<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________.
Commission file number: 0-27644
Digital Generation Systems, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
California 94-3140772
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
875 Battery Street
San Francisco, California 94111
(Address of principal executive offices, including zip code)
(415) 276-6600
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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
--- ---
Number of shares of registrant's Common Stock, without par value, outstanding as
of March 31, 2000: 28,080,907
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<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
The discussion in this Report contains forward-looking statements that involve
risks and uncertainties. The statements contained in this Report that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Words such as "anticipates," "believes,"
"plans," "expects," "future," "intends," and similar expressions are used to
identify forward-looking statements. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and we assume no obligation to update any such forward-looking
statements. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Business
Considerations" as reported in the Company's Report on Form 10-K filed on March
28, 2000, as well as those risks discussed in this Report, and in the Company's
other United States Securities and Exchange Commission filings.
TABLE OF CONTENTS
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<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Financial Statements............................................................................. 3
Condensed Consolidated Balance Sheets at March 31, 2000 and December 31, 1999.................... 3
Condensed Consolidated Statements of Operations for the quarters ended March 31, 2000
and April 3, 1999................................................................................ 4
Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 2000
and April 3, 1999................................................................................ 5
Notes to Condensed Consolidated Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................ 11
Item 6. Exhibits and Reports on Form 8-K................................................................. 11
SIGNATURES....................................................................................... 11
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGITAL GENERATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,428 $ 5,420
Accounts receivable, less allowance for doubtful accounts of
$1,675 on March 31, 2000 and $1,659 on December 31, 1999 12,626 12,799
Prepaid expenses and other 1,276 1,717
-------- ---------
Total current assets 17,330 19,936
-------- ---------
PROPERTY AND EQUIPMENT, at cost:
Network equipment 36,523 35,304
Office furniture and equipment 6,014 5,833
Leasehold improvements 834 793
-------- ---------
43,371 41,930
Less - Accumulated depreciation and amortization (35,185) (33,772)
-------- ---------
Property and equipment, net 8,186 8,158
-------- ---------
GOODWILL AND OTHER ASSETS, net 13,457 13,672
-------- ---------
TOTAL ASSETS $ 38,973 $ 41,766
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,107 $ 7,781
Accrued liabilities 3,112 3,230
Current portion of long-term debt 7,244 7,689
-------- ---------
Total current liabilities 15,463 18,700
LONG-TERM DEBT, net of current portion 2,067 2,513
SHAREHOLDERS' EQUITY:
Convertible preferred stock, no par value --
Authorized -- 15,000,000 shares
Outstanding -- none
Common stock, no par value --
Authorized -- 100,000,000 shares
Outstanding -- 28,080,907 shares at March 31, 2000
and 27,530,170 shares at December 31, 1999 121,277 119,519
Treasury stock, at cost (101) --
Receivable from issuance of common stock (93) (194)
Accumulated other comprehensive income 52 52
Accumulated deficit (99,692) (98,824)
-------- ---------
Total shareholders' equity 21,443 20,553
-------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 38,973 $ 41,766
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters Ended March 31, 2000 and April 3, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended
-------------
March 31, April 3,
2000 1999
--------- --------
(Unaudited)
<S> <C> <C>
REVENUES $ 12,709 $ 11,460
-------- --------
COSTS AND EXPENSES:
Delivery and material costs 3,964 4,539
Customer operations 4,155 3,557
Sales and marketing 1,022 1,237
Research and development 877 612
General and administrative 1,745 1,507
Depreciation and amortization 1,584 2,490
-------- --------
Total expenses 13,347 13,942
-------- --------
LOSS FROM OPERATIONS (638) (2,482)
-------- --------
OTHER INCOME (EXPENSE):
Interest income 50 95
Interest expense (280) (604)
-------- --------
NET LOSS $ (868) $ (2,991)
======== ========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.03) $ (0.11)
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 28,003 26,462
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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DIGITAL GENERATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Quarters Ended March 31, 2000 and April 3, 1999
(in thousands)
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<CAPTION>
Quarter Ended
------------------------------------
March 31, April 3,
2000 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (868) $ (2,991)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and equipment 1,416 2,269
Amortization of goodwill and intangibles 154 195
Provision for doubtful accounts (20) (77)
Changes in operating assets and liabilities --
Accounts receivable 188 662
Prepaid expenses and other assets 489 (107)
Accounts payable and accrued liabilities (2,798) (441)
---------------- ----------------
Net cash used in operating activities (1,439) (490)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (569) (1,104)
---------------- ----------------
Net cash used in investing activities (569) (1,104)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,758 1,017
Payments on line of credit -- (1,433)
Payments on long-term debt (1,763) (2,713)
---------------- ----------------
Net cash used in financing activities (5) (3,129)
---------------- ----------------
EFFECT OF EXCHANGE RATE CHANGES 21 (62)
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,992) (4,785)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,420 13,025
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,428 $ 8,240
================ ================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 340 $ 1,066
Acquisition of property and equipment through capital lease $ 872 $ --
Treasury stock purchased in exchange for cancellation of note $ 101 $ --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by Digital
Generation Systems, Inc. ("the Company") without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
Effective for fiscal year 2000, beginning January 1, the Company elected to
adjust its fiscal quarters so that each quarter ends on a calendar quarter.
Quarters end on March 31, June 30, and September 30. The Company's fiscal year
will continue to end on December 31.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) which
are, in the opinion of management, necessary to state fairly the results for the
three month period ended March 31, 2000. The results for the three month period
ended March 31, 2000 are not necessarily indicative of the results expected for
the full fiscal year.
Certain reclassifications were made to the 1999 condensed consolidated
financial statements to conform to the 2000 presentation. The reclassifications
have no significant effect on previously reported financial position, results of
operations, or cash flows.
2. EQUITY TRANSACTIONS
For the quarter ended March 31, 2000, 505,466 shares of common stock were
issued pursuant to the exercise of options and warrants for $1,757,739. In
addition, the Company forgave a note receivable of $101,250 from a former
executive in exchange for 22,917 shares of restricted common stock.
3. SEGMENT INFORMATION
The Company operates predominantly in one industry segment: digital and
physical distribution and post-production services for audio and video content,
and its operations are managed primarily by geographic areas. The Company has
defined its reportable segments based on these geographic areas.
6
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DIGITAL GENERATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The information in the following tables is derived directly from the
segments' internal financial reporting used for corporate management purposes.
The expenses, assets, and liabilities attributable to corporate activity are not
allocated to the operating segments. As of March 31, 2000, 5% of the Company's
operating assets are located outside of the United States. The assets of the
Company's Los Angeles segment were maintained as a part of the Chicago segment
in 1999 and it is impractical to break out such assets separately as of April 3,
1999.
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<CAPTION>
For the Three Months Ended March 31, 2000
In $000's
---------------------------------------------------------------------------------
San Francisco New York Chicago Los Angeles Consolidated
------------- -------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue $ 5,118 $2,897 $3,938 $ 756 $12,709
Net income (loss) $(4,477) $1,026 $2,253 $ 330 $ (868)
Total identifiable assets $24,262 $9,275 $3,594 $1,842 $38,973
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended April 3, 1999
In $000's
---------------------------------------------------------------------------------
San Francisco New York Chicago Los Angeles Consolidated
--------------- -------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenue $ 5,232 $ 2,940 $3,048 $ 240 $11,460
Net income (loss) $(2,740) $ 440 $ (325) $(366) $(2,991)
Total identifiable assets $25,692 $10,222 $7,239 $ -- $43,153
</TABLE>
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. Actual results could differ materially from those indicated
in the forward-looking statements as a result of various factors.
Revenues
Revenues were $12,709,000 for the quarter ended March 31, 2000, a 11%
increase from $11,460,000 for the quarter ended April 3, 1999. Revenues
increased primarily due to greater acceptance of the Company's video delivery
services and expanded network of Company equipment located in television
stations.
Delivery and Material Costs
Delivery and material costs were $3,964,000 for the quarter ended March 31,
2000, a 12% decrease from $4,539,000 for the quarter ended April 3, 1999. The
decrease in costs in the period versus the same period of the prior year is
primarily due to the Company's integration of the Vancouver distribution
Networking Operating Center ("NOC") into the San Francisco NOC. Delivery and
materials costs also include costs for video and audio tapes and the related
packaging and shipping costs required when physically duplicating and
distributing a video or audio spot. In addition, delivery and material costs
include the direct material and fees paid to other service providers in
connection with postproduction services and other services offered by the
Company.
Total delivery and material costs as a percentage of revenues decreased to
31% of revenues from 39% of revenues in the quarter ended March 31, 2000
compared to the quarter ended April 3, 1999.
The Company expects that delivery costs will increase in absolute dollars
and may fluctuate as a percentage of revenues in future periods, influenced
principally by volumes, average sales prices and scale economies as video
deliveries increase in volume.
Customer Operations
Customer operations expenses were $4,155,000 and $3,557,000 for the quarter
ended March 31, 2000 and April 3, 1999, respectively. These increases are
primarily due to the addition of the personnel necessary to respond to the
greater volume of orders and deliveries.
Customer operations expenses as a percentage of revenues was 32% for the
quarter ended March 31, 2000, comparable to the 31% of revenues for the quarter
ended April 3, 1999.
The Company expects that customer operations expenses will increase in
absolute dollars and may fluctuate as a percentage of revenues in future
periods. Moreover, the Company believes that in order to compete effectively
and manage future growth, the Company will be required to continue to implement
changes that improve and increase the efficiency of its customer operations.
Sales and Marketing
Sales and marketing expenses were $1,022,000 for the quarter ended March 31,
2000, a 17% decrease from $1,237,000 for the quarter ended April 3, 1999. The
decrease in sales and marketing expense in the quarter ended March 31, 2000 is a
result of improved efficiency of the Company's sales and marketing efforts.
The Company expects to continue to expand sales and marketing programs
designed to introduce the Company's services to the marketplace and to attract
new customers for its services. The Company expects that sales and marketing
expenses will increase in absolute dollars and may fluctuate as a percentage of
revenue in future periods.
8
<PAGE>
Research and Development
Research and development expenses increased 43% to $877,000 for the quarter
ended March 31, 2000 from $612,000 for the quarter ended April 3, 1999. The
increase in research and development expense for the quarter from the
corresponding quarter in the previous year is due primarily to the fact that a
portion of engineering expenses for the quarter ended April 3, 1999 was being
capitalized as a result of the Company's efforts to integrate its network with
that of its Vancouver subsidiary.
The Company expects that additional research and development spending will
be necessary to remain competitive and that its future success will depend in
significant part upon the technological quality of its products and processes
relative to those of its competitors and its ability to develop both new and
enhanced products and services.
General and Administrative
General and administrative expenses increased 15% to $1,745,000 for the
quarter ended March 31, 2000, from $1,507,000 for the quarter ended April 3,
1999. The increase is primarily due to the costs incurred to upgrade the
Company's order entry, billing, and financial reporting systems.
Depreciation and Amortization
Depreciation and amortization expenses decreased 36% to $1,584,000 in the
quarter ended March 31, 2000 from $2,490,000 in the quarter ended April 3, 1999.
The Company acquired the bulk of its assets prior to December 31, 1997;
therefore, beginning in fiscal year 1999, there has been a higher percentage of
fixed assets which are reaching or have reached the end of their depreciable
lives.
The Company recorded goodwill amortization expense of $154,000 for the
quarter ended March 31, 2000, and $195,000 for the quarter ended April 3, 1999.
The Company expects to continue to invest in the expansion of its network.
In particular, the Company is in the process of expanding its infrastructure
within the television broadcast industry that will require additional DG Video
Transmission Systems and Digital Video Playback Systems ("DVPSs") to be built
and installed in production studios and television stations. The Company
expects depreciation and amortization to fluctuate in proportion to this growth.
However, there can be no assurance that the Company will make such investments
or that such investments will result in future revenue growth.
Interest Income and Interest Expense
Interest income decreased 47% to $50,000 in the quarter ended March 31, 2000
from $95,000 for the quarter ended April 3, 1999. This decrease is primarily
the result of a decreased level of cash and cash equivalents in the first
quarter of 2000 over the first quarter of 1999.
Interest expense decreased 56% to $280,000 for the quarter ended March 31,
2000, from $604,000 in the quarter ended April 3, 1999 due primarily to a
decrease in the Company's outstanding debt, particularly its leasing and loan
agreements used to fund the acquisition of components and equipment needed to
develop the Company's network and to provide the Company with the capital
resources necessary to support the Company's business growth. Debt outstanding
under these agreements decreased to $9.3 million at March 31, 2000 from $14.7
million at April 3, 1999. The Company expects that interest expense will
fluctuate in the future based on the levels of borrowing.
Liquidity and Capital Resources
Net cash used in operating activities increased to $1.4 million in the
quarter ended March 31, 2000 from $0.5 million in the quarter ended April 3,
1999.
9
<PAGE>
The Company made capital additions of $1.4 million during the quarter ended
March 31, 2000 versus $1.1 million in the quarter ended April 3, 1999. The
capital additions in both periods were a result of the Company's continued
expansion of its network. Principal payments on long-term debt were $1.8
million in the quarter ended March 31, 2000 versus $2.7 million in the quarter
ended April 3, 1999.
At March 31, 2000, the Company's current sources of liquidity included cash
and cash equivalents of $3.4 million. Based on management's current plans and
forecasts, the Company believes that its existing sources of liquidity will
satisfy the Company's projected working capital, capital lease and revolving
loan commitments, and other cash requirements through the foreseeable future.
Effective April 6, 2000, the Company entered into a loan and security
agreement with Foothill Capital Corporation for a revolving credit facility up
to a maximum of $11 million. The credit facility is secured primarily by
accounts receivable and has a term of three years. The amount available to the
Company is subject to a borrowing base of eligible receivables as defined in the
revolving credit facility.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has some operations in Canada and, therefore, is subject to the
risk that the Canadian dollar/US dollar exchange rates will adversely impact the
Company's results of operations. The Company believes this risk to be
immaterial to the Company's results of operations.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is involved in routine litigation proceedings incidental to the
conduct of its business. The Company does not believe that any such proceedings
presently pending will have a material adverse effect on the Company's financial
condition or results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Exhibit Title
-------------- -------------
10.46 Loan and security agreement, dated as of April 6, 2000 between
Digital Generation Systems, Inc. as Borrower, and Foothill
Capital Corporation as Lender and exhibits thereto.
11.1 Statements of computation of weighted average common shares.
27 Financial Data Schedule.
__________
(b) Report on Form 8-K
Not applicable.
SIGNATURES
Pursuant to the requirements 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.
DIGITAL GENERATION SYSTEMS, INC.
