter into the Loan Agreement on the
condition that, among other things, Creditor amend and restate the Original
Subordination Agreement pursuant to this Agreement;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the Creditor, the Creditor hereby agrees with the Lender that,
effective as of the "Effective Time" (as such term is defined in the Loan
Agreement), the Original Subordination Agreement is amended and restated in its
entirety as follows:
<PAGE>
1. Standby; Subordination; Subrogation. The "Subordinated Claims" (as
defined below) are hereby subordinated to the "Obligations" (as defined
hereinafter) in all respects, and the Creditor will not, without the prior
written consent of the Lender, ask, demand, sue for, take or receive from the
Borrower, by setoff or in any other manner, the whole or any part of any monies
which may now or hereafter be owing by the Borrower, or any successor or assign
of the Borrower, including, without limitation, a receiver, trustee or debtor in
possession, to the Creditor (including, without limitation, any amounts owing by
the Borrower pursuant to the Subordinated Note or arising by right of
subrogation as a result of any payment made under the "Holdings Guaranty" (as
such term is defined in the Loan Agreement)) or be owing by any other person,
firm, partnership, corporation or entity to the Creditor for the benefit of the
Borrower (whether such amounts represent principal or interest, or obligations
which are due or not due, direct or indirect, absolute or contingent, or which
arise by right of subrogation due to reimbursement obligations or otherwise),
including, without limitation, the taking of any negotiable instruments
evidencing such amounts (all such indebtedness, obligations and liabilities,
being hereinafter referred to as the "Subordinated Claims"), nor any security
for any of the foregoing, unless and until all obligations, liabilities, and
indebtedness (including, without limitation, interest that would accrue during
the pendency of a proceeding under Title 11 of the United States Bankruptcy
Code, 11 U.S.C. ss. 101 et. seq., on any obligations owing by the Borrower to
the Lender but for the pendency of such proceeding) of the Borrower to the
Lender, whether now existing or hereafter arising directly between the Borrower
and the Lender or acquired outright, conditionally or as collateral security
from another by the Lender, shall have been fully paid and satisfied (all such
obligations, indebtedness and liabilities of the Borrower to the Lender
including without limitation the "Liabilities" (as such term is defined in the
Loan Agreement), are hereinafter referred to as the "Obligations") and all
financing arrangements between the Borrower and the Lender have been terminated.
All liens and security interests of the Creditor, whether now or hereafter
arising and howsoever existing, in any assets of the Borrower or any assets
securing the Obligations shall be and hereby are subordinated in all respects to
the rights and interests of the Lender in those assets; the Creditor shall have
no right to possession of any such assets or to foreclose upon any such assets,
whether by judicial action or otherwise, unless and until all of the Obligations
shall have been fully paid and satisfied and all financing arrangements between
the Borrower and the Lender have been terminated. In the event, at the request
of the Borrower, the Lender releases any of its security for the Obligations
which constitute part or all of the security for the Subordinated Claims, the
Creditor shall thereupon execute and deliver to the Borrower such termination
statements and releases as the Lender shall request to release the Creditor's
security interest in or lien against such property of the Borrower. The Creditor
acknowledges and agrees that, to the extent the terms and provisions of this
Agreement are inconsistent with the Subordinated Note, the Subordinated Note
shall be
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<PAGE>
deemed to be subject to this Agreement. The priorities set forth herein shall
apply notwithstanding any agreement or understanding between the Creditor and
the Borroweiling or renewal of any financing statement or mortgage, the time of
attachment of any security interest, or any other priority provided by law or by
any other agreement. The term "security interest" as used herein shall mean any
security interest, lien, claim or encumbrance.
2. No Permitted Actions. The Creditor, prior to the payment in full of the
Obligations and the termination of all financing arrangements between the
Borrower and the Lender, agrees to refrain in all aspects from enforcing any
right to payment on any obligation to Creditor from Borrower, or to otherwise
take any action against the Borrower or any of its property or any collateral
securing any of Borrower's obligations to Creditor, without the Lender's prior
written consent. Creditor further agrees that the Subordinated Note may not be
modified, supplemented or amended without the Lender's prior written consent.
3. Subordinated Claims Owed Only to the Creditor. The Creditor represents
and warrants that the Creditor has not previously assigned any interest in the
Subordinated Claims or any security interest in connection therewith, that no
other party owns an interest in the Subordinated Claims or security therefor
other than the Creditor (whether as joint holders of the Subordinated Claims,
participants or otherwise) and that the entire Subordinated Claims is owing only
to the Creditor and covenants that the entire Subordinated Claims shall continue
to be owing only to the Creditor and all security therefor shall continue to be
held solely for the benefit of the Creditor.
4. Lender Priority; Grant of Authority to the Lender. In the event of any
distribution, division, or application, partial or complete, voluntary or
involuntary, by operation of law or otherwise, of all or any part of the assets
of the Borrower or the proceeds thereof to the creditors of the Borrower or
readjustment of the obligations and Subordinated Claims of the Borrower, whether
by reason of liquidation, bankruptcy, arrangement, receivership, assignment for
the benefit of creditors or any other action or proceeding involving the
readjustment of all or any part of the Subordinated Claims, or the application
of the assets of the Borrower to the payment or liquidation thereof, or upon the
dissolution or other winding up of the Borrower's business, or upon the sale of
all or substantially all of the Borrower's assets, then, and in any such event,
(i) the Lender shall be entitled to receive payment in full of any and all of
the Obligations then owing prior to the payment of all or any part of the
Subordinated Claims, and (ii) any payment or distribution of any kind or
character, whether in cash, securities or other property, which shall be payable
or
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<PAGE>
deliverable upon or with respect to any or all of the Subordinated Claims shall
be paid or delivered directly to the Lender for application on any of the
Obligations, due or not due, until such Obligations shall have first been fully
paid and satisfied. In order to enable the Lender to enforce its rights
hereunder in any of the aforesaid actions or proceedings, the Lender is hereby
irrevocably authorized and empowered, in its discretion, to make and present for
and on behalf of the Creditor such proofs of claims against the Borrower on
account of the Subordinated Claims as the Lender may deem expedient or proper
and to vote such proofs of claims in any such proceeding and to receive and
collect any and all dividends or other payments or disbursements made thereon in
whatever form the same may be paid or issued and to apply the same on ans. The
Creditor irrevocably authorizes and empowers the Lender to demand, sue for,
collect and receive each of the aforesaid payments and distributions and give
acquittance therefor and to file claims and take such other actions, in the
Lender's own name or in the name of the Creditor or otherwise, as the Lender may
deem necessary or advisable for the enforcement of this Agreement; the Creditor
will execute and deliver to the Lender such powers of attorney, assignments and
other instruments or documents, including notes and stock certificates (together
with such assignments or endorsements as the Lender shall deem necessary), as
may be requested by the Lender in order to enable the Lender to enforce any and
all claims upon or with respect to any or all of the Subordinated Claims and to
collect and receive any and all payments and distributions which may be payable
or deliverable at any time upon or with respect to the Subordinated Claims, all
for the Lender's own benefit. Following payment in full of the Obligations and
termination of all financing arrangements between the Borrower and the Lender,
the Lender will remit to the Creditor, to the extent of its interest therein and
to the extent permitted by law, all dividends or other payments or distributions
paid to and held by the Lender in excess of the Obligations to the extent
Creditor has made any payment to Lender.
5. Payments Received by the Creditor. Should any payment or distribution
or security or instrument or proceeds thereof be received by the Creditor upon
or with respect to the Subordinated Claims or any other obligations of the
Borrower to the Creditor prior to the satisfaction of all of the Obligations and
termination of all financing arrangements between the Borrower and the Lender in
violation of the terms of this Agreement, the Creditor shall receive and hold
the same in trust, as trustee, for the benefit of the Lender and shall forthwith
deliver the same to the Lender in precisely the form received (except for the
endorsement or assignment of the Creditor where necessary), for application on
any of the Obligations, due or not due, and, until so delivered, the same shall
be held in trust by the Creditor as the property of the Lender. In the event of
the failure of the Creditor to make any such
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<PAGE>
endorsement or assignment to the Lender, the Lender or any of its officers
or employees, is hereby irrevocably authorized to make the same.
6. Instrument Legend. Any instrument evidencing or relating to any of the
Subordinated Claims (including without limitation the Subordinated Note and any
UCC financing statements), or any portion thereof, will, on or before the date
hereof, be inscribed with a legend conspicuously indicating that payment thereof
is subordinated to the claims of the Lender pursuant to the terms of this
Agreement, and (i) a copy thereof will be delivered to the Lender on the date
hereof and (ii) the original of any such instrument will be immediately
delivered to the Lender upon request therefor. Any instrument evidencing or
relating to any of the Subordinated Claims, or any portion thereof, which is
hereafter executed by the Borrower, will, on the date thereof, be inscribed with
the aforesaid legend and a copy thereof will be delivered to the Lender on the
date of its execution or within five (5) business days thereafter and the
original thereof will be delivered as and when described hereinabove.
7. Reimbursements and Borrowings from the Borrower; Assignment of Claims.
The Creditor agrees that, except to the extent permitted in the Loan Agreement,
until the Obligations have been paid in full and satisfied and all financing
arrangements between the Borrower and the Lender have been terminated, the
Creditor will not, directly or indirectly, accept or receive the benefit of any
compensation (including salary, bonuses and other forms of compensation) from or
on behalf of the Borrower. The Creditor further agrees that it will not assign
or transfer to others any claim the Creditor has or may have against the
Borrower. Notwithstanding the foregoing or anything else herein to the contrary,
Creditor may receive and retain the dividends permitted by subsection 8.8 of the
Loan Agreement and other payments from Borrower, in each case as and to the
extent permitted in the Loan Agreement, provided that Creditor may not take any
action against the Borrower with respect thereto.
8. Continuing Nature of Subordination. This Agreement shall be effective
and may not be terminated or otherwise revoked by the Creditor until the
Obligations shall have been fully discharged and all financing arrangements
between the Borrower and the Lender have been terminated. In the event the
Creditor shall have any right under applicable law to otherwise terminate or
revoke this Agreement, such termination or revocation shall not be effective
until two days after written notice of such termination or revocation, signed by
the Creditor, is actually received by the Lender at the address indicated for
the Lender in the first paragraph hereof. In the absence of the circumstances
described in the immediately preceding sentence, this is a continuing agreement
of subordination and the Lender may continue, at any time and
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<PAGE>
without notice to the Creditor, to extend credit or other financial
accommodations and loan monies to or for the benefit of the Borrower on the
faith hereof. Any termination or revocation described hereinabove shall not
affect this Agreement in relation to (a) any of the Obligations which arose
prior to receipt thereof or (b) any of the Obligations created after receipt
thereof, if such Obligations were incurred either through readvances by the
Lender pursuant to its financing arrangements with the Borrower, and/or for the
purpose of protecting any collateral, including, but not limited to, all
protective advances, costs, expenses, and attorneys' and paralegals' fees,
whensoever made, advanced or incurred by the Lender in connection with the
Obligations. If, in reliance on this Agreement, the Lender makes loans or other
advances to or for the benefit of the Borrower or takes other action under the
Loan Agreement after such aforesaid termination or revocation by the Creditor
but prior to the receipt by the Lender of said written notice as set forth
above, the rights of the Lender shall be the same as if such termination or
revocation had not occurred; and, in any editor hereunder shall be affected
pursuant to this Section by the death, incapacity or written revocation of the
Creditor or any other subordinator, pledgor, endorser, or guarantor, if any.
9. Additional Agreements. The Lender, at any time and from time to time,
either before or after any such aforesaid notice of termination or revocation,
may enter into such agreement or agreements with the Borrower or others as the
Lender may deem proper, extending the time of payment of or renewing or
otherwise altering the terms of all or any of the Obligations or affecting the
security underlying, or any guaranty of, any or all of the Obligations, and may
exchange, sell, release, surrender or otherwise deal with any such security,
without in any way thereby impairing or affecting this Agreement.
10. Creditor's Waivers. All of the Obligations shall be deemed to have
been made or incurred in reliance upon this Agreement. The Creditor expressly
waives all notice of the acceptance by the Lender of the subordination and other
provisions of this Agreement and all other notices not specifically required
pursuant to the terms of this Agreement whatsoever, and the Creditor expressly
waives reliance by the Lender upon the subordination and other agreements as
herein provided. The Creditor agrees that the Lender has made no warranties or
representations with respect to the due execution, legality, validity,
completeness or enforceability of the Loan Agreement, or the collectibility of
the Obligations, that the Lender shall be entitled to manage and supervise its
loans to the Borrower in accordance with applicable law and its usual practices,
modified from time to time as it deems appropriate under the circumstances,
without regard to the existence of any rights that the Creditor may now or
hereafter have in or to any of the assets of the Borrower, and that the Lender
shall
-6-
<PAGE>
have no liability to the Creditor for, and the Creditor waives any claim which
the Creditor may now or hereafter have against, the Lender arising out of (i)
any and all actions which the Lender takes or omits to take (including, without
limitation, actions with respect to the creation, perfection or continuation of
liens or security interests in the "Collateral" (as such term is defined in the
Loan Agreement) and other security for the Obligations, actions with respect to
the occurrence of any default, actions with respect to the foreclosure upon,
sale, release, or depreciation of, or failure to realize upon, any of the
Collateral and actions with respect to the collection of any claim for all or
any part of the Obligations from any account debtor, guarantor or any other
party) with respect to the Loan Agreement or any other agreement related thereto
or to the collection of the Obligations or the valuation, use, protection or
release of the Collateral and/or other security for the Obligations, (ii) the
Lender's election, in any proceeding (a "Bankruptcy Proceeding") instituted
under Chapter 11 of Title 11 of the United States Code (11 U.S.C. ss. 101 et
seq.) (the "Bankruptcy Code"), of the application of Section 1111(b)(2) of the
Bankruptcy Code, and/or (iii) any borrowing or grant of a security interest
under Section 364 of the Bankruptcy Code by the Borrower, as debtor in
possession. Creditor agrees not to assert any right it may have to "adequate
protection" of its interest in any property of Borrower in any Bankruptcy
Proceeding.
11. Waivers. No waiver shall be deemed to be made by the Lender of any
rights hereunder, unless the same shall be in writing signed on behalf of the
Lender, and each waiver, if any, shall be a waiver only with respect to the
matter expressly specified therein and shall in no way impair the rights of the
Lender or the obligations of the Creditor to the Lender in any other respect at
any other time.
12. Information Concerning Financial Condition of the Borrower. The
Creditor hereby assumes responsibility for keeping itself informed of the
financial condition of the Borrower, any and all endorsers and any and all
guarantors of the Obligations and Subordinated Claims and of all other
circumstances bearing upon the risk of nonpayment of the Obligations and/or
Subordinated Claims that diligent inquiry would reveal, and the Creditor hereby
agrees that the Lender shall have no duty to advise the Creditor of information
known to it regarding such condition or any such circumstances. In the event the
Lender, in its sole discretion, undertakes, at any time or from time to time, to
provide any such information to the Creditor, the Lender shall be under no
obligation (i) to provide any such information to the Creditor on any subsequent
occasion or (ii) to undertake any investigation and shall be under no obligation
to disclose any information which the Lender wishes to maintain confidential.
The Creditor hereby agrees that all payments received by the Lender may be
applied, reversed, and reapplied, in whole or in part, to any of the
Obligations, as
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<PAGE>
the Lender, in its sole discretion, deems appropriate and assents to any
extension or postponement of the time of payment of the Obligations or to any
other indulgence with respect thereto, to any substitution, exchange or release
of collateral which may at any time secure the Obligations and to the addition
or release of any other party or person primarily or secondarily liable
therefor.
13. No Offset. In the event the Creditor at any time purchases goods or
services from the Borrower, the Creditor hereby irrevocably agrees that it shall
pay for such goods or services in cash or cash equivalents in accordance with
the terms of such purchases and shall not deduct from or setoff against any
amounts billed to the Creditor by the Borrower in connection with such purchases
any amounts the Creditor claims are due to it with respect to the Subordinated
Claims.
14. CONSENT TO JURISDICTION; WAIVERS. THE CREDITOR CONSENTS TO THE
JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN COOK COUNTY, ILLINOIS,
AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND CONSENTS THAT
ALL SUCH SERVICE BE MADE BY REGISTERED MAIL DIRECTED TO THE CREDITOR AT THE
ADDRESS STATED IN THE INITIAL PARAGRAPH OF THIS AGREEMENT AND SERVICE SO MADE
SHALL BE DEEMED TO BE COMPLETED THREE (3) DAYS AFTER THE SAME SHALL HAVE BEEN
POSTED AS AFORESAID. THE CREDITOR WAIVES TRIAL BY JURY, ANY OBJECTION BASED UPON
FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED
HEREUNDER. NOTHING IN THIS SECTION 14 SHALL AFFECT THE RIGHT OF THE LENDER TO
SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF
THE LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST THE CREDITOR OR ITS
PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.
15. Governing Law. This Agreement has been delivered and accepted at and
shall be deemed to have been made in Chicago, Illinois, and shall be
interpreted, and the rights and obligations of the parties hereto determined, in
accordance with the laws and decisions of the State of Illinois, shall be
immediately binding upon the Creditor and its personal representatives, heirs,
successors and assigns, and shall inure to the benefit of the successors and
assigns of the Lender. References herein to Lender shall be deemed to refer to
Lender and its successors and assigns. Creditor shall enter into an agreement in
the form of this Agreement with any successor lender to Lender, but mutatis
mutandis. Except as provided above in this Section 15 as to successors and
assigns of the Lender, this Agreement is not intended to
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<PAGE>
and shall not create rights in favor of any third party (including without
limitation, the Borrower).
16. Section Titles. The section titles contained in this Agreement are and
shall be without substantive meaning or content of any kind whatsoever and are
not a part of the agreement between the parties hereto.
17. Authority. The Creditor hereby certifies that it has all necessary
authority to grant the subordination evidenced hereby and execute this
Agreement.
18. Counterparts. This Subordination Agreement may be executed and
accepted in any number of counterparts each of which shall be an original with
the same effect as if the signatures thereto and hereto were on the same
instrument. The delivery of an executed counterpart of a signature page to this
Subordination Agreement by telecopier shall be effective as delivery of a
manually executed counterpart of this Subordination Agreement.
19. Effectiveness. This Agreement shall become effective at the "Effective
Time" (as such term is defined in the Loan Agreement).
20. Amendment and Restatement. The Original Subordination Agreement is
amended and restated in its entirety in the form hereof as of the effectiveness
of this Agreement; provided, however, that any representations and warranties
made by Creditor to Lender shall survive the execution and delivery hereof.
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<PAGE>
IN WITNESS WHEREOF, this instrument has been duly signed as of the
date first above written.
HRM HOLDINGS CORP.
By: /s/ George Fishman
--------------------------------
Title: Chief Executive Officer
-----------------------------
Acknowledged and accepted in
Chicago, Illinois as of the date
first above written:
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/ Catherine Saccany
------------------------------
Title: Vice President
---------------------------
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<PAGE>
1 Hauppauge Record Manufacturing, Ltd., a New York corporation, hereby accepts,
and acknowledges receipt of a copy of, the foregoing Subordination Agreement and
agrees that it will not pay any of the "Subordinated Claims" (as defined in the
foregoing Subordination Agreement) or grant any security therefor except to the
extent expressly permitted by the terms of such Subordination Agreement. In the
event of a breach of any of the provisions herein or of the foregoing
Subordination Agreement, all of the "Obligations" (as defined in the foregoing
Subordination Agreement) shall, without presentment, demand, protest or notice
of any kind, become immediately due and payable, unless the Lender shall
otherwise elect in writing.
Dated: October 30, 1996
Hauppauge Record Manufacturing Ltd.
By: /s/ George Fishman
-------------------------------
Its: Chief Financial Officer
------------------------------
Attest:
By: /s/ Charles Kavanagh
----------------------------
Vice President-Finance
----------------------------
and Treasurer
----------------------------
(AFFIX CORPORATE SEAL)
-11-
Exhibit (10)(a)(viii)
October 30, 1996
Hauppauge Record Manufacturing Ltd.
15 Gilpin Avenue
Hauppauge, New York 11788
Attention: George Fishman
Re: Fee Letter
Reference is made to the Amended and Restated Loan and Security Agreement
dated as of October 30, 1996 (as amended, restated, modified, supplemented and
in effect from time to time, the "LSA") between Hauppauge Record Manufacturing
Ltd., a New York corporation ("Borrower"), and American National Bank and Trust
Company of Chicago ("ANB"). Capitalized terms used herein without otherwise
being defined shall have the same meanings herein as set forth in the LSA.
As consideration for ANB's consent to the Merger under the Hauppauge LSA
and AFL LSA and agreement to restructure the credit facilities described therein
as provided in the LSA, Borrower agrees to pay to ANB the following fees:
(a) Borrower shall pay ANB a non-refundable restructuring fee (the
"Restructuring Fee") in an amount of $250,000, such Restructuring Fee to be
paid in installments of $62,500 on the date of the acceptance of this
letter by Borrower, $62,500 on August 1, 1997 and $125,000 on October 31,
1997; provided, however, that notwithstanding the foregoing the unpaid
amount of the Restructuring Fee shall become
<PAGE>
immediately due and payable, if earlier, upon the termination of the LSA;
and provided further, however, that if the LSA has not been terminated
prior to October 31, 1997 the $125,000 installment due on such date shall
not be required to be paid by Borrower if on and as of date (a) no Default
or Event of Default has occurred and is continuing, and (b) Borrower shall
have made all principal and interest payments required to be paid on the
Term Loan when due, including without limitation all payments pursuant to
subsections 2.3(E), (F),(G) and (I) of the LSA.
(b) Borrower shall pay ANB a non-refundable fee of $25,000 on October
31, 1996, which fee shall be paid in lieu of the fee due to Lender under
subsection 2.7(H) of the AFL LSA; provided, however, that notwithstanding
the foregoing such fee shall become immediately due and payable, if
earlier, upon the termination of the LSA.
(c) Borrower shall pay ANB a non-refundable fee of $100,000 on
December 31, 1998; provided, however, that notwithstanding the foregoing
such fee shall become immediately due and payable, if earlier, upon the
termination of the LSA; and provided further, however, that no such fee
shall be required to be paid by Borrower if the Additional Loan has been
paid full on or before December 31, 1997 and the LSA has not been
terminated on or before such date.
All fees payable hereunder shall be paid in immediately available funds. By
acceptance of this letter, you hereby authorize Lender to debit the Loan Account
from time to time to pay ANB the foregoing fees.
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<PAGE>
This Fee Letter may be executed in any number of counterparts, each of
which shall be an original and all of which when taken together, shall
constitute the original. This Fee Letter shall be governed by and construed in
accordance with the internal laws (and not the conflicts of law provisions) of
the State of Illinois.
If you are in agreement with the foregoing, please indicate your acceptance
of the terms hereof by signing in the appropriate space below and returning the
executed duplicate of the Fee Letter to ANB.
Very truly yours,
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/ Catherine Saccany
-----------------------------------
Name: Catherine Saccany
---------------------------------
Title: Vice President
--------------------------------
Agreed to and accepted as of
the date first above written:
HAUPPAUGE RECORD MANUFACTURING LTD.
By: /s/ George Fishman
------------------------------------
Name: George Fishman
----------------------------------
Title: Chief Financial Officer
---------------------------------
-3-
Exhibit (10)(a)(ix)
COLLATERAL PATENT,
TRADEMARK, COPYRIGHT AND LICENSE ASSIGNMENT
THIS COLLATERAL PATENT, TRADEMARK, COPYRIGHT AND LICENSE ASSIGNMENT
("Assignment") made as of October 30, 1996, by Hauppauge Record Manufacturing
Ltd., a New York corporation (the "Assignor"), with a mailing address at 15
Gilpin Avenue, Hauppauge, New York 11788, to American National Bank and Trust
Company of Chicago (the "Assignee") with a mailing address at 33 North LaSalle
Street, Chicago, Illinois 60690.
W I T N E S S E T H:
WHEREAS, Assignor has entered into that certain Amended and Restated Loan
and Security Agreement dated as of October 30, 1996 (as amended, modified or
supplemented from time to time, the "Loan Agreement") with Assignee; and
WHEREAS, it is a condition to the effectiveness of the Loan Agreement and
any extensions of credit to or for the benefit of the Assignor thereunder that,
among other things, Assignor execute and deliver to Assignee this Assignment;
NOW, THEREFORE, in consideration of the premises set forth herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Assignor agrees as follows:
1. Incorporation of Loan Agreement. The Loan Agreement and the terms and
provisions thereof are hereby incorporated herein in their entirety by this
reference thereto. Terms used herein which are not defined herein but are
defined in the Loan Agreement shall have the meanings ascribed to them therein.
2. Collateral Assignment of Patents, Trademarks, Copyrights and Licenses.
To secure the complete and timely satisfaction of all of the Liabilities, the
Assignor hereby mortgages, pledges and assigns to Assignee, as and by way of a
mortgage and security interest having priority over all other security
interests, with power of sale upon the occurrence of a Default, and grants
Assignee a security interest in, all of Assignor's right, title and interest in
and to all of the following, whether now existing or hereafter arising:
<PAGE>
(i) patents and patent applications, including, without limitation, the
inventions and improvements described and claimed therein, and those patents and
patent applications listed on Schedule A attached hereto and made a part hereof,
and (a) the reissues, divisions, continuations, renewals, extensions and
continuations-in-part thereof, (b) all income, royalties, damages and payments
now and hereafter due and/or payable under and with respect thereto, including,
without limitation, damages and payments for past or future infringements
thereof, (c) the right to sue for past, present and future infringements
thereof, and (d) all rights corresponding thereto throughout the world (all of
the foregoing patents and applications, together with the items described in
clauses (a) through (d), inclusive, in which Assignor now or hereafter has any
right, title or interest are sometimes hereinafter individually and/or
collectively referred to as the "Patents");
(ii) all service marks, trademarks, trademark or service mark
registrations, trademark or service mark applications, trade names, copyrights,
copyright registrations and copyright applications including, without
limitation, the trademarks, service marks, copyrights and applications listed on
Schedule B attached hereto and made a part hereof, and (a) renewals thereof, (b)
all income, royalties, damages and payments now and hereafter due and/or payable
with respect thereto, including, without limitation, damages and payments for
past or future infringements thereof, (c) the right to sue for past, present and
future infringements thereof, and (d) all rights corresponding thereto
throughout the world (all of the foregoing service marks, trademarks,
registrations, applications and trade names, together with the items described
in clauses (a) through (d), inclusive, with respect thereto in which Assignor
now or hereafter has any right, title or interest are sometimes hereinafter
individually and/or collectively referred to as the "Marks" and all of the
foregoing copyrights, copyright registrations and copyright applications,
together with the items described in clauses (a) through (d), inclusive, in
which Assignor now or hereafter has any right, title or interest are sometimes
hereinafter individually and/or collectively referred to as the "Copyrights");
(iii) all Assignor's rights and obligations pursuant to its license
agreements with any other Person or Persons with respect to any Patents, Marks
and Copyrights, whether Assignor is a licensor or licensee under any such
license agreements, including, without limitation, the licenses listed on
Schedule C attached hereto and made a part hereof, and, subject to the terms of
such licenses, the right to prepare for sale, sell and advertise for sale, all
Inventory now or hereafter owned by the Assignor and now or hereafter covered by
such licenses (all of the foregoing is hereinafter referred to collectively as
the "Licenses"); and
(iv) the goodwill of Assignor's business connected with and symbolized by
the Marks;
-2-
<PAGE>
provided, however, that there shall be excluded from the foregoing collateral
assignment and grant of a security interest any of the existing Licenses to
which Assignor is a licensee (and any Patents, Marks and Copyrights currently
licensed by others to Assignor pursuant to such Licenses) in each case to the
extent (but only to the extent) that the applicable License lawfully prohibits
such collateral assignment or grant of a security interest; provided further,
however, that , upon Assignee's request, Assignor will use its best efforts to
obtain any consent needed to subject any such property to this collateral
assignment and grant of a security interest.
