U.S. Securities and Exchange Commission
Washington, D.C. 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 December 31, 1998, 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 0-25866
------------------------------
PHOENIX GOLD INTERNATIONAL, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
OREGON 93-1066325
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9300 NORTH DECATUR STREET, PORTLAND, OREGON 97203
---------------------------------------------------
(Address of principal executive offices) (Zip code)
(503) 288-2008
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
There were 3,248,745 shares of the issuer's common stock outstanding as of
January 29, 1999.
<PAGE>
<TABLE>
<CAPTION>
PHOENIX GOLD INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1998
INDEX
-----
Part I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Balance Sheets at December 31, 1998 (unaudited)
and September 30, 1998 (audited) 3
Statements of Earnings for the Three Months Ended
December 31, 1998 and 1997 (unaudited) 4
Statements of Cash Flows for the Three Months Ended
December 31, 1998 and 1997 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
INDEX TO EXHIBITS 13
</TABLE>
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
PHOENIX GOLD INTERNATIONAL, INC.
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------------ ------------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,599 $ 2,602
Accounts receivable, net 4,594,460 4,287,965
Inventories 6,321,512 6,886,720
Prepaid expenses 254,438 169,621
Deferred taxes 434,000 446,000
------------------ ------------------
Total current assets 11,607,009 11,792,908
Property and equipment, net 2,316,748 2,522,005
Goodwill, net 207,798 217,702
Deferred taxes 569,000 567,000
Other assets 100,089 108,513
------------------ ------------------
Total assets $ 14,800,644 $ 15,208,128
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,197,355 $ 1,781,341
Line of credit 1,508,189 900,000
Accrued payroll and benefits 262,577 420,209
Other accrued expenses 379,432 448,214
Current portion of long-term obligations 218,061 222,529
------------------ ------------------
Total current liabilities 3,565,614 3,772,293
Long-term obligations 887,492 938,233
Shareholders' equity:
Preferred stock;
Authorized - 5,000,000 shares; none outstanding - -
Common stock, no par value;
Authorized - 20,000,000 shares
Issued and outstanding - 3,248,745 and 3,464,745 shares 7,192,422 7,548,822
Retained earnings 3,155,116 2,948,780
------------------ ------------------
Total shareholders' equity 10,347,538 10,497,602
------------------ ------------------
Total liabilities and shareholders' equity $ 14,800,644 $ 15,208,128
================== ==================
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Net sales $ 6,665,935 $ 6,058,001
Cost of sales 4,944,883 4,643,204
------------------ ------------------
Gross profit 1,721,052 1,414,797
Operating expenses:
Selling 786,681 755,053
General and administrative 542,177 566,278
------------------ ------------------
Total operating expenses 1,328,858 1,321,331
------------------ ------------------
Income from operations 392,194 93,466
Other income (expense):
Interest expense (48,858) (97,439)
Other income, net - 7,975
------------------ ------------------
Total other income (expense) (48,858) (89,464)
------------------ ------------------
Earnings before income taxes 343,336 4,002
Income tax expense (137,000) (1,000)
------------------ ------------------
Net earnings $ 206,336 $ 3,002
================== ==================
Earnings per share - basic and diluted $ 0.06 $ 0.00
================== ==================
Average shares outstanding - basic 3,436,261 3,464,555
================== ==================
Average shares outstanding - diluted 3,436,261 3,485,296
================== ==================
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
----------------------------------
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 206,336 $ 3,002
Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities:
Depreciation and amortization 245,825 252,424
Deferred taxes 10,000 31,000
Changes in operating assets and liabilities:
Accounts receivable (306,495) 852,700
Inventories 565,208 311,300
Prepaid expenses (84,817) (142,537)
Other assets - (3,106)
Accounts payable (583,986) (446,397)
Accrued expenses (226,414) (164,187)
---------------- --------------
Net cash provided by (used in) operating activities (174,343) 694,199