Dated: May 11, 2000 By /S/ OMAR CHOUCAIR
------------------
Omar Choucair
Chief Financial Officer (Principal Financial and
Chief Accounting Officer)
11
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EXHIBIT 10.46
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LOAN AND SECURITY AGREEMENT
among
DIGITAL GENERATION SYSTEMS, INC.,
DIGITAL GENERATION SYSTEMS OF NEW YORK, INC.,
and
STARCOM MEDIATECH, INC.,
as Borrowers, on the one hand,
and
FOOTHILL CAPITAL CORPORATION,
on the other hand
Dated as of April 6, 2000
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<PAGE>
TABLE OF CONTENTS
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Page(s)
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<S> <C>
1. DEFINITIONS AND CONSTRUCTION....................................................................... 1
1.1 Definitions................................................................................... 1
1.2 Accounting Terms.............................................................................. 12
1.3 Code.......................................................................................... 13
1.4 Construction.................................................................................. 13
1.5 Schedules and Exhibits........................................................................ 13
2. LOAN AND TERMS OF PAYMENT.......................................................................... 13
2.1 Revolving Advances............................................................................ 13
2.2 Letters of Credit............................................................................. 14
2.3 Intentionally Omitted......................................................................... 16
2.4 Intentionally Omitted......................................................................... 16
2.5 Overadvances.................................................................................. 16
2.6 Interest and Letter of Credit Fees: Rates, Payments, and Calculations........................ 16
2.7 Collection of Accounts........................................................................ 17
2.8 Crediting Payments; Application of Collections................................................ 18
2.9 Designated Account............................................................................ 18
2.10 Maintenance of Loan Account; Statements of Obligations........................................ 19
2.11 Fees.......................................................................................... 19
3. CONDITIONS; TERM OF AGREEMENT...................................................................... 20
3.1 Conditions Precedent to the Initial Advance, the Initial Letter of Credit and the Term Loan... 20
3.2 Conditions Precedent to all Advances and all Letters of Credit................................ 21
3.3 Conditions Subsequent......................................................................... 21
3.4 Term.......................................................................................... 21
3.5 Effect of Termination......................................................................... 22
3.6 Early Termination by Borrowers................................................................ 22
3.7 Termination Upon Event of Default............................................................. 22
4. CREATION OF SECURITY INTEREST...................................................................... 23
4.1 Grant of Security Interest.................................................................... 23
4.2 Negotiable Collateral......................................................................... 23
4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral........................ 23
4.4 Delivery of Additional Documentation Required................................................. 23
4.5 Power of Attorney............................................................................. 23
4.6 Right to Inspect.............................................................................. 24
</TABLE>
i
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<S> <C>
5. REPRESENTATIONS AND WARRANTIES..................................................................... 24
5.1 No Encumbrances............................................................................... 24
5.2 Eligible Accounts............................................................................. 25
5.3 Intentionally Omitted......................................................................... 25
5.4 Equipment..................................................................................... 25
5.5 Location of Inventory......................................................................... 25
5.6 Inventory Records............................................................................. 25
5.7 Location of Chief Executive Office; FEIN...................................................... 25
5.8 Due Organization and Qualification; Subsidiaries.............................................. 25
5.9 Due Authorization; No Conflict................................................................ 26
5.10 Litigation.................................................................................... 26
5.11 No Material Adverse Change.................................................................... 27
5.12 Solvency...................................................................................... 27
5.13 Employee Benefits............................................................................. 27
5.14 Environmental Condition....................................................................... 27
6. AFFIRMATIVE COVENANTS.............................................................................. 28
6.1 Accounting System............................................................................. 28
6.2 Collateral Reporting.......................................................................... 28
6.3 Financial Statements, Reports, Certificates................................................... 28
6.4 Tax Returns................................................................................... 29
6.5 Guarantor Reports............................................................................. 29
6.6 Allowances.................................................................................... 30
6.7 Intentionally Omitted......................................................................... 30
6.8 Maintenance of Equipment...................................................................... 30
6.9 Taxes......................................................................................... 30
6.10 Insurance..................................................................................... 30
6.11 No Setoffs or Counterclaims................................................................... 31
6.12 Location of Inventory......................................................................... 31
6.13 Compliance with Laws.......................................................................... 32
6.14 Employee Benefits............................................................................. 32
6.15 Leases........................................................................................ 32
7. NEGATIVE COVENANTS................................................................................. 33
7.1 Indebtedness.................................................................................. 33
7.2 Liens......................................................................................... 33
7.3 Restrictions on Fundamental Changes........................................................... 34
7.4 Disposal of Assets............................................................................ 34
7.5 Change Name................................................................................... 34
7.6 Guarantee..................................................................................... 34
7.7 Nature of Business............................................................................ 34
7.8 Prepayments and Amendments.................................................................... 34
7.9 Change of Control............................................................................. 34
7.10 Intentionally Omitted......................................................................... 35
</TABLE>
ii
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<TABLE>
<CAPTION>
<S> <C>
7.11 Distributions................................................................................. 35
7.12 Accounting Methods............................................................................ 35
7.13 Investments................................................................................... 35
7.14 Transactions with Affiliates.................................................................. 35
7.15 Suspension.................................................................................... 35
7.16 Compensation.................................................................................. 35
7.17 Use of Proceeds............................................................................... 36
7.18 Change in Location of Chief Executive Office.................................................. 36
7.19 No Prohibited Transactions Under ERISA........................................................ 36
7.20 Financial Covenant............................................................................ 37
7.21 Capital Expenditures.......................................................................... 37
8. EVENTS OF DEFAULT.................................................................................. 37
9. FOOTHILL'S RIGHTS AND REMEDIES..................................................................... 39
9.1 Rights and Remedies........................................................................... 39
9.2 Remedies Cumulative........................................................................... 41
10. TAXES AND EXPENSES................................................................................ 42
11. WAIVERS; INDEMNIFICATION.......................................................................... 42
11.1 Demand; Protest; etc.......................................................................... 42
11.2 Foothill's Liability for Collateral........................................................... 42
11.3 Indemnification............................................................................... 42
11.4 Joint Borrowers............................................................................... 43
12. NOTICES........................................................................................... 47
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER........................................................ 48
14. DESTRUCTION OF BORROWERS' DOCUMENTS............................................................... 48
15. GENERAL PROVISIONS................................................................................ 48
15.1 Effectiveness................................................................................. 48
15.2 Successors and Assigns........................................................................ 49
15.3 Section Headings.............................................................................. 49
15.4 Interpretation................................................................................ 49
15.5 Severability of Provisions.................................................................... 49
15.6 Amendments in Writing......................................................................... 49
15.7 Counterparts; Telefacsimile Execution......................................................... 49
15.8 Revival and Reinstatement of Obligations...................................................... 50
</TABLE>
iii
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<TABLE>
<S> <C>
15.9 Integration................................................................................... 51
</TABLE>
SCHEDULES AND EXHIBITS
----------------------
Schedule P-1 Permitted Liens
Schedule 5.7 Chief Executive Offices, FEINs
Schedule 5.8 Subsidiaries
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 6.12 Location of Inventory
Schedule 7.1 Indebtedness
Exhibit C-1 Form of Compliance Certificate
iv
<PAGE>
LOAN AND SECURITY AGREEMENT
---------------------------
THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of
April 6, 2000, among FOOTHILL CAPITAL CORPORATION, a California corporation
("Foothill"), with a place of business located at 11111 Santa Monica Boulevard,
Suite 1500, Los Angeles, California 90025-3333, on the one hand, and DIGITAL
GENERATION SYSTEMS, INC., a California corporation ("Parent"), DIGITAL
GENERATION SYSTEMS OF NEW YORK, INC., a New York corporation ("PDR"), and
STARCOM MEDIATECH, INC., a Delaware corporation ("Starcom") (collectively the
"Borrowers" and each individually a "Borrower") on the other hand.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions.
As used in this Agreement, the following terms shall have the following
definitions:
"Account Debtor" means any Person who is or who may become
--------------
obligated under, with respect to, or on account of, an Account.
"Accounts" means all currently existing and hereafter arising
--------
accounts, contract rights, and all other forms of obligations owing to a Person
arising out of the sale or lease of goods or the rendition of services by such
Person, irrespective of whether earned by performance, and any and all credit
insurance, guaranties, or security therefor.
"Advances" has the meaning set forth in Section 2.1(a).
-------- --------------
"Affiliate" means, as applied to any Person, any other Person who
---------
directly or indirectly controls, is controlled by, is under common control with
or is a director or officer of such Person. For purposes of this definition,
"control" means the possession, directly or indirectly, of the power to vote 5%
or more of the securities having ordinary voting power for the election of
directors or the direct or indirect power to direct the management and policies
of a Person.
"Agreement" has the meaning set forth in the preamble hereto.
---------
"Authorized Person" means any officer or other employee of
-----------------
Borrower.
"Average Unused Portion of Maximum Amount" means, as of any date
----------------------------------------
of determination, (a) the Maximum Amount, less (b) the sum of (i) the average
----
Daily Balance of Advances that were outstanding during the immediately preceding
month, plus (ii) the average Daily Balance of the undrawn Letters of Credit that
----
were outstanding during the immediately preceding month.
1
<PAGE>
"Bankruptcy Code" means the United States Bankruptcy Code
---------------
(11 U.S.C. (S) 101 et seq.), as amended, and any successor statute.
------
"Benefit Plan" means a "defined benefit plan" (as defined in
------------
Section 3(35) of ERISA) for which any Borrower, any Subsidiary of any Borrower,
or any ERISA Affiliate has been an "employer" (as defined in Section 3(5) of
ERISA) within the past six years.
"Borrower" and "Borrowers" have the meaning set forth in the
-------- ---------
preamble to this Agreement.
"Borrowers' Books" means all of Borrowers' books and records
----------------
including: ledgers; records indicating, summarizing, or evidencing Borrowers'
properties or assets (including the Collateral) or liabilities; all information
relating to Borrowers' business operations or financial condition; and all
computer programs, disk or tape files, printouts, runs, or other computer
prepared information.
"Borrowing Base" has the meaning set forth in Section 2.1(a).
-------------- --------------
"Business Day" means any day that is not a Saturday, Sunday, or
------------
other day on which national banks are authorized or required to close.
"Canadian Collections" has the meaning set forth in Section 2.7.
-------------------- -----------
"Change of Control" shall be deemed to have occurred at such
-----------------
time as: (a) PDR or Starcom ceases to be a wholly-owned Subsidiary of Parent
unless PDR and Starcom merge with one another or PDR and/or Starcom merge into
Parent or (b) a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934) becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly
or indirectly, of more than 45% of the total voting power of all classes of
stock then outstanding of Parent entitled to vote in the election of directors.
"Closing Date" means the date of the first to occur of the
------------
making of the initial Advance or the issuance of the initial Letter of Credit.
"Code" means the California Uniform Commercial Code.
----
"Collateral" means each Borrower's right, title, and interest in
----------
each of the following:
(a) Accounts,
(b) Borrowers' Books,
(c) General Intangibles,
(d) Inventory,
(e) Negotiable Collateral,
2
<PAGE>
(f) Investment Property,
(g) any money, or other assets of Borrowers that now or
hereafter come into the possession, custody, or control of Foothill, and
(h) the proceeds and products, whether tangible or intangible,
of any of the foregoing, including proceeds of insurance covering any or all of
the Collateral of Borrowers, and any and all Accounts, Borrowers' Books, General
Intangibles, Inventory, Investment Property, Negotiable Collateral, money,
deposit accounts, or other tangible or intangible property resulting from the
sale, exchange, collection, or other disposition of any of the foregoing, or any
portion thereof or interest therein, and the proceeds thereof. Notwithstanding
anything contained in this definition, the Collateral and proceeds shall not
include Borrowers' Equipment.
"Collateral Access Agreement" means a landlord waiver, mortgagee
---------------------------
waiver, bailee letter, or acknowledgment agreement of any warehouseman,
processor, lessor, consignee, or other Person in possession of, having a Lien
upon, or having rights or interests in the Inventory of any Borrower, in each
case, in form and substance satisfactory to Foothill.
"Collections" means all cash, checks, notes, instruments, and
-----------
other items of payment (including, insurance proceeds, proceeds of cash sales,
rental proceeds, and tax refunds).
"Compliance Certificate" means a certificate substantially in
----------------------
the form of Exhibit C-1 and delivered by the chief accounting officer of a
-----------
Borrower to Foothill.
"Daily Balance" means, with respect to each day during the term
-------------
of this Agreement, the amount of an Obligation owed at the end of such day.
"deems itself insecure" means that the Person deems itself
---------------------
insecure in accordance with the provisions of Section 1208 of the Code.
"Default" means an event, condition, or default that, with the
-------
giving of notice, the passage of time, or both, would be an Event of Default.
"Designated Account" means account number 4210-035440 of
------------------
Borrowers maintained with Borrowers' Designated Account Bank, or such other
deposit account of Borrowers (located within the United States) which has been
designated, in writing and from time to time, by Borrowers to Foothill.
"Designated Account Bank" means Wells Fargo, whose office is
-----------------------
located at 420 Montgomery Street, San Francisco, California 94163, and whose ABA
number is 121-000-248.
"Dilution" means, in each case based upon the experience of the
--------
immediately prior three months or 12 months, the result of dividing the Dollar
amount of (a) bad debt write-downs, discounts, returns, credits, or other
dilutive items with respect to the Accounts
3
<PAGE>
of Borrowers, by (b) Borrowers' Collections (excluding extraordinary items) plus
the Dollar amount of clause (a).
"Dilution Reserve" means, as of any date of determination, an
----------------
amount sufficient to reduce Foothill's advance rate against Eligible Accounts by
one percentage point for each percentage point by which the greater of Dilution
for three months or 12 months is in excess of 5.0%.
"Disbursement Letter" means an instructional letter executed and
-------------------
delivered by Borrowers to Foothill regarding the extensions of credit to be made
on the Closing Date, the form and substance of which shall be satisfactory to
Foothill.
"Dollars or $" means United States dollars.
------------
"Early Termination Premium" has the meaning set forth in Section
------------------------- -------
3.6.
- ---
"Eligible Accounts" means those Accounts created by a Borrower
-----------------
in the ordinary course of business, that arise out of such Borrower's sale of
goods or rendition of services, that strictly comply with each and all of the
representations and warranties respecting Accounts made by such Borrower to
Foothill in the Loan Documents, and that are and at all times continue to be
acceptable to Foothill in all respects in its reasonable credit judgment;
provided, however, that standards of eligibility may be fixed and revised from
- -------- -------
time to time by Foothill in Foothill's reasonable credit judgment. Eligible
Accounts shall not include the following:
(a) Accounts that the Account Debtor has failed to pay within 90
days of original invoice date or 60 days of due date;
(b) Accounts owed by an Account Debtor or its Affiliates where
50% or more of all Accounts owed by that Account Debtor (or its Affiliates) to
the Borrowers, in the aggregate, are deemed ineligible under clause (a) above;
(c) Accounts with respect to which the Account Debtor is an
employee, Affiliate, or agent of a Borrower;
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the Account Debtor may be
conditional;
(e) Accounts that are not payable in Dollars or with respect
to which the Account Debtor: (i) does not maintain its chief executive office in
the United States or Canada, or (ii) is not organized under the laws of the
United States or any State thereof or Canada or any province thereof, or (iii)
is the government of any foreign country or sovereign state, or of any state,
province, municipality, or other political subdivision thereof, or of any
department, agency, public corporation, or other instrumentality thereof, unless
(y) the Account is supported by an irrevocable letter of credit satisfactory to
Foothill (as to form, substance, and issuer or domestic confirming bank) that
has been delivered to Foothill and is directly drawable
4
<PAGE>
by Foothill, or (z) the Account is covered by credit insurance in form and
amount, and by an insurer, satisfactory to Foothill;
(f) Accounts with respect to which the Account Debtor is either
(i) the United States or any department, agency, or instrumentality of the
United States (exclusive, however, of Accounts with respect to which the
relevant Borrower has complied, to the satisfaction of Foothill, with the
Assignment of Claims Act, 31 U.S.C. (S) 3727), or (ii) any State of the United
States (exclusive, however, of Accounts owed by any State that does not have a
statutory counterpart to the Assignment of Claims Act);
(g) Accounts with respect to which the Account Debtor is a
creditor of any Borrower, has or has asserted a right of setoff, has disputed
its liability, or has made any claim with respect to the Account;
(h) Accounts with respect to an Account Debtor whose total
obligations owing to Borrowers, in the aggregate, exceed 10% of all Eligible
Accounts of Borrowers, to the extent of the obligations owing by such Account
Debtor in excess of such percentage;
(i) Accounts with respect to which the Account Debtor is subject
to any Insolvency Proceeding, or becomes insolvent, or goes out of business;
(j) Accounts the collection of which Foothill, in its reasonable
credit judgment consistently applied, believes to be doubtful by reason of the
Account Debtor's financial condition;
(k) Accounts with respect to which the goods giving rise to such
Account have not been shipped and billed to the Account Debtor, the services
giving rise to such Account have not been performed and accepted by the Account
Debtor, or the Account otherwise does not represent a final sale;
(l) Accounts with respect to which the Account Debtor is located
in the states of Minnesota, New Jersey, or West Virginia (or any other state
that requires a creditor to file a Business Activity Report or similar document
in order to bring suit or otherwise enforce its remedies against such Account
Debtor in the courts or through any judicial process of such state), unless the
relevant Borrower has qualified to do business in Minnesota, New Jersey, West
Virginia, or such other states, or has filed a Notice of Business Activities
Report with the applicable division of taxation, the department of revenue, or
with such other state offices, as appropriate, for the then-current year, or is
exempt from such filing requirement; and
(m) Accounts that represent progress payments or other advance
billings that are due prior to the completion of performance by a Borrower of
the subject contract for goods or services.
"Equipment" means all of a Person's present and hereafter
---------
acquired machinery, machine tools, motors, equipment, furniture, furnishings,
fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods
(other than consumer goods, farm products, or Inventory), wherever located,
including, (a) any interest of such Person in any of the foregoing,
5
<PAGE>
and (b) all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of
-----
1974, 29 U.S.C. (S)(S) 1000 et seq., amendments thereto, successor statutes, and
-- ---
regulations or guidance promulgated thereunder.
"ERISA Affiliate" means (a) any corporation subject to ERISA
---------------
whose employees are treated as employed by the same employer as the employees of
a Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA
whose employees are treated as employed by the same employer as the employees of
a Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of
ERISA and Section 412 of the IRC, any organization subject to ERISA that is a
member of an affiliated service group of which a Borrower is a member under IRC
Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section
412 of the IRC, any party subject to ERISA that is a party to an arrangement
with a Borrower and whose employees are aggregated with the employees of such
Borrower under IRC Section 414(o).
"ERISA Event" means (a) a Reportable Event with respect to any
-----------
Benefit Plan or Multiemployer Plan, (b) the withdrawal of a Borrower, any of its
Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which
it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c)
the providing of notice of intent to terminate a Benefit Plan in a distress
termination (as described in Section 4041(c) of ERISA), (d) the institution by
the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e)
any event or condition (i) that provides a basis under Section 4042(a)(1), (2),
or (3) of ERISA for the termination of, or the appointment of a trustee to
administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in
termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the
partial or complete withdrawal within the meaning of Sections 4203 and 4205 of
ERISA, of a Borrower, any of its Subsidiaries or ERISA Affiliates from a
Multiemployer Plan, or (g) providing any security to any Plan under Section
401(a)(29) of the IRC by a Borrower or its Subsidiaries or any of their ERISA
Affiliates.
"Event of Default" has the meaning set forth in Section 8.
---------------- ---------
"Excess Availability" means Borrowers' unrestricted cash and cash
-------------------
equivalents plus Borrowers' unused Availability minus the amount of Borrowers'
---- -----
accounts payable that are more than 60 days past due date and are not disputed
by Borrowers in good faith.
"Existing Lender" means Venture Lending and Leasing, Inc.
---------------
"FEIN" means Federal Employer Identification Number.
----
"Foothill" has the meaning set forth in the preamble to this
--------
Agreement.
"Foothill Account" has the meaning set forth in Section 2.7.
---------------- -----------
6
<PAGE>
"Foothill Expenses" means all: costs or expenses (including
-----------------
taxes, and insurance premiums) required to be paid by a Borrower under any of
the Loan Documents that are paid by Foothill; fees or charges paid by Foothill
in connection with Foothill's transactions with Borrowers, including, fees or
charges for couriers and messengers, public record searches (including tax lien,
litigation, and UCC searches and including searches with the patent and
trademark office or the copyright office), filing, recording, publication,
appraisal; costs and expenses paid by Foothill in the disbursement of funds to
Borrowers (by wire transfer or otherwise); charges paid by Foothill resulting
from the dishonor of checks; costs and expenses paid by Foothill to correct any
default or enforce any provision of the Loan Documents, or in gaining possession
of, maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral, or any portion thereof,
irrespective of whether a sale is consummated; costs and expenses paid by
Foothill in examining Borrowers' Books; costs and expenses of third party claims
or any other suit paid by Foothill in enforcing or defending the Loan Documents
or in connection with the transactions contemplated by the Loan Documents or
Foothill's relationship with Borrowers or any guarantor; and Foothill's
reasonable attorneys fees and expenses incurred in advising, structuring,
drafting, reviewing, administering, amending, terminating, enforcing, defending,
or concerning the Loan Documents (including attorneys fees and expenses incurred
in connection with a "workout," a "restructuring," or an Insolvency Proceeding
concerning Borrowers or any guarantor of the Obligations), irrespective of
whether suit is brought.