3. Restrictions on Future Agreements. Assignor agrees and covenants that
until the Liabilities shall have been satisfied in full and the Loan Agreement
shall have been terminated, Assignor will not, without Assignee's prior written
consent, take any action or enter into any agreement, including, without
limitation entering into any license agreement, which is inconsistent with
Assignor's obligations under this Assignment, and Assignor further agrees and
covenants that without Assignee's prior written consent it will not take any
action, or permit any action to be taken by others subject to its control,
including its licensees, or fail to take any action which would affect the
validity or enforcement or nature of the rights transferred to Assignee under
this Assignment. Assignor agrees and covenants not to sell or assign its
interest in, or grant any license under, the Patents, Marks, Copyrights or
Licenses, without receiving the prior written consent of Assignee thereto.
4. Certain Covenants, Representations and Warranties of Assignor. Assignor
covenants, represents and warrants (to the best of Assignor's knowledge with
respect to any Patents, Marks and Copyrights which are licensed by third parties
to Assignor) that: (i) the Patents, Marks, Copyrights and Licenses are
subsisting, have not been adjudged invalid or unenforceable in whole or in part,
and, to the best of Assignor's knowledge, are not currently being challenged in
any way; (ii) none of the Patents, Marks, Copyrights and Licenses have lapsed or
expired or have been abandoned, whether due to any failure to pay any
maintenance or other fees or make any filing or otherwise; (iii) each of the
Patents, Marks, Copyrights and Licenses is valid and enforceable and Assignor is
unaware of any invalidating prior art (including public uses and sales) relative
to the Patents, and is unaware of any impairments to the Patents, Marks,
Copyrights or Licenses which would have a material adverse effect on the
validity and/or enforceability of the Patents,
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<PAGE>
Marks, Copyrights or Licenses; (iv) to the best of Assignor's knowledge, no
claim has been made that the use of any of the Patents, Marks, Copyrights or
Licenses constitutes an infringement; (v) Assignor owns the entire right, title
and interest in and to each of the Patents, Marks and Copyrights (other than
those being licensed to Assignor pursuant to the Licenses) free and clear of any
Liens and encumbrances of every kind and nature, and the Licenses are valid and
subsisting licenses with respect to the Patents, Marks, Copyrights described
therein, free and clear of any Liens and encumbrances of every kind and nature
arising by, through or under Assignor, in each case except for (A) rights
granted by Assignor pursuant to the applicable licenses listed on Schedule C,
and (B) Liens and encumbrances in favor of Assignee pursuant to this Agreement
or the other Financing Agreements; (vi) the Patents, Marks and Copyrights and
Licenses listed on Schedules A, B and C, respectively, constitute all such items
in which Assignor has any right, title or interest; (vii) Assignor has the
unqualified right to enter into this Agreement and perform its terms; (viii)
Assignor will continue to use proper statutory notice in connection with its use
of the Patents, Marks and Copyrights; ality in its manufacture of products sold
under the Marks consistent with those currently employed by it.
5. New Patents, Marks, Copyrights and Licenses. If, before the Liabilities
shall have been satisfied in full and the Loan Agreement shall have been
terminated, Assignor shall (i) obtain rights to any new patentable inventions,
trademarks, service marks, trademark or service mark registrations, copyrights,
copyright registrations, trade names or licenses, or (ii) become entitled to the
benefit of any patent, trademark or service mark application, trademark, service
mark, trademark or service mark registration, copyrights, copyright
registrations, license or license renewal, or patent for any reissue, division,
continuation, renewal, extension, or continuation-in-part of any Patent or any
improvement on any Patent, the provisions of Section 2 above shall automatically
apply thereto and Assignor shall give to Assignee prompt written notice thereof.
Assignor hereby authorizes Assignee to modify this Assignment by noting any
future acquired Patents, Marks, Copyrights on Schedule A or B and any Licenses
and licensed Patents, Marks or Copyrights on Schedule C, as applicable;
provided, however, that the failure of Assignee to make any such notation shall
not limit or affect the obligations of Assignor or rights of Assignee hereunder.
6. Royalties; Terms. Assignor hereby agrees that the use by Assignee of
all Patents, Marks, Copyrights and Licenses as described above shall be
worldwide (or in the case of the Patents, Marks and Copyrights licensed to
Assignor such smaller geographic location if any is specified for Assignor's use
in the applicable License) and without any liability for royalties or other
related charges from Assignee to Assignor. The term of the assignments granted
herein shall extend until the earlier of (i) the expiration of each of the
respective Patents, Marks, Copyrights and Licenses assigned hereunder, or (ii)
satisfaction in full of the Liabilities and termination of the Loan Agreement.
7. Grant of License to the Assignor. Unless and until a Default shall have
occurred and notice given as provided in the following sentence, Assignee hereby
grants to Assignor (but only to the extent the same was lawfully granted to
Assignee by Assignor pursuant to this Agreement) the royalty-free, exclusive,
nontransferable right and license
-4-
<PAGE>
for Assignor's own benefit and account and no other to use the Marks and all
materials covered by the Copyrights, to exercise Assignee's rights under the
Licenses, and to make, have made, use and sell products conforming to the
inventions disclosed and claimed in the Patents for Assignor's own benefit and
account and for none other. Assignor agrees not to sell or assign its interest
in, or grant any sublicense under, the license granted to Assignor in this
Section 7 without the prior written consent of Assignee. From and after the
occurrence of a Default and notice to such effect from the Assignee to the
Assignor, Assignor's license with respect to the Patents, Marks, Copyrights and
Licenses as set forth in this Section 7 shall terminate forthwith.
8. Assignee's Right to Inspect. Assignee shall have the right, at any time
and from time to time, to inspect Assignor's premises and to examine Assignor's
books, records and operations, including, without limitation, Assignor's quality
control processes. From and after the occurrence of a Default and notice by
Assignee to Assignor of Assignee's intention to enforce its rights and claims
against any of the Patents, Marks, Copyrights and Licenses, Assignor agrees that
Assignee, or a conservator appointed by Assignee, shall have the right to
establish such additional product quality controls as Assignee or said
conservator, in its sole judgment, may deem necessary to assure maintenance of
the quality of products sold by Assignor under the Marks consistent with the
quality of products now manufactured by Assignor.
9. Termination of the Assignor's Security Interest. This Assignment is
made for collateral purposes only. Upon satisfaction in full of the Liabilities
and termination of the Loan Agreement, subject to any disposition thereof which
may have been made by Assignee pursuant hereto or pursuant to any of the other
Financing Agreements, title to the Patents, Marks, Copyrights and Licenses shall
automatically revert to Assignor. Assignee shall, at Assignor's expense, execute
and deliver to Assignor all termination statements and other instruments as may
be necessary or proper to terminate Assignee's security interest in, and to
revest in Assignor all right, title and interest in and to, the Patents, Marks,
Copyrights, and Licenses transferred to Assignee pursuant to this Assignment,
subject to any disposition thereof which may have been made by Assignee pursuant
hereto or pursuant to any of the other Financing Agreements. Any such
termination statements and instruments shall be without recourse upon or
warranty by Assignee.
10. Duties of the Assignor. Assignor shall have the duty (i) to prosecute
diligently any patent application of the Patents, any application respecting the
Marks, and any copyright application of the Copyrights pending as of the date
hereof or thereafter, (ii) to make application on unpatented but patentable
inventions and on registerable but unregistered trademarks, service marks and
copyrights, and (iii) to preserve, maintain and
-5-
<PAGE>
enforce against infringement all rights in patent applications and patents
constituting the Patents, in trademark or service mark applications, trademarks,
service marks, and trademark or service mark registrations constituting the
Marks, and in copyright applications, copyrights and copyright registrations
constituting the Copyrights. Any expenses incurred in connection with the
foregoing shall be borne by Assignor. Assignor shall not abandon any pending
patent application, trademark application, copyright application, service mark
application, patent, trademark, service mark or copyright without the written
consent of Assignee.
11. Assignee's Right to Sue. From and after the occurrence of a Default,
Assignee shall have the right, but shall in no way be obligated, to bring suit
in its own name to enforce the Patents, the Marks, the Copyrights and the
Licenses, and any licenses thereunder, and, if Assignee shall commence any such
suit, Assignor shall, at the request of Assignee, do any and all lawful acts and
execute any and all proper documents required by Assignee in aid of such
enforcement, and Assignor shall promptly, upon demand, reimburse and indemnify
Assignee for all costs and expenses incurred by Assignee in the exercise of its
rights under this Section 11.
12. Waivers. No course of dealing between Assignor and Assignee, nor any
failure to exercise, nor any delay in exercising, on the part of Assignee, any
right, power or privilege hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise of any right, power or privilege hereunder or
thereunder preclude any other or further exercise thereof or the exercise of any
other right, power or privilege.
13. Severability. The provisions of this Assignment are severable, and if
any clause or provision shall be held invalid and unenforceable in whole or in
part in any jurisdiction, then such invalidity or unenforceability shall affect
only such clause or provision, or part thereof, in such jurisdiction, and shall
not in any manner affect such clause or provision in any other jurisdiction, or
any other clause or provision of this Assignment in any jurisdiction.
14. Modification. This Assignment cannot be altered, amended or
modified in any way, except as specifically provided in Section 5 hereof or by a
writing signed by the parties hereto.
15. Further Assurances. Assignor shall execute and deliver to Assignee, at
any time or times hereafter at the request of Assignee, all papers (including,
without limitation, any as may be deemed desirable by Assignee for filing or
recording with any Patent and Trademark Office, and any successor thereto) and
take all such actions (including, without limitation, paying the cost of filing
or recording any of the foregoing
-6-
<PAGE>
in all public offices reasonably deemed desirable by Assignee), as Assignee may
request, to evidence Assignee's interest in the Patents, Marks, Copyrights and
Licenses and the goodwill associated therewith and enforce Assignee's rights
under this Assignment.
16. Cumulative Remedies; Power of Attorney; Effect on Loan Documents. All
of Assignee's rights and remedies with respect to the Patents, Marks, Copyrights
and Licenses, whether established hereby, by any of the Financing Agreements or
otherwise, or by any other agreements or by law shall be cumulative and may be
exercised singularly or concurrently. Assignor hereby constitutes and appoints
Assignee as Assignor's true and lawful attorney-in-fact, with full power of
substitution in the premises, with power at any time after the occurrence of
Default, to (i) endorse Assignor's name on all applications, documents, papers
and instruments determined by Assignee in its sole discretion as necessary or
desirable for Assignee in the use of the Patents, Marks, Copyrights and
Licenses, (ii) take any other actions with respect to the Patents, Marks,
Copyrights and Licenses as Assignee deems in Good Faith to be in the best
interest of Assignee, (iii) grant or issue any exclusive or non-exclusive
license under the Patents, Marks or Copyrights to any Person, or (iv) assign,
pledge, convey or otherwise transfer title in or dispose of the Patents, Marks,
Copyrights or Licenses to any Person. Assignor hereby ratifies all that such
attorney shall lawfully do or cause to be done by virtue hereof. This power of
attorney shall be irrevocable until the Liabilities shall have been satisfied in
full and the Loan Agreement shall have been terminated. Assignor acknowledges
and agrees that this Assignment is not intended to limit or restrict in any way
the rights and remedies of Assignee under the Loan Agreement or any of the
Financing Agreements but rather is intended to facilitate the exercise of such
rights and remedies. Assignee shall have, in addition to all other rights and
remedies given it by the terms of this Assignment, all rights and remedies
allowed by law and the rights and remedies of a secured party under the Uniform
Commercial Code as enacted in any jurisdiction in which the Patents, Marks,
Copyrights or Licenses may be enforced. Assignor hereby releases the Assignee
from any and all claims, causes of action and demands at any time arising out of
or with respect to any actions taken or omitted to be taken by the Assignee
under the powers of attorney granted herein.
17. Binding Effect; Benefits. This Assignment shall be binding upon the
Assignor and its respective successors and assigns and shall inure to the
benefit of Assignee and its respective successors, assigns and nominees.
18. Governing Law. This Assignment shall be deemed to have been executed
and delivered in Chicago, Illinois, and shall be governed by and construed in
accordance with the internal laws (as opposed to conflicts of law provisions) of
Illinois.
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<PAGE>
WITNESS the due execution hereof as of the date first above written.
HAUPPAUGE RECORD MANUFACTURING LTD.
By: /s/ George Fishman
----------------------------------
Title: Chief Executive Officer
-------------------------------
(SEAL)
Attest:
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/ Catherine Saccany
---------------------------------
Title: Vice President
------------------------------
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Exhibit (10)(a)(x)
SECURITY AGREEMENT
This Security Agreement (this "Agreement"), dated as of the 30th day
of October, 1996, is made by Allied Digital Technologies Corp., a Delaware
corporation ("Allied"), HMG Digital Technologies Corp., a Delaware corporation
("HMG"), and HRM Holdings Corp., a Delaware corporation ("Holdings"; Allied, HMG
and Holdings are sometimes hereinafter referred to, individually, as a "Debtor"
and, collectively, as the "Debtors"), and American National Bank and Trust
Company of Chicago ("Secured Party").
WHEREAS, Allied owns all of the issued and outstanding capital stock
of HMG; HMG owns all of the issued and outstanding capital stock of Holdings;
and Holdings owns all of the issued and outstanding capital stock of Hauppauge
Record Manufacturing Ltd., a New York corporation ("Borrower");
WHEREAS, Debtors, Allied Film Laboratory, Inc., a Michigan
corporation ("AFL"), and Borrower entered into that certain Tax Allocation
Agreement dated as of January 11, 1995 (as amended or otherwise modified from
time to time, the "Allied Tax Sharing Agreement") to provide, among other
things, for the allocation of certain income tax liabilities and credits among
Debtors, AFL and Borrower and superseding for certain periods that certain Tax
Allocation Agreement dated as of September 20, 1993 among HMG, Holdings and
Borrower (the "HMG Tax Sharing Agreement") and that certain Tax Allocation
Agreement dated as of October 15, 1992 between Holdings and Borrower (the
"Holdings Tax Sharing Agreement"; the Allied Tax Sharing Agreement, the HMG Tax
Sharing Agreement and the Holdings Tax Sharing Agreement are sometimes referred
to herein, individually, as a "Tax Sharing Agreement" and, collectively, as a
"Tax Sharing Agreement");
WHEREAS, AFL has merged with and into Borrower and Borrower has
entered into that certain Amended and Restated Loan and Security Agreement dated
as of the date hereof with Secured Party (as amended or otherwise modiporate and
other relationships between Debtors and Borrower, Debtors will benefit from the
advances and financial accommodations provided by Secured Party to Borrower
pursuant to the Loan Agreement and any distributions, dividends or other
payments permitted to be made, directly or indirectly, by Borrower to any of
Debtors, pursuant to the terms and provisions of the Loan Agreement and the
other "Financing Agreements" (as such term is defined in the Loan Agreement);
<PAGE>
NOW THEREFORE, in consideration of the terms and conditions
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. DEFINITIONS.
1.1 Terms Defined in the Loan Agreement. All capitalized terms used
and not otherwise defined herein shall have the meanings ascribed to such terms
in the Loan Agreement.
1.2 General Terms. When used herein, the following terms shall
have the following meanings:
"Collateral" shall mean, collectively, all property and interests in
property now owned or hereafter acquired by any Debtor in or upon which a
security interest, lien, charge or mortgage is granted to Secured Party by
any Debtor, whether under this Agreement or under any other documents,
instruments or writings executed by any Debtor and delivered to Secured
Party.
"General Intangibles" shall mean, collectively, all general
intangibles, choses in action, causes of action and all other intangible
personal property of each Debtor of every kind and nature (other than
accounts) now owned or hereafter acquired, including without limitation
goodwill, corporate or other business records, computer software, tax
refunds, tax refund claims, rights and claims against any taxing authority
(domestic or foreign) and the like, wheresoever located.
"Obligations" shall mean, collectively, all liabilities, obligations
and indebtedness of Borrower and each of the Debtors to Secured Party, in
each case of any and every kind and nature, whether heretofore, now or
hereafter owing, arising, due or payable and howsoever evidenced, created,
incurred, acquired or owing, whether primary, secondary, direct,
contingent, fixed or otherwise (including obligations of performance) and
whether arising or existing under written agreement, oral agreement or
operation of law, including without limitation the Liabilities and all of
Borrower's and each Debtor's respective indebtedness and other obligations
to Secured Party under the Loan Agreement, this Agreement and any of the
other Financing Agreements.
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<PAGE>
1.3 Other Terms Defined in Illinois Uniform Commercial Code. All
other terms contained in this Agreement (and which are not otherwise
specifically defined herein) shall have the meanings provided in Article 9 of
the Uniform Commercial Code as in effect in the State of Illinois (the "Code")
to the extent the same are used or defined therein.
2. COLLATERAL.
2.1 Security Interest. To secure payment and performance of the
Obligations, each Debtor hereby grants to Secured Party a right of setoff
against and a continuing security interest in and to all of the following
personal property and interests in property of such Debtor, whether now owned or
hereafter arising or acquired and wheresoever located: (i) all returns, reports,
declarations and other filings made by or with respect to any one or more of
Borrower and Debtors relating to any Tax Accounts (as defined below) or any
income, property, sales, use or other taxes, fees or assessments (collectively,
the "Tax Documents"); (ii) all tax refunds and all other rights and claims
against and all refunds and payments due from any taxing authority (domestic or
foreign) (collectively, the "Tax Accounts"); (iii) all monies or other payments
received by such Debtor with respect to any of the Tax Accounts or the Tax
Documents (or any liability of any one or more of Debtors and Borrower under any
of the Tax Documents) or any payments made by any one or more of Debtors and
Borrower with respect to any of the Tax Documents (or any liability of any one
or more of Debtors and Borrower under any of the Tax Documents), including
without limitation monies or other payments received by such Debtor from
Borrower or any other Debtor intended for use in making any tax payments or
pursuant to any of the Tax Sharing Agreements; (iv) all contract rights, General
Intangibles, chattel paper, instruments, notes, and documents relating to any of
the foregoing; (v) such Debtor's deposit accounts (general or special) with and
credits and other claims against Secured Party and any other financial
institution with which such Debtor maintains deposits; (vi) such Debtor's
monies, and any and all other property and interests in property of such Debtor
now or hereafter coming into the actual possession, custody or control of
Secured Party or any agent or affiliate of Secured Party in any way or for any
purpose (whether for y, pledge, transmission, collection or otherwise); (vii)
all books and records relating to any of the foregoing; and (viii) all
accessions and additions to, substitutions for, and replacements, products and
proceeds, of any of the foregoing.
2.2 Preservation of Collateral and Perfection of Security Interests
Therein. Each Debtor shall execute and deliver to Secured Party, concurrently
with the execution of this Agreement, and at any time or times hereafter at the
request of Secured Party, all financing statements, instruments or other
documents (and pay the
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<PAGE>
cost of filing or recording the same in all public offices deemed necessary by
Secured Party), as Secured Party may request, in a form reasonably satisfactory
to Secured Party, to perfect and keep perfected the security interest in the
Collateral granted by such Debtor to Secured Party or to otherwise protect and
preserve the Collateral and Secured Party's security interest therein or to
enforce Secured Party's security interests in the Collateral or to comply with
the federal Assignment of Claims Act or any similar federal or state laws.
Should any Debtor fail to do so, Secured Party is authorized to sign any such
financing statements, instruments or other documents as such Debtor's agent.
Each Debtor further agrees that a carbon, photographic or other reproduction of
this Agreement or of a financing statement is sufficient as a financing
statement.
2.3 Setoff. Each Debtor agrees that Secured Party has all rights of
setoff and banker's lien provided by applicable law and, in addition thereto,
each Debtor agrees that (in addition to Secured Party's rights with respect to
proceeds of Collateral) at any time (a) any amount owing by any Debtor under
this Agreement or by Borrower or any Debtor under any of the Financing
Agreements is then due or (b) any default by any Debtor under this Agreement or
any Default exists, Secured Party may apply to the payment of the obligations of
any one or more of the Debtors under this Agreement and the other Obligations,
any and all balances, credits, deposits, accounts or monies of any Debtor then
or thereafter with Secured Party. Without limitation of the foregoing and in
addition to Secured Party's rights with respect to the proceeds of the
Collateral, each Debtor agrees that upon and after the occurrence and during the
continuance of a default by any Debtor under this Agreement or a Default,
Secured Party and each of its branches and offices is hereby authorized, at any
time and from time to time, without notice, (i) to setoff against, and to
appropriate and apply to the payment of, the obligations of any one or more of
the Debtors under this Agreement and the other Obligations (in each case,
whether matured or unmatured, fixed or contingent or liquidated or unliquidated)
any and all amounts owing by Secured Party or any such office or branch to any
one or more of the Debtors (whether matured or unmatured, and, in the case of
deposits, whether general or special, time or demand and however evidenced) and
(ii) pending any such action, to the extent necessary, to hold such amounts as
collateral to secure such obligations and the other Obligations and to return as
unpaid for insufficient funds any and all checks and other items drawn against
any deposits so held as Secured Party may elect in its sole discretion exercised
in Good Faith.
3. WARRANTIES.
Debtors represent and warrant that as of the date of the execution
of this Agreement, and continuing so long as this Agreement remains in effect:
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<PAGE>
3.1 Corporate Existence. Each Debtor is a corporation duly organized
and in good standing under the laws of its state of incorporation identified in
the preamble to this Agreement and is duly qualified as a foreign corporation
and in good standing in each state where the nature and extent of the business
transacted by such Debtor or the ownership of its assets makes such
qualification necessary, except for those jurisdictions in which the failure to
so qualify would not in the aggregate have a material adverse effect on such
Debtor's financial condition, results of operations or business or the ability
of such Debtor to perform its obligations under this Agreement.
3.2 Corporate Authority. The execution and delivery by each Debtor
of this Agreement and the performance of each Debtor's obligations hereunder:
(i) are within such Debtor's corporate powers; (ii) are duly authorized by such
Debtor's Board of Directors and, if necessary, such Debtor's stockholders; (iii)
are not in contravention of the terms of any Debtor's Certificate or Articles of
Incorporation, or By-Laws, or of any indenture, or other agreement or
undertaking to which any Debtor is a party or by which any Debtor or any of its
property is bound or any judgment, decree or order applicable to any Debtor;
(iv) do not, as of the execution hereof, require any governmental consent,
registration or approval; (v) do not contravene any contractual or governmental
restriction binding upon any Debtor; and (vi) will not, except as contemplated
herein, result in the imposition of any lien, charge, security interest or
encumbrance upon any property of any Debtor.
3.3 Binding Effect. This Agreement has been duly executed and
delivered by each Debtor and constitutes the legal, valid and binding obligation
of each Debtor, enforceable against each Debtor in accordance with its terms.
3.4 Collateral. The Collateral is and will continue to be owned by
the Debtors, free and clear of all liens, security interests, claims and other
encumbrances except (i) security interests in favor of Secured Party and (ii)
rights of Borrower and the Debtors under the Tax Sharing Agreements. All
tangible Collateral of each Debtor is and will continue to be located at the
address of the chief executive office of such Debtor as such address may be
changed from time to time pursuant to subsection 5.1 hereof.
3.5 Chief Place of Business. As of the execution hereof, the
principal place of business and chief executive office of each Debtor is located
at 15 Gilpin Avenue, Hauppauge, New York 11788. If any change in any such
location occurs, Debtors promptly shall notify Secured Party thereof in
accordance with subsection 5.1 hereof. As of the execution hereof (except for
certain of Allied's books and records, records of account and chattel paper
which may continue to be located at
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<PAGE>
7375 Woodward Avenue, Detroit, Michigan 48202 prior to November 30, 1996), the
books and records of each Debtor, all records of account and all chattel paper
constituting Collateral (to the extent the same have not been delivered to
Secured Party) are located at the principal place of business and chief
executive office of such Debtor, and if any change in such location occurs,
Debtors promptly shall notify Secured Party thereof in accordance with
subsection 5.1 hereof. Allied's tax identification number is 38-3191597, HMG's
tax identification number is 13-3643843 and Holdings' tax identification number
is 11- 3040949.
3.6 Other Corporate Names. No Debtor has used any corporate or
fictitious name other than the corporate name shown on such Debtor's Articles or
Certificate of Incorporation, except that HMG used the name RCL Acquisition
Corp. prior to amending its name to its current name in 1993.
3.7 Patents, Trademarks and Licenses. Each Debtor possesses adequate
licenses, permits, patents, patent applications, copyrights, service marks,
trademarks, trademark applications, trade styles, trade names, governmental
approvals or authorizations and other rights to continue to conduct its business
as heretofore conducted by it or contemplated to be conducted by it.
3.8 Subsidiaries. Allied owns beneficially and of record all of the
issued and outstanding shares of capital stock of HMG; HMG owns beneficially and
of record all of the issued and outstanding shares of capital stock of Holdings;
and Holdings owns beneficially and of record all of the issued and outstanding
shares of capital stock of Borrower.
3.9 Survival of Warranties. All representations and warranties
contained in this Agreement shall survive the execution and delivery of this
Agreement.