Cash flows from investing activities:
Capital expenditures, net (22,240) (70,718)
---------------- ---------------
Net cash used in investing activities (22,240) (70,718)
Cash flows from financing activities:
Line of credit, net 608,189 (554,219)
Repayment of long-term obligations (55,209) (96,221)
Purchase of common stock (356,400) -
Proceeds from exercise of stock options - 26,957
---------------- ----------------
Net cash provided by (used in) financing activities 196,580 (623,483)
---------------- ----------------
Decrease in cash and cash equivalents (3) (2)
Cash and cash equivalents, beginning of period 2,602 2,603
--------------- ---------------
Cash and cash equivalents, end of period $ 2,599 $ 2,601
=============== ===============
Supplemental disclosure:
Cash paid for interest $ 50,000 $ 102,000
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
5
<PAGE>
PHOENIX GOLD INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - UNAUDITED FINANCIAL STATEMENTS
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted from these unaudited financial statements. These unaudited
financial statements should be read in conjunction with the financial statements
and notes included in the Company's Annual Report on Form 10-K for the year
ended September 30, 1998 filed with the Securities and Exchange Commission. The
results of operations for the three-month period ended December 31, 1998 are not
necessarily indicative of the operating results for the full year. In the
opinion of management, all adjustments, consisting only of normal recurring
accruals, have been made to present fairly the Company's financial position at
December 31, 1998 and the results of its operations and its cash flows for the
three-month periods ended December 31, 1998 and 1997.
NOTE 2 - REPORTING PERIODS
The Company's fiscal year is the 52-week or 53-week period ending the last
Sunday in September. Fiscal 1999 and fiscal 1998 are 52-week years and all
quarters are 13-week periods. For presentation convenience, the Company has
indicated in these financial statements that its fiscal year ended on September
30 and that the three months presented ended on December 31.
NOTE 3 - PROSPECTIVE ACCOUNTING CHANGE
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14, FINANCIAL REPORTING FOR
SEGMENTS OF A BUSINESS ENTERPRISE. SFAS No. 131 will be effective for the year
ending September 30, 1999 and requires that comparative information from earlier
years be restated to conform to the requirements of this standard. Phoenix Gold
operates in a single industry segment. Adoption of SFAS No. 131 may result in
additional disclosures in the notes to financial statements, but will have no
impact on the financial statements.
6
<PAGE>
NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost or market and consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
--------------------- ---------------------
<S> <C> <C>
Raw materials $ 2,453,241 $ 2,732,112
Work-in-process 5,923 8,527
Finished goods 3,777,595 4,058,828
Supplies 84,753 87,253
===================== =====================
Total inventories $ 6,321,512 $ 6,886,720
===================== =====================
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
--------------------- ---------------------
<S> <C> <C>
Machinery, equipment, and vehicles $ 4,546,702 $ 4,526,903
Leasehold improvements 1,527,834 1,527,834
Construction in progress 49,276 46,835
--------------------- ---------------------
6,123,812 6,101,572
Less accumulated depreciation
and amortization (3,807,064) (3,579,567)
===================== =====================
Total property and equipment, net $ 2,316,748 $ 2,522,005
===================== =====================
</TABLE>
NOTE 6 - LINE OF CREDIT
During December 1998, the Company renewed its $5.5 million revolving
operating line of credit on essentially the same terms through December 1999.
NOTE 7 - COMMITMENTS
The Board of Directors has authorized the Company to purchase up to $1.0
million of Company common stock. On December 15, 1998, the Company acquired
216,000 shares of its common stock from a third party for $356,400.
During December 1998, the Company exercised its option to purchase the
facility which it leases under an operating lease. The purchase price is $3.1
million and the closing is expected to occur on June 30, 1999. Management
intends to sell and leaseback the facility as soon as the purchase is completed.