"GAAP" means generally accepted accounting principles as in
----
effect from time to time in the United States, consistently applied.
"General Intangibles" means all of any Person's present and
-------------------
future general intangibles and other personal property (including contract
rights, rights arising under common law, statutes, or regulations, choses or
things in action, goodwill, patents, trade names, trademarks, servicemarks,
copyrights, blueprints, drawings, purchase orders, customer lists, monies due or
recoverable from pension funds, route lists, rights to payment and other rights
under any royalty or licensing agreements, infringement claims, computer
programs, information contained on computer disks or tapes, literature, reports,
catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax
refund claims), other than goods, Accounts, and Negotiable Collateral.
"Governing Documents" means the certificate or articles of
-------------------
incorporation, by-laws, or other organizational or governing documents of any
Person.
"Governmental Authority" means any nation or government, any
----------------------
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Hazardous Materials" means (a) substances that are defined or
-------------------
listed in, or otherwise classified pursuant to, any applicable laws or
regulations as "hazardous substances," "hazardous materials," "hazardous
wastes," "toxic substances," or any other formulation intended to define, list,
or classify substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP
toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas,
natural gas liquids, synthetic
7
<PAGE>
gas, drilling fluids, produced waters, and other wastes associated with the
exploration, development, or production of crude oil, natural gas, or geothermal
resources, (c) any flammable substances or explosives or any radioactive
materials, and (d) asbestos in any form or electrical equipment that contains
any oil or dielectric fluid containing levels of polychlorinated biphenyls in
excess of 50 parts per million.
"Indebtedness" means: (a) all obligations of a Person for
------------
borrowed money, (b) all obligations of a Person evidenced by bonds, debentures,
notes, or other similar instruments and all reimbursement or other obligations
of a Person in respect of letters of credit, bankers acceptances, interest rate
swaps, or other financial products, (c) all obligations of a Person under
capital leases, (d) all obligations or liabilities of others secured by a Lien
on any property or asset of a Person, irrespective of whether such obligation or
liability is assumed, and (e) any obligation of a Person guaranteeing or
intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or
sold with recourse to such Person) any indebtedness, lease, dividend, letter of
credit, or other obligation of any other Person.
"Insolvency Proceeding" means any proceeding commenced by or
---------------------
against any Person under any provision of the Bankruptcy Code or under any other
bankruptcy or insolvency law, assignments for the benefit of creditors, formal
or informal moratoria, compositions, extensions generally with creditors, or
proceedings seeking reorganization, arrangement, or other similar relief.
"Intangible Assets" means, with respect to any Person, that
-----------------
portion of the book value of all of such Person's assets that would be treated
as intangibles under GAAP.
"Intellectual Property Security Agreement" means any one of those
----------------------------------------
certain Intellectual Property Security Agreements, of even date therewith,
between a Borrower and Foothill.
"Inventory" means all present and future inventory in which a
---------
Person has any interest, including goods held for sale or lease or to be
furnished under a contract of service and all of such Person's present and
future raw materials, work in process, finished goods, and packing and shipping
materials, wherever located.
"Investment Property" means all of a Person's presently existing
-------------------
and hereafter acquired or arising investment property (as that term is defined
in Section 9115 of the Code).
"IRC" means the Internal Revenue Code of 1986, as amended, and
---
the regulations thereunder.
"L/C" has the meaning set forth in Section 2.2(a).
--- --------------
"L/C Guaranty" has the meaning set forth in Section 2.2(a).
------------ --------------
"Letter of Credit" means an L/C or an L/C Guaranty, as the
----------------
context requires.
8
<PAGE>
"Lien" means any interest in property securing an obligation
----
owed to or a claim by, any Person other than the owner of the property, whether
such interest shall be based on the common law, statute, or contract, whether
such interest shall be recorded or perfected, and whether such interest shall be
contingent upon the occurrence of some future event or events or the existence
of some future circumstance or circumstances, including the lien or security
interest arising from a mortgage, deed of trust, encumbrance, pledge,
hypothecation, assignment, deposit arrangement, security agreement, adverse
claim or charge, conditional sale or trust receipt, or from a lease,
consignment, or bailment for security purposes and also including reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting Real
Property.
"Loan Account" has the meaning set forth in Section 2.10.
------------ ------------
"Loan Documents" means this Agreement, the Disbursement Letter,
--------------
the Intellectual Property Security Agreements, the Letters of Credit, the
Lockbox Agreements, the Subordination Agreement, any note or notes executed by
any Borrower and payable to Foothill, and any other agreement entered into, now
or in the future, in connection with this Agreement.
"Lockbox Account" shall mean a depositary account established
---------------
pursuant to one of the Lockbox Agreements.
"Lockbox Agreements" means those certain Lockbox Operating
------------------
Procedural Agreements and those certain Depository Account Agreements, in form
and substance satisfactory to Foothill, each of which is among a Borrower or
Borrowers, Foothill, and one of the Lockbox Banks.
"Lockbox Banks" means Wells Fargo or such other banks as may be
-------------
agreed to by Foothill and Borrowers from time to time.
"Lockboxes" has the meaning set forth in Section 2.7.
--------- -----------
"Material Adverse Change" means (a) a material adverse change
-----------------------
in the business, prospects, operations, results of operations, assets,
liabilities or condition (financial or otherwise) of a Borrower, (b) the
material impairment of a Borrower's ability to perform its obligations under the
Loan Documents to which it is a party or of Foothill to enforce the Obligations
or realize upon the Collateral, (c) a material adverse effect on the value of
the Collateral or the amount that Foothill would be likely to receive (after
giving consideration to delays in payment and costs of enforcement) in the
liquidation of such Collateral, or (d) a impairment of the priority of
Foothill's Liens with respect to a material portion of the Collateral.
"Maturity Date" has the meaning set forth in Section 3.4.
------------- -----------
"Maximum Amount" means $11,000,000.
--------------
"Multiemployer Plan" means a "multiemployer plan" (as defined in
------------------
Section 4001(a)(3) of ERISA) to which a Borrower, any of its Subsidiaries, or
any ERISA Affiliate has contributed, or was obligated to contribute, within the
past six years.
9
<PAGE>
"Negotiable Collateral" means all of a Person's present and
---------------------
future letters of credit, notes, drafts, instruments, investment property,
security entitlements, Investment Property, securities (including the shares of
stock of Subsidiaries of such Person), documents, personal property leases
(wherein such Person is the lessor), and chattel paper.
"Obligations" means all loans, Advances, debts, principal,
-----------
interest (including any interest that, but for the provisions of the Bankruptcy
Code, would have accrued), contingent reimbursement obligations under any
outstanding Letters of Credit, premiums (including Early Termination Premiums),
liabilities (including all amounts charged to Borrowers' Loan Account pursuant
hereto), obligations, fees, charges, costs, or Foothill Expenses (including any
fees or expenses that, but for the provisions of the Bankruptcy Code, would have
accrued), lease payments, guaranties, covenants, and duties owing by a Borrower
to Foothill of any kind and description (whether pursuant to or evidenced by the
Loan Documents or pursuant to any other agreement between Foothill and any
Borrower, and irrespective of whether for the payment of money), whether direct
or indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and including any debt, liability, or obligation owing from a
Borrower to others that Foothill may have obtained by assignment or otherwise,
and further including all interest not paid when due and all Foothill Expenses
that a Borrower is required to pay or reimburse by the Loan Documents, by law,
or otherwise.
"Overadvance" has the meaning set forth in Section 2.5.
----------- -----------
"Pay-Off Letter" means a letter, in form and substance
--------------
reasonably satisfactory to Foothill, from Existing Lender respecting the amount
necessary to repay in full all of the obligations of Borrowers owing to Existing
Lender and obtain a termination or release of all of the Liens existing in favor
of Existing Lender in and to the properties or assets of Borrowers.
"PBGC" means the Pension Benefit Guaranty Corporation as defined
----
in Title IV of ERISA, or any successor thereto.
"Permitted Investments" means (a) direct obligations of the
---------------------
United States or any of its agencies or obligations fully guaranteed by the
United States, provided that such obligations mature within two years from the
date acquired; (b) deposit accounts and certificates of deposit which mature
within one year from the date of purchase and are issued by any commercial bank
or trust company (i) organized under the laws of the United States or any of its
states, (ii) having consolidated capital, surplus and undivided profits
aggregating at least $500,000,000 and (iii) whose senior debt securities are
rated "A" or better by Standard & Poor's Ratings Group or an equivalent rating
from another nationally recognized credit rating agency and (c) commercial paper
given an "A-1" rating or better by Standard & Poor's Ratings Group or an
equivalent rating by another nationally recognized credit rating agency and
maturing not more than 270 days from the date acquired.
"Permitted Liens" means (a) Liens held by Foothill, (b) Liens for
---------------
unpaid taxes that either (i) are not yet due and payable or (ii) are the subject
of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) Liens on
------------
Equipment, (e) the interests of lessors under operating leases and purchase
money security interests and Liens of lessors under capital leases
10
<PAGE>
to the extent that the acquisition or lease of the underlying asset is not
prohibited by Section 7.21 and so long as the Lien only attaches to the asset
------------
purchased or acquired and only secures the purchase price of the asset, (f)
Liens arising by operation of law in favor of warehousemen, landlords, carriers,
mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course
of business of a Borrower and not in connection with the borrowing of money, and
which Liens either (i) are for sums not yet due and payable, or (ii) are the
subject of Permitted Protests, (g) Liens arising from deposits made in
connection with obtaining worker's compensation or other unemployment insurance,
(h) Liens or deposits to secure performance of bids, tenders, or leases (to the
extent permitted under this Agreement), incurred in the ordinary course of
business of a Borrower and not in connection with the borrowing of money, (i)
Liens arising by reason of security for surety or appeal bonds in the ordinary
course of business of a Borrower, (j) Liens of or resulting from any judgment or
award that would not have a Material Adverse Change and as to which the time for
the appeal or petition for rehearing of which has not yet expired, or in respect
of which a Borrower is in good faith prosecuting an appeal or proceeding for a
review, and in respect of which a stay of execution pending such appeal or
proceeding for review has been secured, and (k) with respect to any Real
Property, easements, rights of way, zoning and similar covenants and
restrictions, and similar encumbrances that customarily exist on properties of
Persons engaged in similar activities and similarly situated and that in any
event do not materially interfere with or impair the use or operation of the
Collateral by any Borrower or the value of Foothill's Lien thereon or therein,
or materially interfere with the ordinary conduct of the business of a Borrower.
"Permitted Protest" means the right of a Borrower to protest any
-----------------
Lien (other than any such Lien that secures the Obligations), tax (other than
payroll taxes or taxes that are the subject of a United States federal tax
lien), or rental payment, provided that (a) a reserve with respect to such
obligation is established on the books of such Borrower in an amount that is
reasonably satisfactory to Foothill, (b) any such protest is instituted and
diligently prosecuted by such Borrower in good faith, and (c) Foothill is
satisfied that, while any such protest is pending, there will be no impairment
of the enforceability, validity, or priority of any of the Liens of Foothill in
and to the Collateral.
"Person" means and includes natural persons, corporations,
------
limited liability companies, limited partnerships, general partnerships, limited
liability partnerships, joint ventures, trusts, land trusts, business trusts, or
other organizations, irrespective of whether they are legal entities, and
governments and agencies and political subdivisions thereof.
"Plan" means any employee benefit plan, program, or arrangement
----
maintained or contributed to by a Borrower or with respect to which it may incur
liability.
"Real Property" means any estates or interests in real property
-------------
now owned or hereafter acquired by a Borrower.
"Reference Rate" the rate of interest announced within Wells
--------------
Fargo as its principal office in San Francisco as its "prime rate", with the
understanding that the "prime rate" is one of Wells Fargo's base rates (not
necessarily the lowest of such rates) and serves as the basis upon which
effective rates of interest are calculated for those loans making reference
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thereto and is evidenced by the recording thereof after its announcement in such
internal publication or publications as Wells Fargo may designate.
"Reportable Event" means any of the events described in Section
----------------
4043(c) of ERISA or the regulations thereunder other than a Reportable Event as
to which the provision of 30 days notice to the PBGC is waived under applicable
regulations.
"Retiree Health Plan" means an "employee welfare benefit plan" within
-------------------
the meaning of Section 3(1) of ERISA that provides benefits to individuals after
termination of their employment, other than as required by Section 601 of ERISA.
"Solvent" means, with respect to any Person on a particular date, that
-------
on such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature, and (e) such Person is not engaged
in business or a transaction, and is not about to engage in business or a
transaction, for which such Person's properties and assets would constitute
unreasonably small capital after giving due consideration to the prevailing
practices in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that reasonably can
be expected to become an actual or matured liability.
"Subsidiary" of a Person means a corporation, partnership, limited
----------
liability company, or other entity in which that Person directly or indirectly
owns or controls the shares of stock or other ownership interests having
ordinary voting power to elect a majority of the board of directors (or appoint
other comparable managers) of such corporation, partnership, limited liability
company, or other entity.
"Systems Reserve" means a reserve in the amount of $500,000 which
---------------
shall remain in effect until Borrowers' internal systems are fully integrated to
the reasonable satisfaction of Foothill.
"Tangible Net Worth" means, as of any date of determination, the
------------------
difference of (a) a Person's total stockholder's equity, minus (b) the sum of:
-----
(i) all Intangible Assets of such Person, (ii) all of such Person's prepaid
expenses, and (iii) all amounts due to such Person from Affiliates.
"Voidable Transfer" has the meaning set forth in Section 15.8.
----------------- ------------
"Wells Fargo" means Wells Fargo Bank, National Association.
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1.2 Accounting Terms.
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All accounting terms not specifically defined herein shall be construed in
accordance with GAAP. When used herein, the term "financial statements" shall
include the notes and schedules thereto. Whenever the term "Borrower" is used
in respect of a financial covenant or a related definition, it shall be
understood to mean Borrowers on a consolidated basis unless the context clearly
requires otherwise.
1.3 Code.
Any terms used in this Agreement that are defined in the Code shall be construed
and defined as set forth in the Code unless otherwise defined herein.
1.4 Construction.
Unless the context of this Agreement clearly requires otherwise, references to
the plural include the singular, references to the singular include the plural,
the term "including" is not limiting, and the term "or" has, except where
otherwise indicated, the inclusive meaning represented by the phrase "and/or."
The words "hereof," "herein," "hereby," "hereunder," and similar terms in this
Agreement refer to this Agreement as a whole and not to any particular provision
of this Agreement. An Event of Default shall "continue" or be "continuing"
until such Event of Default has been waived in writing by Foothill. Section,
subsection, clause, schedule, and exhibit references are to this Agreement
unless otherwise specified. Any reference in this Agreement or in the Loan
Documents to this Agreement or any of the Loan Documents shall include all
alterations, amendments, changes, extensions, modifications, renewals,
replacements, substitutions, and supplements, thereto and thereof, as
applicable.
1.5 Schedules and Exhibits.
All of the schedules and exhibits attached to this Agreement shall be deemed
incorporated herein by reference.
2. LOAN AND TERMS OF PAYMENT.
2.1 Revolving Advances.
(a) Subject to the terms and conditions of this Agreement,
Foothill agrees to make advances ("Advances") to Borrowers in an amount
outstanding not to exceed at any one time the lesser of (i) the Maximum Amount
less the outstanding balance of all undrawn or unreimbursed Letters of Credit or
- ----
(ii) the Borrowing Base less the outstanding balance of all undrawn or
----
unreimbursed Letters of Credit. For purposes of this Agreement, "Borrowing
Base", as of any date of determination, shall mean the result of:
(x) the lesser of (i) 80% of the value of Eligible Accounts
of all Borrowers less the amount, if any, of the Dilution Reserve and
----
the Systems Reserve, and (ii) an amount equal to all Borrowers'
Collections with respect to Accounts for the immediately preceding 90
day period, minus
(y) the aggregate amount of reserves, if any, established by
Foothill under Sections 2.1(b), 6.15 and 10.
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(b) Anything to the contrary in this Section 2.1
-----------
notwithstanding, Foothill may (i) reduce the advance rates based upon Eligible
Accounts without declaring an Event of Default if it determines that there has
occurred a Material Adverse Change; and (ii) establish reserves against the
Borrowing Base in such amounts as Foothill in its reasonable judgment (from the
perspective of an asset-based lender) shall deem necessary or appropriate,
including reserves on account of (y) sums that Borrower is required to pay (such
as taxes, assessments, insurance premiums, or, in the case of leased assets,
rents or other amounts payable under such leases) and has failed to pay under
any section of this Agreement or any other Loan Document and (z) without
duplication of the foregoing, amounts owing by Borrower to any Person to the
extent secured by a Lien on, or trust over, any of the Collateral, which Lien or
trust, in the reasonable determination of Foothill (from the perspective of an
asset-based lender), would be likely to have a priority superior to the Liens of
Foothill (such as landlord liens, ad valorem taxes, or sales taxes where given
priority under applicable law) in and to such item of the Collateral.
(c) Amounts borrowed pursuant to this Section 2.1 may be repaid
-----------
and, subject to the terms and conditions of this Agreement, reborrowed at any
time during the term of this Agreement.
2.2 Letters of Credit.
(a) Subject to the terms and conditions of this Agreement,
Foothill agrees to issue letters of credit for the account of a Borrower (each,
an "L/C") or to issue guarantees of payment (each such guaranty, an "L/C
Guaranty") with respect to letters of credit issued by an issuing bank for the
account of a Borrower. Foothill shall have no obligation to issue a Letter of
Credit if either of the following would result:
(i) the sum of 100% of the aggregate amount of all undrawn
and unreimbursed Letters of Credit would exceed the Borrowing Base
less the amount of outstanding Advances; or
(ii) the aggregate amount of all undrawn or unreimbursed
Letters of Credit would exceed the lower of: (x) the Maximum Amount
less the amount of outstanding Advances; or (y) $3,000,000.