4. AFFIRMATIVE COVENANTS.
Debtors covenant and agree that, so long as this Agreement remains
in effect:
4.1 Inspection. Secured Party, or any Person designated by Secured
Party (including without limitation any Participant) in writing, shall have the
right, from time to time hereafter, to call at any Debtor's place or places of
business (or any other place where the Collateral or any information relating
thereto is kept or located) during reasonable business hours, and, without
hindrance or delay, (i) to inspect, audit, check and make copies of and extracts
from each Debtor's books, records, journals,
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<PAGE>
orders, receipts and any correspondence and other data relating to any Debtor's
business or to any transactions between any one or more of the Debtors and their
Subsidiaries and Secured Party, (ii) to make such verification concerning the
Collateral as Secured Party may consider reasonable under the circumstances, and
(iii) to discuss the affairs, finances and business of each of Debtors and their
Subsidiaries with any officers, employees, directors or independent accountants
of any of the Debtors and their Subsidiaries and agrees that such discussions or
communications shall be without liability to Secured Party or such independent
accountants. Debtors shall pay on demand all photocopying expenses incurred by
Secured Party under this subsection 4.1.
4.2 Closing Costs and Expenses. Debtors shall reimburse Secured
Party on demand for all reasonable expenses and fees paid or incurred in
connection with the documentation, negotiation and execution of this Agreement,
including without limitation lien search, filing and recording fees and taxes
and the reasonable fees and expenses of Secured Party's attorneys and paralegals
(whether such attorneys and paralegals are employees of Secured Party or are
separately engaged by Secured Party), whether such expenses and fees are
incurred prior to or after the date hereof. All reasonable costs and expenses
incurred by Secured Party with respect to the negotiation, documentation and
execution of this Agreement and the enforcement, collection and protection of
Secured Party's interest in the Collateral shall be payable on demand and
secured by the Collateral.
4.3 Notice. Debtors shall, as soon as possible, and in any event
within five (5) days after any officer of any Debtor learns of any change in the
location of any Collateral from the applicable address set forth in subsection
3.4 or subsection 3.5 hereof or any subsequent location, give written notice
thereof to Secured Party.
4.4 Instruments and Chattel Paper. Immediately upon any Debtor's
receipt thereof, Debtors shall deliver or cause to be delivered to Borrower all
amounts which Borrower is entitled pursuant to any of the Tax Sharing
Agreements. If any default by any Debtor under this Agreement or any Default has
occurred and is continuing, Debtors shall deliver or cause to be delivered to
Secured Party, with appropriate endorsement and assignment to vest title and
possession in Secured Party, with full recourse to Debtors, all chattel paper
and instruments constituting part of the Collateral which any Debtor now owns or
may at any time or times hereafter acquire.
4.5 Appointment of Secured Party as each Debtor's Attorney-in-Fact.
Each Debtor hereby irrevocably designates, makes, constitutes and appoints
Secured Party (and all officers, employees and agents designated by Secured
Party) as such Debtor's true and lawful attorney-in-fact, and authorizes Secured
Party, in such
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<PAGE>
Debtor's or Secured Party's name, following the occurrence and during the
continuance of a default by any Debtor under this Agreement or a Default, to:
(i) demand payment of any Tax Account or any other Collateral; (ii) enforce
payment of any Tax Account or any other Collateral by legal proceedings or
otherwise; (iii) exercise all of such Debtor's rights and remedies with respect
to proceedings brought with respect to any Tax Account or any other Collateral;
(iv) settle, adjust, compromise, extend or renew any Tax Account or any other
Collateral; (v) discharge and release any Tax Account or any other Collateral;
(vi) prepare, file and sign such Debtor's name on any Tax Document or other
similar document; (vii) notify the post office authorities to change the address
for delivery of such Debtor's mail to an address designated by Secured Party,
and open and deal with all mail addressed to such Debtor; (viii) take control in
any manner of any item of payment or proceeds with respect to any of the
Collateral; (ix) endorse such Debtor's name upon any items of payment or
proceeds with respect to any of the Collateral and deposit the same in Secured
Party's account on account of the obligations of any one or more of the Debtors
under this Agreement or the other Obligations; (x) endorse such Debtor's name
upon any chattel paper, document, instrument, invoice, or similar document or
agreement relating to any Tax Account or any other Collateral; and (xi) do all
acts and things which are necessary, in Secured Party's sole discretion, to
fulfill each Debtor's obligations under this Agreement. If Secured Party
undertakes to collect the Collateral from any taxing authority, then Secured
Party will proceed in a commercially reasonable manner to the extent required by
law and Secured Party may deduct its reasonable expenses of realization from any
such collections.
4.6 Financial Statements and Other Information. Each Debtor
shall provide Holdings and Borrower with all financial statements and other
information with respect to such Debtor and such Debtor's Subsidiaries and other
Affiliates as may be required by the other Debtors or the Borrower to fulfill
their respective obligations under the Loan Agreement and the other Financing
Agreements.
5. NEGATIVE COVENANTS.
Debtors covenant and agree that so long as this Agreement remains in
effect (unless Secured Party shall give its prior written consent thereto):
5.1 Amendment of Articles of Incorporation or By-Laws; Corporate
Name; Places of Business. No Debtor shall amend its Articles or Certificate of
Incorporation or By-Laws to effect a change in its corporate name unless Debtors
furnish to Secured Party all such executed financing statements and amendments
to financing statements which Secured Party may request prior to the filing of
such
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<PAGE>
amendment and furnish to Secured Party a copy of such amendment, certified
by the Secretary of State of such Debtor's state of incorporation, within ten
(10) days of the date such amendment is filed with such Secretary of State. No
Debtor shall make any change to the location of its principal place of business,
chief executive office, books and records, chattel paper or records of account
unless prior to the effective date of such change in location, Debtors deliver
to Secured Party such financing statements and amendments to financing
statements which Secured Party may request to reflect such change in location.
Debtors shall deliver such other documents and instruments as Secured Party may
request in connection with any such change in name or location within ten (10)
days of the effectiveness of such change or Secured Party's request therefor.
5.2 Encumbrances. No Debtor shall create, incur, assume or suffer to
exist any security interest, mortgage, pledge, lien or other encumbrance of any
nature whatsoever on any of the Collateral other than the liens and security
interests granted to the Secured Party under this Agreement or under the other
Financing Agreements.
5.3 Consolidations, Mergers or Changes. No Debtor shall
recapitalize, consolidate with or merge with any other Person, or otherwise
change its identity or corporate structure, unless prior to the effective date
of such event Debtors notify Secured Party and deliver to Secured Party such
financing statements, amendments to financing statements and other documents and
instruments as Secured Party may request to perfect, keep perfected and
otherwise protect and preserve the Secured Party's security interest in the
Collateral and Secured Party's other rights under this Agreement, in each case
in a manner satisfactory to Secured Party.
5.4 Tax Sharing Agreements. No Debtor shall, and no Debtor shall
permit any of its Subsidiaries to, enter into or consent to any modification or
alteration of any of the Tax Sharing Agreements.
6. WAIVERS; OTHER AGREEMENTS.
A. Secured Party is hereby authorized, without notice to or demand
upon any of the Debtors, which notice or demand is expressly waived hereby, and
without discharging or otherwise affecting the obligations of any Debtor
hereunder (which shall remain absolute and unconditional notwithstanding any
such action or omission to act), from time to time, to:
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(i) supplement, renew, extend, accelerate or otherwise change the
time for payment of, or other terms relating to, the Obligations, or any
portion thereof, or otherwise modify, amend or change the terms of any
promissory note or other agreement, document or instrument (including
without limitation the Loan Agreement and the other Financing Agreements)
heretofore, now or hereafter executed by the Borrower or any of the
Debtors and delivered to the Secured Party, including without limitation
any increase or decrease of the principal amount thereof or the rate of
interest thereon;
(ii) waive or otherwise consent to noncompliance with any provision
of any agreement, document or instrument (including without limitation the
Loan Agreement and the other Financing Agreements) evidencing or in
respect of the Obligations, or any part thereof, heretofore, now or
hereafter executed by any of the Borrower and the Debtors and delivered to
the Secured Party;
(iii) accept partial payments on the Obligations;
(iv) receive, take and hold security or collateral for the payment
or performance of the Obligations, or any part thereof, or for the payment
or performance of any guaranties of all or any part of the Obligations,
and exchange, enforce, waive, substitute, liquidate, terminate, abandon,
fail to perfect, subordinate, transfer, otherwise alter and release any
such security or collateral;
(v) apply any and all such security or collateral and direct the
order or manner of sale thereof as Secured Party may determine in its sole
discretion;
(vi) settle, release, compromise, collect or otherwise liquidate the
Obligations, or any part thereof, or accept, substitute, release, exchange
or otherwise alter, affect or impair any security or collateral for the
Obligations, or any part thereof, or any guaranty therefor, in any manner;
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(vii) add, release or substitute any one or more guarantors, makers
or endorsers of all or any part of the Obligations and otherwise deal with
the Borrower, any of the Debtors or any guarantor, maker or endorser as
Secured Party may elect in its sole discretion;
(viii) apply any and all payments or recoveries from the Borrower,
any of the Debtors or any guarantor, maker or endorser of all or any part
of the Obligations to the Obligations in such order as Secured Party in
its sole discretion may determine, whether such Obligations are secured or
unsecured or guaranteed or not guaranteed by others;
(ix) apply any and all payments or recoveries from any of the
Debtors or from any guarantor, maker or endorser of all or any part of the
Obligations or sums realized from security furnished by any of them upon
any of their indebtedness or obligations to Secured Party as Secured Party
in its sole discretion may determine, whether or not such indebtedness or
obligations relate to the Obligations; and
(x) refund at any time, at Secured Party's sole discretion, any
payment received by Secured Party in respect of any Obligations, and
payment to Secured Party of the amount so refunded shall be fully secured
hereby even though prior thereto this Agreement shall have been canceled
or surrendered (or any lien, security interest or other collateral shall
have been released or terminated by virtue thereof) by Secured Party, and
such prior cancellation or surrender (or release or termination) shall not
diminish, release, discharge, impair or otherwise affect the obligations
of any Debtor hereunder in respect of the amount so refunded (and any
lien, security interest or other collateral so released or terminated
shall be reinstated with respect to such obligations).
B. Debtors hereby agree that each of their obligations under this
Agreement are absolute and unconditional and shall not be discharged or
otherwise affected as a result of:
(i) the invalidity or unenforceability of any security for or any
guaranty of all or any part of the Obligations or of any promissory note
or other agreement, document or instrument (including without limitation
the Loan Agreement and the other Financing Agreements) evidencing or in
respect of all or any part of the Obligations, or the lack of perfection
or continuing perfection or failure of priority of any security for all or
any part of the Obligations or any guaranty therefor;
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(ii) the absence of any attempt to collect the Obligations, or any
portion thereof, from the Borrower, any Debtor or any guarantor or other
action to enforce the same;
(iii) any failure by Secured Party to acquire, perfect and maintain
any security interest in, or to preserve any rights to, any security or
collateral for all or any part of the Obligations or any guaranty
therefor;
(iv) any election by Secured Party in any proceeding
instituted under Chapter 11 of Title 11 of the United States Code
(11 U.S.C. ss. 101 et seq.) (the "Bankruptcy Code");
(v) any borrowing or grant of a security interest by the
Borrower or any Debtor, as debtor-in-possession, or extension of
credit, under the Bankruptcy Code;
(vi) the disallowance, under the Bankruptcy Code, of all or
any portion of the Secured Party's claim(s) for repayment of the
Obligations;
(vii) any use of cash collateral under the Bankruptcy Code;
(viii) any agreement or stipulation as to the provision of
adequate protection in any bankruptcy proceeding;
(ix) the avoidance of any lien in favor of Secured Party for
any reason;
(x) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, liquidation or dissolution proceeding commenced by
or against the Borrower, any Debtor or any guarantor, maker or endorser of
all or any part of the Obligations, including without limitation any
discharge of, or bar or stay against collecting or accelerating, all or
any of the Obligations (or any interest thereon) in or as a result of any
such proceeding;
(xi) any failure by Secured Party to file or enforce a claim against
the Borrower, any Debtor or any estate in any bankruptcy or insolvency
case or proceeding;
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(xii) any action taken by Secured Party that is authorized by
this Agreement;
(xiii) any election by Secured Party under Section 9-501(4) of the
Uniform Commercial Code as enacted in any relevant jurisdiction as to any
security for the Obligations or any guaranty of all or any part of the
Obligations; or
(xiv) any other circumstance which might otherwise constitute a
legal or equitable discharge or defense of a guarantor.
C. Until the Obligations shall have been paid and performed in full
and all of the Financing Agreements shall have been terminated, no Debtor shall
have any right of subrogation and each Debtor hereby waives any right to enforce
any remedy which Secured Party now has or may hereafter have against the
Borrower, or any other Debtor or any guarantor of all or any part of the
Obligations, and each Debtor hereby waives any benefit of, and any right to
participate in, any security or collateral given to Secured Party to secure
payment, or performance of any of the Obligations or any other liability of the
Borrower or any Debtor to Secured Party. Each Debtor further agrees that any and
all claims of such Debtor against the Borrower, any other Debtor or any
guarantor of all or any part of the Obligations, or against any of their
respective properties, arising by reason of this Agreement, including without
limitation by reason of any payment by such Debtor to Secured Party pursuant to
the provisions hereof, shall be subordinate and subject in right of payment to
the prior payment, in full, of all principal and interest, all reasonable costs
of collection (including attorneys' and paralegals' fees) and payment and
performance in full of any other liabilities or obligations of each of the
Debtors and Borrower to Secured Party, including without limitation the
Liabilities, which may arise either with respect to, on or under any Financing
Agreement or any other note, instrument, document, item, agreement or other
writing heretofore, now or hereafter delivered to Secured Party. Each Debtor
further waives:
(i) any requirements of diligence or promptness on the part
of Secured Party;
(ii) presentment, demand for payment or performance and protest and
notice of protest with respect to the Obligations or any guaranty with
respect thereto;
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(iii) notices (a) of nonperformance, (b) of acceptance of this
Agreement, (c) of default in respect of the Obligations, (d) of the
existence, creation or incurrence of new or additional indebtedness,
arising either from additional loans extended to the Borrower or any
Debtor or otherwise, (e) that the principal amount, or any portion
thereof, and/or any interest on any document or instrument evidencing all
or any part of the Obligations is due, (f) of any and all proceedings to
collect from the Borrower, any other Debtor, any guarantor, maker or
endorser of all or any part of the Obligations, or from anyone else, and
(g) of exchange, sale, surrender or other handling of any security or
collateral given to Secured Party to secure payment of the Obligations or
any guaranty therefor;
(iv) any right to require Secured Party to (a) proceed first against
the Borrower, any other Debtor or any other Person whatsoever, (b) proceed
against or exhaust any security given to or held by Secured Party in
connection with the Obligations, or (c) pursue any other remedy in Secured
Party's power whatsoever;
(v) any defense arising by reason of (a) any disability or other
defense of the Borrower or any other Debtor, (b) the cessation from any
cause whatsoever of the liability of the Borrower or any other Debtor, (c)
any act or omission of Secured Party or others which directly or
indirectly, by operation of law or otherwise, results in or aids the
discharge or release of the Borrower or any other Debtor or any security
given to or held by Secured Party in connection with the Obligations;
(vi) any and all other suretyship defenses under applicable
law; and
(vii) the benefit of any statute of limitations affecting the
Obligations or any Debtor's liability hereunder or the enforcement hereof.
In connection with the foregoing, Debtors covenant that this Agreement shall not
be discharged, except by complete performance of the obligations contained
herein and the payment and discharge in full of all of the Obligations and
termination of all Financing Agreements (including without limitation any
commitments with respect to the Liabilities). All waivers granted by each Debtor
hereunder shall be unconditional and
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irrevocable irrespective of whether the Obligations have been paid in full by
any Debtor or any other party.
D. Each Debtor hereby assumes responsibility for keeping itself
informed of the financial condition of the Borrower and the other Debtors, of
any and all endorsers and/or guarantors of all or any part of the Obligations
and of all other circumstances bearing upon the risk of nonpayment and
nonperformance of the Obligations, or any part thereof, and each Debtor hereby
agrees that Secured Party shall not have any duty to advise such Debtor of
information known to Secured Party regarding such condition or any such
circumstances. In the event Secured Party, in its sole discretion, undertakes at
any time or from time to time to provide any such information to any Debtor,
Secured Party shall not have any obligation (i) to undertake any investigation,
whether or not a part of its regular business routine, (ii) to disclose any
information which Secured Party wishes to maintain confidential or (iii) to make
any other or future disclosures of such information or any other information to
any Debtor.
E. No Debtor shall take any action which would, directly or
indirectly, result in an Event of Default or Default under the Loan Agreement.
7. DEFAULT, RIGHTS AND REMEDIES OF SECURED
PARTY.
7.1 Rights and Remedies Generally. In the event of a default by any
Debtor under this Agreement or a Default, Secured Party shall have, in addition
to any other rights and remedies contained in this Agreement, all of the rights
and remedies of a secured party under the Code or other applicable laws, all of
which rights and remedies shall be cumulative, and non-exclusive, to the extent
permitted by law. Without limiting the generality of the foregoing, to the
extent permitted by applicable law, each Debtor hereby agrees that it will not
invoke or utilize any law which might cause delay in or impede the enforcement
of the rights under this Agreement or any of the Financing Agreements. In
addition to all such rights and remedies, the sale, lease or other disposition
of the Collateral, or any part thereof, by Secured Party after a default by any
Debtor under this Agreement or a Default may be for cash, credit or any
combination thereof, and Secured Party may purchase all or any part of the
Collateral at public or, if permitted by law, private sale, and in lieu of
actual payment of such purchase price, may set off the amount of such purchase
price against the obligations of any one or more of the Debtors or the
Obligations then owing. Any sales of the Collateral may be adjourned from time
to time with or without notice. Secured Party may, in its sole discretion, cause
the Collateral to remain on any Debtor's premises, at
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the Debtors' expense, pending sale or other disposition of the Collateral.
Secured Party shall have the right to conduct such sales on any Debtor's
premises, at Debtors' expense, or elsewhere, on such occasion or occasions as
Secured Party may see fit.
7.2 Sale of Other Disposition of Collateral by Secured Party. Any
notice required to be given by Secured Party of a sale, lease or other
disposition or other intended action by Secured Party with respect to any of the
Collateral which is deposited in the United States, registered mail, postage
prepaid and duly addressed to Debtors at the address specified for notices
pursuant to subsection 8.12 hereof, at least ten (10) days prior to such
proposed action shall constitute fair and reasonable notice to Debtors of any
such action. The net proceeds realized by Secured Party upon any such sale or
other dispositions, after deduction for the expense of retaking, holding,
preparing for sale, selling or the like and the reasonable attorneys' fees, and
legal expenses incurred by Secured Party in connection therewith, shall be
applied as provided herein toward satisfaction of obligations of the Debtors
under this Agreement and the Obligations, including without limitation the
obligations of each Debtor described in subsections 4.1, 4.2, 8.2 and 8.3
hereof. Secured Party shall account to the Debtors for any surplus realized upon
such sale or other disposition, and Debtors shall remain liable for any
deficiency. The commencement of any action, legal or equitable, or the rendering
of any judgement of decree for any deficiency shall not affect Secured Party's
security interest in the Collateral until all of the obligations of the Debtors
under this Agreement and the Obligations are fully paid and performed. Each
Debtor agrees that Secured Party has no obligation to preserve rights to the
Collateral against any other parties.
7.3 Waiver of Demand. Demand, presentment, protest and notice of
nonpayment are hereby waived by each Debtor. Each Debtor also waives the benefit
of all valuation, appraisal and exemption laws.
7.4 Waiver of Notice. UPON THE OCCURRENCE AND DURING THE CONTINUANCE
OF A DEFAULT BY ANY DEBTOR UNDER THIS AGREEMENT OR A DEFAULT, EACH DEBTOR
(PURSUANT TO AUTHORITY GRANTED BY ITS BOARD OF DIRECTORS) HEREBY WAIVES ALL
RIGHTS TO NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE BY SECURED PARTY
OF ITS RIGHTS TO REPOSSESS THE COLLATERAL WITHOUT JUDICIAL PROCESS OR TO
REPLEVY, ATTACH OR LEVY UPON THE COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.
EACH DEBTOR ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY COUNSEL OF ITS CHOICE WITH
RESPECT TO THIS TRANSACTION AND THIS AGREEMENT.
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7.5 Remedies Against Other Persons. The obligations of each Debtor
hereunder are independent of and separate from the Obligations and the
obligations of any other Debtor or guarantor of the Obligations or any other
Person. If any of the Obligations are not paid when due (and the applicable
grace period, if any, under the Loan Agreement has expired), or upon the
occurrence and during the continuance of any Default, Secured Party may, at its
sole election, proceed directly and at once, without notice, against any Debtor
and all or any part of the Collateral without first proceeding against the
Borrower, any other Debtor or any guarantor of all or part of the Obligations or
any other Person, or against any other security for the Obligations or the
obligations of any such guarantor. Each Debtor consents and agrees that Secured
Party shall not be under any obligation to make any demand upon or pursue or
exhaust any of its rights or remedies against the Borrower, any other Debtor or
any guarantor or any other Person with respect to the Obligations, or to pursue
or exhaust any of its rights or remedies with respect to any security therefor,
or any direct or indirect guaranty thereof or any security for any such
guaranty.
8. MISCELLANEOUS.
8.1 Waiver. Secured Party's failure, at any time or times hereafter,
to require strict performance by any Debtor of any provision of this Agreement
shall not waive, affect or diminish any right of Secured Party thereafter to
demand strict compliance and performance therewith. Any suspension or waiver by
Secured Party of a default by any Debtor under this Agreement shall not suspend,
waive or affect any default by any other Debtor or any other default by such
Debtor under this Agreement, whether the same is prior or subsequent thereto and
whether of the same or of a different kind or character. None of the
undertakings, agreements, warranties, covenants and representations of any of
the Debtors contained in this Agreement and no default by any Debtor under this
Agreement or Default shall be deemed to have been suspended or waived by Secured
Party unless such suspension or waiver is in writing signed by an authorized
officer of Secured Party, and directed to such Debtor specifying such suspension
or waiver. All defaults by any Debtor under this Agreement and all Defaults
shall continue until the same are waived by Secured Party in accordance with the
preceding sentence.
8.2 Costs and Attorneys' Fees. If at any time or times hereafter
Secured Party employs counsel in connection with protecting or perfecting
Secured Party's security interest in the Collateral or in connection with any
matters contemplated by or arising out of this Agreement, whether (a) to
prepare, negotiate or execute (i) any amendment to or modification or extension
of this Agreement, or any instrument, document or agreement executed by any
Person in connection with the
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transactions contemplated by this Agreement, or (ii) any instrument, document or
agreement to be executed by any Person in connection with the transactions
contemplated by this Agreement, or (iii) any instrument, document or agreement
in connection with any sale or attempted sale of any interest herein to any
participant, (b) to commence, defend, or intervene in any litigation or to file
a petition, complaint, answer, motion or other pleadings, (c) to take any other
action in or with respect to any suit or proceeding (bankruptcy or otherwise),
(d) to consult with officers of Secured Party to advise Secured Party, (e) to
protect, collect, lease, sell, take possession of, release or liquidate any of
the Collateral, or (f) to attempt to enforce or to enforce any security interest
in any of the Collateral, or to enforce any rights of Secured Party, including
without limitation Secured Party's rights to collect any of obligations of any
of the Debtor under this Agreement or the Obligations, then in any of such
events, all of the reasonable attorneys' fees arising from such services, and
any expenses, costs and charges relating thereto, including without limitation
all reasonable fees of all paralegals and other staff employed by such
attorneys, together with interest following demand for payment thereof at the
from time to time rate applicable to the Liabilities constituting part of the
Revolving Loan, shall be payable by Debtors on demand and secured by the
Collateral.
8.3 Expenditures by Secured Party. In the event any Debtor shall
fail to pay taxes, insurance, assessments, costs or expenses which such Debtor
is, under any of the terms hereof or under the terms of any other Financing
Agreement, required to pay, or fails to keep the Collateral free from security
interests, liens or encumbrances as provided in this Agreement, Secured Party
may, in its sole discretion, make expenditures for any or all of such purposes,
and the amount so expended, together with interest thereon at the from time to
time rate applicable to the Liabilities constituting part of the Revolving Loan,
shall be payable by Debtors on demand and secured by the Collateral.
8.4 Custody and Preservation of Collateral. Secured Party shall be
deemed to have exercised reasonable care in the custody and preservation of any
of the Collateral in its possession if it takes such action for that purpose as
any Debtor shall request in writing, but failure by Secured Party to comply with
any such request shall not of itself be deemed a failure to exercise reasonable
care, and no failure by Secured Party to preserve or protect any right with
respect to the preservation of such Collateral not so requested by Debtors shall
of itself be deemed a failure to exercise reasonable care in the custody or
preservation of such Collateral.
8.5 Reliance by Secured Party. All covenants, agreements,
representations and warranties made herein by any Debtor shall, notwithstanding
any
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investigation by Secured Party, be deemed to be material and to have been relied
upon by Secured Party.
8.6 Parties. Whenever in this Agreement there is reference made to
any of the parties hereto, such reference shall be deemed to include, wherever
applicable, a reference to the successors and assigns of such party and the
provisions of this Agreement shall be binding upon and inure to the benefit of
said successors and assigns. Notwithstanding anything herein to the contrary, no
Debtor may assign or otherwise transfer its rights or obligations under this
Agreement without the prior written consent of Secured Party. Without in any way
limiting Secured Party's rights, Secured Party may sell participations in the
Obligations or sell or assign its rights hereunder, in whole or in part, on such
terms as Secured Party may determine.
8.7 Severability. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provisions or the remaining provisions of this Agreement.
8.8 Application of Payments. Notwithstanding any contrary provision
contained in this Agreement, each Debtor irrevocably waives the right to direct
the application of any and all payments at any time or times hereafter received
by Secured Party from any Debtor or with respect to any of the Collateral, and
each Debtor does hereby irrevocably agree that Secured Party shall have the
continuing exclusive right to apply and reapply any and all payments received at
any time or times hereafter, whether with respect to the Collateral or
otherwise, against the Obligations and the obligations of any Debtor under this
Agreement in such manner as Secured Party may deem advisable, notwithstanding
any entry by Secured Party upon any of its books and records.
8.9 Marshalling; Payments Set Aside. Secured Party shall be under no
obligation to marshall any assets in favor of any Debtor or any other Person or
against or in payment of any or all of the obligations of any Debtor under this
Agreement or the Obligations. To the extent that any Debtor makes a payment or
payments to Secured Party or Secured Party enforces its security interests or
exercises its rights of setoff, and such payment or payments or the proceeds of
such enforcement or setoff or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside and/or required to be
repaid to a trustee, receiver or any other party under any bankruptcy law, state
or federal law, common law or equitable cause,
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then, to the extent of such recovery, the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and effect
as if such payment had not been made or such enforcement or setoff had not
occurred.