The completion of the sale and leaseback transaction assumes that management is
able to locate a buyer and negotiate the sale and leaseback on acceptable terms
to the Company. There is no assurance that management will be able to identify a
buyer for the facility and to negotiate a sale and leaseback on acceptable
terms.
7
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
- ---------------------
Net sales increased $608,000, or 10.0%, to $6.7 million for the three
months ended December 31, 1998 compared to $6.1 million for the three months
ended December 31, 1997 due principally to increased domestic sales. Domestic
sales increased $1.1 million, or 30.9%, to $4.8 million for the three months
ended December 31, 1998 compared to $3.7 million for the three months ended
December 31, 1997. International sales decreased 22.3% to $1.8 million for the
three months ended December 31, 1998, from $2.4 million in the comparable 1997
period. International sales represented 27.7% and 39.2% of net sales for the
three months ended December 31, 1998 and 1997, respectively. The Company expects
international sales for fiscal 1999 to remain at levels lower than historically
achieved due to current world-wide economic conditions.
Sales of electronics, speakers and accessories increased 14.9%, 4.9% and
2.9%, respectively for the three months ended December 31, 1998 compared to the
corresponding quarter in fiscal 1998 due to increased domestic sales.
Gross profit increased to 25.8% from 23.4% of net sales for the three
months ended December 31, 1998 and 1997, respectively, primarily due to
increased sales volume which caused manufacturing overhead to decrease as a
percentage of sales.
Operating expenses consist of selling, general and administrative expenses.
Total operating expenses increased $8,000, or 0.6%, to $1,329,000 for the three
months ended December 31, 1998 compared to $1,321,000 for the three months ended
December 31, 1997. Operating expenses were 19.9% and 21.8% of net sales in the
respective three-month periods.
Selling expenses increased $32,000, or 4.2%, to $787,000 for the three
months ended December 31, 1998 compared to $755,000 for the comparable 1997
period. Selling expenses were 11.8% and 12.5% of net sales in the respective
three-month periods. The increased selling expenses in dollar amount were due to
higher payroll costs as a result of additional sales and marketing personnel.
General and administrative expenses decreased $24,000, or 4.3%, to
$542,000 for the three months ended December 31, 1998 compared to $566,000 for
the comparable fiscal 1998 period. General and administrative expenses were 8.1%
and 9.3% of net sales in the respective three-month periods. The decreased
general and administrative expenses were due to lower payroll costs as a result
of decreases in personnel.
Interest expense decreased by $49,000 to $48,000 for the three months
ended December 31, 1998 compared to $97,000 for the three months ended December
31, 1997. The decrease in interest expense was due to lower average debt levels
during the three months ended December 31, 1998 due to the reduction of debt as
compared to the corresponding quarter in fiscal 1998 and lower interest rates on
the outstanding borrowings.
8
<PAGE>
Net earnings were $206,000, or $0.06 per share (basic and diluted) for the
three months ended December 31, 1998, compared to net earnings of $3,000, or
$0.00 per share (basic and diluted) for the three months ended December 31,
1997. The increase in net earnings in the first quarter of fiscal 1999 compared
to the corresponding quarter in fiscal 1998 was due to increased sales, improved
gross margin and cost control programs which reduced operating expenses as a
percentage of sales.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary needs for funds are for working capital and, to a
lesser extent, for capital expenditures. The Company financed its operations
during the first quarter of fiscal 1999 from cash provided from financing
activities. Net cash used in operating activities was $174,000 for the three
months ended December 31, 1998. When cash flow from operations is less than
current needs, the Company increases the balance owing on its operating line of
credit. When cash flow from operations exceeds current needs, the Company pays
down in part the balance owing on its operating line of credit rather than
investing and accumulating excess cash, resulting in low reported cash balances.