----
Each Borrower expressly understands and agrees that Foothill shall have no
obligation to arrange for the issuance by issuing banks of the letters of credit
that are to be the subject of L/C Guarantees. Each Borrower and Foothill
acknowledge and agree that certain of the letters of credit that are to be the
subject of L/C Guarantees may be outstanding on the Closing Date. Each Letter
of Credit shall have an expiry date no later than 60 days prior to the date on
which this Agreement is scheduled to terminate under Section 3.4 (without regard
-----------
to any potential renewal term) and all such Letters of Credit shall be in form
and substance acceptable to Foothill in its sole discretion. If Foothill is
obligated to advance funds under a Letter of Credit, Borrowers immediately shall
reimburse such amount to Foothill and, in the absence of such reimbursement, the
amount so advanced immediately and automatically shall be deemed to be an
Advance hereunder and, thereafter, shall bear interest at the rate then
applicable to Advances under Section 2.6.
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14
<PAGE>
(b) Each Borrower hereby agrees to indemnify, save, defend, and
hold Foothill harmless from any loss, cost, expense, or liability, including
payments made by Foothill, expenses, and reasonable attorneys fees incurred by
Foothill arising out of or in connection with any Letter of Credit. Each
Borrower agrees to be bound by the issuing bank's regulations and
interpretations of any letters of credit guarantied by Foothill and opened to or
for such Borrower's account or by Foothill's interpretations of any L/C issued
by Foothill to or for such Borrower's account, even though this interpretation
may be different from such Borrower's own, and Borrowers understand and agree
that Foothill shall not be liable for any error, negligence, or mistake, whether
of omission or commission (except for Foothill's gross negligence or willful
misconduct) in following any Borrower's instructions or those contained in the
Letter of Credit or any modifications, amendments, or supplements thereto. Each
Borrower understands that the L/C Guarantees may require Foothill to indemnify
the issuing bank for certain costs or liabilities arising out of claims by a
Borrower against such issuing bank. Each Borrower hereby agrees to indemnify,
save, defend, and hold Foothill harmless with respect to any loss, cost, expense
(including reasonable attorneys fees), or liability incurred by Foothill under
any L/C Guaranty as a result of Foothill's indemnification of any such issuing
bank.
(c) Each Borrower hereby authorizes and directs any bank that
issues a letter of credit guaranteed by Foothill to deliver to Foothill all
instruments, documents, and other writings and property received by the issuing
bank pursuant to such letter of credit, and to accept and rely upon Foothill's
instructions and agreements with respect to all matters arising in connection
with such letter of credit and the related application. A Borrower may or may
not be the "applicant" or "account party" with respect to such letter of credit.
(d) Any and all charges, commissions, fees, and costs incurred
by Foothill relating to the letters of credit guaranteed by Foothill shall be
considered Foothill Expenses for purposes of this Agreement and immediately
shall be reimbursable by Borrowers to Foothill.
(e) Immediately upon the termination of this Agreement,
Borrowers agree to either (i) provide cash collateral to be held by Foothill in
an amount equal to 105% of the maximum amount of Foothill's obligations under
outstanding Letters of Credit, or (ii) cause to be delivered to Foothill
releases of all of Foothill's obligations under outstanding Letters of Credit.
At Foothill's discretion, any proceeds of Collateral received by Foothill after
the occurrence and during the continuation of an Event of Default may be held as
the cash collateral required by this Section 2.2(e) after applying such cash to
--------------
repay the Obligations other than outstanding Letters of Credit.
(f) If by reason of (i) any change in any applicable law,
treaty, rule, or regulation or any change in the interpretation or application
by any governmental authority of any such applicable law, treaty, rule, or
regulation, or (ii) compliance by the issuing bank or Foothill with any
direction, request, or requirement (irrespective of whether having the force of
law) of any governmental authority or monetary authority including, without
limitation, Regulation D of the Board of Governors of the Federal Reserve System
as from time to time in effect (and any successor thereto):
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<PAGE>
(A) any reserve, deposit, or similar requirement is or shall be
imposed or modified in respect of any Letters of Credit issued hereunder, or
(B) there shall be imposed on the issuing bank or Foothill any
other condition regarding any letter of credit, or Letter of Credit, as
applicable, issued pursuant hereto;
and the result of the foregoing is to increase, directly or indirectly, the cost
to the issuing bank or Foothill of issuing, making, guaranteeing, or maintaining
any letter of credit, or Letter of Credit, as applicable, or to reduce the
amount receivable in respect thereof by such issuing bank or Foothill, then, and
in any such case, Foothill may, at any time within a reasonable period after the
additional cost is incurred or the amount received is reduced, notify Borrowers,
and Borrowers shall pay on demand such amounts as the issuing bank or Foothill
may specify to be necessary to compensate the issuing bank or Foothill for such
additional cost or reduced receipt, together with interest on such amount from
the date of such demand until payment in full thereof at the rate set forth in
Section 2.6(a)(i) or (c)(i), as applicable. The determination by the issuing
- ---------------------------
bank or Foothill, as the case may be, of any amount due pursuant to this Section
-------
2.2(f), as set forth in a certificate setting forth the calculation thereof in
- ------
reasonable detail, shall, in the absence of manifest or demonstrable error, be
final and conclusive and binding on all of the parties hereto.
2.3 Intentionally Omitted.
2.4 Intentionally Omitted.
2.5 Overadvances.
If, at any time or for any reason, the amount of Obligations owed by Borrowers
to Foothill pursuant to Sections 2.1 or 2.2 is greater than either the Dollar or
------------ ---
percentage limitations set forth in Sections 2.1 and 2.2 (an "Overadvance"),
------------ ---
Borrowers immediately shall pay to Foothill, in cash, the amount of such excess
to be used by Foothill first, to repay Advances outstanding under Section 2.1
-----------
and, thereafter, to be held by Foothill as cash collateral to secure Borrower's
obligation to repay Foothill for all amounts paid pursuant to Letters of Credit.
2.6 Interest and Letter of Credit Fees: Rates, Payments, and
Calculations. (a) Interest Rate. Except as provided in clause (b) below, all
Obligations (except for undrawn Letters of Credit) shall bear interest on the
Daily Balance at a per annum rate of 1.50 percentage points above the Reference
Rate.
(b) Letter of Credit Fee. Borrowers shall pay Foothill a fee (in
addition to the charges, commissions, fees, and costs set forth in Section
-------
2.2(d)) equal to 1.50% per annum times the aggregate undrawn amount of all
- -------
Letters of Credit outstanding as of the end of each day.
(c) Default Rate. Upon the occurrence and during the
continuation of an Event of Default, (i) all Obligations (except for undrawn
Letters of Credit) shall bear interest
16
<PAGE>
on the Daily Balance at a per annum rate equal to 5.50 percentage points above
the Reference Rate, and (ii) the Letter of Credit fee provided in Section 2.6(b)
--------------
shall be increased to 5.50% per annum times the aggregate undrawn amount of all
Letters of Credit outstanding as of the end of each day.
(d) Minimum Interest. In no event shall the rate of interest
chargeable hereunder for any day be less than 8.00% per annum. To the extent
that interest accrued hereunder at the rate set forth herein would be less than
the foregoing minimum daily rate, the interest rate chargeable hereunder for
such day automatically shall be deemed increased to the minimum rate.
(e) Payments. Interest and Letter of Credit fees payable
hereunder shall be due and payable, in arrears, on the first day of each month
during the term hereof. Each Borrower hereby authorizes Foothill, at its option,
without prior notice to such Borrower, to charge such interest and Letter of
Credit fees, all Foothill Expenses (as and when incurred), the charges,
commissions, fees, and costs provided for in Section 2.2(d) (as and when accrued
--------------
or incurred), the fees and charges provided for in Section 2.11 (as and when
------------
accrued or incurred), and all other payments due under any Loan Document to
Borrowers' Loan Account, which amounts thereafter shall accrue interest at the
rate then applicable to Advances hereunder. Any interest not paid when due shall
be compounded and shall thereafter accrue interest at the rate then applicable
to Advances hereunder.
(f) Computation. The Reference Rate as of the date of this
Agreement is 9.00% per annum. In the event the Reference Rate is changed from
time to time hereafter, the applicable rate of interest hereunder automatically
and immediately shall be increased or decreased by an amount equal to such
change in the Reference Rate. All interest and fees chargeable under the Loan
Documents shall be computed on the basis of a 360 day year for the actual number
of days elapsed.
(g) Intent to Limit Charges to Maximum Lawful Rate. In no event
shall the interest rate or rates payable under this Agreement, plus any other
amounts paid in connection herewith, exceed the highest rate permissible under
any law that a court of competent jurisdiction shall, in a final determination,
deem applicable. Borrowers and Foothill, in executing and delivering this
Agreement, intend legally to agree upon the rate or rates of interest and manner
of payment stated within it; provided, however, that, anything contained herein
-------- -------
to the contrary notwithstanding, if said rate or rates of interest or manner of
payment exceeds the maximum allowable under applicable law, then, ipso facto as
---- -----
of the date of this Agreement, Borrowers are and shall be liable only for the
payment of such maximum as allowed by law, and payment received from Borrowers
in excess of such legal maximum, whenever received, shall be applied to reduce
the principal balance of the Obligations to the extent of such excess.
2.7 Collection of Accounts.
Borrowers shall at all times maintain lockboxes (the "Lockboxes") and,
immediately after the Closing Date, shall instruct all Account Debtors with
respect to the Accounts, General Intangibles, and Negotiable Collateral of
Borrowers to remit all Collections in respect thereof to such Lockboxes.
---
Borrowers, Foothill, and the Lockbox Banks shall enter into the Lockbox
17
<PAGE>
Agreements, which among other things shall provide for the opening of a Lockbox
Account for the deposit of Collections at a Lockbox Bank. Each Borrower agrees
that all Collections and other amounts received by such Borrower from any
Account Debtor or any other source immediately upon receipt shall be deposited
into a Lockbox Account. No Lockbox Agreement or arrangement contemplated
thereby shall be modified by a Borrower without the prior written consent of
Foothill. Upon the terms and subject to the conditions set forth in the Lockbox
Agreements, all amounts received in each Lockbox Account shall be wired each
Business Day into an account (the "Foothill Account") maintained by Foothill at
a depositary selected by Foothill. Notwithstanding anything to the contrary
contained in this Section 2.7, until the sooner to occur of May 6, 2000 or the
-----------
establishment of a satisfactory Lockbox Agreement with respect to the
Collections in Canada (the "Canadian Collections"), such Canadian Collections
need not be deposited into a Lockbox by the Account Debtor or by any Borrower,
but may be handled consistently with the Borrowers' current business practices.
2.8 Crediting Payments; Application of Collections.
The receipt of any Collections by Foothill (whether from transfers to Foothill
by the Lockbox Banks pursuant to the Lockbox Agreements or otherwise)
immediately shall be applied provisionally to reduce the Obligations outstanding
under Section 2.1, but shall not be considered a payment on account unless such
-----------
Collection item is a wire transfer of immediately available federal funds and is
made to the Foothill Account or unless and until such Collection item is honored
when presented for payment. From and after the Closing Date, Foothill shall be
entitled to charge Borrowers for two Business Days of `clearance' or `float' at
the rate set forth in Section 2.6(a)(i) or Section 2.6(c)(i), as applicable, on
----------------- -----------------
all Collections that are received by Foothill (regardless of whether forwarded
by the Lockbox Banks to Foothill, whether provisionally applied to reduce the
Obligations under Section 2.1, or otherwise). This across-the-board two
-----------
Business Day clearance or float charge on all Collections is acknowledged by the
parties to constitute an integral aspect of the pricing of Foothill's financing
of Borrowers, and shall apply irrespective of the characterization of whether
receipts are owned by a Borrower or Foothill, and whether or not there are any
outstanding Advances, the effect of such clearance or float charge being the
equivalent of charging two Business Days of interest on such Collections.
Should any Collection item not be honored when presented for payment, then
Borrowers shall be deemed not to have made such payment, and interest shall be
recalculated accordingly. Anything to the contrary contained herein
notwithstanding, any Collection item shall be deemed received by Foothill only
if it is received into the Foothill Account on a Business Day on or before 11:00
a.m. California time. If any Collection item is received into the Foothill
Account on a non-Business Day or after 11:00 a.m. California time on a Business
Day, it shall be deemed to have been received by Foothill as of the opening of
business on the immediately following Business Day.
2.9 Designated Account.
Foothill is authorized to make the Advances and the Letters of Credit under this
Agreement based upon telephonic or other instructions received from anyone
purporting to be an Authorized Person, or without instructions if pursuant to
Section 2.6(e). Borrowers agree to establish and maintain a single Designated
- --------------
Account with the Designated Account Bank for the purpose of receiving the
proceeds of the Advances requested by Borrowers and made by Foothill hereunder.
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Unless otherwise agreed by Foothill and Borrowers, any Advance requested by
Borrowers and made by Foothill hereunder shall be made to the Designated
Account.
2.10 Maintenance of Loan Account; Statements of Obligations.
At the request of Borrowers, to facilitate and expedite the administration and
accounting processes and procedures of their borrowings under this Agreement,
Foothill has agreed, in lieu of maintaining separate loan accounts on Foothill's
books in the name of each of the Borrowers, that Foothill shall maintain a
single account on its books in the names of all of the Borrowers (the "Loan
Account"). All Advances made by Foothill to Borrowers or for Borrower's
account, including accrued interest, Foothill Expenses, and any other payment
Obligations of Borrowers shall be made jointly and severally to the Borrowers
and shall be charged to the Loan Account. In accordance with Section 2.8, the
-----------
Loan Account will be credited with all payments received by Foothill from any
Borrower or for any Borrower's account, including all amounts received in the
Foothill Account from any Lockbox Bank. Foothill shall render one statement
regarding the Loan Account to Parent on behalf of Borrowers, including
principal, interest, fees, and including an itemization of all charges and
expenses constituting Foothill Expenses owing, and such statements shall be
conclusively presumed to be correct and accurate and constitute an account
stated between Borrowers and Foothill unless, within 60 days after receipt
thereof by Borrowers, Borrowers shall deliver to Foothill written objection
thereto describing the error or errors contained in any such statements. Each
Borrower hereby expressly agrees and acknowledges that Foothill shall have no
obligation to account separately to such Borrower.
2.11 Fees.
Borrowers shall pay to Foothill the following fees:
(a) Closing Fee. On the Closing Date, a closing fee of $82,500;
(b) Unused Line Fee. On the first day of each month during the
term of this Agreement, an unused line fee in an amount equal to 0.50% per annum
times the Average Unused Portion of the Maximum Amount;
(c) Intentionally Omitted;
(d) Financial Examination, Reporting, and Appraisal Fees.
Foothill's customary fee of $750 per day per examiner, plus out-of-pocket
expenses, for each financial analysis and examination (i.e., audits) of
Borrowers performed by personnel employed by Foothill; and, the actual charges
paid or incurred by Foothill if it elects to employ the services of one or more
third Persons to perform such financial analyses and examinations (i.e., audits)
of Borrowers; and a one time fee of $3,000 plus out of pocket expenses for
setting up electronic reporting by Borrowers. Borrowers' liability to reimburse
Foothill with respect to any audits conducted by or on behalf of Foothill while
no Event of Default exists shall be limited to a maximum of $35,000 in any 12
month period, plus out of pocket expenses.
(e) Servicing Fee. On the first day of each month during the
term of this Agreement, and thereafter so long as any Obligations are
outstanding, a servicing fee in an amount equal to $3,000 or $1,500 if Borrowers
implement electronic reporting with Foothill.
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3. CONDITIONS; TERM OF AGREEMENT.
3.1 Conditions Precedent to the Initial Advance, the Initial Letter
of Credit and the Term Loan.
The obligation of Foothill to make the initial Advance, to issue the initial
Letter of Credit or to make the Term Loan is subject to the fulfillment, to the
satisfaction of Foothill and its counsel, of each of the following conditions on
or before the Closing Date:
(a) the Closing Date shall occur on or before April 7, 2000;
(b) Foothill shall have received confirmation of the filing of
its financing statements;
(c) Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full force and
effect:
(i) the Lockbox Agreements;
(ii) the Disbursement Letter;
(iii) the Pay-Off Letter; and
(iv) the Intellectual Property Security Agreements;
(d) Foothill shall have received a certificate from the
Secretary of each Borrower attesting to the resolutions of each Borrower's Board
of Directors authorizing its execution, delivery, and performance of this
Agreement and the other Loan Documents to which such Borrower is a party and
authorizing specific officers of such Borrower to execute the same;
(e) Foothill shall have received copies of each Borrower's
Governing Documents, as amended, modified, or supplemented to the Closing Date,
certified by the Secretary of such Borrower;
(f) Foothill shall have received a certificate of status with
respect to each Borrower, dated within 20 days of the Closing Date, such
certificate to be issued by the appropriate officer of the jurisdiction of
organization of such Borrower, which certificate shall indicate that such
Borrower is in good standing in such jurisdiction;
(g) Foothill shall have received certificates of status with
respect to each Borrower, each dated within 15 days of the Closing Date, such
certificates to be issued by the appropriate officer of the jurisdictions in
which its failure to be duly qualified or licensed would constitute a Material
Adverse Change, which certificates shall indicate that such Borrower is in good
standing in such jurisdictions;
(h) Foothill shall have received a certificate of insurance,
together with the endorsements thereto, as are required by Section 6.10, the
------------
form and substance of which shall be satisfactory to Foothill and its counsel;
20
<PAGE>
(i) Foothill shall have received an opinion of Borrowers'
counsel in form and substance satisfactory to Foothill in its sole discretion;
(j) Borrowers shall have not less than $2,000,000 of Excess
Availability after giving effect to: (a) the payoff of Existing Lender and (b)
payment to Foothill of the Closing Fee; and
(k) all other documents and legal matters in connection with the
transactions contemplated by this Agreement shall have been delivered, executed,
or recorded and shall be in form and substance satisfactory to Foothill and its
counsel.