8.10 Section Titles. The section titles contained in this Agreement
shall be without substantive meaning or content of any kind whatsoever and are
not a part of the agreement between the parties.
8.11 Continuing Effect. This Agreement and Secured Party's security
interests in the Collateral, shall continue in full force and effect so long as
any Obligations shall be owed to Secured Party, and (even if there shall be no
Obligations outstanding) until all of the Financing Agreements (as defined in
the Loan Agreement) (including without limitation any commitments with respect
to the Liabilities) have been terminated and all of the Liabilities have been
fully paid and discharged as provided in the Loan Agreement and all obligations
of each Debtor under this Agreement have been fully paid and discharged.
8.12 Notices. Except as otherwise expressly provided herein, any
notice required or desired to be served, given or delivered hereunder shall be
in writing, and shall be deemed to have been validly served, given or delivered
(i) three (3) days after deposit in the United States mails, with proper postage
prepaid, (ii) when sent after receipt of confirmation or answerback if sent by
telecopy, or other similar facsimile transmission, (iii) one (1) Business Day
after deposited with a reputable overnight courier with all charges prepaid, or
(iv) when delivered, if hand-delivered by messenger, all of which shall be
properly addressed to Secured Party or Debtors as the case may be, and sent to
the address or number indicated as follows:
(i) If to Secured Party at:
American National Bank and
Trust Company of Chicago
33 North LaSalle Street
Chicago, Illinois 60690
Attention: Dennis E. Harrison
Telecopy: 312/661-6929
Confirmation: 312/661-5707
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(ii) If to any Debtor to such Debtor at:
15 Gilpin Avenue
Hauppauge, New York 11788
Attention: George Fishman
Telecopy: 516/234-0346
Confirmation: 516/234-0200
with a copy of such notice to:
Warshaw Burstein Cohen Schlesinger & Kuh, LLP
555 Fifth Avenue
New York, New York
Attention: Frederick R. Cummings, Jr., Esq.
Telecopy: 212/972-9150
Confirmation: 212/984-7807
or to such other address or number as Secured Party or the Debtors designate to
the other in the manner herein prescribed.
8.13 Equitable Relief. Each Debtor recognizes that, in the event
such Debtor fails to perform, observe or discharge any of its obligations or
liabilities under this Agreement, any remedy at law may prove to be inadequate
relief to Secured Party; therefore, each Debtor agrees that Secured Party, if
Secured Party so requests, shall be entitled to temporary and permanent
injunctive relief in any such case without the necessity of proving actual
damages.
8.14 CHOICE OF LAW. THIS AGREEMENT SHALL BE DEEMED TO BE EXECUTED
AND HAS BEEN DELIVERED AND ACCEPTED IN CHICAGO, ILLINOIS. ANY DISPUTE BETWEEN
THE PARTIES HERETO ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO
THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, AND
WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN
ACCORDANCE WITH THE INTERNAL LAWS AND NOT THE CONFLICTS OF LAW PROVISIONS OF THE
STATE OF ILLINOIS.
8.15 CONSENT TO JURISDICTION.
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(A) EXCLUSIVE JURISDICTION. EXCEPT AS PROVIDED IN SUBSECTION 8.15(B)
HEREOF, SECURED PARTY AND DEBTORS AGREE THAT ALL DISPUTES BETWEEN THEM ARISING
OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED
BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, AND WHETHER ARISING IN CONTRACT,
TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE OR FEDERAL COURTS
LOCATED IN COOK COUNTY, ILLINOIS, BUT SECURED PARTY AND DEBTORS ACKNOWLEDGE THAT
ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF
COOK COUNTY, ILLINOIS. EACH DEBTOR WAIVES IN ALL DISPUTES ANY OBJECTION THAT IT
MAY HAVE TO THE LOCATION OF THE COURT CONSIDERING THE DISPUTE.
(B) OTHER JURISDICTIONS. EACH DEBTOR AGREES THAT SECURED PARTY SHALL
HAVE THE RIGHT TO PROCEED AGAINST SUCH DEBTOR OR ITS PROPERTY ("PROPERTY") IN A
COURT IN ANY LOCATION TO ENABLE SECURED PARTY TO REALIZE ON THE COLLATERAL OR
ANY OTHER SECURITY FOR THE OBLIGATIONS OR THE OBLIGATIONS OF ANY DEBTOR UNDER
THIS AGREEMENT, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR
OF SECURED PARTY. EACH DEBTOR AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE
COUNTERCLAIM IN ANY PROCEEDING BROUGHT BY SECURED PARTY TO REALIZE ON THE
PROPERTY, THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS OR THE
OBLIGATIONS OF ANY DEBTOR UNDER THIS AGREEMENT, OR TO ENFORCE A JUDGMENT OR
OTHER COURT ORDER IN FAVOR OF SECURED PARTY. EACH DEBTOR WAIVES ANY OBJECTION
THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH SECURED PARTY HAS
COMMENCED A PROCEEDING DESCRIBED IN THIS SUBSECTION 8.15(B).
8.16 SERVICE OF PROCESS. EACH DEBTOR HEREBY WAIVES PERSONAL SERVICE
OF ANY AND ALL PROCESS UPON IT AND IRREVOCABLY APPOINTS CT CORPORATION SYSTEM,
208 SOUTH LASALLE STREET, CHICAGO, ILLINOIS 60604 AS SUCH DEBTOR'S AGENT FOR THE
PURPOSE OF ACCEPTING SERVICE OF PROCESS WITHIN THE STATE OF ILLINOIS. SECURED
PARTY AGREES TO PROMPTLY FORWARD BY REGISTERED MAIL (NO RETURN RECEIPT REQUIRED)
A COPY OF ANY PROCESS SO SERVED UPON SAID AGENT TO DEBTORS AT THEIR ADDRESS FOR
NOTICES PROVIDED PURSUANT TO SUBSECTION 8.12 HEREOF. EACH
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DEBTOR HEREBY CONSENTS TO SERVICE OF PROCESS AS AFORESAID. EACH DEBTOR FURTHER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF THE COURTS REFERRED TO IN
SUBSECTION 8.15 HEREOF IN ANY SUCH ACTION OR PROCEEDING BY MAILING COPIES OF
SUCH SERVICE BY REGISTERED MAIL, POSTAGE PREPAID TO SUCH DEBTOR AT SAID ADDRESS.
NOTHING IN THIS AGREEMENT SHALL AFFECT THE RIGHT OF SECURED PARTY TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW BUT ANY FAILURE TO RECEIVE SUCH
COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS.
8.17 WAIVER OF JURY TRIAL AND BOND.
(A) WAIVER OF JURY TRIAL. EACH DEBTOR AND SECURED PARTY WAIVE ANY
RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT, OR OTHERWISE, BETWEEN SECURED PARTY AND ANY ONE OR MORE OF THE
DEBTORS ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT OR ANY
OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION
THEREWITH OR THE TRANSACTIONS RELATED THERETO. EACH DEBTOR AND SECURED PARTY
HEREBY AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION
SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY MAY FILE AN
ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE OTHERS TO THE WAIVER OF THEIR RIGHT TO TRIAL BY
JURY.
(B) WAIVER OF BOND. EACH DEBTOR WAIVES THE POSTING OF ANY BOND
OTHERWISE REQUIRED OF SECURED PARTY IN CONNECTION WITH ANY JUDICIAL PROCESS OR
PROCEEDING TO OBTAIN POSSESSION OF, REPLEVY, ATTACH, OR LEVY UPON ANY COLLATERAL
OR ANY OTHER SECURITY FOR THE OBLIGATIONS OR THE OBLIGATIONS OF ANY DEBTOR UNDER
THIS AGREEMENT, TO ENFORCE ANY JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF
SECURED PARTY, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING
ORDER, PRELIMINARY OR PERMANENT INJUNCTION, THIS AGREEMENT, OR ANY OTHER
AGREEMENT OR DOCUMENT BETWEEN SECURED PARTY AND ANY ONE OR MORE OF THE DEBTORS.
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8.18 ADVICE OF COUNSEL. EACH DEBTOR REPRESENTS TO SECURED PARTY THAT
IT HAS DISCUSSED THIS AGREEMENT AND THE TRANSACTION GOVERNED BY THIS AGREEMENT
WITH SUCH DEBTOR'S LAWYERS.
8.19 Indemnification. Each Debtor agrees to defend, protect,
indemnify and hold harmless Secured Party and each of its officers, directors,
employees, attorneys, consultants and agents (collectively, the "Indemnitees")
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, expenses and disbursements
of any kind or nature whatsoever (including without limitation the reasonable
fees and disbursements of counsel for and consultants of such Indemnitees in
connection with any investigative, administrative or judicial proceeding,
whether or not such Indemnitees shall be designated a party thereto), which may
be imposed on, incurred by, or asserted against such Indemnitees (whether
direct, indirect, or consequential and whether based on any federal or state
laws or other statutory regulations, including without limitation securities,
environmental and commercial laws and regulations, under common law or at
equitable cause or on contract or otherwise) in any manner relating to or
arising out of this Agreement, or any act, event or transaction related or
attendant thereto, or the management of the Collateral (including any liability
under federal, state or local environmental laws or regulations) (collectively,
the "Indemnified Matters"); provided that such Debtor shall have no obligation
to any Indemnitee hereunder with respect to Indemnified Matters caused by or
resulting from the willful misconduct or gross negligence of such Indemnitee. To
the extent that the undertaking to indemnify, pay and hold harmless set forth in
this subsection 8.19 may be unenforceable because it is violative of any law or
public policy, each Debtor shall contribute the maximum portion which it is
permitted to pay and satisfy under applicable law, to the payment and
satisfaction of all Indemnified Matters incurred by the Indemnitees.
8.20 Counterparts. This Agreement may be executed in any number of
counterparts each of which shall be an original with the same effect as if the
signatures thereto and hereto were on the same instrument. The delivery of an
executed counterpart of a signature page to this Agreement by telecopier shall
be effective as delivery of a manually executed counterpart of this Agreement.
8.21 Effectiveness. This Agreement shall become effective on the
Effective Time.
8.22 Liability of Debtors. Each of the Debtors shall be jointly and
severally liable with respect to each of the representations, warranties and
covenants
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made by any Debtor under this Agreement, each of which are intended and shall be
deemed to have been made individually by each of the Debtors and jointly and
severally by all of the Debtors.
8.23 Amendment and Restatement. The HMG Security Agreement and the
Security Agreement are hereby amended and restated in their entirety in the form
of this Agreement as of the effectiveness of this Agreement; provided, however
that any representations and warranties made by any Debtor to the Secured Party
shall survive the execution and delivery of this Agreement.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the
day and year first above written.
ALLIED DIGITAL TECHNOLOGIES CORP.
By: /s/ George Fishman
---------------------------------
Title: Chief Executive Officer
------------------------------
HMG DIGITAL TECHNOLOGIES CORP.
By: /s/ George Fishman
---------------------------------
Title: Chief Executive Officer
------------------------------
Accepted and agreed to in Chicago, Illinois on this 30th day of October, 1996.
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/ Catherine Saccany
----------------------------
Title: Vice President
-------------------------
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Exhibit (10)(a)(xi)
AMENDED AND RESTATED
GUARANTY AGREEMENT
THIS AMENDED AND RESTATED GUARANTY AGREEMENT dated as of October 30,
1996 ("Guaranty") and made by Allied Digital Technologies Corp., a Delaware
corporation, with an office located at 15 Gilpin Avenue, Hauppauge, New York
11788 (the "Guarantor"), in favor of American National Bank and Trust Company of
Chicago, with an office at 33 North LaSalle Street, Chicago, Illinois 60690
(together with its successors and assigns, the "Lender").
W I T N E S S E T H:
A. The Guarantor entered into that certain Guaranty Agreement dated
as of January 11, 1995 in favor of the Lender (the "Original Guaranty").
B. Hauppauge Record Manufacturing Ltd., a New York corporation (the
"Borrower"), has entered into that certain Amended and Restated Loan and
Security Agreement dated as of October 30, 1996 with the Lender (such agreement,
as it may hereafter be amended or otherwise modified from time to time, being
hereinafter referred to as the "Loan Agreement"; capitalized terms used but not
otherwise defined herein are used herein as defined in the Loan Agreement).
C. Borrower is an indirect wholly-owned Subsidiary of the Guarantor
and, as a result of the intercorporate and other relationships between the
Guarantor and the Borrower, the Guarantor will benefit from the advances and
financial accommodations provided by the Lender and the Loan Agreement.
D. As a condition precedent to the effectiveness of the Loan
Agreement and any extensions of credit pursuant thereto, the Lender has
required, among other things, that the Guarantor amend and restate the Original
Guaranty in the form of this Guaranty.
NOW, THEREFORE, in consideration of the above premises and any loans
and other financial accommodations heretofore, now or hereafter made to or for
the benefit of Borrower by the Lender, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Guarantor hereby agrees
<PAGE>
that, effective as of the Effective Time, the Original Guaranty is amended and
restated as follows:
1. Guaranty.
A. The Guarantor hereby absolutely, unconditionally and irrevocably
guarantees the full and prompt payment when due, whether at maturity or earlier,
by reason of acceleration, mandatory prepayment or otherwise, and at all times
thereafter, and the due and punctual performance, of all of the Liabilities
(including without limitation any and all "Liabilities" as such term was defined
in the Hauppauge LSA or the AFL LSA), including, without limitation, all sums
which may become due under the terms and provisions of the Notes or the Loan
Agreement, whether for principal, interest (including, without limitation,
interest accruing before, during or after any bankruptcy, insolvency,
reorganization, arrangement, readjustment of debt, liquidation or dissolution
proceeding, and, if interest ceases to accrue by operation of law by reason of
any such proceeding, interest which otherwise would have accrued in the absence
of such proceeding), premium, fees, expenses or otherwise, whether or not from
time to time reduced or extinguished or hereafter increased or incurred, whether
or not recovery may be or hereafter may become barred by any statute of
limitations, whether enforceable or unenforceable as against the Borrower, now
or hereafter existing, or due or to become due (all Liabilities together with
the Costs (as hereinafter defined), collectively, the "Guaranteed Obligations").
This is a continuing guaranty of payment and not of collection.
B. The Guarantor further agrees to pay, upon demand, all costs and
expenses ("Costs"), including, without limitation, all court costs and
reasonable attorneys' and paralegals' fees and expenses, paid or incurred by the
Lender (i) in endeavoring to collect all or any part of the Guaranteed
Obligations from, or in prosecuting any action against, the Guarantor or any
other guarantor of all or any part of the Guaranteed Obligations or (ii) in
endeavoring to realize upon (whether by judicial, non-judicial or other
proceedings) any collateral securing the Guarantor's liabilities under this
Guaranty.
C. The Guarantor further agrees that, if any payment made by the
Borrower or any other Person is applied to the Guaranteed Obligations and is at
any time annulled, set aside, rescinded, invalidated, declared to be fraudulent
or preferential or otherwise required to be refunded or repaid, or the proceeds
of Collateral or any other security are required to be returned by the Lender to
the Borrower, its estate, trustee, receiver or any other Person, including,
without limitation, the Guarantor, under any bankruptcy law, state or federal
law, common law or equitable cause, then, to the extent of such payment or
repayment, the Guarantor's liability hereunder (and any lien,
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security interest or other collateral securing such liability) shall be and
remain in full force and effect, as fully as if such payment had never been
made, or, if prior thereto this Guaranty shall have been cancelled or
surrendered (and if any lien, security interest or other collateral securing
Guarantor's liability hereunder shall have been released or terminated by virtue
of such cancellation or surrender), this Guaranty (and such lien, security
interest or other collateral) shall be reinstated in full force and effect, and
such prior cancellation or surrender shall not diminish, release, discharge,
impair or otherwise affect the obligations of the Guarantor in respect of the
amount of such payment (or any lien, security interest or other collateral
securing such obligation).
2. Representations and Warranties. The Guarantor represents and
warrants that as of the date of the execution of this Guaranty, and continuing
so long as any Guaranteed Obligations remain outstanding, and (even if there
shall be no Guaranteed Obligations outstanding) so long as this Guaranty remains
in effect:
A. Corporate Existence. The Guarantor and each of its Subsidiaries
is a corporation duly organized and in good standing under the laws of the state
of its incorporation and is duly qualified as a foreign corporation and in good
standing in each state where the nature and extent of the business transacted by
it or the ownership of its assets makes such qualification necessary, except for
those jurisdictions in which the failure so to qualify would not, in the
aggregate, have a material adverse effect on the Guarantor's or such
Subsidiaries financial condition, results of operations or business or the
ability of the Guarantor or any such Subsidiary to perform its obligations under
this Guaranty or under any of the Financing Agreements to which it is a party.
B. Corporate Authority. As to the Guarantor and each of its
Subsidiaries, the execution and delivery by such Person of this Guaranty and of
each Financing Agreement to which it is a party and the performance of such
Person's obligations hereunder and thereunder: (i) are within the corporate
powers of such Person; (ii) are duly authorized by the Board of Directors of
such Person and, if necessary, the stockholders of such Person; (iii) are not in
contravention of the terms of such Person's Certificate or Articles of
Incorporation, or By-Laws, or of any indenture, or other agreement or
undertaking to which such Person is a party or by which such Person or any of
its property is bound or any judgment, decree or order applicable to such
Person; (iv) do not require any governmental consent, registration or approval;
(v) do not contravene any contractual or governmental restriction binding upon
such Person; and (vi) will not, except as contemplated herein, result in the
imposition of any Lien upon any property of such Person under any existing
indenture, mortgage, deed of
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<PAGE>
trust, loan or credit agreement or other material agreement or instrument to
which such Person is a party or by which it or any of its property may be bound
or affected.
C. Binding Effect. Each of this Guaranty and all of the Financing
Agreements have been duly executed and delivered by the Guarantor and each of
its Subsidiaries that is a party thereto and constitute the legal, valid and
binding obligations of the Guarantor and each such Subsidiary that is a party
thereto, enforceable against the Guarantor and each of its Subsidiaries that is
a party thereto in accordance with their respective terms.
3. Waivers; Other Agreements.
A. The Lender is hereby authorized, without notice to or demand upon
the Guarantor, which notice or demand is expressly waived hereby, and without
discharging or otherwise affecting the obligations of the Guarantor hereunder
(which shall remain absolute and unconditional notwithstanding any such action
or omission to act), from time to time, to:
(i) supplement, renew, extend, accelerate or otherwise change the
time for payment of, or other terms relating to, the Guaranteed
Obligations, or any portion thereof, or otherwise modify, amend or change
the terms of any promissory note or other agreement, document or
instrument (including, without limitation, the Loan Agreement and the
other Financing Agreements) now or hereafter executed by the Borrower and
delivered to the Lender, including, without limitation, any increase or
decrease of the principal amount thereof or the rate of interest thereon;
(ii) waive or otherwise consent to noncompliance with any provision
of any agreement, document or instrument (including, without limitation,
the Loan Agreement and the other Financing Agreements) evidencing or in
respect of the Guaranteed Obligations, or any part thereof, now or
hereafter executed by the Borrower and delivered to the Lender;
(iii) accept partial payments on the Guaranteed Obligations;
(iv) receive, take and hold security or collateral for the payment
or performance of the Guaranteed Obligations, or any part thereof, or for
the payment or performance of any guaranties of all or
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<PAGE>
any part of the Guaranteed Obligations, and exchange, enforce, waive,
substitute, liquidate, terminate, abandon, fail to perfect, subordinate,
transfer, otherwise alter and release any such security or collateral;
(v) apply any and all such security or collateral and direct the
order or manner of sale thereof as the Lender may determine in its sole
discretion;
(vi) settle, release, compromise, collect or otherwise liquidate the
Guaranteed Obligations, or any part thereof, or accept, substitute,
release, exchange or otherwise alter, affect or impair any security or
collateral for the Guaranteed Obligations, or any part thereof, or any
other guaranty therefor, in any manner;
(vii) add, release or substitute any one or more other guarantors,
makers or endorsers of all or any part of the Guaranteed Obligations and
otherwise deal with the Borrower or any other guarantor, maker or endorser
as the Lender may elect in its sole discretion;
(viii) apply any and all payments or recoveries from the Guarantor,
from the Borrower or from any other guarantor, maker or endorser of all or
any part of the Guaranteed Obligations to the Guaranteed Obligations in
such order as the Lender in its sole discretion may determine, whether
such Guaranteed Obligations are secured or unsecured or guaranteed or not
guaranteed by others;
(ix) apply any and all payments or recoveries from the Guarantor or
any other guarantor, maker or endorser of all or any part of the
Guaranteed Obligations or sums realized from security furnished by any of
them upon any of their indebtedness or obligations to the Lender, as the
Lender in its sole discretion may determine, whether or not such
indebtedness or obligations relate to the Guaranteed Obligations; and
(x) refund to Borrower or any Person making any payment (or its
estate, a trustee or receiver) at any time, at the Lender's sole
discretion, any payment received by the Lender in respect of any
Guaranteed Obligations, and payment to the Lender of the amount so
refunded shall be fully guaranteed hereby even though prior thereto this
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<PAGE>
Guaranty shall have been cancelled or surrendered (or any lien, security
interest or other collateral shall have been released or terminated by
virtue thereof) by the Lender, and such prior cancellation or surrender
(or release or termination) shall not diminish, release, discharge, impair
or otherwise affect the obligations of the Guarantor hereunder in respect
of the amount so refunded (and any lien, security interest or other
collateral so released or terminated shall be reinstated with respect to
such obligations).
B. The Guarantor hereby agrees that its obligations under this
Guaranty are absolute and unconditional and shall not be discharged or otherwise
affected as a result of:
(i) the invalidity or unenforceability of any security for or other
guaranty of all or any part of the Guaranteed Obligations or of any
promissory note or other agreement, document or instrument (including,
without limitation, the Loan Agreement and the Financing Agreements)
evidencing or in respect of all or any part of the Guaranteed Obligations,
or the lack of perfection or continuing perfection or failure of priority
of any security for all or any part of the Guaranteed Obligations or any
other guaranty therefor;
(ii) the absence of any attempt to collect the Guaranteed
Obligations, or any portion thereof, from the Borrower or any other
guarantor or other action to enforce the same;
(iii) any failure by the Lender to acquire, perfect and maintain any
security interest in, or to preserve any rights to, any security or
collateral for all or any part of the Guaranteed Obligations or any
guaranty therefor;
(iv) any election by the Lender in any proceeding instituted under
Chapter 11 of Title 11 of the United States Code (11 U.S.C. ss. 101 et
seq.) (the "Bankruptcy Code");
(v) any borrowing or grant of a security interest by the Borrower,
as debtor-in-possession, or extension of credit, under the Bankruptcy
Code;
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<PAGE>
(vi) the disallowance, under the Bankruptcy Code, of all or any
portion of the Lender's claim(s) for repayment of the Guaranteed
Obligations;
(vii) any use of cash collateral under the Bankruptcy Code;
(viii) any agreement or stipulation as to the provision of adequate
protection in any bankruptcy proceeding;
(ix) the avoidance of any lien in favor of the Lender for any
reason;
(x) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, liquidation or dissolution proceeding commenced by
or against the Borrower, the Guarantor or any other guarantor, maker or
endorser, including without limitation, any discharge of, or bar or stay
against collecting or accelerating, all or any of the Guaranteed
Obligations (or any interest thereon) in or as a result of any such
proceeding;
(xi) any failure by the Lender to file or enforce a claim against
the Borrower or its estate in any bankruptcy or insolvency case or
proceeding;
(xii) any action taken by the Lender that is authorized by this
Guaranty;
(xiii) any election by the Lender under Section 9-501(4) of the
Uniform Commercial Code as enacted in any relevant jurisdiction as to any
security for the Guaranteed Obligations or any guaranty of all or any part
of the Guaranteed Obligations; or
(xiv) any other circumstance which might otherwise constitute a
legal or equitable discharge or defense of a guarantor.
C. Until the Guaranteed Obligations shall have been paid and
performed in full and all of the Financing Agreements shall have been
terminated, the Guarantor shall have no right of subrogation and hereby waives
any right to enforce any remedy which the Lender now has or may hereafter have
against the Borrower or any guarantor of all or any part of the Guaranteed
Obligations, and the Guarantor hereby
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<PAGE>
waives any benefit of, and any right to participate in, any security or
collateral given to the Lender to secure payment or performance of any of the
Guaranteed Obligations or any other liability of the Borrower to the Lender. The
Guarantor further agrees that any and all claims of the Guarantor against the
Borrower or any guarantor of all or any part of the Guaranteed Obligations, or
against any of their respective properties, arising by reason of this Guaranty,
including without limitation by reason of any payment by the Guarantor to the
Lender pursuant to the provisions hereof, shall be subordinate and subject in
right of payment to the prior payment, in full, of all principal and interest,
all reasonable costs of collection (including attorneys' and paralegals' fees)
and payment and performance in full of any other liabilities or obligations to
the Lender by the Borrower, including without limitation the Liabilities, which
may arise either with respect to or on any Financing Agreement or any other
note, instrument, document, item, agreement or other writing heretofore, now or
hereafter delivered to the Lender. The Guarantor further waives:
(i) any requirements of diligence or promptness on the part of the
Lender;
(ii) presentment, demand for payment or performance and protest and
notice of protest with respect to the Guaranteed Obligations or any
guaranty with respect thereto;
(iii) notices (a) of nonperformance, (b) of acceptance of this
Guaranty, (c) of default in respect of the Guaranteed Obligations, (d) of
the existence, creation or incurrence of new or additional indebtedness,
arising either from additional loans extended to the Borrower or
otherwise, (e) that the principal amount, or any portion thereof, and/or
any interest on any document or instrument evidencing all or any part of
the Guaranteed Obligations is due, (f) of any and all proceedings to
collect from the Borrower, any maker, endorser or any other guarantor of
all or any part of the Guaranteed Obligations, or from anyone else, and
(g) of exchange, sale, surrender or other handling of any security or
collateral given to the Lender to secure payment of the Guaranteed
Obligations or any guaranty therefor;
(iv) any right to require the Lender to (a) proceed first against
the Borrower or any other Person whatsoever, (b) proceed against or
exhaust any security given to or held by the Lender in connection with the
Guaranteed Obligations, or (c) pursue any other remedy in the Lender's
power whatsoever;
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<PAGE>
(v) any defense arising by reason of (a) any disability or other
defense of the Borrower, (b) the cessation from any cause whatsoever of
the liability of the Borrower, (c) any act or omission of the Lender or
others which directly or indirectly, by operation of law or otherwise,
results in or aids the discharge or release of the Borrower or any
security given to or held by the Lender in connection with the Guaranteed
Obligations;
(vi) any and all other suretyship defenses under applicable law; and
(vii) the benefit of any statute of limitations affecting the
Guaranteed Obligations or the Guarantor's liability hereunder or the
enforcement hereof.