Accounts receivable increased by $306,000 during the three months ended
December 31, 1998 due to the increase in net sales. Inventories decreased by
$565,000 and accounts payable decreased $584,000 during the first quarter of
fiscal 1999 due to management's continuing efforts to reduce inventory levels in
order to reduce outstanding liabilities. Prepaid expenses increased $85,000
during the three months ended December 31, 1998, primarily due to trade show
deposits and insurance costs incurred at the beginning of the Company's fiscal
year. The line of credit increased $608,000 due to the reduction in accounts
payable and accrued expenses. Accrued expenses decreased $226,000 due to lower
accrued payroll and benefits at December 31, 1998. Overall, net working capital
increased $21,000 during the first quarter of fiscal 1999.
During the first quarter of fiscal 1999, the Board of Directors authorized
the Company to purchase up to $1.0 million of Company common stock. On December
15, 1998, the Company acquired 216,000 shares of its common stock from a third
party for $356,400 financed by borrowings under the Company's operating line of
credit.
During the first quarter of fiscal 1999, the Company also completed its
restructuring plan implemented during the fourth quarter of fiscal 1998. Cash
payments were not material.
The Company made capital expenditures of $22,000 in the three months ended
December 31, 1998. Management anticipates that discretionary capital
expenditures for the remainder of fiscal 1999 will not exceed $400,000. These
anticipated expenditures will be financed from proceeds of short-term debt and
cash provided from operations.
During December 1998, the Company exercised its option to purchase the
office and manufacturing facility which it leases under an operating lease. The
purchase price is $3.1 million and the closing is expected to occur on June 30,
1999. Management intends to sell and leaseback the facility as soon as the
purchase is completed. The completion of the sale and leaseback transaction
assumes that management is able to locate a buyer and negotiate the sale and
leaseback on acceptable terms to the Company. There is no assurance that
management will be able to identify a buyer for the facility and to negotiate a
sale and leaseback on acceptable terms.
9
<PAGE>
During December 1998, the Company renewed its $5.5 million revolving
operating line of credit on essentially the same terms through December 1999.
The Company has assessed its exposure to market risks for its financial
instruments and has determined that its exposures to such risks are not
material.
YEAR 2000 CONVERSION
- --------------------
The Company has begun a process to prepare its computer systems and
applications for the Year 2000 date conversion. The process includes a review of
information systems used in the Company's internal business as well as by third
party vendors, manufacturers and suppliers. The Company has substantially
completed its internal assessment of Year 2000 conversion requirements. The
Company's products do not include embedded technology, such as microcontrollers.
The Company's third party interfaces, such as those with its vendors and
customers, are not computerized, and the Company's information systems utilize
standard, readily available business software. As a result, the Company believes
the effect of the Year 2000 conversion on its business will not be material.
Information systems that are determined not to be Year 2000 compliant will
be modified, upgraded or replaced through acquisition and implementation of "off
the shelf" upgrades to existing information system software. A portion of the
upgrades has already been acquired from third party vendors at a cost of less
than $10,000, and the balance of the upgrades is believed to be readily
available. The Company plans to implement such upgrades during fiscal 1999 and
believes the aggregate cost of all such upgrades will not be material.
There can be no assurance, however, because of the existence of numerous
systems and related components within the Company and the interdependency of
these systems, that certain systems at the Company, or systems at entities that
provide services or goods for the Company, will operate in the Year 2000. The
Company is continuing to evaluate the risks to the Company of failure to be Year
2000 compliant and to develop a contingency plan. Although it is not currently
anticipated, the inability to complete the Company's Year 2000 conversion on a
timely basis or the failure of a system at the Company or at an entity that
provides services and goods to the Company is not expected to have a material
impact on future operating results, financial condition or cash flows.