3.2 Conditions Precedent to all Advances and all Letters of Credit.
The following shall be conditions precedent to all Advances and all Letters of
Credit:
(a) the representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct in all respects
on and as of the date of such extension of credit, as though made on and as of
such date (except to the extent that such representations and warranties relate
solely to an earlier date);
(b) no Default or Event of Default shall have occurred and be
continuing on the date of such extension of credit, nor shall either result from
the making thereof; and
(c) no injunction, writ, restraining order, or other order of
any nature prohibiting, directly or indirectly, the extending of such credit
shall have been issued and remain in force by any governmental authority against
any Borrower, Foothill, or any of their Affiliates.
3.3 Conditions Subsequent.
As conditions subsequent to initial closing hereunder, Borrowers shall perform
or cause to be performed the following (the failure by Borrowers to so perform
or cause to be performed constituting an Event of Default):
(a) within 30 days of the Closing Date, deliver to Foothill the
certified copies of the policies of insurance, together with the endorsements
thereto, as are required by Section 6.10, the form and substance of which shall
------------
be satisfactory to Foothill and its counsel,
(b) within 30 days of the Closing Date, provide Foothill with
Collateral Access Agreements from the landlords of Borrowers' offices in San
Francisco, California and Irving, Texas, and
(c) within 30 days of the Closing Date, provide Foothill with a
Lockbox Agreement, satisfactory to Foothill, with respect to the Canadian
Collections.
3.4 Term.
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This Agreement shall become effective upon the execution and delivery hereof by
Borrowers and Foothill and shall continue in full force and effect for a term
ending on the date (the "Maturity Date") that is three years from the Closing
Date, unless sooner terminated pursuant to the terms hereof. The foregoing
notwithstanding, Foothill shall have the right to terminate its obligations
under this Agreement immediately and without notice upon the occurrence and
during the continuation of an Event of Default.
3.5 Effect of Termination.
On the date of termination of this Agreement, all Obligations (including
contingent reimbursement obligations of Borrowers with respect to any
outstanding Letters of Credit) immediately shall become due and payable without
notice or demand. No termination of this Agreement, however, shall relieve or
discharge Borrowers of Borrowers' duties, Obligations, or covenants hereunder,
and Foothill's continuing security interests in the Collateral shall remain in
effect until all Obligations have been fully and finally discharged and
Foothill's obligation to provide additional credit hereunder is terminated. If
Borrowers have sent a notice of termination pursuant to the provisions of
Section 3.4, but fail to pay the Obligations in full in accordance with such
- -----------
section, then Foothill may, but shall not be required to, renew this Agreement
for an additional term of one year.
3.6 Early Termination by Borrowers.
The provisions of Section 3.4 that allow termination of this Agreement by
-----------
Borrowers only on the Maturity Date notwithstanding, Borrowers have the option,
at any time upon 90 days prior written notice to Foothill, to terminate this
Agreement by paying to Foothill, in cash, the Obligations (including an amount
equal to 105% of the undrawn amount of the Letters of Credit), in full, together
with a premium (the "Early Termination Premium") equal to (a) 3.0% of the
Maximum Amount if such termination occurs during the first year after the
Closing Date, (b) 2.0% of the Maximum Amount if such termination occurs during
the second year after the Closing Date and (c) 1.0% of the Maximum Amount if
such termination occurs at any time more than two years after the Closing Date;
provided, however, that the Early Termination Premium shall be waived if
- -------- -------
Borrowers repay the Obligations from proceeds of a financing provided by a
commercial banking unit of Wells Fargo. With respect to any early termination
that is effective during the 15 day period immediately preceding the Maturity
Date, the Early Termination Premium shall be equal to (a) 1% of the Maximum
Amount times (b) n/360, where "n" equals the number of days from the effective
-----
date of such termination to and excluding the Maturity Date.
3.7 Termination Upon Event of Default.
If Foothill terminates this Agreement upon the occurrence of an Event of
Default, in view of the impracticability and extreme difficulty of ascertaining
actual damages and by mutual agreement of the parties as to a reasonable
calculation of Foothill's lost profits as a result thereof, Borrowers shall pay
to Foothill upon the effective date of such termination, a premium in an amount
equal to the Early Termination Premium. The Early Termination Premium shall be
presumed to be the amount of damages sustained by Foothill as the result of the
early termination and Borrowers
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agree that it is reasonable under the circumstances currently existing. The
Early Termination Premium provided for in this Section 3.7 shall be deemed
-----------
included in the Obligations.
4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest.
Each Borrower hereby grants to Foothill a continuing security interest in all of
such Borrower's currently existing and hereafter acquired or arising Collateral
in order to secure prompt repayment of any and all Obligations and in order to
secure prompt performance by such Borrower of each of its covenants and duties
under the Loan Documents. Foothill's security interests in the Collateral shall
attach to all Collateral without further act on the part of Foothill or
Borrowers. Anything contained in this Agreement or any other Loan Document to
the contrary notwithstanding, except for (a) the sale of Inventory to buyers in
the ordinary course of business, (b) the sale of obsolete Inventory, (c) the
sale of other Collateral in an amount not to exceed $250,000 in the aggregate in
any 12-month period as provided in Section 7.4, and (d) transfers of Collateral
-----------
among Borrowers, no Borrower has any authority, express or implied, to dispose
of any item or portion of the Collateral.
4.2 Negotiable Collateral.
In the event that any Collateral, including proceeds, is evidenced by or
consists of Negotiable Collateral, Borrowers, immediately upon the request of
Foothill, shall endorse and deliver physical possession of such Negotiable
Collateral to Foothill.
4.3 Collection of Accounts, General Intangibles, and Negotiable
Collateral.
At any time, Foothill or Foothill's designee may (a) notify customers or Account
Debtors of any Borrower that the Accounts, General Intangibles, or Negotiable
Collateral of such Borrower have been assigned to Foothill or that Foothill has
a security interest therein, and (b) collect the Accounts, General Intangibles,
and Negotiable Collateral of such Borrower directly and charge the collection
costs and expenses to the Loan Account. Each Borrower agrees that it will hold
in trust for Foothill, as Foothill's trustee, any Collections that it receives
and immediately will deliver said Collections to Foothill in their original form
as received by Borrower.
4.4 Delivery of Additional Documentation Required.
At any time upon the request of Foothill, Borrowers shall execute and deliver to
Foothill all financing statements, continuation financing statements, fixture
filings, security agreements, pledges, assignments, control agreements,
affidavits, reports, notices, schedules of accounts, letters of authority, and
all other documents that Foothill reasonably may request, in form satisfactory
to Foothill, to perfect and continue perfected Foothill's security interests in
the Collateral, and in order to fully consummate all of the transactions
contemplated hereby and under the other the Loan Documents.
4.5 Power of Attorney.
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Each Borrower hereby irrevocably makes, constitutes, and appoints Foothill (and
any of Foothill's officers, employees, or agents designated by Foothill) as such
Borrower's true and lawful attorney, with power to (a) if such Borrower refuses
to, or fails timely to execute and deliver any of the documents described in
Section 4.4, sign the name of such Borrower on any of the documents described in
- -----------
Section 4.4, (b) at any time that an Event of Default has occurred and is
- -----------
continuing, sign such Borrower's name on any invoice or bill of lading relating
to any Account of such Borrower, drafts against Account Debtors, schedules and
assignments of Accounts of such Borrower, verifications of Accounts of such
Borrower, and notices to Account Debtors, (c) send requests for verification of
Accounts of such Borrower, (d) endorse such Borrower's name on any Collection
item that may come into Foothill's possession, (e) at any time that an Event of
Default has occurred and is continuing, notify the post office authorities to
change the address for delivery of such Borrower's mail to an address designated
by Foothill, to receive and open all mail addressed to such Borrower, and to
retain all mail relating to the Collateral of such Borrower and forward all
other mail to such Borrower, (f) at any time that an Event of Default has
occurred and is continuing, make, settle, and adjust all claims under such
Borrower's policies of insurance and make all determinations and decisions with
respect to such policies of insurance, and (g) at any time that an Event of
Default has occurred and is continuing, settle and adjust disputes and claims
respecting the Accounts of such Borrower directly with Account Debtors, for
amounts and upon terms that Foothill determines to be reasonable, and Foothill
may cause to be executed and delivered any documents and releases that Foothill
determines to be necessary. The appointment of Foothill as such Borrower's
attorney, and each and every one of Foothill's rights and powers, being coupled
with an interest, is irrevocable until all of the Obligations have been fully
and finally repaid and performed and Foothill's obligation to extend credit
hereunder is terminated.
4.6 Right to Inspect.
Foothill (through any of its officers, employees, or agents) shall have the
right, from time to time hereafter, during normal business hours prior to the
occurrence of an Event of Default, to inspect Borrowers' Books and to check,
test, and appraise the Collateral in order to verify Borrowers' financial
condition or the amount, quality, value, condition of, or any other matter
relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce Foothill to enter into this Agreement, each
Borrower makes the following representations and warranties which shall be true,
correct, and complete in all respects as of the date hereof, and shall be true,
correct, and complete in all respects as of the Closing Date, and at and as of
the date of the making of each Advance and Letter of Credit made thereafter, as
though made on and as of the date of such Advance and Letter of Credit (except
to the extent that such representations and warranties relate solely to an
earlier date) and such representations and warranties shall survive the
execution and delivery of this Agreement:
5.1 No Encumbrances.
Each Borrower has good and indefeasible title to its Collateral, free and clear
of Liens except for Permitted Liens.
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5.2 Eligible Accounts.
The Eligible Accounts of each Borrower are bona fide existing obligations
created by the sale and delivery of Inventory or the rendition of services to
Account Debtors in the ordinary course of such Borrower's business,
unconditionally owed to such Borrower without defenses, disputes, offsets,
counterclaims, or rights of return or cancellation. The property giving rise to
such Eligible Accounts has been delivered to the Account Debtor, or to the
Account Debtor's agent for immediate shipment to and unconditional acceptance by
the Account Debtor. Borrowers have not received notice of actual or imminent
bankruptcy, insolvency, or material impairment of the financial condition of any
Account Debtor regarding any Eligible Account.
5.3 Intentionally Omitted.
5.4 Equipment.
All of the Equipment of Borrowers is used or held for use in Borrowers' business
and is fit for such purposes.
5.5 Location of Inventory.
The Inventory of Borrowers is not stored with a bailee, warehouseman, or similar
party (without Foothill's prior written consent) and is located only at the
locations identified on Schedule 6.12 or otherwise permitted by Section 6.12.
------------- ------------
5.6 Inventory Records.
Each Borrower keeps correct and accurate records itemizing and describing the
kind, type, quality, and quantity of its Inventory, and such Borrower's cost
therefor.
5.7 Location of Chief Executive Office; FEIN.
The chief executive office of each Borrower and each Borrower's FEIN is set
forth on Schedule 5.7.
------------
5.8 Due Organization and Qualification; Subsidiaries.
(a) Each Borrower is duly organized and existing and in good
standing under the laws of the jurisdiction of its incorporation and qualified
and licensed to do business in, and in good standing in, any state where the
failure to be so licensed or qualified reasonably could be expected to cause a
Material Adverse Change.
(b) Set forth on Schedule 5.8, is a complete and accurate list
------------
of each Borrower's direct and indirect Subsidiaries, showing: (i) the
jurisdiction of their incorporation; (ii) the number of shares of each class of
common and preferred stock authorized for each of such Subsidiaries; and (iii)
the number and the percentage of the outstanding shares of each such class owned
directly or indirectly by such Borrower. All of the outstanding capital stock of
each such Subsidiary has been validly issued and is fully paid and non-
assessable.
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(c) Except as set forth on Schedule 5.8, no capital stock (or
------------
any securities, instruments, warrants, options, purchase rights, conversion or
exchange rights, calls, commitments or claims of any character convertible into
or exercisable for capital stock) of any direct or indirect Subsidiary of any
Borrower is subject to the issuance of any security, instrument, warrant,
option, purchase right, conversion or exchange right, call, commitment or claim
of any right, title, or interest therein or thereto.
5.9 Due Authorization; No Conflict.
(a) The execution, delivery, and performance by each Borrower of
this Agreement and the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action.
(b) The execution, delivery, and performance by each Borrower of
this Agreement and the Loan Documents to which it is a party do not and will not
(i) violate any provision of federal, state, or local law or regulation
(including Regulations T, U, and X of the Federal Reserve Board) applicable to
such Borrower, the Governing Documents of such Borrower, or any order, judgment,
or decree of any court or other Governmental Authority binding on such Borrower,
(ii) conflict with, result in a breach of, or constitute (with due notice or
lapse of time or both) a default under any material contractual obligation or
material lease of such Borrower, (iii) result in or require the creation or
imposition of any Lien of any nature whatsoever upon any properties or assets of
such Borrower, other than Permitted Liens, or (iv) require any approval of
stockholders or any approval or consent of any Person under any material
contractual obligation of such Borrower.
(c) Other than the filing of appropriate financing statements,
fixture filings, and mortgages, the execution, delivery, and performance by each
Borrower of this Agreement and the Loan Documents to which such Borrower is a
party do not and will not require any registration with, consent, or approval
of, or notice to, or other action with or by, any federal, state, foreign, or
other Governmental Authority or other Person.
(d) This Agreement and the Loan Documents to which any Borrower
is a party, and all other documents contemplated hereby and thereby, when
executed and delivered by such Borrower will be the legally valid and binding
obligations of such Borrower, enforceable against such Borrower in accordance
with their respective terms, except as enforcement may be limited by equitable
principles or by bankruptcy, insolvency, reorganization, moratorium, or similar
laws relating to or limiting creditors' rights generally.
(e) The Liens granted by each Borrower to Foothill in and to its
properties and assets pursuant to this Agreement and the other Loan Documents
are validly created, perfected, and first priority Liens, subject only to
Permitted Liens.
5.10 Litigation.
There are no actions or proceedings pending by or against any Borrower before
any court or administrative agency and no Borrower has any knowledge or belief
of any pending, threatened, or imminent litigation, governmental investigations,
or claims, complaints, actions, or prosecutions involving any Borrower or any
guarantor of the Obligations, except for:
26
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(a) ongoing collection matters in which a Borrower is the plaintiff; (b) matters
disclosed on Schedule 5.10; and (c) matters arising after the date hereof that,
-------------
if decided adversely to a Borrower, would not cause a Material Adverse Change.
5.11 No Material Adverse Change.
All financial statements relating to any Borrower or any guarantor of the
Obligations that have been delivered by any Borrower to Foothill have been
prepared in accordance with GAAP (except, in the case of unaudited financial
statements, for the lack of footnotes and being subject to year-end audit
adjustments) and fairly present such Borrower's (or such guarantor's, as
applicable) financial condition as of the date thereof and such Borrower's
results of operations for the period then ended. There has not been a Material
Adverse Change with respect to any Borrower (or such guarantor, as applicable)
since the date of the latest financial statements submitted to Foothill on or
before the Closing Date.
5.12 Solvency.
Each Borrower is Solvent. No transfer of property is being made by any Borrower
and no obligation is being incurred by any Borrower in connection with the
transactions contemplated by this Agreement or the other Loan Documents with the
intent to hinder, delay, or defraud either present or future creditors of any
Borrower.
5.13 Employee Benefits.
None of Borrowers, any of their Subsidiaries, or any of their ERISA Affiliates
maintains or contributes to any Benefit Plan, other than those listed on
Schedule 5.13. Each Borrower, each of its Subsidiaries and each ERISA Affiliate
- -------------
have satisfied the minimum funding standards of ERISA and the IRC with respect
to each Benefit Plan to which it is obligated to contribute. No ERISA Event has
occurred nor has any other event occurred that may result in an ERISA Event that
reasonably could be expected to result in a Material Adverse Change. None of
Borrowers or their Subsidiaries, any ERISA Affiliate, or any fiduciary of any
Plan is subject to any direct or indirect liability with respect to any Plan
under any applicable law, treaty, rule, regulation, or agreement. None of
Borrowers or their Subsidiaries or any ERISA Affiliate is required to provide
security to any Plan under Section 401(a)(29) of the IRC.
5.14 Environmental Condition.
None of Borrowers' properties or assets has ever been used by any Borrower or,
to the best of each Borrower's knowledge, by previous owners or operators in the
disposal of, or to produce, store, handle, treat, release, or transport, any
Hazardous Materials. None of Borrowers' properties or assets has ever been
designated or identified in any manner pursuant to any environmental protection
statute as a Hazardous Materials disposal site, or a candidate for closure
pursuant to any environmental protection statute. No Lien arising under any
environmental protection statute has attached to any revenues or to any real or
personal property owned or operated by any Borrower. No Borrower has received a
summons, citation, notice, or directive from the Environmental Protection Agency
or any other federal or state governmental agency concerning any action or
omission by any Borrower resulting in the releasing or disposing of Hazardous
Materials into the environment.
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<PAGE>
6. AFFIRMATIVE COVENANTS.
Each Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, such Borrower shall do all of the following:
6.1 Accounting System.
Maintain a standard and modern system of accounting that enables such Borrower
to produce financial statements in accordance with GAAP, and maintain records
pertaining to its Collateral that contain information as from time to time may
be requested by Foothill. Such Borrower also shall keep a modern inventory
reporting system that shows all additions, sales, claims, returns, and
allowances with respect to its Inventory.