In connection with the foregoing, the Guarantor covenants that this Guaranty
shall not be discharged, except by complete performance of the obligations
contained herein and the payment and discharge in full of all of the Liabilities
and termination of all Financing Agreements (including without limitation any
commitments with respect to the Liabilities). All waivers granted by the
Guarantor hereunder, shall be unconditional and irrevocable irrespective of
whether the Guaranteed Obligations have been paid in full by the Guarantor or
any other party.
D. The Guarantor hereby assumes responsibility for keeping itself
informed of the financial condition of the Borrower, of any and all endorsers
and/or other guarantors of all or any part of the Guaranteed Obligations and of
all other circumstances bearing upon the risk of nonpayment and nonperformance
of the Guaranteed Obligations, or any part thereof, and the Guarantor hereby
agrees that the Lender shall not have any duty to advise the Guarantor of
information known to the Lender regarding such condition or any such
circumstances. In the event the Lender, in its sole discretion, undertakes at
any time or from time to time to provide any such information to the Guarantor,
the Lender shall not have any obligation (i) to undertake any investigation,
whether or not a part of its regular business routine, (ii) to disclose any
information which the Lender wishes to maintain confidential or (iii) to make
any other or future disclosures of such information or any other information of
the Guarantor.
E. The Guarantor shall not take any action which would, directly or
indirectly, result in an Event of Default or Default under the Loan Agreement.
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<PAGE>
F. The Guarantor shall take such actions as may be required by
Holdings to enable Holdings to fulfill its obligations under the Holdings
Guaranty and shall not take any action or fail to take any action which would
result in a breach or default of the provisions of the Holdings Guaranty which
relate to the Guarantor or its Subsidiaries.
4. Default; Remedies.
A. The obligations of the Guarantor hereunder are independent of and
separate from the Guaranteed Obligations and the obligations of any other
guarantor of the Guaranteed Obligations or any other Person. If any of the
Guaranteed Obligations are not paid when due (and the applicable grace period,
if any, under the Loan Agreement has expired), or upon the occurrence and during
the continuance of any Default, the Lender may, at its sole election, proceed
directly and at once, without notice, against the Guarantor to collect and
recover the full amount or any portion of the Guaranteed Obligations, without
first proceeding against the Borrower or any other guarantor of all or part of
the Guaranteed Obligations or any other Person, or against any Collateral or any
other security for the Guaranteed Obligations or the obligations of the
Guarantor or any other guarantor under any guaranty; provided, however, if any
Default specified in subsection 9.1(G), (H), (I) or (J) of the Loan Agreement
shall occur and be continuing, the Guarantor shall, at the option of the Lender,
pay to the Lender, the full amount which would be payable under this Guaranty if
all of the Liabilities were then due and payable.
B. To secure the full and prompt payment and performance of the
Guaranteed Obligations and the Guarantor's obligations under this Guaranty, the
Guarantor hereby grants to the Lender a right of setoff against and a continuing
security interest in all of the Guarantor's now or hereafter acquired balances,
credits, deposits, accounts, monies and any other property and interests in
property of every kind or description of or in the Guarantor's name now or
hereafter coming into the actual possession, custody or control of the Lender or
any agent or affiliate of the Lender in any way or for any purpose (whether for
safekeeping, deposit, custody, pledge, transmission, collection or otherwise).
At any time after any Default, the Lender may, without notice to the Guarantor
and regardless of the acceptance of any security or collateral for the payment
hereof, appropriate and apply toward the payment of the Guaranteed Obligations
(i) any indebtedness due or to become due from the Lender to the Guarantor and
(ii) any balances, credits, deposits, accounts, monies or other property of or
in the name of the Guarantor at any time held by or coming into the possession,
custody or control of the Lender or any agent or affiliate of the Lender.
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<PAGE>
C. The Guarantor hereby authorizes and empowers the Lender, in its
sole discretion, without any notice (except notices required by law to the
extent such notice as a matter of law may not be waived) or demand to the
Guarantor whatsoever and without affecting the obligations of the Guarantor
hereunder, to exercise any right or remedy which the Lender may have available
to it, including, but not limited to, foreclosure by one or more judicial or
nonjudicial sales, and to the extent permitted by applicable law, the Guarantor
hereby waives any defense to the recovery by the Lender against the Guarantor of
any deficiency after such action and the Guarantor expressly waives any defense
or benefits that may be derived from statutes and laws relating thereto. No
exercise by the Lender of, and no omission of the Lender to exercise, any power
or authority recognized herein and no impairment or suspension of any right or
remedy of the Lender against the Guarantor, any other guarantor, maker or
endorser or any security shall in any way suspend, discharge, release, exonerate
or otherwise affect any of the Guarantor's obligations hereunder or give to the
Guarantor any right of recourse against the Lender.
D. The Guarantor consents and agrees that the Lender shall not be
under any obligation to make any demand upon or pursue or exhaust any of its
rights or remedies against the Borrower or any guarantor or any other Person
with respect to the Guaranteed Obligations, or to pursue or exhaust any of its
rights or remedies with respect to any security therefor, or any direct or
indirect guaranty thereof or any security for any such guaranty, or to marshal
any assets in favor of the Guarantor or against or in payment of any or all of
the Guaranteed Obligations or to resort to any security or any such guaranty in
any particular order. All of the Lender's rights and remedies provided for
herein, in the Loan Agreement and the other Financing Agreements or otherwise
available to the Lender under applicable law, shall be cumulative and
non-exclusive to the extent permitted by law. Without limiting the generality of
the foregoing, to the extent permitted by applicable law, the Guarantor hereby
agrees that it will not invoke or utilize any law which might cause delay in or
impede the enforcement of the rights under this Guaranty or any of the Financing
Agreements.
E. Demand, presentment, protest and notice of nonpayment are hereby
waived by the Guarantor. The Guarantor also waives the benefit of all
valuations, appraisal and exemption laws.
5. Miscellaneous.
A. This Guaranty shall be irrevocable. If notwithstanding the
provisions of this Guaranty, the Guarantor is entitled by law to revoke or
terminate this Guaranty
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other than as is expressly provided for herein, the Guarantor agrees that this
Guaranty shall continue in full force and effect and any such revocation or
termination shall not become effective until at least thirty (30) days after
written notice of revocation of this Guaranty, specifically referring hereto
(and identifying the effective date (the "Revocation Date") of such revocation
which shall be at least thirty (30) days after the Lender's receipt thereof),
signed by the Guarantor, is given to the Lender and is actually received by the
Lender. Such revocation shall not affect the right and power of the Lender to
enforce rights arising prior to the Revocation Date. If, in reliance on this
Guaranty, the Lender makes loans or takes other action after the revocation by
the Guarantor but prior to the Revocation Date, the rights of the Lender with
respect thereto shall be the same as if such revocation had not occurred.
B. This Guaranty shall be binding upon the Guarantor and upon its
successors and assigns and shall inure to the benefit of the Lender and its
successors and assigns; all references herein to the Borrower and to the
Guarantor shall be deemed to include their respective successors and assigns and
all references herein to the Lender shall be deemed to include its successors
and assigns. The Borrower's successors and assigns shall include, without
limitation, a receiver, trustee or debtor-in-possession of or for the Borrower.
This Guaranty shall be enforceable by Lender or any of Lender's successors and
assigns and any such successors and assigns shall have the same rights and
benefits as the Lender hereunder. Notwithstanding anything herein to the
contrary, the Guarantor may not assign or otherwise transfer its rights or
obligations under this Guaranty without the prior written consent of the Lender.
C. All references to the singular shall be deemed to include the
plural where the context so requires. All representations, warranties and
covenants contained herein shall survive the execution and delivery of this
Guaranty, the transfer by Lender of any interest in the Guaranteed Obligations
or under the Financing Agreements, and may be relied upon by any assignee or
successor, regardless of any investigation made at any time by or on behalf of
Lender or any such assignee or successor. The Guarantor acknowledges the
Lender's acceptance hereof and reliance hereon.
D. No course of dealing and no delay on the part of the Lender in
the exercise of any right or remedy shall operate as a waiver thereof, and no
single or partial exercise by the Lender of any right or remedy shall preclude
any further exercise thereof, nor shall any modification or waiver of any of the
provisions of this Guaranty be binding upon the Lender, except as expressly set
forth in a writing duly signed and delivered by the Lender. The Lender's failure
at any time or times hereafter to require strict performance by the Borrower or
the Guarantor or any other Person of any of the provisions, warranties, terms
and conditions contained in the Loan
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Agreement, any of the other Financing Agreements or any promissory note,
security agreement, agreement, guaranty, instrument or document now or at any
time or times hereafter executed by the Borrower or the Guarantor or any other
Person and delivered to the Lender shall not waive, affect or diminish any right
of the Lender at any time or times hereafter to demand strict performance
thereof and such right shall not be deemed to have been waived by any act or
knowledge of the Lender, or its agents, officers or employees, unless such
waiver is contained in an instrument in writing signed by an authorized officer
or agent of the Lender and directed to the Borrower or the Guarantor or other
Person, as the case may be, specifying such waiver. All Defaults under the Loan
Agreement and all defaults under this Guaranty shall continue until the same are
waived in a writing directed to the Guarantor in accordance with this paragraph
5.D. No waiver of any default shall operate as a waiver of any other default or
the same default on a future occasion, and no action by the Lender permitted
hereunder shall in any way affect or impair the Lender's rights or the
obligations of the Guarantor under this Guaranty. Any determination by a court
of competent jurisdiction of the amount of any principal and/or interest owing
by the Borrower to the Lender shall be conclusive and binding on the Guarantor
irrespective of whether it was a party to the suit or action in which such
determination was made (unless such determination was made as a result of a
default judgment in a proceeding in which Borrower did not appear).
E. THIS GUARANTY SHALL BE DEEMED TO HAVE BEEN EXECUTED, AND WAS
DELIVERED AND ACCEPTED IN CHICAGO, ILLINOIS. THIS GUARANTY SHALL BE CONSTRUED IN
ALL RESPECTS IN ACCORDANCE WITH, AND GOVERNED BY, AND ANY DISPUTE BETWEEN THE
PARTIES HERETO ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS GUARANTY AND
WHETHER ARISING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED IN
ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW
PROVISIONS) AND DECISIONS OF THE STATE OF ILLINOIS.
F. WHENEVER POSSIBLE, EACH PROVISION OF THIS GUARANTY SHALL BE
INTERPRETED IN SUCH A MANNER AS TO BE EFFECTIVE AND VALID UNDER APPLICABLE LAW,
BUT IF ANY PROVISION OF THIS GUARANTY SHALL BE PROHIBITED BY OR INVALID UNDER
APPLICABLE LAW, SUCH PROVISION SHALL BE INEFFECTIVE ONLY TO THE EXTENT OF SUCH
PROHIBITION OR INVALIDITY, WITHOUT INVALIDATING THE
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REMAINDER OF SUCH PROVISION OR THE REMAINING PROVISIONS OF THIS GUARANTY.
G. (i) EXCEPT AS PROVIDED IN SUBPARAGRAPH 5.G(ii) BELOW, THE LENDER
AND THE GUARANTOR AGREE THAT ALL DISPUTES BETWEEN THEM ARISING OUT OF, CONNECTED
WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS GUARANTY AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR
OTHERWISE, SHALL BE RESOLVED ONLY BY STATE OR FEDERAL COURTS LOCATED IN COOK
COUNTY, ILLINOIS, BUT THE LENDER AND THE GUARANTOR ACKNOWLEDGE THAT ANY APPEALS
FROM THOSE COURTS MAY HAVE TO BE BY A COURT LOCATED OUTSIDE OF COOK COUNTY,
ILLINOIS. THE GUARANTOR WAIVES IN ALL DISPUTES ANY OBJECTION THAT IT MAY HAVE TO
THE LOCATION OF THE COURT CONSIDERING THE DISPUTE.
(ii) THE GUARANTOR AGREES THAT THE LENDER SHALL HAVE THE RIGHT TO
PROCEED AGAINST THE GUARANTOR OR ITS PROPERTY ("PROPERTY") IN A COURT IN ANY
LOCATION TO ENABLE THE LENDER TO REALIZE ON ANY SECURITY FOR THE GUARANTEED
OBLIGATIONS OR THE GUARANTOR'S OBLIGATIONS UNDER THIS GUARANTY, OR TO ENFORCE A
JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF THE LENDER. THE GUARANTOR
AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING
BROUGHT BY THE LENDER TO REALIZE ON THE PROPERTY OR ANY SECURITY FOR THE
GUARANTEED OBLIGATIONS OR THE GUARANTOR'S OBLIGATIONS UNDER THIS GUARANTY, OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE LENDER. THE GUARANTOR
WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH THE
LENDER HAS COMMENCED A PROCEEDING DESCRIBED IN THIS PARAGRAPH 5.G.
H. THE GUARANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL
PROCESS UPON IT AND IRREVOCABLY APPOINTS CT CORPORATION SYSTEM, 208 SOUTH
LASALLE STREET, CHICAGO, ILLINOIS 60604, ITS REGISTERED AGENT, AS THE
GUARANTOR'S AGENT FOR THE PURPOSE OF ACCEPTING ON BEHALF OF THE GUARANTOR
SERVICE OF PROCESS WITHIN THE STATE OF ILLINOIS (THE "SP AGENT"). LENDER AGREES
TO PROMPTLY FORWARD BY REGISTERED MAIL (NO RETURN RECEIPT REQUIRED) A COPY OF
ANY PROCESS SO SERVED BY IT
-14-
<PAGE>
UPON THE SP AGENT TO THE GUARANTOR AT ITS ADDRESS SET FORTH IN PARAGRAPH 5.O
BELOW. THE GUARANTOR HEREBY CONSENTS TO SERVICE OF PROCESS AS AFORESAID. THE
GUARANTOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF THE
COURTS REFERRED TO IN PARAGRAPH 5.G ABOVE IN ANY SUCH ACTION OR PROCEEDING BY
MAILING COPIES OF SUCH SERVICE BY REGISTERED MAIL, POSTAGE PREPAID TO THE
GUARANTOR AT SAID ADDRESS. NOTHING IN THIS GUARANTY SHALL AFFECT THE RIGHT OF
THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. ANY FAILURE TO
RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS.
I. THE GUARANTOR AND THE LENDER WAIVE ANY RIGHT TO HAVE A JURY
PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR
OTHERWISE, BETWEEN THE LENDER AND THE GUARANTOR ARISING OUT OF, CONNECTED WITH,
RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS GUARANTY OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT
EXECUTED OR DELIVERED IN CONNECTION THEREWITH OR THE TRANSACTIONS RELATED
THERETO. THE GUARANTOR AND THE LENDER HEREBY AGREE AND CONSENT THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT
A JURY AND THAT EITHER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS
GUARANTY WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE OTHER TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
J. THE GUARANTOR WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED
OF THE LENDER IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO OBTAIN
POSSESSION OF, REPLEVY, ATTACH, OR LEVY UPON ANY SECURITY FOR THE GUARANTEED
OBLIGATIONS OR THE GUARANTOR'S OBLIGATIONS UNDER THIS GUARANTY, TO ENFORCE ANY
JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF THE LENDER, OR TO ENFORCE BY
SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER, PRELIMINARY OR PERMANENT
INJUNCTION, THIS GUARANTY, OR ANY OF THE OTHER AGREEMENT OR DOCUMENT BETWEEN THE
LENDER AND THE GUARANTOR.
-15-
<PAGE>
K. This Guaranty contains all the terms and conditions of the
agreement between the Lender and the Guarantor relating to the subject matter
hereof. The terms or provisions of this Guaranty may not be waived, altered,
modified or amended except in a writing duly executed by the party to be charged
thereby.
L. Neither the Lender nor its affiliates, directors, officers,
agents, attorneys or employees shall be liable to the Guarantor for any action
taken, or omitted to be taken, by it or them or any of them under this Guaranty,
the Loan Agreement or the Financing Agreements or in connection herewith or
therewith.
M. The Guarantor warrants and agrees that each of the waivers set
forth in this Guaranty are made with full knowledge of their significance and
consequences and that, under the circumstances, the waivers are reasonable. If
any of said waivers are determined to be contrary to any applicable law or
public policy, such waivers shall be effective to the maximum extent permitted
by law. Should any one or more provisions of this Guaranty be determined to be
illegal or unenforceable, all other provisions hereof shall nevertheless remain
effective.
N. Captions are for convenience only and shall not affect the
meaning of any term or provision of this Guaranty.
O. Except as otherwise expressly provided herein, any notice
required or desired to be served, given or delivered hereunder shall be in
writing, and shall be deemed to have been validly served, given or delivered (i)
three (3) days after deposit in the United States mails, with proper postage
prepaid, (ii) when sent after receipt of confirmation or answerback if sent by
telecopy, or other similar facsimile transmission, (iii) one (1) Business Day
after deposited with a reputable overnight courier with all charges prepaid, or
(iv) when delivered, if hand-delivered by messenger, all of which shall be
properly addressed to the Person to be notified, as the case may be, and sent to
the address or number indicated as follows:
(i) If to the Lender at:
American National Bank and
Trust Company of Chicago
33 North LaSalle Street
Chicago, Illinois 60690
Attention: Dennis E. Harrison
Telecopy: 312/661-6929
Confirmation: 312/661-5707
-16-
<PAGE>
(ii) If to the Guarantor at:
Allied Digital Technologies Corp.
15 Gilpin Avenue
Hauppauge, New York 11788
Attention: George Fishman
Telecopy: 516/234-0346
Confirmation: 516/234-0200
with a copy of such notice to:
Warshaw Burstein Cohen Schlesinger & Kuh, LLP
555 Fifth Avenue
New York, New York 10017
Attention: Frederick R. Cummings, Jr., Esq.
Telecopy: 212/972-9150
Confirmation: 212/984-7807
or to such other address or number as the Guarantor or the Lender designates to
the other in the manner herein prescribed.
P. The Guarantor acknowledges that any breach by the Guarantor of
any of the provisions of this Guaranty will cause irreparable injury to the
Lender and there is no adequate remedy at law for a breach of the provisions of
this Guaranty. The Guarantor agrees that the Lender will have the immediate
right, upon such breach, to obtain temporary and permanent injunctive relief in
any such case without the necessity of proving actual damages and that the
granting of any such relief shall not preclude the Lender from pursuing any
other available relief or remedies for such breach.
Q. This Guaranty may be executed and accepted in any number of
counterparts each of which shall be an original with the same effect as if the
signatures thereto and hereto were on the same instrument. The delivery of an
executed counterpart of a signature page or acceptance to this Guaranty by
telecopier shall be effective as delivery of a manually executed counterpart of
this Guaranty.
R. THE GUARANTOR ACKNOWLEDGES AND REPRESENTS TO THE LENDER THAT IT
HAS BEEN ADVISED BY COUNSEL WITH RESPECT TO THE TRANSACTION GOVERNED BY THIS
GUARANTY AND THE TERMS OF THIS GUARANTY.
-17-
<PAGE>
S. This Guaranty shall become effective at the Effective Time.
T. The Original Guaranty is amended and restated in its entirety in
the form hereof as of the effectiveness of this Guaranty; provided, however, any
representations and warranties made by the Guarantor to the Lender shall survive
the execution and delivery hereof.
IN WITNESS WHEREOF, the Guarantor has made this Guaranty as of the
date first above written.
ALLIED DIGITAL TECHNOLOGIES
CORP.
By: /s/ George Fishman
------------------
Title: Chief Executive Officer
--------------------------
Acknowledged and agreed to in Chicago,
Illinois, as of this 30th day of
October, 1996:
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/Catherine Saccany
---------------------
Title: Vice President
-------------------
-18-
Exhibit (10)(b)(i)
THIS NOTE AND PAYMENT OF THE INDEBTEDNESS EVIDENCED HEREBY IS SUBORDINATED TO
CERTAIN CLAIMS AS DESCRIBED IN, AND IS SUBJECT TO THE TERMS OF, THAT CERTAIN
AMENDED AND RESTATED SUBORDINATION AGREEMENT DATED AS OF OCTOBER 30, 1996
BETWEEN WILLIAM H. SMITH, INDIVIDUALLY AND AS TRUSTEE, AND AMERICAN NATIONAL
BANK AND TRUST COMPANY OF CHICAGO, AS AMENDED FROM TIME TO TIME (THE
"SUBORDINATION AGREEMENT").
$4,000,000 Dated: October 30, 1996
Hauppauge, New York
AMENDED AND RESTATED PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, HAUPPAUGE RECORD MANUFACTURING LTD., a
New York corporation ("Maker), successor to Allied Film Laboratory, Inc., a
Michigan corporation ("AFL"), promises to pay to the order of William H. Smith
as trustee (the "Trustee") of the William H. Smith Trust under trust agreement
dated November 13, 1978, as amended ("Payee") whose address is 26479 Greythorne
Trail, Farmington Hills, Michigan 48334, or at such other address as holder of
this Note may from time to time designate, the principal sum of Four Million
Dollars ($4,000,000.00), in lawful money of the United States of America, with
interest thereon as hereinafter set forth below. The entire principal balance of
this Note, together with the interest accrued but unpaid thereon, shall be due
and payable in full on January 1, 2001 ("Due Date"). In addition, on the Due
Date, the Maker shall pay to the Payee, in lawful money of the United States of
America, the following amounts: (i) the sum of $533,333.33, representing accrued
but unpaid interest from January 24, 1995 through the date of this Note under
that certain Amended and Restated Promissory Note, dated January 24, 1995,
executed by AFL and payable to the order of William H. Smith, as Trustee, in the
amount of $4,000,000 (the
<PAGE>
"Original Note"), (ii) to the extent not permitted to be paid pursuant to the
terms of that certain Amended and Restated Loan and Security Agreement dated as
of October 30, 1996, between the Maker and American National Bank and Trust
Company of Chicago ("ANBC")(as amended, modified or supplemented from time to
time, the "Loan Agreement"), all accrued but unpaid interest on the principal
balance of this Note from the date hereof through July 31, 1997, and (iii) to
the extent not permitted to be paid pursuant to the terms of the Loan Agreement,
accrued but unpaid interest on the principal balance of this Note from August 1,
1997 through the Due Date. None of the amounts set forth in clauses (i)-(iii)
above shall bear interest hereunder.
The outstanding principal balance of this Note shall bear interest after
the date hereof at a rate of ten percent (10%) per annum until acceleration and
at a rate of twelve percent (12%) per annum after acceleration ("Default Rate").
Interest may accrue but no interest shall be payable for periods on or prior to
July 31, 1997; provided that if interest is at any time permitted to be paid or
advanced under the Loan Agreement, such interest shall be paid or advanced in
accordance with the terms of the Loan Agreement. Subject to the terms and
provisions of the Loan Agreement, interest accruing on and after August 1, 1997
shall be payable in arrears quarterly on the first day of October, January,
April and July, commencing October 1, 1997, and if interest is otherwise
permitted to be paid or advanced under the Loan Agreement, such interest shall
be paid or advanced in accordance with the terms of the Loan Agreement. To the
extent interest is not permitted to be paid by the Loan Agreement, payment of
such amounts shall be deferred without interest until the Due Date.
Interest calculation shall be based on the actual number of days elapsed
over a 360-day year. In no event shall the rate of interest hereunder exceed the
maximum rate of interest permitted by the laws governing this Note. If the
interest collected should exceed the maximum amount permitted by such laws, such
excess shall be deemed received on the
2
<PAGE>
account of, and shall automatically be applied to reduce, the principal balance
of this Note.
As long as this Note and payment of the indebtedness evidenced hereby is
subordinated pursuant to the Subordination Agreement, this Note may not be
prepaid without the prior written consent of ANBC.
An event of default ("Event of Default") shall be deemed to have occurred
if (i) Maker fails to pay when due the indebtedness evidenced by this Note or
the interest due thereon; (ii) Maker fails to perform any obligations under, or
comply with any provisions of this Note; (iii) Maker becomes the subject of a
proceeding in bankruptcy which, in the case of an involuntary proceeding,
remains undismissed, undischarged or unbonded for a period of sixty (60) days,
makes an assignment of all or a substantial part of its assets for the benefit
of its creditors, becomes insolvent, or is unable to meet its debts as they
mature; or (iv) a levy or writ of attachment, garnishment, execution or other
like judicial process is filed or issued against Maker with respect to all or
any substantial part of its assets which results in the entry of an order for
such relief which shall not have been vacated, discharged, stayed or bonded
pending appeal within sixty (60) days from the entry thereof. Upon the
occurrence of any Event of Default herein, the holder shall give written notice
to Maker by sending such notice by regular mail and by certified U.S. mail,
postage prepaid, return receipt requested to maker at its chief corporate
offices, or such other address as the Maker shall supply in writing. If such
Event of Default is not fully cured within 10 calendar days after the mailing of
such written notice, the whole or any unpaid principal balance, together with
interest accrued thereon, shall be immediately due and payable and the holder
hereof shall be entitled to exercise any one or more of its rights and remedies
granted to Payee by law. Additionally, Maker agrees to immediately pay the
holder hereof the amount of any and all expenses, including reasonable
attorneys' fees incurred by such holder in enforcing any of its rights
hereunder. Notwithstanding the foregoing, it shall not be an
3
<PAGE>
Event of Default hereunder if the Maker fails to pay when due the indebtedness
evidenced by this Note or the interest due thereon if the reason the Maker so
fails to pay is because of the terms and conditions contained in the Loan
Agreement.
The rights and remedies provided herein are cumulative to the rights and
remedies provided by applicable law. Nothing herein is intended, nor would it be
construed, to preclude the exercise of any one or more of the rights and
remedies provided hereunder or by applicable law.
Except as explicitly provided above, Maker waives presentment, protest and
demand, notice of protest, demand and dishonor and non-payment of this Note. No
extension of the time for the payment of this Note made by agreement with any
person now or hereafter liable for the payment of this Note shall operate to
release, discharge, modify, change or effect the original liability under this
Note, either in whole or in part, of Maker.
This Note shall be governed by and construed in accordance with the laws of
the State of New York without giving effect to the conflicts of laws principles
thereof.
4
<PAGE>
This Amended and Restated Promissory Note constitutes an amendment and
restatement in its entirety of the Original Note.