FORWARD-LOOKING STATEMENTS
- --------------------------
This Report contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, including, without
limitation, statements as to expectations, beliefs and future financial
performance, that are based on current expectations and are subject to certain
risks, trends and uncertainties that could cause actual results to vary from
those projected, which variances may have a material adverse effect on the
Company. Among the factors that could cause actual results to differ materially
are the following: business conditions and growth in the car audio, professional
sound and custom audio/video and home theater markets and the general economy;
business conditions in international markets; changes in the number of
customers; the timing and size of orders by dealers, distributors and OEM
customers; competitive factors such as rival products and price pressures; the
failure of new products to compete successfully in existing or new markets; the
failure to achieve timely improvement in the manufacturing ramp with respect to
new products; changes in product mix; availability and price of components,
subassemblies and products supplied by third party vendors; and cost and yield
issues associated with production at the Company's factory.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Loan Agreement dated December 18, 1998 between the
Company and U.S. National Bank Association
10.2 Promissory Note dated December 28, 1998 made by the
Company in favor of U.S. National Bank Association
27 Financial Data Schedule
(b) Reports on Form 8-K
A current report on Form 8-K, dated December 18, 1998, was
filed on December 21, 1998 to report the Company's
purchase of 216,000 shares of its common stock.
11
<PAGE>
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.
PHOENIX GOLD INTERNATIONAL, INC.
/s/ Joseph K. O'Brien
------------------------
Joseph K. O'Brien
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: February 4, 1999
12
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit Page
------- ----
<S> <C> <C>
10.1 Loan Agreement dated December 18, 1998 between the Company
and U.S. National Bank Association 14
10.2 Promissory Note dated December 28, 1998 made by the Company
in favor of U.S. National Bank Association 20
27 Financial Data Schedule 27
</TABLE>
13
December 18, 1998
ACKNOWLEDGMENT COPY
Mr. Joe O'Brien, CFO
Phoenix Gold International, Inc.
9300 North Decatur
Portland, OR 97203
Dear Joe:
I am pleased to advise you that U.S. Bank National Association has renewed your
revolving line of credit subject to the following terms and conditions:
BORROWER: Phoenix Gold International, Inc.
GUARANTOR(S): None.
REVOLVING LINE OF CREDIT:
-------------------------
MAXIMUM LOAN AMOUNT: $5,500,000.
PURPOSE: Operating funds.
INTEREST RATE: Borrower will have the option of:
1) Fully floating variable interest
rate equal to Lender's Prime Rate
(currently 7.75%),
2) London Inter-Bank Offering Rate
(LIBOR) + 2.50% (currently 7.80%,
based on a 60-day LIBOR rate of
5.30%).
LIBOR advances are subject to:
------------------------------
a) Minimum advance of $500,000, increments of
$100,000 thereafter.
b) No prepayment is permitted.
c) Contracts may be fixed for 1, 2, or 3 months
(not to extend past expiry date).
d) Two business days' notice required with rates
set between 8:00 AM and 12:00 PM Pacific Coast
Time.
14
<PAGE>
THE INTEREST RATE CHARGED TO
BORROWER IS TIED TO THE PRIME RATE
OF U.S. BANK NATIONAL ASSOCIATION,
COMPUTED ON THE BASIS OF A 360-DAY
YEAR AND THE ACTUAL NUMBER OF DAYS
ELAPSED. BORROWER IS ADVISED THAT
U.S. BANK NATIONAL ASSOCIATION'S
PRIME RATE IS THE RATE OF INTEREST
WHICH THE BANK FROM TIME TO TIME
IDENTIFIES AND PUBLICLY ANNOUNCES AS
ITS PRIME RATE, AND IS NOT
NECESSARILY, FOR EXAMPLE, THE LOWEST
RATE OF INTEREST WHICH THE BANK
COLLECTS FROM ANY BORROWER OR GROUP
OF BORROWERS.
MATURITY DATE: Payable on demand.
REVIEW DATE: December 31, 1999.
REPAYMENT: Optional advance note; interest
payable monthly, principal payable
upon demand, automated credit sweep
on prime based borrowings.