6.2 Collateral Reporting.
Provide Foothill with the following documents at the following times in form
satisfactory to Foothill: (a) on a weekly basis prior to the occurrence of an
Event of Default and during the continuation thereof and, at Foothill's request,
on each Business Day after an Event of Default, a sales journal, collection
journal, and credit register since the last such schedule and a calculation of
the Borrowing Base as of such date, (b) on a monthly basis and, in any event, by
no later than the 15th day of each month during the term of this Agreement, (i)
a detailed calculation of the Borrowing Base, and (ii) a detailed aging, by
total, of such Borrower's Accounts, together with a reconciliation to the
detailed calculation of the Borrowing Base previously provided to Foothill, (c)
on a monthly basis and, in any event, by no later than the 15th day of each
month during the term of this Agreement, a summary aging, by vendor, of such
Borrower's accounts payable and any book overdraft, (d) upon request from
Foothill, Inventory reports specifying such Borrower's cost and the wholesale
market value of its Inventory, (e) prior to the existence of an Event of
Default, weekly notice of all returns, disputes, or claims which exceed
$10,000, and if an Event of Default exists, daily notice of all returns,
disputes, or claims of any amount, (f) upon request, copies of invoices in
connection with its Accounts, customer statements, credit memos, remittance
advices and reports, deposit slips, shipping and delivery documents in
connection with its Accounts and for Inventory acquired by such Borrower,
purchase orders and invoices, (g) on a quarterly basis, a detailed list of such
Borrower's customers, (h) on a monthly basis, and, in any event, by no later
than the 15th day of each month during the term of this Agreement, a calculation
of the Dilution for the prior month; (i) upon Foothill's request, Borrowers'
electronic data; and (j) such other reports as to the Collateral or the
financial condition of such Borrower as Foothill may request from time to time.
Original sales invoices evidencing daily sales shall be mailed by such Borrower
to each Account Debtor and, at Foothill's direction after an Event of Default
has occurred and is continuing, the invoices shall indicate on their face that
such Borrower's Account has been assigned to Foothill and that all payments are
to be made directly to Foothill.
6.3 Financial Statements, Reports, Certificates.
Deliver to Foothill: (a) as soon as available, but in any event within 30 days
after the end of each month during each of such Borrower's fiscal years, a
company prepared balance sheet, income
28
<PAGE>
statement, and statement of cash flow covering such Borrower's operations during
such period; and (b) as soon as available, but in any event within 90 days after
the end of each of such Borrower's fiscal years, financial statements of Parent
for each such fiscal year, audited by independent certified public accountants
reasonably acceptable to Foothill and certified, without any qualifications, by
such accountants to have been prepared in accordance with GAAP, together with a
certificate of such accountants addressed to Foothill stating that such
accountants do not have knowledge of the existence of any Default or Event of
Default under Sections 7.20 or 7.21. Such audited financial statements shall
------------- ----
include a balance sheet, profit and loss statement, and statement of cash flow
and, if prepared, such accountants' letter to management. If such Borrower is a
parent company of one or more Subsidiaries or Affiliates, or is a Subsidiary or
Affiliate of another company, then, in addition to the financial statements
referred to above, such Borrower agrees to deliver financial statements prepared
on a consolidating basis so as to present such Borrower and each such related
entity separately, and on a consolidated basis.
Together with the above, Parent also shall deliver to Foothill
Parent's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K
Current Reports, and any other filings made by Parent with the Securities and
Exchange Commission, if any, as soon as the same are filed, or any other
information that is provided by Parent to its shareholders, and any other report
reasonably requested by Foothill relating to the financial condition of Parent.
Each month, together with the financial statements provided
pursuant to Section 6.3(a), such Borrower shall deliver to Foothill a Compliance
--------------
Certificate signed by its chief financial officer to the effect that: (i) all
financial statements delivered or caused to be delivered to Foothill hereunder
have been prepared in accordance with GAAP (except, in the case of unaudited
financial statements, for the lack of footnotes and being subject to year-end
audit adjustments) and fairly present the financial condition of such Borrower,
(ii) the representations and warranties of such Borrower contained in this
Agreement and the other Loan Documents are true and correct in all material
respects on and as of the date of such certificate, as though made on and as of
such date (except to the extent that such representations and warranties relate
solely to an earlier date), (iii) for each month that also is the date on which
a financial covenant in Section 7.20 is to be tested, such Borrower is in
------------
compliance at the end of such period with the applicable financial covenants
contained in Section 7.20 (and demonstrating such compliance in reasonable
------------
detail), and (iv) on the date of delivery of such certificate to Foothill there
does not exist any condition or event that constitutes a Default or Event of
Default (or, in the case of clauses (i), (ii), or (iii), to the extent of any
non-compliance, describing such non-compliance as to which he or she may have
knowledge and what action such Borrower has taken, is taking, or proposes to
take with respect thereto).
6.4 Tax Returns.
Deliver to Foothill copies of each of such Borrower's future federal income tax
returns, and any amendments thereto, within 30 days of the filing thereof with
the Internal Revenue Service.
6.5 Guarantor Reports.
Cause any guarantor of any of the Obligations to deliver its annual financial
statements at the time when such Borrower provides its audited financial
statements to Foothill and copies of all
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federal income tax returns as soon as the same are available and in any event no
later than 30 days after the same are required to be filed by law (after
permitted extensions).
6.6 Allowances.
Cause allowances or credits, if any, as between such Borrower and its Account
Debtors to be on the same basis and in accordance with the usual customary
practices of such Borrower, as they exist at the time of the execution and
delivery of this Agreement, and Borrower shall promptly issue a credit
memorandum reflecting such allowances or credits.
6.7 Intentionally Omitted.
6.8 Maintenance of Equipment.
Maintain its Equipment in good operating condition and repair (ordinary wear and
tear excepted), and make all necessary replacements thereto so that the value
and operating efficiency thereof shall at all times be maintained and preserved.
6.9 Taxes.
Cause all assessments and taxes, whether real, personal, or otherwise, due or
payable by, or imposed, levied, or assessed against such Borrower or any of its
property to be paid in full, before delinquency or before the expiration of any
extension period, except to the extent that the validity of such assessment or
tax shall be the subject of a Permitted Protest. Such Borrower shall make due
and timely payment or deposit of all such federal, state, and local taxes,
assessments, or contributions required of it by law, and will execute and
deliver to Foothill, on demand, appropriate certificates attesting to the
payment thereof or deposit with respect thereto. Such Borrower will make timely
payment or deposit of all tax payments and withholding taxes required of it by
applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon request,
furnish Foothill with proof satisfactory to Foothill indicating that such
Borrower has made such payments or deposits.
6.10 Insurance.
(a) At its expense, keep its Collateral insured against loss or
damage by fire, theft, explosion, sprinklers, and all other hazards and risks,
and in such amounts, as are ordinarily insured against by other owners in
similar businesses. Such Borrower also shall maintain business interruption,
public liability, product liability, and property damage insurance relating to
such Borrower's ownership and use of its Collateral, as well as insurance
against larceny, embezzlement, and criminal misappropriation.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as may be reasonably satisfactory to
Foothill. All insurance required herein shall be written by companies which are
authorized to do insurance business in the State of California. All hazard
insurance and such other insurance as Foothill shall specify, shall contain a
California Form 438BFU (NS) mortgagee endorsement, or an equivalent endorsement
satisfactory to Foothill, showing Foothill as sole loss payee thereof, and shall
contain a waiver of warranties. Every policy of insurance referred to in this
Section 6.10 shall
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contain an agreement by the insurer that it will not cancel such policy except
after 30 days prior written notice to Foothill and that any loss payable
thereunder shall be payable notwithstanding any act or negligence of such
Borrower or Foothill which might, absent such agreement, result in a forfeiture
of all or a part of such insurance payment and notwithstanding occupancy or use
of the Real Property for purposes more hazardous than permitted by the terms of
such policy. Such Borrower shall deliver to Foothill certified copies of such
policies of insurance and evidence of the payment of all premiums therefor.
(c) Original policies or certificates thereof satisfactory to
Foothill evidencing such insurance shall be delivered to Foothill at least 10
days prior to the expiration of the existing or preceding policies. Such
Borrower shall give Foothill prompt notice of any loss covered by such
insurance, and Foothill shall have the right to adjust any loss. Foothill shall
have the exclusive right to adjust all losses payable under any such insurance
policies without any liability to such Borrower whatsoever in respect of such
adjustments. Any monies received as payment for any loss under any insurance
policy including the insurance policies mentioned above, shall be paid over to
Foothill to be applied at the option of Foothill either to the prepayment of the
Obligations without premium, in such order or manner as Foothill may elect, or
shall be disbursed to such Borrower for application to the cost of repairs,
replacements, or restorations. All repairs, replacements, or restorations shall
be effected with reasonable promptness and shall be of a value at least equal to
the value of the items or property destroyed prior to such damage or
destruction. Upon the occurrence of an Event of Default, Foothill shall have the
right to apply all prepaid premiums to the payment of the Obligations in such
order or form as Foothill shall determine.
(d) Except for insurance relating to Equipment, such Borrower
shall not take out separate insurance concurrent in form or contributing in the
event of loss with that required to be maintained under this Section 6.10,
------------
unless Foothill is included thereon as named insured with the loss payable to
Foothill under a standard California 438BFU (NS) Mortgagee endorsement, or its
local equivalent. Such Borrower immediately shall notify Foothill whenever such
separate insurance is taken out, specifying the insurer thereunder and full
particulars as to the policies evidencing the same, and originals of such
policies immediately shall be provided to Foothill.
6.11 No Setoffs or Counterclaims.
Make payments hereunder and under the other Loan Documents by or on behalf of
such Borrower without setoff or counterclaim and free and clear of, and without
deduction or withholding for or on account of, any federal, state, or local
taxes.
6.12 Location of Inventory.
Keep its Inventory only at the locations identified on Schedule 6.12; provided,
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however, that Borrowers may amend Schedule 6.12 so long as such amendment occurs
- ------- -------------
by written notice to Foothill not less than 10 days prior to the date on which
the Inventory of Borrowers is moved to such new location, so long as such new
location is within the continental United States, and so long as, at the time of
such written notification, Borrowers provide any financing statements necessary
to perfect and continue perfected Foothill's security interests in such assets.
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6.13 Compliance with Laws.
Comply with the requirements of all applicable laws, rules, regulations, and
orders of any governmental authority, including the Fair Labor Standards Act and
the Americans With Disabilities Act, other than laws, rules, regulations, and
orders the non-compliance with which, individually or in the aggregate, would
not have and could not reasonably be expected to have a Material Adverse Change.
6.14 Employee Benefits.
(a) Deliver to Foothill: (i) promptly, and in any event within 10
Business Days after such Borrower or any of its Subsidiaries knows or has reason
to know that an ERISA Event has occurred that reasonably could be expected to
result in a Material Adverse Change, a written statement of the chief financial
officer of such Borrower describing such ERISA Event and any action that is
being taking with respect thereto by such Borrower, any such Subsidiary or ERISA
Affiliate, and any action taken or threatened by the IRS, Department of Labor,
or PBGC. Such Borrower or such Subsidiary, as applicable, shall be deemed to
know all facts known by the administrator of any Benefit Plan of which it is the
plan sponsor, (ii) promptly, and in any event within three Business Days 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 such
Borrower, any of its Subsidiaries or, to the knowledge of such Borrower, any
ERISA Affiliate with respect to such request, and (iii) promptly, and in any
event within three Business Days after receipt by such Borrower, any of its
Subsidiaries or, to the knowledge of such Borrower, any ERISA Affiliate, of the
PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to
administer a Benefit Plan, copies of each such notice.
(b) Cause to be delivered to Foothill, upon Foothill's request, each
of the following: (i) a copy of each Plan (or, where any such plan is not in
writing, complete description thereof) (and if applicable, related trust
agreements or other funding instruments) and all amendments thereto, all written
interpretations thereof and written descriptions thereof that have been
distributed to employees or former employees of such Borrower or its
Subsidiaries; (ii) the most recent determination letter issued by the IRS with
respect to each Benefit Plan; (iii) for the three most recent plan years, annual
reports on Form 5500 Series required to be filed with any governmental agency
for each Benefit Plan; (iv) all actuarial reports prepared for the last three
plan years for each Benefit Plan; (v) a listing of all Multiemployer Plans, with
the aggregate amount of the most recent annual contributions required to be made
by such Borrower or any ERISA Affiliate to each such plan and copies of the
collective bargaining agreements requiring such contributions; (vi) any
information that has been provided to such Borrower or any ERISA Affiliate
regarding withdrawal liability under any Multiemployer Plan; and (vii) the
aggregate amount of the most recent annual payments made to former employees of
such Borrower or its Subsidiaries under any Retiree Health Plan.
6.15 Leases.
Pay when due all rents and other amounts payable under any Real Property leases
to which such Borrower is a party or by which such Borrower's Real Property
assets are bound, unless such
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payments are the subject of a Permitted Protest. To the extent that such
Borrower fails timely to make payment of such rents and other amounts payable
when due under its Real Property leases, Foothill shall be entitled, in its
discretion, to reserve an amount equal to such unpaid amounts against the
Borrowing Base.
7. NEGATIVE COVENANTS.
Each Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, such Borrower will not do any of the following:
7.1 Indebtedness.
Create, incur, assume, permit, guarantee, or otherwise become or remain,
directly or indirectly, liable with respect to any Indebtedness, except:
(a) Indebtedness evidenced by this Agreement, together
with Indebtedness to issuers of letters of credit that is the subject of
L/C Guarantees;
(b) Indebtedness set forth in Schedule 7.1;
------------
(c) Indebtedness secured by Permitted Liens;
(d) Indebtedness among Borrowers;
(e) unsecured Indebtedness that is subordinated to
Foothill on terms acceptable to Foothill; and
(f) refinancings, renewals, or extensions of Indebtedness
permitted under clauses (b) and (c) of this Section 7.1 (and continuance or
-----------
renewal of any Permitted Liens associated therewith) so long as: (i) the terms
and conditions of such refinancings, renewals, or extensions do not materially
impair the prospects of repayment of the Obligations by Borrowers, (ii) the net
cash proceeds of such refinancings, renewals, or extensions do not result in an
increase in the aggregate principal amount of the Indebtedness so refinanced,
renewed, or extended, (iii) such refinancings, renewals, refundings, or
extensions do not result in a shortening of the average weighted maturity of the
Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that
Indebtedness that is refinanced was subordinated in right of payment to the
Obligations, then the subordination terms and conditions of the refinancing
Indebtedness must be at least as favorable to Foothill as those applicable to
the refinanced Indebtedness.
7.2 Liens.
Create, incur, assume, or permit to exist, directly or indirectly, any Lien on
or with respect to any of its property or assets, of any kind, whether now owned
or hereafter acquired, or any income or profits therefrom, except for Permitted
Liens (including Liens on Equipment and Liens that are replacements of Permitted
Liens to the extent that the original Indebtedness is refinanced under Section
-------
7.1(d) and so long as the replacement Liens only encumber those assets or
- ------
property that secured the original Indebtedness).
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7.3 Restrictions on Fundamental Changes.
Except for a merger of one Borrower into another Borrower with not less than 10
days prior written notice to Foothill, enter into any merger, consolidation,
reorganization, or recapitalization, or reclassify its capital stock, or
liquidate, wind up, or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of,
in one transaction or a series of transactions, all or any substantial part of
its property or assets.
7.4 Disposal of Assets.
Sell, lease, assign, transfer, or otherwise dispose of any of such Borrower's
properties or assets other than (a) sales of Inventory to buyers in the ordinary
course of such Borrower's business as currently conducted, (b) sales of obsolete
Inventory, (c) sales of Equipment, (d) sales of other assets in an amount not to
exceed $150,000 in the aggregate in any 12-month period, and (e) transfers of
assets among Borrowers; provided, however, that all proceeds of Collateral shall
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be deposited into the Lockboxes and credited against the Obligations.
7.5 Change Name.
Change such Borrower's name, FEIN, corporate structure (within the meaning of
Section 9402(7) of the Code), or identity, or add any new fictitious name
without 30 days prior written notice to Foothill.
7.6 Guarantee.
Guarantee or otherwise become in any way liable with respect to the obligations
of any third Person except (a) by endorsement of instruments or items of payment
for deposit to the account of such Borrower or which are transmitted or turned
over to Foothill, (b) guaranties of Permitted Indebtedness and (c) guaranties of
Borrowers' real estate leases.
7.7 Nature of Business.
Make any change in the principal nature of such Borrower's business.
7.8 Prepayments and Amendments.
(a) Except in connection with a refinancing permitted by Section
-------
7.1(f), prepay, redeem, retire, defease, purchase, or otherwise acquire any
- ------
Indebtedness owing to any third Person, other than the Obligations in accordance
with this Agreement, and
(b) Directly or indirectly, amend, modify, alter, increase, or
change any of the terms or conditions of any agreement, instrument, document,
indenture, or other writing evidencing or concerning Indebtedness permitted
under Sections 7.1(b), (c), or (d); provided, however, that Borrowers can prepay
---------------------------- -------- -------
their unsecured Indebtedness payable to Thomas Baur so long as no Event of
Default has occurred and is continuing and after giving effect to such
prepayment Borrowers have not less than $2,000,000 of Excess Availability.
7.9 Change of Control.
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Cause, permit, or suffer, directly or indirectly, any Change of Control.
7.10 Intentionally Omitted.
7.11 Distributions.
Make any distribution or declare or pay any dividends (in cash or other
property, other than capital stock) on, or purchase, acquire, redeem, or retire
any of such Borrower's capital stock, of any class, whether now or hereafter
outstanding.
7.12 Accounting Methods.
Modify or change its method of accounting or enter into, modify, or terminate
any agreement currently existing, or at any time hereafter entered into with any
third party accounting firm or service bureau for the preparation or storage of
such Borrower's accounting records without said accounting firm or service
bureau agreeing to provide Foothill information regarding the Collateral or such
Borrower's financial condition. Such Borrower waives the right to assert a
confidential relationship, if any, it may have with any accounting firm or
service bureau in connection with any information requested by Foothill pursuant
to or in accordance with this Agreement, and agrees that Foothill may contact
directly any such accounting firm or service bureau in order to obtain such
information.