HAUPPAUGE RECORD MANUFACTURING
LTD.
By: /s/ Charles Kavanagh
---------------------------
5
Exhibit (10)(b)(ii)
THIS NOTE AND PAYMENT OF THE INDEBTEDNESS EVIDENCED HEREBY IS SUBORDINATED TO
CERTAIN CLAIMS AS DESCRIBED IN, AND IS SUBJECT TO THE TERMS OF, THAT CERTAIN
AMENDED AND RESTATED SUBORDINATION AGREEMENT DATED AS OF OCTOBER 30, 1996
BETWEEN WILLIAM H. SMITH, INDIVIDUALLY AND AS TRUSTEE, AND AMERICAN NATIONAL
BANK AND TRUST COMPANY OF CHICAGO, AS AMENDED FROM TIME TO TIME (THE
"SUBORDINATION AGREEMENT").
$2,000,000 Dated: October 30, 1996
Hauppauge, New York
AMENDED AND RESTATED PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, HAUPPAUGE RECORD MANUFACTURING LTD., a
New York corporation ("Maker), successor to Allied Film Laboratory, Inc., a
Michigan corporation ("AFL"), promises to pay to the order of William H. Smith
("Payee") whose address is 26479 Greythorne Trail, Farmington Hills, Michigan
48334, or at such other address as holder of this Note may from time to time
designate, the principal sum of Two Million Dollars ($2,000,000.00), in lawful
money of the United States of America, with interest thereon as hereinafter set
forth below. The entire principal balance of this Note, together with the
interest accrued but unpaid thereon, shall be due and payable in full on January
1, 2001 ("Due Date"). In addition, on the Due Date, the Maker shall pay to the
Payee, in lawful money of the United States of America, the following amounts:
(i) the sum of $196,111.11, representing accrued but unpaid interest from
November 8, 1995 through the date of this Note under that certain Amended and
Restated Promissory Note, dated November 8, 1995, executed by AFL and payable to
the order of the Payee in the amount of $2,000,000 (the "Original Note"), (ii)
to the extent not permitted to be paid pursuant to the terms of that certain
Amended and Restated Loan and Security Agreement dated
<PAGE>
as of October 30, 1996, between the Maker and American National Bank and Trust
Company of Chicago ("ANBC")(as amended, modified or supplemented from time to
time, the "Loan Agreement"), all accrued but unpaid interest on the principal
balance of this Note from the date hereof through July 31, 1997, and (iii) to
the extent not permitted to be paid pursuant to the terms of the Loan Agreement,
accrued but unpaid interest on the principal balance of this Note from August 1,
1997 through the Due Date. None of the amounts set forth in clauses (i)-(iii)
above shall bear interest hereunder.
The outstanding principal balance of this Note shall bear interest after
the date hereof at a rate of ten percent (10%) per annum until acceleration and
at a rate of twelve percent (12%) per annum after acceleration ("Default Rate").
Interest may accrue but no interest shall be payable for periods on or prior to
July 31, 1997; provided that if interest is at any time permitted to be paid or
advanced under the terms of the Loan Agreement, such interest shall be paid or
advanced in accordance with the terms of the Loan Agreement. Subject to the
terms and provisions of the Loan Agreement, interest accruing on and after
August 1, 1997 shall be payable in arrears quarterly on the first day of
October, January, April and July, commencing October 1, 1997, and if interest is
otherwise permitted to be paid or advanced under the Loan Agreement, such
interest shall be paid or advanced in accordance with the terms of the Loan
Agreement. To the extent interest is not permitted to be paid by the Loan
Agreement, payment of such amounts shall be deferred without interest until the
Due Date.
Interest calculation shall be based on the actual number of days elapsed
over a 360-day year. In no event shall the rate of interest hereunder exceed the
maximum rate of interest permitted by the laws governing this Note. If the
interest collected should exceed the maximum amount permitted by such laws, such
excess shall be deemed received on the account of, and shall automatically be
applied to reduce, the principal balance of this Note.
2
<PAGE>
As long as this Note and payment of the indebtedness evidenced hereby is
subordinated pursuant to the Subordination Agreement, this Note may not be
prepaid without the prior written consent of ANBC.
An event of default ("Event of Default") shall be deemed to have occurred
if (i) Maker fails to pay when due the indebtedness evidenced by this Note or
the interest due thereon; (ii) Maker fails to perform any obligations under, or
comply with any provisions of this Note; (iii) Maker becomes the subject of a
proceeding in bankruptcy which, in the case of an involuntary proceeding,
remains undismissed, undischarged or unbonded for a period of sixty (60) days,
makes an assignment of all or a substantial part of its assets for the benefit
of its creditors, becomes insolvent, or is unable to meet its debts as they
mature; or (iv) a levy or writ of attachment, garnishment, execution or other
like judicial process is filed or issued against Maker with respect to all or
any substantial part of its assets which results in the entry of an order for
such relief which shall not have been vacated, discharged, stayed or bonded
pending appeal within sixty (60) days from the entry thereof. Upon the
occurrence of any Event of Default herein, the holder shall give written notice
to Maker by sending such notice by regular mail and by certified U.S. mail,
postage prepaid, return receipt requested to maker at its chief corporate
offices, or such other address as the Maker shall supply in writing. If such
Event of Default is not fully cured within 10 calendar days after the mailing of
such written notice, the whole or any unpaid principal balance, together with
interest accrued thereon, shall be immediately due and payable and the holder
hereof shall be entitled to exercise any one or more of its rights and remedies
granted to Payee by law. Additionally, Maker agrees to immediately pay the
holder hereof the amount of any and all expenses, including reasonable
attorneys' fees incurred by such holder in enforcing any of its rights
hereunder. Notwithstanding the foregoing, it shall not be an Event of Default
hereunder if the Maker fails to pay when due the indebtedness evidenced by this
Note or the interest due
3
<PAGE>
thereon if the reason the Maker so fails to pay is because of the terms and
conditions contained in the Loan Agreement.
The rights and remedies provided herein are cumulative to the rights and
remedies provided by applicable law. Nothing herein is intended, nor would it be
construed, to preclude the exercise of any one or more of the rights and
remedies provided hereunder or by applicable law.
Except as explicitly provided above, Maker waives presentment, protest and
demand, notice of protest, demand and dishonor and non-payment of this Note. No
extension of the time for the payment of this Note made by agreement with any
person now or hereafter liable for the payment of this Note shall operate to
release, discharge, modify, change or effect the original liability under this
Note, either in whole or in part, of Maker.
This Note shall be governed by and construed in accordance with the laws of
the State of New York without giving effect to the conflicts of laws principles
thereof.
4
<PAGE>
This Amended and Restated Promissory Note constitutes an amendment and
restatement in its entirety of the Original Note.
HAUPPAUGE RECORD MANUFACTURING
LTD.
By: /s/ Charles Kavanagh
----------------------------
5
Exhibit (10)(ee)(i)
HMG DIGITAL TECHNOLOGIES CORP.
SUBORDINATED PROMISSORY NOTE
$200,000 Date: October 30, 1996
FOR VALUE RECEIVED, HMG DIGITAL TECHNOLOGIES CORP., a Delaware corporation
(the "Payor"), hereby unconditionally promises to pay to the order of George N.
Fishman (the "Payee") at 35 Frost Creek Drive, Locust Valley, New York 11560, or
such other place as the holder hereof may hereafter designate in writing, the
principal sum of Two Hundred Thousand ($200,000) Dollars in lawful money of the
United States of America.
This Note is one of a series of Subordinated Notes in the aggregate
principal amount of $2,000,000 (each a "Note" and collectively, the "Notes"),
identical in all respects except as to principal amount and payee, issued by
Payor.
1. Definitions
"ANBC" means American National Bank and Trust Company of Chicago.
"Bankruptcy Code" means Title 11 of the United States Code entitled
"Bankruptcy", as now and hereafter in effect, or any successor statute.
"Business Day" means a day, other than a Saturday or Sunday, on
which banks in New York, New York are open for the transaction of banking
business.
"Hauppauge" means Hauppauge Record Manufacturing Ltd., a New York
corporation and an indirectly wholly-owned Subsidiary of the Payor.
<PAGE>
"Hauppauge Loan Agreement" means the Amended and Restated Loan and
Security Agreement entered into as of October 30, 1996 between Hauppauge and
ANBC, as such agreement may be further amended, restated, supplemented or
otherwise modified from time to time.
"Insolvency or Liquidation Proceedings" means (a) any insolvency or
bankruptcy case or proceeding (including any case under the Bankruptcy Code), or
any receivership, liquidation, reorganization or other similar case or
proceeding, relative to the Payor or to its assets, or (b) any liquidation,
dissolution, reorganization or winding up of the Payor, whether voluntary or
involuntary and whether or not involving solvency or bankruptcy, or (c) any
assignment for the benefit of creditors or any other marshalling of assets and
liabilities of the Payor.
"Interest Payment Date" means for any year, the last Business Day in
each March, June, September and December of that year.
"Parent" means Allied Digital Technologies Corp., a Delaware
corporation.
"Person" means any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation, the
government of any country or sovereign state, or of any state, province,
municipality, or other political subdivision thereof, or any department, agency,
public corporation or other instrumentality of any of the foregoing, or any
other entity.
2. Payments
2.1 Principal. Subject to the other provisions of this Note, the
principal amount of this Note shall be due and payable on December 31, 1998
(such date, as the same may be extended pursuant to the provisions of this
Section 2.1 being referred to as the "Maturity Date"). If Hauppauge is
prohibited by the Hauppauge Loan Agreement from distributing
2
<PAGE>
funds in amounts which will enable Payor to pay the entire principal amount of
this Note on any Maturity Date, then (i) such portion of the principal that is
permitted to be paid on such date shall be paid, (ii) the Maturity Date with
respect to the remaining principal shall automatically be extended to the
Interest Payment Date that next follows such Maturity Date until all such
remaining principal has been paid (and any Default hereunder on account of the
failure to make such payment shall be waived until January 1, 2001); provided
that in no event shall the Maturity Date be later than January 1, 2001, and
(iii) until paid, any remaining principal shall bear interest at the rate
provided in paragraph 2.2 hereof.
2.2 Interest. Subject to the other terms of this Note and the terms
of the Hauppauge Loan Agreement, the Payor shall pay interest in cash quarterly
in arrears on the principal balance of this Note outstanding from time to time
from the date hereof until such principal is fully paid at a rate of ten (10%)
percent per annum. Notwithstanding the foregoing, to the extent Hauppauge is
permitted by the Hauppauge Loan Agreement to distribute funds in amounts which
otherwise are intended to enable Payor to pay interest or advance payments of
interest hereunder, Payor shall pay or advance such interest in accordance with
the terms of the Hauppauge Loan Agreement. Interest shall be calculated daily on
the unpaid principal balance of this Note at the close of business on each day
and on the basis of the actual number of days elapsed over a 360-day year.
Accrued interest shall be payable on each Interest Payment Date, commencing on
December 31, 1996, and concurrently with each payment of principal under this
Note; provided that to the extent Hauppauge is permitted by the Hauppauge Loan
Agreement to distribute funds in amounts which otherwise are intended to enable
Payor to pay or advance interest hereunder, Payor shall pay or advance such
interest in accordance with the terms of the Hauppauge Loan Agreement. In no
event shall the rate of Interest hereunder exceed the maximum rate of interest
permitted by the laws governing this Note. If the interest collected should
exceed the maximum amount
3
<PAGE>
permitted by such laws, such excess shall be deemed received on the account of,
and shall automatically be applied to reduce, the principal balance of this
Note. In the event Hauppauge is prohibited by the Hauppauge Loan Agreement from
distributing funds in amounts which will enable Payor to pay the entire interest
due on this Note, such amounts shall be deferred without interest until the
Maturity Date.
2.3 Payments. All payments of principal and interest hereunder shall
be payable in lawful money of the United States of America, in immediately
available funds.
2.4 Prepayment of Principal. As long as the Hauppauge Loan Agreement
is in effect or any obligations to ANBC pursuant to the Hauppauge Loan Agreement
or the Financing Agreements referred to therein remain outstanding, principal
and interest on this Note may not be prepaid without the prior written consent
of ANBC.
3. Default; Rights and Remedies of the Payees.
3.1 Defaults. It shall constitute a default ("Default") if any one
or more shall occur:
(a) Payor fails to pay (i) principal on this Note, when due or
declared due (whether at scheduled maturity, required prepayment,
acceleration, demand or otherwise) or (ii) interest within ten days
of the date such interest is due or declared due (whether at
scheduled maturity, required prepayment, acceleration, demand or
otherwise); or
(b) Payor shall commence (i) any case, proceeding or other action
under the Bankruptcy Code or law of any jurisdiction, domestic or
foreign, relating to bankruptcy, insolvency, reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution,
composition or other relief with respect to its
4
<PAGE>
debts; (ii) any Insolvency or Liquidation Proceeding; or (iii) any
case, proceeding or other action seeking appointment of a receiver,
custodian or other similar official for it or for all or any
substantial part of its assets, or making a general assignment for
the benefit of its creditors; or
(c) There shall be commenced against Payor any case, proceeding or
other action of a nature referred to in clause (b) above which (i)
results in the entry of an order for relief or any such adjudication
or appointment, or (ii) remains undismissed, undischarged or
unbonded for a period of sixty (60) days; or
(d) There shall be commenced against Payor any case, proceeding or
other action seeking issuance of a warrant of attachment, execution,
distraint or process against all or any substantial part of its
assets which results in the entry of an order for such relief which
shall not have been vacated, discharged, stayed or bonded pending
appeal within sixty (60) days from the entry thereof.
3.2 Remedies. If a Default shall have occurred, Payee (or, if Payee
shall have assigned any of its interest hereunder, the holder of this Note) may,
without notice to or demand on Payor (except as provided below) do one or more
of the following at any time or times thereafter and in any order: (a) declare
any or all of the obligations hereunder (including, without limitation,
principal and interest) to be immediately due and payable; and (b) pursue
Payee's other rights and remedies under this Note and applicable law. Payee
shall give Payor contemporaneous notice of any action described in clause (a)
above.
5
<PAGE>
3.3 Waiver of Demand. Demand, presentment, protest and notice of
nonpayment are hereby waived by Payor. Payor also waives the benefit of all
valuation, appraisal and exemption laws.
3.4 Waiver. Payee's failure, at any time or times hereafter, to
require strict performance by Payor of any provision of this Note shall not
waive, affect or diminish any right of Payee thereafter to demand strict
compliance and performance therewith. Any suspension or waiver by Payee of a
Default by Payor under this Note shall not suspend, waive or effect any other
Default by Payor under this Note, whether the same is prior or subsequent
thereto and whether of the same or of a different kind or character. None of the
undertakings, agreements, warranties, covenants and representations of Payor
contained in this Note and no Default by Payor under this Note shall be deemed
to have been suspended or waived by Payee unless such suspension or waiver is in
writing, and directed to Payor specifying such suspension or waiver. All
defaults shall continue until the same are waived by Payee in accordance with
the preceding sentence.
4. Successors and Assigns; Entire Agreement. The terms and provisions
hereof shall inure to the benefit of, and be binding upon, the respective
successors and permitted assigns of the Payee and the Payor. As long as the
Hauppauge Loan Agreement is in effect or any obligations to ANBC pursuant to the
Hauppauge Loan Agreement or the Financing Agreements referred to therein remain
outstanding, the provisions of Section 2.4, Section 5 and this Section 4 of this
Note shall also inure to the benefit of ANBC. As long as the Hauppauge Loan
Agreement is in effect or any obligations to ANBC pursuant to the Hauppauge Loan
Agreement or the Financing Agreements referred to therein remain outstanding,
the Payee may assign or grant participation in all or any part of this Note and
his related rights and remedies upon the prior written consent of ANBC. The
Payor may not assign any part of its obligations to the Payee without the
Payee's prior written consent. This Note sets
6
<PAGE>
forth the entire agreement and understanding among the parties as to the subject
matter hereof and merges and supersedes all prior discussions, agreements and
understandings of any and every nature among them, relating to the subject
matter hereof.
5. Modification of this Note. This Note may not be changed, modified or
terminated orally, but only by an agreement in writing signed by the party to be
bound by it. As long as the Hauppauge Loan Agreement is in effect or any
obligations by Payor to ANBC pursuant to the Hauppauge Loan Agreement remain
outstanding, no change to or modification of this Note may be made without the
prior written consent of ANBC, except for changes and modifications which extend
the maturity of, or decrease the rate of interest payable under, this Note or
modify the provisions in this Note to make them less burdensome to Payor. No
act, failure or delay by the Payee shall constitute a waiver of any of its
rights and remedies. Any written waiver shall be applicable only in the specific
instance for which it is given.
6. Governance by New York Law. This Note shall be governed by, and
construed and enforced in accordance with, the laws of the State of New York,
without regard to the conflict of laws provisions thereof.
7. Extension of Time For Payment. The holder of this Note at the holder's
option may extend the time for payment of this Note, postpone the enforcement
hereof, or grant any other indulgences, without affecting or diminishing the
holder's rights to recourse against the Payor, endorsers, sureties or
guarantors, which right is expressly reserved.
8. Expenses and Fees. The Payor shall pay all costs and expenses,
including, without limitation, reasonable attorneys' fees and disbursements,
paid or incurred by the holder in connection with collecting or enforcing this
Note.
7
<PAGE>
9. Waivers of Notice. The Payor, endorsers, sureties and guarantors of
this Note waive presentment for payment, demand, protest, notice of protest and
notice of dishonor hereof, and all other notices to which they may be entitled.
10. Restricted Transactions. Neither the Payor nor any affiliate of the
Payor shall consent to or permit any payment (whether interest or principal),
acquisition, redemption or other distribution in respect of any of the Notes
unless prior to or concurrently with such transaction, each holder of a Note is
offered the opportunity to participate pro rata in such transaction upon the
same terms and conditions, including the amount of consideration, for all
holders of the Notes.
IN WITNESS WHEREOF, the Payor has caused this Note to be executed by its
duly authorized officer on the date first above written.
HMG DIGITAL TECHNOLOGIES CORP.
By: /s/ George Fishman
---------------------------------
Name: George Fishman
Title: Chief Executive Officer
15 Gilpin Avenue
------------------------------------
Address
Hauppauge, New York 11788
------------------------------------
City, State, Zip Code
8
Exhibit (10)(ee)(ii)
HMG DIGITAL TECHNOLOGIES CORP.
SUBORDINATED PROMISSORY NOTE
$200,000 Date: October 30, 1996
FOR VALUE RECEIVED, HMG DIGITAL TECHNOLOGIES CORP., a Delaware
corporation (the "Payor"), hereby unconditionally promises to pay to the order
of Donald L. Olesen (the "Payee") at 8 Donna Drive, Upper Brookville, New York
11771, or such other place as the holder hereof may hereafter designate in
writing, the principal sum of Two Hundred Thousand ($200,000) Dollars in lawful
money of the United States of America.
This Note is one of a series of Subordinated Notes in the aggregate
principal amount of $2,000,000 (each a "Note" and collectively, the "Notes"),
identical in all respects except as to principal amount and payee, issued by
Payor.
1. Definitions
"ANBC" means American National Bank and Trust
Company of Chicago.
"Bankruptcy Code" means Title 11 of the United States Code
entitled "Bankruptcy", as now and hereafter in effect, or any successor statute.
"Business Day" means a day, other than a Saturday or Sunday, on
which banks in New York, New York are open for the transaction of banking
business.
"Hauppauge" means Hauppauge Record Manufacturing Ltd., a New York
corporation and an indirectly wholly-owned Subsidiary of the Payor.
"Hauppauge Loan Agreement" means the Amended and Restated Loan and
Security Agreement entered into as of October 30, 1996 between Hauppauge and
ANBC, as such
<PAGE>
agreement may be further amended, restated, supplemented or otherwise modified
from time to time.
"Insolvency or Liquidation Proceedings" means (a) any insolvency
or bankruptcy case or proceeding (including any case under the Bankruptcy Code),
or any receivership, liquidation, reorganization or other similar
2
<PAGE>
case or proceeding, relative to the Payor or to its assets, or (b) any
liquidation, dissolution, reorganization or winding up of the Payor, whether
voluntary or involuntary and whether or not involving solvency or bankruptcy, or
(c) any assignment for the benefit of creditors or any other marshalling of
assets and liabilities of the Payor.
"Interest Payment Date" means for any year, the last Business Day
in each March, June, September and December of that year.
"Parent" means Allied Digital Technologies Corp., a Delaware
corporation.
"Person" means any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation, the
government of any country or sovereign state, or of any state, province,
municipality, or other political subdivision thereof, or any department, agency,
public corporation or other instrumentality of any of the foregoing, or any
other entity.
2. Payments
2.1 Principal. Subject to the other provisions of this Note, the
principal amount of this Note shall be due and payable on December 31, 1998
(such date, as the same may be extended pursuant to the provisions of this
Section 2.1 being referred to as the "Maturity Date"). If Hauppauge is
prohibited by the Hauppauge Loan Agreement from distributing funds in amounts
which will enable Payor to pay the entire principal amount of this Note on any
Maturity Date, then (i) such portion of the principal that is permitted to be
paid on such date shall be paid, (ii) the Maturity Date with respect to the
remaining principal shall automatically be extended to the Interest Payment Date
that next follows such Maturity Date until all such remaining principal has been
paid (and any Default hereunder on account of the failure to make such payment
shall be waived until January 1, 2001);
3
<PAGE>
provided that in no event shall the Maturity Date be later than January 1, 2001,
and (iii) until paid, any remaining principal shall bear interest at the rate
provided in paragraph 2.2 hereof.
2.2 Interest. Subject to the other terms of this Note and the
terms of the Hauppauge Loan Agreement, the Payor shall pay interest in cash
quarterly in arrears on the principal balance of this Note outstanding from time
to time from the date hereof until such principal is fully paid at a rate of ten
(10%) percent per annum. Notwithstanding the foregoing, to the extent Hauppauge
is permitted by the Hauppauge Loan Agreement to distribute funds in amounts
which otherwise are intended to enable Payor to pay interest or advance payments
of interest hereunder, Payor shall pay or advance such interest in accordance
with the terms of the Hauppauge Loan Agreement. Interest shall be calculated
daily on the unpaid principal balance of this Note at the close of business on
each day and on the basis of the actual number of days elapsed over a 360-day
year. Accrued interest shall be payable on each Interest Payment Date,
commencing on December 31, 1996, and concurrently with each payment of principal
under this Note; provided that to the extent Hauppauge is permitted by the
Hauppauge Loan Agreement to distribute funds in amounts which otherwise are
intended to enable Payor to pay or advance interest hereunder, Payor shall pay
or advance such interest in accordance with the terms of the Hauppauge Loan
Agreement. In no event shall the rate of Interest hereunder exceed the maximum
rate of interest permitted by the laws governing this Note. If the interest
collected should exceed the maximum amount permitted by such laws, such excess
shall be deemed received on the account of, and shall automatically be applied
to reduce, the principal balance of this Note. In the event Hauppauge is
prohibited by the Hauppauge Loan Agreement from distributing funds in amounts
which will enable Payor to pay the entire interest due on this Note, such
amounts shall be deferred without interest until the Maturity Date.
4
<PAGE>
2.3 Payments. All payments of principal and interest hereunder
shall be payable in lawful money of the United States of America, in immediately
available funds.
2.4 Prepayment of Principal. As long as the Hauppauge Loan
Agreement is in effect or any obligations to ANBC pursuant to the Hauppauge Loan
Agreement or the Financing Agreements referred to therein remain outstanding,
principal and interest on this Note may not be prepaid without the prior written
consent of ANBC.
3. Default; Rights and Remedies of the Payees.
3.1 Defaults. It shall constitute a default ("Default") if any
one or more shall occur:
(a) Payor fails to pay (i) principal on this Note, when due or
declared due (whether at scheduled maturity, required prepayment,
acceleration, demand or otherwise) or (ii) interest within ten
days of the date such interest is due or declared due (whether at
scheduled maturity, required prepayment,
acceleration, demand or otherwise); or
(b) Payor shall commence (i) any case, proceeding or other action
under the Bankruptcy Code or law of any jurisdiction, domestic or
foreign, relating to bankruptcy, insolvency, reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution,
composition or other relief with respect to its debts; (ii) any
Insolvency or Liquidation Proceeding; or (iii) any case,
proceeding or other action seeking appointment of a receiver,
custodian or other similar official for it or for all or any
substantial part of its assets, or making a general assignment
for the benefit of its creditors; or
5
<PAGE>
(c) There shall be commenced against Payor any case, proceeding
or other action of a nature referred to in clause (b) above which
(i) results in the entry of an order for relief or any such
adjudication or appointment, or (ii) remains undismissed,
undischarged or unbonded for a period of sixty (60) days; or
(d) There shall be commenced against Payor any case, proceeding
or other action seeking issuance of a warrant of attachment,
execution, distraint or process against all or any substantial
part of its assets which results in the entry of an order for
such relief which shall not have been vacated, discharged, stayed
or bonded pending appeal within sixty (60) days from the entry
thereof.
3.2 Remedies. If a Default shall have occurred, Payee (or, if
Payee shall have assigned any of its interest hereunder, the holder of this
Note) may, without notice to or demand on Payor (except as provided below) do
one or more of the following at any time or times thereafter and in any order:
(a) declare any or all of the obligations hereunder (including, without
limitation, principal and interest) to be immediately due and payable; and (b)
pursue Payee's other rights and remedies under this Note and applicable law.
Payee shall give Payor contemporaneous notice of any action described in clause
(a) above.
3.3 Waiver of Demand. Demand, presentment, protest and notice of
nonpayment are hereby waived by Payor. Payor also waives the benefit of all
valuation, appraisal and exemption laws.
3.4 Waiver. Payee's failure, at any time or times hereafter, to
require strict performance by Payor of any provision of this Note shall not
waive, affect or diminish any right of Payee thereafter to demand strict
compliance and performance therewith. Any suspension or
6
<PAGE>
waiver by Payee of a Default by Payor under this Note shall not suspend, waive
or effect any other Default by Payor under this Note, whether the same is prior
or subsequent thereto and whether of the same or of a different kind or
character. None of the undertakings, agreements, warranties, covenants and
representations of Payor contained in this Note and no Default by Payor under
this Note shall be deemed to have been suspended or waived by Payee unless such
suspension or waiver is in writing, and directed to Payor specifying such
suspension or waiver. All defaults shall continue until the same are waived by
Payee in accordance with the preceding sentence.