7.13 Investments.
Directly or indirectly make, acquire, or incur any liabilities (including
contingent obligations) for or in connection with (a) the acquisition of the
securities (whether debt or equity) of, or other interests in, a Person, (b)
loans, advances, capital contributions, or transfers of property to a Person, or
(c) the acquisition of all or substantially all of the properties or assets of a
Person; provided, however, that Borrowers may (a) make loans to employees in an
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aggregate amount outstanding at any one time not to exceed $250,000, (b) make
loans among Borrowers, (c) make Permitted Investments, (d) receive securities
issued by Account Debtors in cases under the Bankruptcy Code and (e) make
deposits made in the ordinary course of business.
7.14 Transactions with Affiliates.
Directly or indirectly enter into or permit to exist any material transaction
with any Affiliate of such Borrower except for transactions that are in the
ordinary course of such Borrower's business, upon fair and reasonable terms,
that are fully disclosed to Foothill, and that are no less favorable to such
Borrower than would be obtained in an arm's length transaction with a non-
Affiliate.
7.15 Suspension.
Suspend or go out of a substantial portion of its business.
7.16 Compensation.
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Increase the annual fee or per-meeting fees paid to directors during any year by
more than 20% over the prior year.
7.17 Use of Proceeds.
Use the proceeds of the Advances made hereunder for any purpose other than (i)
on the Closing Date, (y) to repay in full the outstanding principal, accrued
interest, and accrued fees and expenses owing to Existing Lender, and (z) to pay
transactional costs and expenses incurred in connection with this Agreement, and
(ii) thereafter, consistent with the terms and conditions hereof, for its lawful
and permitted corporate purposes.
7.18 Change in Location of Chief Executive Office.
Relocate its chief executive office to a new location without providing 30 days
prior written notification thereof to Foothill and so long as, at the time of
such written notification, such Borrower provides any financing statements or
fixture filings necessary to perfect and continue perfected Foothill's security
interests and also provides to Foothill a Collateral Access Agreement with
respect to such new location.
7.19 No Prohibited Transactions Under ERISA.
Directly or indirectly:
(a) engage, or permit any Subsidiary of such Borrower to
engage, in any prohibited transaction which is reasonably likely to result in a
civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the
IRC for which a statutory or class exemption is not available or a private
exemption has not been previously obtained from the Department of Labor;
(b) permit to exist with respect to any Benefit Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of
the IRC), whether or not waived;
(c) fail, or permit any Subsidiary of such Borrower to fail, to
pay timely required contributions or annual installments due with respect to any
waived funding deficiency to any Benefit Plan;
(d) terminate, or permit any Subsidiary of such Borrower to
terminate, any Benefit Plan where such event would result in any liability of
such Borrower, any of its Subsidiaries or any ERISA Affiliate under Title IV of
ERISA;
(e) fail, or permit any Subsidiary of such Borrower to fail, to
make any required contribution or payment to any Multiemployer Plan;
(f) fail, or permit any Subsidiary of such Borrower to fail, to
pay any required installment or any other payment required under Section 412 of
the IRC on or before the due date for such installment or other payment;
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<PAGE>
(g) amend, or permit any Subsidiary of such Borrower to amend,
a Plan resulting in an increase in current liability for the plan year such that
either of such Borrower, any Subsidiary of such Borrower or any ERISA Affiliate
is required to provide security to such Plan under Section 401(a)(29) of the
IRC; or
(h) withdraw, or permit any Subsidiary of such Borrower to
withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely
to result in any liability of any such entity under Title IV of ERISA;
which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of such Borrower, any of its
Subsidiaries or any ERISA Affiliate in excess of $50,000.
7.20 Financial Covenant.
Have Parent fail to maintain Tangible Net Worth of at least the dollar amounts
set forth below:
Quarter Ending Minimum Tangible Net Worth
-------------- --------------------------
June 30, 2000 $ 6,500,000
September 30, 2000 $ 8,400,000
December 31, 2000 $12,000,000
March 31, 2001 $15,500,000
June 30, 2001 $17,000,000
September 30, 2001 $19,000,000
December 31, 2001 $22,000,000
March 31, 2002 $23,000,000
June 30, 2002 through and $24,000,000
including March 31, 2003
7.21 Capital Expenditures.
Borrowers shall, in the aggregate, make capital expenditures in any fiscal year
in excess of the amounts set forth below:
Fiscal Year Ending Maximum Capital Expenditures
------------------ ----------------------------
December 31, 2000 $4,000,000
December 31, 2001 $4,500,000
December 31, 2002 and $5,000,000
December 31, 2003
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an event of
default (each, an "Event of Default") under this Agreement:
8.1
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If Borrowers fail to pay when due and payable or when declared due and payable,
any portion of the Obligations (whether of principal, interest (including any
interest which, but for the provisions of the Bankruptcy Code, would have
accrued on such amounts), fees and charges due Foothill, reimbursement of
Foothill Expenses, or other amounts constituting Obligations);
8.2
If any Borrower fails to perform, keep, or observe any term, provision,
condition, covenant, or agreement contained in this Agreement, in any of the
Loan Documents, or in any other present or future agreement between such
Borrower and Foothill; provided, however, that Borrowers' failure or neglect to
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comply with Sections 6.2, 6.3, 6.4, 6.5, 6.9, 6.10 and 6.12 shall not constitute
------------ --- --- --- --- ---- ----
an Event of Default hereunder unless such failure or neglect continues for five
days or more;
8.3
If there is a Material Adverse Change;
8.4
If any material portion of any Borrower's properties or assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any third Person;
8.5
If an Insolvency Proceeding is commenced by any Borrower;
8.6
If an Insolvency Proceeding is commenced against any Borrower and any of the
following events occur: (a) such Borrower consents to the institution of the
Insolvency Proceeding against it; (b) the petition commencing the Insolvency
Proceeding is not timely controverted; (c) the petition commencing the
Insolvency Proceeding is not dismissed within 60 calendar days of the date of
the filing thereof; provided, however, that, during the pendency of such period,
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Foothill shall be relieved of its obligation to extend credit hereunder; (d) an
interim trustee is appointed to take possession of all or a substantial portion
of the properties or assets of, or to operate all or any substantial portion of
the business of, such Borrower; or (e) an order for relief shall have been
issued or entered therein;
8.7
If any Borrower is enjoined, restrained, or in any way prevented by court order
from continuing to conduct all or any material part of its business affairs;
8.8
If a notice of Lien, levy, or assessment is filed of record with respect to any
of any Borrower's properties or assets by the United States Government, or any
department, agency, or
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<PAGE>
instrumentality thereof, or by any state, county, municipal, or governmental
agency, or if any taxes or debts owing at any time hereafter to any one or more
of such entities becomes a Lien, whether choate or otherwise, upon any of such
Borrower's properties or assets and the same is not paid on the payment date
thereof and such Liens, in the aggregate, exceed $150,000; provided, however,
-------- -------
that Foothill shall have the right to establish a reserve against the Borrowing
Base in the amount of such Liens;
8.9
If a judgment or other claim becomes a Lien or encumbrance upon any material
portion of any Borrower's properties or assets and such Liens, in the aggregate,
exceed $150,000; provided, however, that Foothill shall have the right to
-------- -------
establish a reserve against the Borrowing Base in the amount of such Liens;
8.10
If there is a default in any material agreement to which any Borrower is a party
with one or more third Persons and such default (a) occurs at the final maturity
of the obligations thereunder, or (b) results in a right by such third
Person(s), irrespective of whether exercised, to accelerate the maturity of such
Borrower's obligations thereunder;
8.11
If any Borrower makes any payment on account of Indebtedness that has been
contractually subordinated in right of payment to the payment of the
Obligations, except to the extent such payment is permitted by the terms of the
subordination provisions applicable to such Indebtedness;
8.12
If any material misstatement or misrepresentation exists now or hereafter in any
warranty, representation, statement, or report made to Foothill by any Borrower
or any officer, employee, agent, or director of any Borrower, or if any such
warranty or representation is withdrawn; or
8.13
If the obligation of any guarantor under its guaranty or other third Person
under any Loan Document is limited or terminated by operation of law or by the
guarantor or other third Person thereunder, or any such guarantor or other third
Person becomes the subject of an Insolvency Proceeding.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 Rights and Remedies.
Upon the occurrence, and during the continuation, of an Event of Default
Foothill may, at its election, without notice of its election and without
demand, do any one or more of the following, all of which are authorized by
Borrowers:
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<PAGE>
(a) Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan Documents, or otherwise, immediately due and payable;
(b) Cease advancing money or extending credit to or for the benefit
of Borrowers under this Agreement, under any of the Loan Documents, or under any
other agreement between Borrowers and Foothill;
(c) Terminate this Agreement and any of the other Loan Documents as
to any future liability or obligation of Foothill, but without affecting
Foothill's rights and security interests in the Collateral and without affecting
the Obligations;
(d) Settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which Foothill considers advisable, and in
such cases, Foothill will credit Borrowers' Loan Account with only the net
amounts received by Foothill in payment of such disputed Accounts after
deducting all Foothill Expenses incurred or expended in connection therewith;
(e) Cause Borrowers to hold all of their returned Inventory in trust
for Foothill, segregate all such returned Inventory from all other property of
any Borrower or in any Borrower's possession and conspicuously label said
returned Inventory as the property of Foothill;
(f) Without notice to or demand upon any Borrower or any guarantor,
make such payments and do such acts as Foothill considers necessary or
reasonable to protect its security interests in the Collateral. Borrowers agree
to assemble the Collateral if Foothill so requires, and to make the Collateral
available to Foothill as Foothill may designate. Each Borrower authorizes
Foothill to enter the premises where the Collateral is located, to take and
maintain possession of the Collateral, or any part of it, and to pay, purchase,
contest, or compromise any encumbrance, charge, or Lien that in Foothill's
determination appears to conflict with its security interests and to pay all
expenses incurred in connection therewith. With respect to any of Borrowers'
owned or leased premises, each Borrower hereby grants Foothill a license to
enter into possession of such premises and to occupy the same, without charge,
for up to 120 days in order to exercise any of Foothill's rights or remedies
provided herein, at law, in equity, or otherwise;
(g) Without notice to any Borrower (such notice being expressly
waived), and without constituting a retention of any collateral in satisfaction
of an obligation (within the meaning of Section 9505 of the Code), set off and
apply to the Obligations any and all (i) balances and deposits of any Borrower
held by Foothill (including any amounts received in the Lockbox Accounts), or
(ii) indebtedness at any time owing to or for the credit or the account of any
Borrower held by Foothill;
(h) Hold, as cash collateral, any and all balances and deposits of
any Borrower held by Foothill, and any amounts received in the Lockbox Accounts,
to secure the full and final repayment of all of the Obligations;
(i) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein) the
Collateral. Foothill is
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hereby granted a license or other right to use, without charge, any 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 each Borrower's rights
under all licenses and all franchise agreements shall inure to Foothill's
benefit;
(j) Sell the Collateral at either a public or private sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in such
manner and at such places (including any Borrower's premises) as Foothill
determines is commercially reasonable. It is not necessary that the Collateral
be present at any such sale;
(k) Foothill shall give notice of the disposition of the Collateral
as follows:
(1) Foothill shall give Borrowers and each holder of a security
interest in the Collateral who has filed with Foothill a written request for
notice, a notice in writing of the time and place of public sale, or, if the
sale is a private sale or some other disposition other than a public sale is to
be made of the Collateral, then the time on or after which the private sale or
other disposition is to be made;
(2) The notice shall be personally delivered or mailed, postage
prepaid, to Borrowers as provided in Section 12, at least five days before the
----------
date fixed for the sale, or at least five days before the date on or after which
the private sale or other disposition is to be made; no notice needs to be given
prior to the disposition of any portion of the Collateral that is perishable or
threatens to decline speedily in value or that is of a type customarily sold on
a recognized market. Notice to Persons other than Borrowers claiming an interest
in the Collateral shall be sent to such addresses as they have furnished to
Foothill;
(3) If the sale is to be a public sale, Foothill also shall give
notice of the time and place by publishing a notice one time at least five days
before the date of the sale in a newspaper of general circulation in the county
in which the sale is to be held;
(l) Foothill may credit bid and purchase at any public sale; and
(m) Any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by Borrowers. Any excess will be
returned, without interest and subject to the rights of third Persons, by
Foothill to Borrowers.
9.2 Remedies Cumulative.
Foothill's rights and remedies under this Agreement, the Loan Documents, and all
other agreements shall be cumulative. Foothill shall have all other rights and
remedies not inconsistent herewith as provided under the Code, by law, or in
equity. No exercise by Foothill of one right or remedy shall be deemed an
election, and no waiver by Foothill of any Event of Default shall be deemed a
continuing waiver. No delay by Foothill shall constitute a waiver, election, or
acquiescence by it.
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10. TAXES AND EXPENSES.
If any Borrower fails to pay any monies (whether taxes, assessments,
insurance premiums, or, in the case of leased properties or assets, rents or
other amounts payable under such leases) due to third Persons, or fails to make
any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement, then, to the extent that Foothill
determines that such failure by such Borrower could result in a Material Adverse
Change, in its discretion and without prior notice to Borrowers, Foothill may do
any or all of the following: (a) make payment of the same or any part thereof;
(b) set up such reserves in Borrowers' Loan Account as Foothill deems necessary
to protect Foothill from the exposure created by such failure; or (c) obtain and
maintain insurance policies of the type described in Section 6.10, and take any
------------
action with respect to such policies as Foothill deems prudent. Any such
amounts paid by Foothill shall constitute Foothill Expenses. Any such payments
made by Foothill shall not constitute an agreement by Foothill to make similar
payments in the future or a waiver by Foothill of any Event of Default under
this Agreement. Foothill need not inquire as to, or contest the validity of,
any such expense, tax, or Lien and the receipt of the usual official notice for
the payment thereof shall be conclusive evidence that the same was validly due
and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 Demand; Protest; etc.
Each Borrower waives demand, protest, notice of protest, notice of default or
dishonor, notice of payment and nonpayment, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees at any time held by Foothill on which
such Borrower may in any way be liable.
11.2 Foothill's Liability for Collateral.
So long as Foothill complies with its obligations, if any, under Section 9207 of
the Code, Foothill shall not in any way or manner be liable or responsible for:
(a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring
or arising in any manner or fashion from any cause; (c) any diminution in the
value thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency, or other Person. All risk of loss, damage, or destruction of
the Collateral shall be borne by Borrowers.
11.3 Indemnification.
Borrowers shall pay, indemnify, defend, and hold Foothill and each of its
respective officers, directors, employees, counsel, agents, and attorneys-in-
fact (each, an "Indemnified Person") harmless (to the fullest extent permitted
by law) from and against any and all claims, demands, suits, actions,
investigations, proceedings, and damages, and all reasonable attorneys fees and
disbursements and other costs and expenses actually incurred in connection
therewith (as and when they are incurred and irrespective of whether suit is
brought), at any time asserted against, imposed upon, or incurred by any of them
in connection with or as a result of or related to the execution, delivery,
enforcement, performance, and administration (including any of the foregoing
arising out of the administration of the credit facilities hereunder on a joint
borrowing
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basis) of this Agreement and any other Loan Documents or the transactions
contemplated herein, and with respect to any investigation, litigation, or
proceeding related to this Agreement, any other Loan Document, or the use of the
proceeds of the credit provided hereunder (irrespective of whether any
Indemnified Person is a party thereto), or any act, omission, event or
circumstance in any manner related thereto (all the foregoing, collectively, the
"Indemnified Liabilities"). Borrowers shall have no obligation to any
Indemnified Person under this Section 11.3 with respect to any Indemnified
------------
Liability that a court of competent jurisdiction finally determines to have
resulted from the gross negligence or willful misconduct of such Indemnified
Person. This provision shall survive the termination of this Agreement and the
repayment of the Obligations.
11.4 Joint Borrowers.
(a) Each Borrower agrees that it is jointly and severally,
directly and primarily liable to Foothill for payment in full of all
Obligations, whether for principal, interest or otherwise and that such
liability is independent of the duties, obligations, and liabilities of the
other Borrowers. Foothill may bring a separate action or actions on each, any,
or all of the Obligations against any Borrower, whether action is brought
against the other Borrowers or whether the other Borrowers are joined in such
action. In the event that any Borrower fails to make any payment of any
Obligations on or before the due date thereof, the other Borrowers immediately
shall cause such payment to be made or each of such Obligations to be performed,
kept, observed, or fulfilled.
(b) The Loan Documents are a primary and original obligation of
each Borrower, are not the creation of a surety relationship, and are an
absolute, unconditional, and continuing promise of payment and performance which
shall remain in full force and effect without respect to future changes in
conditions, including any change of law or any invalidity or irregularity with
respect to the Loan Documents. Each Borrower agrees that its liability under the
Loan Documents shall be immediate and shall not be contingent upon the exercise
or enforcement by Foothill of whatever remedies it may have against the other
Borrowers, or the enforcement of any lien or realization upon any security
Foothill may at any time possess. Each Borrower consents and agrees that
Foothill shall be under no obligation (under Section 2899 or 3433 of the
California Civil Code or otherwise) to marshal any assets of any Borrower
against or in payment of any or all of the Obligations.
(c) Each Borrower acknowledges that it is presently informed as
to the financial condition of the other Borrowers and of all other circumstances
which a diligent inquiry would reveal and which bear upon the risk of nonpayment
of the Obligations. Each Borrower hereby covenants that it will continue to keep
informed as to the financial condition of the other Borrowers, the status of the
other Borrowers and of all circumstances which bear upon the risk of nonpayment
of the Obligations. Absent a written request from any Borrower to Foothill for
information, such Borrower hereby waives any and all rights it may have to
require Foothill to disclose to such Borrower any information which Foothill may
now or hereafter acquire concerning the condition or circumstances of the other
Borrowers.