4. Successors and Assigns; Entire Agreement. The terms and provisions
hereof shall inure to the benefit of, and be binding upon, the respective
successors and permitted assigns of the Payee and the Payor. As long as the
Hauppauge Loan Agreement is in effect or any obligations to ANBC pursuant to the
Hauppauge Loan Agreement or the Financing Agreements referred to therein remain
outstanding, the provisions of Section 2.4, Section 5 and this Section 4 of this
Note shall also inure to the benefit of ANBC. As long as the Hauppauge Loan
Agreement is in effect or any obligations to ANBC pursuant to the Hauppauge Loan
Agreement or the Financing Agreements referred to therein remain outstanding,
the Payee may assign or grant participation in all or any part of this Note and
his related rights and remedies upon the prior written consent of ANBC. The
Payor may not assign any part of its obligations to the Payee without the
Payee's prior written consent. This Note sets forth the entire agreement and
understanding among the parties as to the subject matter hereof and merges and
supersedes all prior discussions, agreements and understandings of any and every
nature among them, relating to the subject matter hereof.
5. Modification of this Note. This Note may not be changed, modified or
terminated orally, but only by an agreement in writing signed by the party to be
bound by it. As long as the Hauppauge Loan Agreement is in effect or any
7
<PAGE>
obligations by Payor to ANBC pursuant to the Hauppauge Loan Agreement remain
outstanding, no change to or modification of this Note may be made without the
prior written consent of ANBC, except for changes and modifications which extend
the maturity of, or decrease the rate of interest payable under, this Note or
modify the provisions in this Note to make them less burdensome to Payor. No
act, failure or delay by the Payee shall constitute a waiver of any of its
rights and remedies. Any written waiver shall be applicable only in the specific
instance for which it is given.
6. Governance by New York Law. This Note shall be governed by, and
construed and enforced in accordance with, the laws of the State of New York,
without regard to the conflict of laws provisions thereof.
7. Extension of Time For Payment. The holder of this Note at the
holder's option may extend the time for payment of this Note, postpone the
enforcement hereof, or grant any other indulgences, without affecting or
diminishing the holder's rights to recourse against the Payor, endorsers,
sureties or guarantors, which right is expressly reserved.
8. Expenses and Fees. The Payor shall pay all costs and expenses,
including, without limitation, reasonable attorneys' fees and disbursements,
paid or incurred by the holder in connection with collecting or enforcing this
Note.
9. Waivers of Notice. The Payor, endorsers, sureties and guarantors of
this Note waive presentment for payment, demand, protest, notice of protest and
notice of dishonor hereof, and all other notices to which they may be entitled.
10. Restricted Transactions. Neither the Payor nor any affiliate of the
Payor shall consent to or permit any payment (whether interest or principal),
acquisition, redemption or other distribution in respect of any of the
8
<PAGE>
Notes
unless prior to or concurrently with such transaction, each holder of a Note is
offered the opportunity to participate pro rata in such transaction upon the
same terms and conditions, including the amount of consideration, for all
holders of the Notes.
IN WITNESS WHEREOF, the Payor has caused this Note to be executed by
its duly authorized officer on the date first above written.
HMG DIGITAL TECHNOLOGIES CORP.
By: /s/ George Fishman
----------------------------------
Name: George Fishman
Title: Chief Executive Officer
15 Gilpin Avenue
-------------------------------------
Address
Hauppauge, New York 11788
-------------------------------------
City, State, Zip Code
9
Exhibit (10)(eee)(iii)
HMG DIGITAL TECHNOLOGIES CORP.
SUBORDINATED PROMISSORY NOTE
$1,600,000 Date: October 30, 1996
FOR VALUE RECEIVED, HMG DIGITAL TECHNOLOGIES CORP., a Delaware corporation
(the "Payor"), hereby unconditionally promises to pay to the order of William H.
Smith as Trustee (the "Trustee") of the William H. Smith Trust under trust
agreement dated November 13, 1978, as amended (the "Payee") at 26479 Greythorne
Trail, Farmington Hills, Michigan 48334, or such other place as the holder
hereof may hereafter designate in writing, the principal sum of One Million Six
Hundred Thousand ($1,600,000) Dollars in lawful money of the United States of
America.
This Note is one of a series of Subordinated Notes in the aggregate
principal amount of $2,000,000 (each a "Note" and collectively, the "Notes"),
identical in all respects except as to principal amount and payee, issued by
Payor.
1. Definitions
"ANBC" means American National Bank and Trust Company of Chicago.
"Bankruptcy Code" means Title 11 of the United States Code entitled
"Bankruptcy", as now and hereafter in effect, or any successor statute.
"Business Day" means a day, other than a Saturday or Sunday, on
which banks in New York, New York are open for the transaction of banking
business.
"Hauppauge" means Hauppauge Record Manufacturing Ltd., a New York
corporation and an indirectly wholly-owned Subsidiary of the Payor.
<PAGE>
"Hauppauge Loan Agreement" means the Amended and Restated Loan and
Security Agreement entered into as of October 30, 1996 between Hauppauge and
ANBC, as such agreement may be further amended, restated, supplemented or
otherwise modified from time to time.
"Insolvency or Liquidation Proceedings" means (a) any insolvency or
bankruptcy case or proceeding (including any case under the Bankruptcy Code), or
any
2
<PAGE>
receivership, liquidation, reorganization or other similar case or
proceeding, relative to the Payor or to its assets, or (b) any liquidation,
dissolution, reorganization or winding up of the Payor, whether voluntary or
involuntary and whether or not involving solvency or bankruptcy, or (c) any
assignment for the benefit of creditors or any other marshalling of assets and
liabilities of the Payor.
"Interest Payment Date" means for any year, the last Business Day in
each March, June, September and December of that year.
"Parent" means Allied Digital Technologies Corp., a Delaware
corporation.
"Person" means any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation, the
government of any country or sovereign state, or of any state, province,
municipality, or other political subdivision thereof, or any department, agency,
public corporation or other instrumentality of any of the foregoing, or any
other entity.
2. Payments
2.1 Principal. Subject to the other provisions of this Note, the
principal amount of this Note shall be due and payable on December 31, 1998
(such date, as the same may be extended pursuant to the provisions of this
Section 2.1 being referred to as the "Maturity Date"). If Hauppauge is
prohibited by the Hauppauge Loan Agreement from distributing funds in amounts
which will enable Payor to pay the entire principal amount of this Note on any
Maturity Date, then (i) such portion of the principal that is permitted to be
paid on such date shall be paid, (ii) the Maturity Date with respect to the
remaining principal shall automatically be extended to the Interest Payment Date
that next follows such Maturity Date until all such remaining principal has been
paid (and any Default hereunder on account of the failure to
3
<PAGE>
make such payment shall be waived until January 1, 2001); provided that in no
event shall the Maturity Date be later than January 1, 2001, and (iii) until
paid, any remaining principal shall bear interest at the rate provided in
paragraph 2.2 hereof.
2.2 Interest. Subject to the other terms of this Note and the terms
of the Hauppauge Loan Agreement, the Payor shall pay interest in cash quarterly
in arrears on the principal balance of this Note outstanding from time to time
from the date hereof until such principal is fully paid at a rate of ten (10%)
percent per annum. Notwithstanding the foregoing, to the extent Hauppauge is
permitted by the Hauppauge Loan Agreement to distribute funds in amounts which
otherwise are intended to enable Payor to pay or advance payments of interest
hereunder, Payor shall pay or advance such interest in accordance with the terms
of the Hauppauge Loan Agreement. Interest shall be calculated daily on the
unpaid principal balance of this Note at the close of business on each day and
on the basis of the actual number of days elapsed over a 360-day year. Accrued
interest shall be payable on each Interest Payment Date, commencing on December
31, 1996, and concurrently with each payment of principal under this Note;
provided that to the extent Hauppauge is permitted by the Hauppauge Loan
Agreement to distribute funds in amounts which otherwise are intended to enable
Payor to pay or advance interest hereunder, Payor shall pay or advance such
interest in accordance with the terms of the Hauppauge Loan Agreement. In no
event shall the rate of Interest hereunder exceed the maximum rate of interest
permitted by the laws governing this Note. If the interest collected should
exceed the maximum amount permitted by such laws, such excess shall be deemed
received on the account of, and shall automatically be applied to reduce, the
principal balance of this Note. In the event Hauppauge is prohibited by the
Hauppauge Loan Agreement from distributing funds in amounts which will enable
Payor to pay the entire interest due on this Note, such amounts shall be
deferred without interest until the Maturity Date.
4
<PAGE>
2.3 Payments. All payments of principal and interest hereunder shall
be payable in lawful money of the United States of America, in immediately
available funds.
2.4 Prepayment of Principal. As long as the Hauppauge Loan Agreement
is in effect or any obligations to ANBC pursuant to the Hauppauge Loan Agreement
or the Financing Agreements referred to therein remain outstanding, principal
and interest on this Note may not be prepaid without the prior written consent
of ANBC.
3. Default; Rights and Remedies of the Payees.
3.1 Defaults. It shall constitute a default ("Default") if any one
or more shall occur:
(a) Payor fails to pay (i) principal on this Note, when due or
declared due (whether at scheduled maturity, required prepayment,
acceleration, demand or otherwise) or (ii) interest within ten days
of the date such interest is due or declared due (whether at
scheduled maturity, required prepayment, acceleration, demand or
otherwise); or
(b) Payor shall commence (i) any case, proceeding or other action
under the Bankruptcy Code or law of any jurisdiction, domestic or
foreign, relating to bankruptcy, insolvency, reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution,
composition or other relief with respect to its debts; (ii) any
Insolvency or Liquidation Proceeding; or (iii) any case, proceeding
or other action seeking appointment of a receiver, custodian or
other similar official for it or for all or any substantial part of
its assets, or making a general assignment for the benefit of its
creditors; or
5
<PAGE>
(c) There shall be commenced against Payor any case, proceeding or
other action of a nature referred to in clause (b) above which (i)
results in the entry of an order for relief or any such adjudication
or appointment, or (ii) remains undismissed, undischarged or
unbonded for a period of sixty (60) days; or
(d) There shall be commenced against Payor any case, proceeding or
other action seeking issuance of a warrant of attachment, execution,
distraint or process against all or any substantial part of its
assets which results in the entry of an order for such relief which
shall not have been vacated, discharged, stayed or bonded pending
appeal within sixty (60) days from the entry thereof.
3.2 Remedies. If a Default shall have occurred, Payee (or, if Payee
shall have assigned any of its interest hereunder, the holder of this Note) may,
without notice to or demand on Payor (except as provided below) do one or more
of the following at any time or times thereafter and in any order: (a) declare
any or all of the obligations hereunder (including, without limitation,
principal and interest) to be immediately due and payable; and (b) pursue
Payee's other rights and remedies under this Note and applicable law. Payee
shall give Payor contemporaneous notice of any action described in clause (a)
above.
3.3 Waiver of Demand. Demand, presentment, protest and notice of
nonpayment are hereby waived by Payor. Payor also waives the benefit of all
valuation, appraisal and exemption laws.
3.4 Waiver. Payee's failure, at any time or times hereafter, to
require strict performance by Payor of any provision of this Note shall not
waive, affect or diminish any right of Payee thereafter to demand strict
compliance and performance therewith. Any suspension or
6
<PAGE>
waiver by Payee of a Default by Payor under this Note shall not suspend, waive
or effect any other Default by Payor under this Note, whether the same is prior
or subsequent thereto and whether of the same or of a different kind or
character. None of the undertakings, agreements, warranties, covenants and
representations of Payor contained in this Note and no Default by Payor under
this Note shall be deemed to have been suspended or waived by Payee unless such
suspension or waiver is in writing, and directed to Payor specifying such
suspension or waiver. All defaults shall continue until the same are waived by
Payee in accordance with the preceding sentence.
4. Successors and Assigns; Entire Agreement. The terms and provisions
hereof shall inure to the benefit of, and be binding upon, the respective
successors and permitted assigns of the Payee and the Payor. As long as the
Hauppauge Loan Agreement is in effect or any obligations to ANBC pursuant to the
Hauppauge Loan Agreement or the Financing Agreements referred to therein remain
outstanding, the provisions of Section 2.4, Section 5 and this Section 4 of this
Note shall also inure to the benefit of ANBC. As long as the Hauppauge Loan
Agreement is in effect or any obligations to ANBC pursuant to the Hauppauge Loan
Agreement or the Financing Agreements referred to therein remain outstanding,
the Payee may assign or grant participation in all or any part of this Note and
his related rights and remedies upon the prior written consent of ANBC. The
Payor may not assign any part of its obligations to the Payee without the
Payee's prior written consent. This Note sets forth the entire agreement and
understanding among the parties as to the subject matter hereof and merges and
supersedes all prior discussions, agreements and understandings of any and every
nature among them, relating to the subject matter hereof.
5. Modification of this Note. This Note may not be changed, modified or
terminated orally, but only by an agreement in writing signed by the party to be
bound by it. As long as the Hauppauge Loan Agreement is in effect or any
7
<PAGE>
obligations by Payor to ANBC pursuant to the Hauppauge Loan Agreement remain
outstanding, no change to or modification of this Note may be made without the
prior written consent of ANBC, except for changes and modifications which extend
the maturity of, or decrease the rate of interest payable under, this Note or
modify the provisions in this Note to make them less burdensome to Payor. No
act, failure or delay by the Payee shall constitute a waiver of any of its
rights and remedies. Any written waiver shall be applicable only in the specific
instance for which it is given.
6. Governance by New York Law. This Note shall be governed by, and
construed and enforced in accordance with, the laws of the State of New York,
without regard to the conflict of laws provisions thereof.
7. Extension of Time For Payment. The holder of this Note at the holder's
option may extend the time for payment of this Note, postpone the enforcement
hereof, or grant any other indulgences, without affecting or diminishing the
holder's rights to recourse against the Payor, endorsers, sureties or
guarantors, which right is expressly reserved.
8. Expenses and Fees. The Payor shall pay all costs and expenses,
including, without limitation, reasonable attorneys' fees and disbursements,
paid or incurred by the holder in connection with collecting or enforcing this
Note.
9. Waivers of Notice. The Payor, endorsers, sureties and guarantors of
this Note waive presentment for payment, demand, protest, notice of protest and
notice of dishonor hereof, and all other notices to which they may be entitled.
10. Restricted Transactions. Neither the Payor nor any affiliate of the
Payor shall consent to or permit any payment (whether interest or principal),
acquisition, redemption or other distribution in respect of any of the
8
<PAGE>
Notes unless prior to or concurrently with such transaction, each holder of a
Note is offered the opportunity to participate pro rata in such transaction upon
the same terms and conditions, including the amount of consideration, for all
holders of the Notes.
IN WITNESS WHEREOF, the Payor has caused this Note to be executed by its
duly authorized officer on the date first above written.
HMG DIGITAL TECHNOLOGIES CORP.
By: /s/ George Fishman
-------------------------------------
Name: George Fishman
Title: Chief Executive Officer
15 Gilpin Avenue
----------------------------------------
Address
Hauppauge, New York 11788
----------------------------------------
City, State, Zip Code
9
[Letterhead of Allied Digital Technologies Corp.]
- - --------------------------------------------------------------------------------
AGREEMENT
BETWEEN
ANCHOR BAY ENTERTAINMENT
AND
ALLIED DIGITAL TECHNOLOGIES CORP.
FOR
VIDEOTAPE DUPLICATION
AND
ORDER FULFILLMENT
DATED: JUNE 16, 1995
<PAGE>
Table of Contents
1. SERVICES 1
2. PAYMENT/TERMS 2
3. SHIPPING 2
4. OWNERSHIP OF MATERIAL 2
5. STORAGE OF ANCHOR BAY'S MATERIALS: 2
6. CONDITION OF ANCHOR BAY'S MATERIALS: 2
7. THIRD PARTY AUTHORIZATION: 3
8. STANDARD LEADERS/COLOR BARS: 3
9. EXAMINATION OF RECORDS BY ANCHOR BAY: 3
10. INSURANCE: 3
a. ANCHOR BAY TO INSURE: 3
b. ALLIED's NEGLIGENCE 4
11. GENERAL CONDITIONS: 4
a. TERM: 4
b. INDEMNIFICATION: 4
c. DEFAULT OR BREACH: 5
d. STANDARD OF PERFORMANCE: 6
e. WARRANTY OF SERVICES: 7
i. DEFINITIONS: 7
ii. WARRANTY: 7
iii. CORRECTION OF DEFECT: 8
iv. COMPLAINTS: 8
f. FORCE MAJEURE: 8
g. SUBCONTRACTING: 8
h. ANCHOR BAY'S FURNISHED MATERIAL: 8
i. CAPTIONS: 8
j. WAIVER: 9
k. GOVERNING LAW: 9
1. UNENFORCEABLE CLAUSES: 9
<PAGE>
Table of Contents
Page 2
m. ASSOCIATION: 9
n. ASSIGNMENT: 9
o. NOTICES AND CONSENT: 9
12. INTEGRATION 9
<PAGE>
VIDEOTAPE DUPLICATION
AGREEMENT entered into as of _______________ between ALLIED DIGITAL TECHNOLOGIES
TECHNOLOGIES with offices at 7375 Woodward Avenue, Detroit, Michigan 48202
("ALLIED"), and ANCHOR BAY ENTERTAINMENT with offices at 500 Kirts Boulevard,
Troy, Michigan 48084, ("ANCHOR BAY") regarding the use of the Custom Duplication
Department (videotape duplication services) of ALLIED, as set forth in this
Agreement.
1. SERVICES: ALLIED agrees to provide the followings ervices to ANCHOR BAY
upon receipt of ANCHOR BAY's written purchase order and shipping request:
a) DUPLICATION: ALLIED shall duplicate, package and label videocassette
in the quantities and formats and at the prices set forth on Schedule
A. ANCHOR BAY shall provide ALLIED with technically acceptable master
elements. ALLIED shall not duplicate video tapes in quantities other
than as specifically requested by ANCHOR BAY.
b) ORDER FINISHING: ALLIED shall provide to ANCHOR BAY the finishing
services set forth on Schedule B at the prices indicated for such
services. ALLIED shall furnish packing materials which shall be
consistent with accepted standards and practices in the industry for
the shipment of products described herein. ALLIED shall quote, as
needed, the cost for any packing materials necessary to ship items not
standard or not as specified in Schedule B.
i. ANCHOR BAY will direct all requests for video tapes or related
services to ALLIED by mail addressed to 370 J.D. Yarnell
Industrial Parkway, Clinton, Tennessee, 37716, or via ALLIED's
fax (615) 457-7799, or via EDI transmission.
ii. All lists, names and records are the sole property of ANCHOR BAY
and shall be maintained in confidence by ALLIED. ALLIED shall not
divulge to others (except with ANCHOR BAY's prior written
approval) any information it may receive in connection with its
performance hereunder.
iii. ALLIED will inspect returned tapes upon receipt of shipment from
ANCHOR BAY's customers and report any damage or quantity
discrepancy to ANCHOR BAY in accordance with the guidelines
outlined in Schedule B.
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2. PAYMENT/TERMS: Invoicing will be on an order basis on completion. ALLIED
will submit: itemized invoices for services rendered and copies of freight
reports. ANCHOR BAY will initiate payment procedures upon receipt of
detailed invoices. Payment terms for all charges incurred by ANCHOR BAY
shall be 2% 30 days, net 60 days.
3. SHIPPING: All deliveries to ANCHOR BAY shall be F.O.B., Clinton,
Tennessee. In the absence of any other instructions by ANCHOR BAY, ALLIED
will make all shipments via carriers of its selection. ANCHOR BAY will
request in writing any special method of shipping or insurance (see,
Schedule B attached).
4. OWNERSHIP OF MATERIAL:
a) ANCHOR BAY represents that it is the sole owner, licensee, or
authorized agent of the owner(s) of the materials delivered to ALLIED
for services of any kind, and that ANCHOR BAY is the owner, licensee,
or authorized agent of the owner(s) of all rights in connection with
such materials, including copyrights and literary, photographic and
musical rights. ANCHOR BAY further represents that the above materials
are free of any lien or encumbrance.
b) Title to video tapes produced by ALLIED or shipped to ALLIED to
fulfill ANCHOR BAY needs shall remain at all times wANCHORCHOR BAY.
5. STORAGE OF ANCHOR BAY'S MATERIALS: ALLIED will store ANCHOR BAY's materials
during the time that ANCHOR BAY owns the rights of such materials during
the term of the contract with ALLIED at no charge.
6. CONDITION OF ANCHOR BAY's MATERIALS:
a) Prices for ALLIED's products and services are predicated on ANCHOR BAY
supplying materials deemed by Allied to be compatible with standard
laboratory processing, editing, duplication or handling procedures.
Because video tape duplication masters develop normal wear and display
dropouts with repeated use, ALLIED may require new duplication masters
from time to time and Allied will replace these duplication masters at
its own expense.
b) ALLIED will keep ANCHOR BAY advised concerning the technical quality
and physical condition of all materials received by ALLIED for
processing and/or duplication. ALLIED shall periodically inspect video
tape duplication masters in its possession and notify ANCHOR BAY of
any defects in a timely manner.
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7. THIRD PARTY AUTHORIZATION:
a) No work will be performed on ANCHOR BAY's materials except by direct
order from ANCHOR BAY's authorized representative(s) or in accord with
this Agreement.
8. STANDARD -LEADERS/'COLOR BARS: Video tape duplication masters submitted to
ALLIED for the purpose of duplication must contain color bars and audio
tone per ANSI V98.9. These will be the determining guidelines for picture
and sound quality.
9. EXAMINATION OF RECORDS BY ANCHOR BAY:
a) ALLIED agrees that ANCHOR BAY or any of its duly authorized
representatives shall, until the expiration of 3 years after final
payment under this contract, have access to and the right to examine
any books, documents, papers, or records of ALLIED involving
transactions related to this contract, and to make copies and extracts
thereof. This audit right shall include the right to inspect and take
inventory of all materials supplied by ANCHOR BAY or held on behalf of
ANCHOR BAY. If a discrepancy exceeding 5 % of the price paid to ALLIED
for the period audited is discovered, ALLIED shall reimburse ANCHOR
BAY for the cost of such audit.
b) The periods of access and examination described in (a) above, for
records which relate to litigation or the settlement of claims arising
out of the performance of this contract, or costs and expenses of this
contract as to which exception has been taken by ANCHOR BAY or any of
its duly authorized representatives, shall continue until such
appeals, litigation, claims, or exceptions have been disposed of.
10. INSURANCE:
a) ANCHOR BAY TO INSURE: ALLIED will not insure ANCHOR BAY'S material
while in the possession of ALLIED or while in transit to and from
ALLIED. All such materials delivered to ALLIED are accepted by ALLIED
with the express understanding and condition that ANCHOR BAY will
carry the insurance coverage ANCHOR BAY deems necessary to protect
against loss or damage suffered whether or not ANCHOR BAY's material
is in ALLIED's care, custody, or control.
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b) ALLIED's NEGLIGENCE: Notwithstanding the provisions of clause 10.a.
above, in the event of loss, damage or destruction of any of ANCHOR
BAY's material as a result of ALLIED's willful misconduct or
negligence or in any other circumstance in which ANCHOR BAY's casualty
insurance does not apply, ALLIED shall be obligated to reimburse
ANCHOR BAY in a timely manner for its damages in connection with any
loss, damage or destruction of ANCHOR BAY's material, including
without limitation: 1) the cost of any raw materials that are lost,
damaged or destroyed; 2) for the cost of duplication, packaging, and
miscellaneous services for which ANCHOR BAY has already paid ALLIED,
relating to materials lost, damaged or destroyed (provided that in the
case of inventory shrinkage, ALLIED will have the opportunity to
re-make product at its expense); and 3) any lost profits or royalties
payable with respect to any unauthorized distribution of any of ANCHOR
BAY's products.
If after review of both parties' inventory records an inventory
shrinkage exists, ALLIED will have the opportunity to re-make product
at its expense.
11. GENERAL CONDITIONS:
a) TERM: The initial term of this Agreement shall run for a period of
FIVE (5) year(s), commencing JULY 15, 1995 and expiring JULY 14, 2000.
The Agreement can be renewed for additional one (1) year terms upon
mutual agreement of both parties.
This Agreement between ALLIED and ANCHOR BAY is an exclusive one in
which ALLIED will duplicate all of ANCHOR BAY's video cassette
requirements, including expected growth, with the following
exceptions:
1. Up to 350,000 units may be duplicated with Handleman's
affiliate operation in Mexico.
2. If ANCHOR BAY makes any acquisitions during the contract
period with expected annual volumes under 3.0 million units,
then it becomes part of this contract. For acquisitions over
3.0 million units annually, ANCHOR BAY reserves the right to
go elsewhere for duplication. ALLIED will have the right to
bid for units over 3.0 million units. ANCHOR BAY retains the
sole right to choose the duplicator.
b) INDEMNIFICATION: ALLIED shall indemnify, save, and hold harmless
ANCHOR BAY from and against any and all damages, penalties, fines,
liabilities, claims, losses, and expenses (including reasonable
<PAGE>
Anchor Bay Entertainment
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legal fees and costs incurred in connection with the investigation of
any threatened claim) arising out of or in connection with ALLIED's
performance of duplication and fulfillment services set forth herein
or out of any breach of ALLIED's obligations hereunder; PROVIDED
HOWEVER, that ANCHOR BAY shall be responsible for the content and
copyright of all ANCHOR BAY videotapes. If the facts giving rise to
the right of indemnification under this paragraph involve any actual
or threatened claim or demand by any third party against ANCHOR BAY or
any possible claim by ANCHOR BAY against any third party ("Third Party
Claim"), and if, within 15 days after receipt of notice of the claim,
ALLIED gives ANCHOR BAY an agreement in writing, in form and substance
reasonably satisfactory to ANCHOR BAY, agreeing to indemnify and hold
ANCHOR BAY harmless from all costs and liability arising from such
ThirdParty Claim (and including, if required by ANCHOR BAY, adequate
assurances of ALLIED's ability to meet its obligations under this
paragraph), ALLIED may at its own expense undertake full
responsibility for the defense or prosecution of such Third Party
Claim and may contest or settle it on such terms as it may choose. If
ALLIED fails to deliver such an agreement of indemnity to ANCHOR BAY,
(1) ANCHOR BAY will be entitled to defend or prosecute such Claim with
counsel of its own choice (the reasonable fees and costs of such
defense or prosecution being indemnified under this paragraph), (2)
ALLIED at its own expense may nevertheless participate with ANCHOR BAY
in the defense or prosecution of such Third-Party Claim and any
settlement negotiations with respect thereto, and ANCHOR BAY may
settle the Third Party Claim on such terms as it may choose, although
it will not reach such a settlement until is has consulted in good
faith with ALLIED, ALLIED's defense or prosecution of, or
participation in, a ThirdParty Claim will not in any manner relieve
ALLIED of its obligations to indemnify ANCHOR BAY under this
paragraph.
C) DEFAULT OR BREACH: In the event that either party is (a) in default or
commits a material breach of the terms of this Agreement; or, (b)
files a petition in bankruptcy, is adjudicated a bankrupt, becomes
insolvent, makes an assignment for the benefit of creditors, or if a
receiver, liquidator, or trustee is appointed for its business or
assets, or otherwise takes advantage of any insolvency laws; and if
such default or breach shall not be cured within thirty (30) calendar
days after written notice of such default or breach is given by the
non-defaulting party to the defaulting party, then at any time after
the expiration of such thirty (30) calendar days, the non-defaulting
party may give written notice to the defaulting party of its election
to terminate this Agreement. Thereupon the
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Agreement shall terminate on the date specified in such notice, which
shall not be less than thirty (30) calendar days following the receipt
of such written notice. Notwithstanding, however, that either party
may not be required to provide the foregoing notice if an event set
forth in (b) above occurs or there is a default that by its nature
cannot be cured in thirty (30) calendar days, and the Agreement shall
be deemed terminated on the date of the event set forth in (b) above
or the date of such default, as the case may be. Such right of
termination shall not be exclusive of any other remedies or means of
redress to which the non-defaulting party may be lawfully entitled.
d) STANDARD OF PERFORMANCE: ALLIED agrees to perform its services with
that standard of care, skill, and diligence normally provided by a
professional organization in the performance of similar services.
ALLIED is given notice that ANCHOR BAY will be relying on the
accuracy, competence, and completeness of ALLIED's services.
i. ALLIED has committed to the following timetable for performance:
a). Duplication - Manufacturing order complete in five working
days after receipt of order. All ANCHOR BAY supplied
components to complete order must be in inventory. The day
the order is received does not count.
b). Fulfillment - Shipping complete in 48 hours after receipt of
order. Finished goods must be in inventory.
c). Returns - Return orders complete in 10 working days after
receipt in year one. Return orders complete in five working
days after receipt in years two through five.
Penalties will apply if the above performance standards are not met as
follows:
a). Up to five duplication orders (title/units) per month can
exceed the five-day window. On the sixth and subsequent
orders, a penalty of $.50/unit will apply for all units
outside of the five-day window.
Minimum order quantity is 100 units or one pancake. Orders
less than 100 units or one pancake will carry a $.50 per
unit surcharge.
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b). Up to 10 fulfillment orders/month may exceed the 48 hours
service window. On the 11th and subsequent orders in any
month exceeding 48 hours, then a penalty of $.50/unit will
apply.
C). Up to 10 return authorizations may be outside of the 10-day
service window in any month. On the 11th and subsequent
return orders in any month exceeding the 10-day service
window, then a penalty of $.25/unit will apply. In years two
through five, the service window will be five days.
The penalty provisions as outlined above do not supersede the
provisions of the Force Majeure (10f).
ii. ALLIED shall comply with all municipal, county, state, and
federal laws and regulations bearing on the performance of its
obligations under this Agreement.
e) WARRANTY OF SERVICES:
i. DEFINITIONS: "Acceptance", as used herein, means the act of an
authorized representative of ANCHOR BAY by which ANCHOR BAY
approves specific services, as partial or complete performance of
the contract. "Correction", as used herein, means the elimination
of a defect.
ii. WARRANTY: Notwithstanding inspection and acceptance by ANCHOR BAY
or any provision concerning the conclusiveness thereof, ALLIED
warrants that all services performed under this contract will, at
the time of delivery, be free from defects in workmanship and
conform to the requirements of this contract. ANCHOR BAY shall
give written notice of any defect or nonconfor-mance to ALLIED
within 60 calendar days from the date of delivery to ANCHOR BAY.
This notice shall state either: (1) that ALLIED shall correct or
perform any defective or nonconforming services; or (2) that
ANCHOR BAY does not require correction or re-performance. Total
defects from all manufacturing causes will be less than one/half
percent (.5%) of duplicates shipped.
A credit memo will be issued monthly amounting to 0. 5 % of sales
for that month exclusive of freight. ANCHOR BAY at its option can
elect to be reimbursed for the actual cost of defectives.
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iii. CORRECTION OF DEFECT: If ALLIED is required to correct or
re-perform, it shall be at no cost to ANCHOR BAY, and any
services corrected or re-performed by ALLIED shall be subject to
this Agreement to the same extent as work initially performed. If
ALLIED fails or refuses to correct or re-perform, ANCHOR BAY may,
by contract or otherwise, correct or replace similar services and
charge to ALLIED the cost occasioned to ANCHOR BAY thereby, or
make an equitable adjustment in the invoice price.
iv. COMPLAINTS: ALLIED shall maintain a file of all complaints
related to services performed under this Agreement, and shall
include in that file a record of actions taken to rectify each
complaint. ANCHOR BAY's right to examine and copy records shall
extend to these files.
f) FORCE MAJEURE: Neither party shall have any liability to the other for
any loss of any kind whatsoever due to delays or failure to perform
caused directly or indirectly by the laws, regulations, acts, demands,
orders or interpositions, or any government or any subdivision or
agent thereof, or by acts of God, strikes, floods, weather, war,
rebellion, insurrection, failure of transportation agencies, shortages
of labor or material, damage or accident to machinery or equipment,
electric power failure, or any other causes beyond the control of
either party. Allied will endeavor to fulfill its obligations at one
or more of its other plants within 10 calendar days. If this cannot be
done, ANCHOR BAY shall be entitled, notwithstanding anything to the
contrary contained in paragraph one, to engage the services of a third
party to fulfill the services described herein.
g) SUBCONTRACTING: ALLIED shall not enter into any subcontracts for any
of the work under this contract without obtaining the prior written
approval of ANCHOR BAY.
h) ANCHOR BAY'S FURNISHED MATERIAL: Title to furnished material shall
remain in ANCHOR BAY. ALLIED shall use said material only in
connection with this Agreement. Upon completing this Agreement, ALLIED
shall follow the instructions of ANCHOR BAY regarding the disposition
of all ANCHOR BAY'S furnished material.
i) CAPTIONS- The captions and headings contained in this Agreement have
been inserted for reference and convenience only and in no way define,
limit or describe the text of this Agreement or the intent of any
provision.
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j) WAIVER: The waiver by any party of a breach or default of any
provision of this Agreement by the other party shall not constitute a
waiver by such party of any succeeding breach of the same or other
provision; nor shall any delay or omission on the part of either party
to exercise or avail itself of any right, power or privilege that it
has or may have hereunder, operate as a waiver of any such right,
power or privilege by such party.
k) GOVERNING LAW: This Agreement shall be governed by, subject to and
construed under the laws of the State of Michigan.
1) UNENFORCEABLE CLAUSES: In the event that any term, clause or provision
of this Agreement shall be construed to be or adjudged invalid, void
or unenforceable, such term, clause or provision shall be construed as
severed from this Agreement, and the remaining terms, clauses and
provisions shall remain in effect.
m) ASSOCIATION: The parties, by this Agreement, do not intend to create a
partnership, principal/agent, master/servant, or joint venture
relationship, and nothing in this Agreement shall be construed as
creating such a relationship between the parties.
n) ASSIGNMENT: This Agreement may not be assigned by either party without
the written consent of the other party.
0) NOTICES AND CONSENT: Any legal notices or written consent required
hereunder shall be in writing and deemed delivered upon receipt of
such notice when sent by certified mail, return receipt requested,
postage prepaid, to the following:
ANCHOR BAY ENTERTAINMENT ALLIED DIGITAL TECHNOLOGIES
ATTN: George F. Port ATTN: James A. Merkle
500 Kirts Boulevard 7375 Woodward Avenue
Troy, Michigan 48084 Detroit, MI 48202-3121
12. INTEGRATION: This Agreement, including Exhibits A and B, and the Addendums
One through Six, hereto, constitutes the entire Agreement between the
parties relating to the subject matter hereof. All prior negotiations,
representations, agreements and understandings are merged into,
extinguished by and completely expressed by it. Neither party shall be
bound by any definition, condition, warranty, representation, amendment,
modification, consent or waiver, other than as expressly stated herein,
unless set forth in a writing executed by the party to be bound.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their authorized representatives as of the day and year first written above.
ALLIED DIGITAL TECHNOLOGIES ANCHOR BAY ENTERTAINMENT
By_________________________ _________________________
James A. Merkle George F. Port
President/CEO President
Allied Digital Technologies Anchor Bay Entertainment
7375 Woodward Ave. 500 Kirts Boulevard
Detroit, MI 48202 Troy, Michigan 48084
<PAGE>
EXHIBIT A
MANUFACTURING
Duplication
ALLIED hereby proposes to provide duplication services in accordance with the
prices set forth in Exhibit A of the Agreement. Said prices are based upon
ANCHOR BAY's projected requirements of 12 mivideocassettesettes during each year
of the Agreement.
The prices set forth in Exhibit A shall apply to the following types of orders:
A. Trailers and Screeners
ALLIED can provide chyron imprinting of trailer/screener information
at intervals as determined by ANCHOR BAY. Such product will be shipped
to individual key accounts either upon request or from a promotional
list provided by ANCHOR BAY, and shall be shipped in the manner
prescribed by ANCHOR BAY within three (3) working days or receipt of
purchase order, contingent upon test approval and component
availability.
Trailers, screeners and/or promotional product requirements can also
be serviced from ALLIED's Detroit facility, to provide more localized
access for ANCHOR BAY.
B. New Release Cassettes
Purchase orders for new release selections which represent a minimum
of 50% of ANCHOR BAY's initial anticipated requirements should be
placed with ALLIED ten (10) working days prior to order close.
Additional new release orders taken after the last order date shall be
available within five (5) working days of purchase order placement,
contingent upon test approval and component availability.
C. Catalog Videocassettetes
ALLIED shall duplicate, package and make available for shipment any
catalog orders for ANCHOR BAY selections within five (5) working days
of receipt of purchase order, contingent upon component availability.
ANCHOR BAY may request expedited service as needed, whereupon ALLIED
will respond by providing its best effort to comply with any and all
such requests-
Duplication orders shall be subject to a four (4%) percent overrun/underrun
policy for all catalog orders. For new releases, the overrun limitation on
initial orders in excess of 25,000 units per selection shall be two (2%)
percent, and the underrun quantity for all new releases shall be zero (O%)
percent.
<PAGE>
Exhibit A - Manufacturing
Page 2
Packaging
ALLIED will store reasonable inventories of component parts, display or
promotional material, and printed matter at no charge to ANCHOR BAY.
ALLIED will assemble and package ANCHOR BAY video product in accordance with the
prices listed in Exhibits A and B of the Agreement.
Auxiliary Services
A. Mastering
ALLIED will create a duplicate running master from each of ANCHOR
BAY's supplied master tapes, and store the original masters in a
secured vault, at no charge.
ALLIED can supply duplicate masters at ANCHOR BAY's request for
charges as listed in Exhibit B of the Agreement.
B. Fulfillment
ALLIED shall prepare all bulk orders for shipment at no charge to
ANCHOR BAY.
ALLIED shall fulfill new release and catalog shipping orders within
forty-eight (48) hours from receipt of order, contingent upon finished
goods availability. Order availability will be confirmed within
twenty-four (24) hours.
ALLIED will ship all product as instructed by ANCHOR BAY. If ANCHOR
BAY does not designate a carrier, then ALLIED will ship orders on a
least-cost basis. Confirmation of order shipment will be transmitted
to ANCHOR BAY no later than 12 noon on the day following the shipment.
C. Inventory Reporting
ALLIED will provide customized reporting information for ANCHOR BAY,
including a Stock Status Report detailing finished goods availability;
Component Reports providing counts on sleeves, labels and inserts;
Receiving Reports showing inbound shipments of components; a Shipping
Activity Report; a detailed account of ANCHOR BAY's outbound product
shipments; and a Product Returns Report indicating items and
quantities returned, R/A numbers, and processing status of the return.
For Reports, see Addendum Five.
<PAGE>
Exhibit A - Manufacturing
Page 3
D. Order Processing
ALLIED is capable of electronic data transmission via computer
interface (EDI). Direct entry access is available via modem, and
orders can be printed on-site at ALLIED for duplication and/or
shipping.
Additionally, direct inquiry capability can be made available upon
determination of systems compatibility. ALLIED will confer with ANCHOR
BAY's Operations and Data Processing personnel to assess requirements
for the most effective method of EDI.
Returns Processing
ALLIED shall issue a monthly credit to ANCHOR BAY equal to one-half of one
percent (0. 5 %) of the value of duplication completed in that month exclusive
of freight. This defect allowance is intended to reimburse ANCHOR BAY in advance
for any and all process defects in product manufactured under the Agreement
which do not result in a major manufacturing recall. Any pervasive manufacturing
defect of a title or titles shall be fully credited and replaced by ALLIED,
exclusive of, and in addition to, the procedure outlined above.
In consideration of ALLIED granting the defect allowance to ANCHOR BAY, ANCHOR
BAY will allow ALLIED to unpackage, de-label, degauss and dispose of any product
returned to ALLIED by ANCHOR BAY that is deemed by ANCHOR BAY to be defective,
provided the product was manufactured by ALLIED.
Processing charges for surplus inventory to be returned to stock are listed in
Exhibit B, Section 7.
Returns processing for contract year one shall be completed in ten (10) working
days and five (5) days for years two to five.
Quality Control
See Quality Standards Addendum 2 for all technical specification.
Physical Inventory
ALLIED shall provide one annual physical inventory of ANCHOR BAY-owned
finished goods and component stock located at its premises, at ALLIED's sole
expense. ANCHOR BAY may furnish, at its own expense, a representative or
representatives to monitor the inventory activity. ALLIED shall furnish a
complete copy of the inventory to ANCHOR BAY promptly upon completion, but no
later than five (5) days after the inventory is completed. Any adjustments to
the counts will be mutually agreed upon by ANCHOR BAY and ALLIED, whereupon all
inventory counts will be accepted as valid.
<PAGE>
Exhibit A - Manufacturing
Page 4
Security
ALLIED will be patrolled by a security force 24 hours a day. All entrances and
exits will be monitored by closed-circuit video surveillance equipment.
All employees and visitors will be required to sign in and out of the video
areas, and access to the master tape vault is limited only to the tape
librarians.
Account Supervision
ALLIED will assign a full-time customer service supervisor to ANCHOR BAY's
account. This person will be responsible for such activities as coordination of
all manufacturing and shipping orders; processing of regular reporting data such
as activity reports, shipping documentation and order confirmations; the overall
internal management of all goods and services provided by ALLIED on behalf of
ANCHOR BAY, to the complete satisfaction of the client. ALLIED will replace its
customer service supervisor assigned to the ANCHOR BAY account if ANCHOR BAY
requests such action.
ALLIED will provide two office cubicles and pay for temporary housing for up to
two ANCHOR BAY employees. ANCHOR BAY pays salaries, living expenses, travel,
etc.
Payment Terms
ANCHOR BAY duplication orders will be invoiced upon transfer from ALLIED's
Packaging Department into the finished goods warehouse.
ALLIED is pleased to offer a payment program of 2@c. 30 days/Net 60 days
from the date of invoice.
Duplication Pricing-
A. Videocassette
Prices are based upon an estimated annual requirement of twelve (12)
million units.
<PAGE>
Exhibit A - Manufacturing
Page 5
B. Standard Play Duplication
Five million units annually.
Program Length Unit Cost
-------------- ---------
20:00 $ .98
25:00 $1.02
30:00 $1.06
35:00 $1.11
40:00 $1.16
45:00 $1.21
50:00 $1.28
55:00 $1.35
60:00 $1.42
65:00 $1.48
70:00 $1.53
75:00 $1.58
80:00 $1.64
85:00 $1.70
90:00 $1.76
95:00 $1.81
100:00 $1.86
105:00 $1.92
110:00 $1.98
115:00 $2.04
120:00 $2.10
125:00 $2.17
130:00 $2.24
135:00 $2.30
<PAGE>
Exhibit A - Manufacturing
Page 6
C. Extended Play Duplication
Seven million units annually.
Program Length Unit Cost
-------------- ---------
30:00 $ .72
35:00 $ .75
40:00 $ .78
45:00 $ .80
50:00 $ .84
55:00 $ .87
60:00 $ .90
65:00 $ .92
70:00 $ .94
75:00 $ .96
80:00 $ .98
85:00 $ .99
90:00 $1.02
95:00 $1.04
100:00 $1.07
105:00 $1.10
110:00 $1.13
120:00 $1.20
130:00 $1.25
140:00 $1.29
150:00 $1.33
160:00 $1.37
170:00 $1.41
180:00 $1.38
190:00 $1.40
200:00 $1.43
210:00 $1.45
220:00 $1.48
230:00 $1.50
240:00 $1.53
250:00 $1.55
260:00 $1.58
270:00 $1.59
280:00 $1.61
290:00 $1.63
300:00 $1.65
310:00 $1.68
320:00 $1.70
330:00 $1.72
340:00 $1.74
350:00 $1.75
360:00 $1.76
<PAGE>
Exhibit A - Manufacturing
Page 7
Program Length Unit Cost
-------------- ---------
370:00 $1.78
380:00 $1.80
390:00 $1.82
400:00 $1.85
410:00 $1.88
The prices listed on the previous pages include the following materials and
services:
* Custom-length loading of standard-grade tape stock into a VHS shell
that meets or exceeds JVC standards.
* Duplication from a full-edited 1 ", D-2.or Betacam SP source master
supplied by ANCHOR BAY.
* Creation of a duplicate running master (SP) or mirror mother master
(EP) for use in actual duplication.
* Provision of a test cassette accompanied by a master tape evaluation
form, for approval by ANCHOR BAY prior to commencement of initial
duplication.
* Application of a face label provided by ANCHOR BAY or Rotoscreen
imprinting of label copy information, from mechanical artworks
provided by ANCHOR BAY.
* Collation into a bottom-load sleeve supplied by ANCHOR BAY.
Shrinkwrapping Packing into a standard 10-count, 30-count, or 50-count
master carton.
* Application of a thermal bar-code label onto each master carton.
* Picking, packing, and shipping of all ANCHOR BAY's sales orders.
<PAGE>
EXHIBIT B
VIDEO SUPPLEMENTAL PRICING SCHEDULE
SUPPLEMENTAL VIDEO SERVICES
(All charges are per cassette except where other-wise noted)
1. JACKET PACKAGING
A. CLIENT SUPPLIED JACKET PACKAGING
1. Slipcase (Bottom Load) No Charge
2. Clamshell with wrap $.10
B. NON STANDARD PACKAGING
1. Shrinkwrap 2 Videos Together $.050
2. Shrinkwrap 3 Videos Together $.100
3. Shrinkwrap 4 Videos Together $.120
Note: Must shrink 4 videos in 2x2
configuration. 2 and 3 videos
can be front to back
Charges also apply to multi-cassette titles in single
slipcases - two-packs, etc.
C. ALLIED SUPPLIED JACKET PACKAGING
1. Slipcases
a. White Universal Slipcase $.100
b. White Universal Die-Cut Slipcase $.120
c. Black Universal Slipcase $.160
d. Black Universal Die-Cut Slipcase $.180
2. Universal Library Case
a. Full White Universal Case $.550
b. Full Black Universal Case $.550
c. 1/3 Black Universal Case $.550
d. 1/3 White Universal Case $.550
e. Special Colors Special Quote
3. Clamshell
a. White Universal Clamshell $.60
b. Black Universal Clamshell $.60
D. RE-PACKAGING
1. Remove video cassette, discard $.10
old package, insert into new
package, shrinkwrap, return to
stock (up to 3 inserts).
<PAGE>
Exhibit B
Page 2
2. STICKER APPLICATION (SLIPCASE)
A. Any combination of 3
stickers or inserts No Charge
Note: Stickers must be printed
on for automated
application, to Allied
specifications
B. Additional Stickers or inserts $.015 each
3. LABEL APPLICATION
A. Face Labels
1. Client Supplied
a. Automatic No Charge
b. Manual $.040
2. ALLIED Supplied (includes application)
a. White computer generated $.050
b. Commercially printed $.02
Thomas face labels - 2/C
Minimum initial
order - 10,000 per
selection, ALLIED
maintains label
inventory, and will
invoice as part of
duplication cost.
3. Rotoscreen Printing No Charge
a. Plate charge Paid by ALLIED
B. Jacket Labels
1. Client Supplied
a. Standard $.040
b. Manual - Wraparound Special Quote
2. ALLIED Supplied (includes application)
a. White Computer generated $.080
b. Commercially printed Special Quote
c. Manual - Wraparound Special Quote
C. Spine Labels
1. Client Supplied $.030
2. ALLIED Supplied (includes application)
a. White computer generated $.050
b. Commercially printed Special Quote
4. INSERTION*
A. Any combination of 3 stickers No Charge
or inserts
B. Additional inserts $.02
* All inserts must be received prefolded
to a size of not greater than 26 1/4
square inches (maximum 3 3/4" x 7").
<PAGE>
Exhibit B
Page 3
5. EDITING CHARGES
A. Editing services (1/2 hour increments) $100.00
per hour
B. Tape Stock (1/2 hour increments per hour)
(1) 3/4 inch $20.00
(2) 1 inch $70.00
(3) D2 $100.00
C. Plastic Master Case $30.00
6. DUPLICATION MASTERS (1")
Program Run Time Unit Cost
---------------- ---------
30 minutes $61.24
35 minutes $75.82
40 minutes $78.83
45 minutes $81.84
50 minutes $84.84
55 minutes $87.85
60 minutes $90.86
65 minutes $112.80
70 minutes $115.81
75 minutes $118.82
80 minutes $121.83
85 minutes $124.83
90 minutes $127.84
95 minutes $140.20
100 minutes $143.1@1
105 minutes $158.05
110 minutes $161.06
115 minutes $164.06
120 minutes $167.07
125 minutes $192.29
130 minutes $195.30
135 minutes $198.31
140 minutes $201.32
145 minutes $204.32
150 minutes $207.33
155 minutes $235.62
160 minutes $238.63
Duplication fees include time, tape and storage cases.
NOTE: 1" with separate PCM Digital Audio tracks requires the
duplication of two masters.
7. RETURNS PROCESSING
A. Factory-Sealed Cartons - No Charge
return to stock
B. Mixed carton-sort and return $.08 each
to stock
<PAGE>
Exhibit B
Page 4
8. FULFILLMENT COSTS
A. Carton-lot quantities No Charge
B. Less than car-ton-lot quantity $.03 per unit
C. Display prepacking/assembly $.03 per cassette
Note: This charge applies to standard
24/36-count and 50/75 count displays,
mixed cartons, and 12-count self-shipper
displays.
D. Product received from Mexico $.03 per unit
and fulfilled
<PAGE>
ADDENDUM #1
RAW MATERIAL INCREASES
Prices for duplication services will be reviewed every six months and adjusted
by the following methodology:
1) At contract signing ALLIED will submit copies of current
invoices for V-O's and videotape from their current
suppliers.
o V-0 Titron Media and SKC
o Videotape 3M and Saehan Media
This will establish a baseline for V-0 and tape on a cost/100 ft. basis.
Adjustments, at six month intervals will be shared on a 50/50 basis up or down.
[Expected V-0 prices 35-36 cents ea.
Videotape $0.0880/100 ft.]
<PAGE>
ADDENDUM #2
SPECIFICATIONS AND QUALITY CONTROL
Been delivered separately.
<PAGE>
ADDENDUM #3
SIGNING ALLOWANCE and
OPTION GRANTS
1) ANCHOR BAY, at its option, will select a cash payment or
equivalent free goods per Exhibit A in the amount of
$1,250,000. This signing allowance is payment to ANCHOR BAY
from ALLIED reflecting the difference between ANCHOR BAY's
current cost of inventory, and the cost of replacing that
inventory pursuant to the duplication prices in this
Agreement. A cash payment will be due to ANCHOR BAY on the
first day following the signing of the contract.
2) Options on ALLIED stock for 250,000 shares will be granted
(AMEX-ADK) as additional consideration for the contract. The
option price will be set at the stock price for ALLIED in
accordance with SEC regulations. This is expected to be the
price on, or 1-2 days after the contract signing. The
options will run for five years.
<PAGE>
ADDENDUM #4
MOVEMENT OF INVENTORY
ALLIED agrees to reimburse ANCHOR BAY for all transportation costs to move 2.5
million units of finished goods and 10-1 1 million sleeves from Livonia, MI to
Clinton. TN.
It is expected that this will cost between $40-50,000. ANCHOR BAY will supply
ALLIED with actual copies of freight bills.
<PAGE>
ADDENDUM #5
REPORTS
<PAGE>
ADDENDUM #6
Allied currently supplies materials and services to the following accounts
providing, at times, direct to retail distribution services of video and audio
products:
International Video Network Polygram
Curb Records BMG
Entertainment Central Sony
Gateways to Space CapCities/ABC
Warner Vision Pocketbooks
Genesis Scholastic
Sunwest Media Profile Records
Wellspring Media Atlantic/Elektra
Disney to Disney Stores Capital/EMI
Questar Arista
Mastervision Sparrow
View Video Geffen
Magna Acclaim
Future
Chicago
Capricorn
Ruthless
Sirius
Contentware
Hallmark
In most all cases the direct to retail distribution is a very minor part of
total shipments and usually only for special projects such as custom displays,
pallet displays, etc.
This agreement shall not prohibit Allied from entering into other such
arrangements. In the event Allied does enter into an agreement not currently in
existence, and which customers' direct to retail volume exceeds 2.0 million
units/year, Allied will so notify Anchor Bay and Anchor Bay will be entitled
thereafter to terminate this agreement on sixty (60) days advance written
notice.
Exhibit 21
Subsidiaries
HMG Digital Technologies Corp.
HRM Holdings Corp.
Hauppauge Record Manufacturing Ltd.
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
reports by reference in this Form 10-K into Allied Digital Technologies Corp.'s
previously filed Registration Statements on Form S-4 File No. 33-86530 and on
Form S-8 File No. 33-88550.
/s/ Arthur Andersen LLP
Detroit, Michigan
November 12, 1996
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our report dated October 22, 1996 (except for Note 4, as to which
the date is November 8, 1996), accompanying the consolidated financial
statements and schedule included in the Annual Report of Allied Digital
Technologies Corp. on Form 10-K for the year ended July 31, 1996. We hereby
consent to the incorporation by reference of said report in the Registration
Statement of Allied Digital Technologies Corp. on Form S-8 File No. 33-88550.
GRANT THORNTON LLP
Melville, New York
November 12, 1996