(d) The liability of each Borrower under the Loan Documents
includes Obligations arising under successive transactions continuing,
compromising, extending, increasing, modifying, releasing, or renewing the
Obligations, changing the interest rate,
43
<PAGE>
payment terms, or other terms and conditions thereof, or creating new or
additional Obligations after prior Obligations have been satisfied in whole or
in part. To the maximum extent permitted by law, each Borrower hereby waives any
right to revoke its liability under the Loan Documents as to future
indebtedness, and in connection therewith, each Borrower hereby waives any
rights it may have under Section 2815 of the California Civil Code. If such a
revocation is effective notwithstanding the foregoing waiver, each Borrower
acknowledges and agrees that (a) no such revocation shall be effective until
written notice thereof has been received by Foothill, (b) no such revocation
shall apply to any Obligations in existence on such date (including, any
subsequent continuation, extension, or renewal thereof, or change in the
interest rate, payment terms, or other terms and conditions thereof), (c) no
such revocation shall apply to any Obligations made or created after such date
to the extent made or created pursuant to a legally binding commitment of
Foothill in existence on the date of such revocation, (d) no payment by such
Borrower or from any other source prior to the date of such revocation shall
reduce the maximum obligation of the other Borrowers hereunder, and (e) any
payment by such Borrower or from any source other than Borrowers, subsequent to
the date of such revocation, shall first be applied to that portion of the
Obligations as to which the revocation is effective and which are not,
therefore, guaranteed hereunder, and to the extent so applied shall not reduce
the maximum obligation of each Borrower hereunder.
(e) (i) Each Borrower absolutely, unconditionally, knowingly,
and expressly waives:
(1) (A) notice of acceptance hereof; (B) notice of any
loans or other financial accommodations made or extended under the Loan
Documents or the creation or existence of any Obligations; (C) notice of
the amount of the Obligations, subject, however, to each Borrower's right
to make inquiry of Foothill to ascertain the amount of the Obligations at
any reasonable time; (D) notice of any adverse change in the financial
condition of the other Borrowers or of any other fact that might increase
such Borrower's risk hereunder; (E) notice of presentment for payment,
demand, protest, and notice thereof as to any instruments among the Loan
Documents; and (F) all notices (except if such notice is specifically
required to be given to Borrowers hereunder or under the Loan Documents)
and demands to which such Borrower might otherwise be entitled.
(2) its right, under Sections 2845 or 2850 of the
California Civil Code, or otherwise, to require Foothill to institute suit
against, or to exhaust any rights and remedies which Foothill has or may
have against, the other Borrowers or any third party, or against any
Collateral provided by the other Borrowers, or any third party. In this
regard, each Borrower agrees that it is bound to the payment of all
Obligations, whether now existing or hereafter accruing, as fully as if
such Obligations were directly owing to Foothill by such Borrower. Each
Borrower further waives any defense arising by reason of any disability or
other defense (other than the defense that the Obligations shall have been
fully and finally performed and indefeasibly paid) of the other Borrowers
or by reason of the cessation from any cause whatsoever of the liability of
the other Borrowers in respect thereof.
(3) (A) any rights to assert against Foothill any defense
(legal or equitable), set-off, counterclaim, or claim which such Borrower
may now or at any
44
<PAGE>
time hereafter have against the other Borrowers or any other party liable
to Foothill; (B) any defense, set-off, counterclaim, or claim, of any kind
or nature, arising directly or indirectly from the present or future lack
of perfection, sufficiency, validity, or enforceability of the Obligations
or any security therefor; (C) any defense such Borrower has to performance
hereunder, and any right such Borrower has to be exonerated, provided by
Sections 2819, 2822, or 2825 of the California Civil Code, or otherwise,
arising by reason of: the impairment or suspension of Foothill's rights or
remedies against the other Borrowers; the alteration by Foothill of the
Obligations; any discharge of the other Borrowers' obligations to Foothill
by operation of law as a result of Foothill's intervention or omission; or
the acceptance by Foothill of anything in partial satisfaction of the
Obligations; (D) the benefit of any statute of limitations affecting such
Borrower's liability hereunder or the enforcement thereof, and any act
which shall defer or delay the operation of any statute of limitations
applicable to the Obligations shall similarly operate to defer or delay the
operation of such statute of limitations applicable to such Borrower's
liability hereunder.
(ii) Each Borrower absolutely, unconditionally, knowingly,
and expressly waives any defense arising by reason of or deriving from (i) any
claim or defense based upon an election of remedies by Foothill; or (ii) any
election by Foothill under Bankruptcy Code Section 1111(b) to limit the amount
of, or any collateral securing, its claim against the Borrowers.
(iii) Until such time as all Obligations have been fully,
finally, and indefeasibly paid in full, in cash, each Borrower hereby
absolutely, unconditionally, knowingly, and expressly postpones: (1) any right
of subrogation such Borrower has or may have as against the other Borrowers with
respect to the Obligations; (2) any right to proceed against the other Borrowers
or any other Person, now or hereafter, for contribution, indemnity,
reimbursement, or any other suretyship rights and claims, whether direct or
indirect, liquidated or contingent, whether arising under express or implied
contract or by operation of law, which such Borrower may now have or hereafter
have as against the other Borrowers with respect to the Obligations; and (3) any
right to proceed or seek recourse against or with respect to any property or
asset of the other Borrowers.
(iv) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR
OTHER PROVISION SET FORTH IN THIS SECTION 11.4, EACH BORROWER HEREBY ABSOLUTELY,
KNOWINGLY, UNCONDITIONALLY, AND EXPRESSLY WAIVES AND AGREES NOT TO ASSERT ANY
AND ALL BENEFITS OR DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR
MORE OF CALIFORNIA CIVIL CODE SECTIONS 2799, 2808, 2809, 2810, 2815, 2819, 2820,
2821, 2822, 2825, 2839, 2845, 2848, 2849, AND 2850, CALIFORNIA UNIFORM
COMMERCIAL CODE SECTIONS 3116, 3118, 3119, 3419, 3605, 9504, 9505, AND 9507, AND
CHAPTER 2 OF TITLE 14 OF PART 4 OF DIVISION 3 OF THE CALIFORNIA CIVIL CODE.
(f) Each Borrower consents and agrees that, without notice to or
by such Borrower, and without affecting or impairing the liability of such
Borrower hereunder, Foothill may, by action or inaction:
45
<PAGE>
(i) compromise, settle, extend the duration or the time
for the payment of, or discharge the performance of, or may refuse to or
otherwise not enforce the Loan Documents, or any part thereof, with respect
to the other Borrowers;
(ii) release the other Borrowers or grant other indulgences
to the other Borrowers in respect thereof; or
(iii) release or substitute any guarantor, if any, of the
Obligations, or enforce, exchange, release, or waive any security for the
Obligations or any guaranty of the Obligations, or any portion thereof.
(g) Foothill shall have the right to seek recourse against each
Borrower to the fullest extent provided for herein, and no election by Foothill
to proceed in one form of action or proceeding, or against any party, or on any
obligation, shall constitute a waiver of Foothill's right to proceed in any
other form of action or proceeding or against other parties unless Foothill has
expressly waived such right in writing. Specifically, but without limiting the
generality of the foregoing, no action or proceeding by Foothill under the Loan
Documents shall serve to diminish the liability of any Borrower thereunder
except to the extent that Foothill finally and unconditionally shall have
realized indefeasible payment by such action or proceeding.
(h) The Obligations shall not be considered indefeasibly paid
for purposes of this Section 11.4 unless and until all payments to Foothill are
------------
no longer subject to any right on the part of any person, including any
Borrower, any Borrower as a debtor in possession, or any trustee (whether
appointed pursuant to 11 U.S.C., or otherwise) of any Borrower's assets to
invalidate or set aside such payments or to seek to recoup the amount of such
payments or any portion thereof, or to declare same to be fraudulent or
preferential. Notwithstanding anything to the contrary in the preceding
sentence, Foothill shall release its security interests and Liens on the
Collateral promptly after receipt of payment of the Obligations in full in good
funds. Upon such full and final performance and indefeasible payment of the
Obligations, Foothill shall have no obligation whatsoever to transfer or assign
its interest in the Loan Documents to any Borrower. In the event that, for any
reason, any portion of such payments to Foothill is set aside or restored,
whether voluntarily or involuntarily, after the making thereof, then the
obligation intended to be satisfied thereby shall be revived and continued in
full force and effect as if said payment or payments had not been made, and each
Borrower shall be liable for the full amount Foothill is required to repay plus
any and all costs and expenses (including attorneys' fees and attorneys' fees
incurred pursuant to 11 U.S.C.) paid by Foothill in connection therewith.
Borrowers and each of them warrant and agree that each of the waivers
and consents set forth herein are made after consultation with legal counsel and
with full knowledge of their significance and consequences, with the
understanding that events giving rise to any defense or right waived may
diminish, destroy or otherwise adversely affect rights which Borrowers otherwise
may have against other Borrowers, Foothill or others, or against Collateral. If
any of the waivers or consents herein are determined to be contrary to any
applicable law or public policy, such waivers and consents shall be effective to
the maximum extent permitted by law.
46
<PAGE>
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other Loan Document shall be in
writing and (except for financial statements and other informational documents
which may be sent by first-class mail, postage prepaid) shall be personally
delivered or sent by registered or certified mail (postage prepaid, return
receipt requested), overnight courier, or telefacsimile to Borrower or to
Foothill, as the case may be, at its address set forth below:
If to Borrowers: c/o DIGITAL GENERATION SYSTEMS, INC.
875 Battery Street
San Francisco, California 94111
Attn: Omar A. Choucair, Chief Financial Officer
Fax No. 415.276.6601
and
5221 N. O'Connor Boulevard, Suite 950
Irving, Texas 75039
Attn: Omar A. Choucair, Chief Financial Officer
Fax No.: 972.402.4808
with copies to: GARDERE & WYNNE
1601 Elm Street
Suite 3000
Dallas, Texas 75201
Attn: David Earhart, Esq.
Fax No. 214.999.4645
If to Foothill: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. 310.478.9788
with copies to: BUCHALTER, NEMER, FIELDS & YOUNGER
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017
Attn: Robert C. Colton, Esq.
Fax No. 213.896.0400
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other. All notices or demands sent in accordance with this Section 12, other
----------
than notices by Foothill in connection with Sections 9504 or 9505 of the Code,
shall be deemed received on the earlier of the date of
47
<PAGE>
actual receipt or 3 days after the deposit thereof in the mail. Each Borrower
acknowledges and agrees that notices sent by Foothill in connection with
Sections 9504 or 9505 of the Code shall be deemed sent when deposited in the
mail or personally delivered, or, where permitted by law, transmitted by
telefacsimile or other similar method set forth above.
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS
EXPRESSLY PROVIDED TO THE CONTRARY IN AN ANOTHER LOAN DOCUMENT), THE
CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS
OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER
OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE
PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE
STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF
CALIFORNIA OR, AT THE SOLE OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH
FOOTHILL SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT
MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH BORROWER AND FOOTHILL
WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO
ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT
ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13. EACH BORROWER AND
----------
FOOTHILL HEREBY WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF
THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH
BORROWER AND FOOTHILL REPRESENTS THAT IT HAS REVIEWED THIS WAIVER AND EACH
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE
FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWERS' DOCUMENTS.
All documents, schedules, invoices, agings, or other papers delivered
to Foothill may be destroyed or otherwise disposed of by Foothill four months
after they are delivered to or received by Foothill, unless Borrowers request,
in writing, the return of said documents, schedules, or other papers and makes
arrangements, at Borrowers' expense, for their return.
15. GENERAL PROVISIONS.
15.1 Effectiveness.
48
<PAGE>
This Agreement shall be binding and deemed effective when executed by Borrowers
and Foothill.
15.2 Successors and Assigns.
This Agreement shall bind and inure to the benefit of the respective successors
and assigns of each of the parties; provided, however, that no Borrower may
-------- -------
assign this Agreement or any rights or duties hereunder without Foothill's prior
written consent and any prohibited assignment shall be absolutely void. No
consent to an assignment by Foothill shall release the assigning Borrower from
its Obligations. Foothill may assign this Agreement and its rights and duties
hereunder and no consent or approval by Borrowers is required in connection with
any such assignment. Foothill reserves the right to sell, assign, transfer,
negotiate, or grant participations in all or any part of, or any interest in
Foothill's rights and benefits hereunder. In connection with any such
assignment or participation, Foothill may disclose all documents and information
which Foothill now or hereafter may have relating to any Borrower or any
Borrower's business. To the extent that Foothill assigns its rights and
obligations hereunder to a third Person, Foothill thereafter shall be released
from such assigned obligations to Borrowers and such assignment shall effect a
novation between Borrowers and such third Person.
15.3 Section Headings.
Headings and numbers have been set forth herein for convenience only. Unless
the contrary is compelled by the context, everything contained in each section
applies equally to this entire Agreement.
15.4 Interpretation.
Neither this Agreement nor any uncertainty or ambiguity herein shall be
construed or resolved against Foothill or Borrowers, whether under any rule of
construction or otherwise. On the contrary, this Agreement has been reviewed by
all parties and shall be construed and interpreted according to the ordinary
meaning of the words used so as to fairly accomplish the purposes and intentions
of all parties hereto.
15.5 Severability of Provisions.
Each provision of this Agreement shall be severable from every other provision
of this Agreement for the purpose of determining the legal enforceability of any
specific provision.
15.6 Amendments in Writing.
This Agreement can only be amended by a writing signed by both Foothill and
Borrowers.
15.7 Counterparts; Telefacsimile Execution.
This Agreement may be executed in any number of counterparts and by different
parties on separate counterparts, each of which, when executed and delivered,
shall be deemed to be an original, and all of which, when taken together, shall
constitute but one and the same Agreement. Delivery of an executed counterpart
of this Agreement by telefacsimile shall be equally as
49
<PAGE>
effective as delivery of an original executed counterpart of this Agreement. Any
party delivering an executed counterpart of this Agreement by telefacsimile also
shall deliver an original executed counterpart of this Agreement but the failure
to deliver an original executed counterpart shall not affect the validity,
enforceability, and binding effect of this Agreement.
15.8 Revival and Reinstatement of Obligations.
If the incurrence or payment of the Obligations by any Borrower or any guarantor
of the Obligations or the transfer by either or both of such parties to Foothill
of any property of either or both of such parties should for any reason
subsequently be declared to be void or voidable under any state or federal law
relating to creditors' rights, including provisions of the Bankruptcy Code
relating to fraudulent conveyances, preferences, and other voidable or
recoverable payments of money or transfers of property (collectively, a
"Voidable Transfer"), and if Foothill is required to repay or restore, in whole
or in part, any such Voidable Transfer, or elects to do so upon the reasonable
advice of its counsel, then, as to any such Voidable Transfer, or the amount
thereof that Foothill is required or elects to repay or restore, and as to all
reasonable costs, expenses, and attorneys fees of Foothill related thereto, the
liability of Borrowers or such guarantor automatically shall be revived,
reinstated, and restored and shall exist as though such Voidable Transfer had
never been made.
50
<PAGE>
15.9 Integration.
This Agreement, together with the other Loan Documents, reflects the entire
understanding of the parties with respect to the transactions contemplated
hereby and shall not be contradicted or qualified by any other agreement, oral
or written, before the date hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in Los Angeles, California.
DIGITAL GENERATION SYSTEMS, INC.,
a California corporation
By: ________________________________________________
Title: _____________________________________________
DIGITAL GENERATION SYSTEMS OF NEW YORK, INC.,
a New York corporation
By _________________________________________________
Title: _____________________________________________
STARCOM MEDIATECH, INC.,
a Delaware corporation
By _________________________________________________
Title: _____________________________________________
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: ________________________________________________
Title: _____________________________________________
51
<PAGE>
COMPLIANCE CERTIFICATE SAMPLE COPY
(Loan and Security Agreement Section 6.3)
Date _______________, 200__
FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard, Suite 1500
Santa Monica, California 90025-3333
Attention: ________________________
RE: Loan and Security Agreement, dated as of April 6, 2000 (the "Agreement") by
and between FOOTHILL CAPITAL CORPORATION ("Foothill") and DIGITAL
GENERATION SYSTEMS OF NEW YORK, INC., STARCOM MEDIATECH, INC. and DIGITAL
GENERATION SYSTEMS, INC. (collectively, "Borrowers").
Dear _______________:
In accordance with Section 6.3 of the Agreement, this letter shall serve as
certification to Foothill that to the best of my knowledge: (i) all financial
statements have been prepared in accordance with GAAP and fairly represent the
financial condition of Borrowers, (ii) the representations and warranties of
Borrowers set forth in the Agreement and other Loan Documents are true and
correct in all material respects on and as of the date of this certification,
(iii) as demonstrated on Exhibit 1 attached hereto, Borrowers are in compliance
with each of their financial covenants set forth in Section 7.20 of the
Agreement as of the date of this certification, and (iv) there does not exist
any condition or event that constitutes a Default or Event of Default. Such
certification is made as of the fiscal month ending ______________, 200___.
Sincerely,
Chief Financial Officer
Exhibit C-1
-----------
<PAGE>
EXHIBIT 11.1
DIGITAL GENERATIONS SYSTEMS, INC.
STATEMENTS OF COMPUTATION OF WEIGHTED AVERAGE
COMMON SHARES
(In thousands, except for per share amounts)
Quarter Ended Quarter Ended
March 31, March 31,
2000 1999
------------- -------------
Net loss $ (868) $ (2,991)
=========== ============
Weighted average common shares outstanding $ 28,003 $ 26,462
=========== ============
Basic and diluted net loss per common share $ (0.03) $ (0.11)
=========== ============
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-2000
<PERIOD-START> JAN-02-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,428
<SECURITIES> 0
<RECEIVABLES> 12,626
<ALLOWANCES> (1,675)
<INVENTORY> 279
<CURRENT-ASSETS> 17,330
<PP&E> 43,371
<DEPRECIATION> (35,185)
<TOTAL-ASSETS> 38,973
<CURRENT-LIABILITIES> 15,463
<BONDS> 0
0
0
<COMMON> 121,277
<OTHER-SE> (99,834)
<TOTAL-LIABILITY-AND-EQUITY> 38,973
<SALES> 0
<TOTAL-REVENUES> 12,709
<CGS> 0
<TOTAL-COSTS> 13,347
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 230
<INCOME-PRETAX> (868)
<INCOME-TAX> 0
<INCOME-CONTINUING> (868)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (868)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