REPAYMENT OF EACH ADVANCE RECEIVED
BY THE BORROWER UNDER THE LINE OF
CREDIT IS SUBJECT TO THE TERMS OF
THE PROMISSORY NOTE EVIDENCING THAT
ADVANCE AS WELL AS ALL TERMS AND
CONDITIONS OF THIS LETTER. IN THE
EVENT OF ANY CONFLICT BETWEEN THE
TWO, THE TERMS AND CONDITIONS OF THE
PROMISSORY NOTE SHALL CONTROL.
LOAN FEE: Upfront annual loan fee of 1/8th of
1% ($6,875), plus all out of pocket
expenses.
COLLATERAL: Perfected first priority security
interest in all of Borrower's now
owned and hereafter acquired
accounts receivable, inventory, and
equipment. (Except equipment which
is currently pledged to other
lenders as security).
COSTS: Borrower shall be responsible for
all of the Banks costs, expenses,
fees, including attorneys fees,
associated with the negotiation
and documentation of these credit
facilities.
FINANCIAL REPORTING
1. Annual CPA audited financial statement to be provided within 90
days of the end of each fiscal year.
2. Monthly company prepared financial statements to be provided
within 30 days of the end of each month.
3. Quarterly compliance certificate to be provided within 30 days of
the end of each quarter.
15
<PAGE>
FINANCIAL COVENANTS
-------------------
As long as indebted to Bank, Borrower is to be in compliance with the following
financial benchmarks, as described below:
CURRENT RATIO: Maintain a ratio of Current Assets
to Current Liabilities equal to or
greater than 2.10:1. Current Ratio
is defined as Current Assets divided
by Current Liabilities
TANGIBLE NET WORTH: Maintain a Tangible Net Worth in
excess of $9,900,000. Tangibl Net
Worth is defined as Net Worth minus
any intangible assets.
PERMITTED STOCK
REPURCHASE Beginning October 1, 1998, up to a
maximum of $500,000 worth of
publicly traded, common stock can be
repurchased without prior written
bank approval as long as the
Borrower remains in compliance with
all financial covenants.
TIMES FIXED
CHARGE COVERAGE: Maintain a ratio of Times Fixed
Charge Coverage equal to or greater
than 1.25:1. Defined as earnings
before interest, taxes,
depreciation, and amortization
(EBITDA) divided by scheduled
principal payments on long term debt
and capital leases plus interest
expense plus cash funded capital
expenditures plus dividends.
All computations made to determine compliance with the covenant requirements
shall be made in accordance with generally accepted accounting principles,
applied on a consistent basis and certified by Borrower as being true and
correct. The Times Fixed Charge Coverage will be based on a rolling four quarter
average.
GENERAL TERMS AND CONDITIONS
1. PRIME RATE: U.S. Bank's prime rate is the rate of interest which Lender
from time to time establishes as its prime rate and is not, for example,
the lowest rate of interest which Lender collects from any borrower or
class of borrowers.
2. LOAN ADVANCES: Advances may be requested by Borrower from time to time in
accordance with the terms of the promissory note. All advances shall be
made at the sole option of Lender. Lender may decline to make any advance
and may terminate the availability of advances at any time.
3. INSURANCE: Borrower shall maintain insurance in such amounts and covering
such risks as Lender shall require.
4. FINANCIAL REPORTING: At any time requested by Lender, Borrower shall
furnish any additional information regarding Borrower's financial condition
and business operations that Lender reasonably requests. This information
may include, but is not limited to, financial statements, tax returns,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets and forecasts.
16
<PAGE>
5. LOAN DOCUMENTATION: Borrower shall deliver to Lender duly executed
promissory notes, deeds of trust, mortgages, security agreements, financing
statements, loan agreements, guaranties, borrower authorizations, attorney
opinion letters and other documents ("Loan Documents") as required by
Lender in form and substance satisfactory to Lender and its counsel.
6. NON-ASSIGNABLE: This credit accommodation may not be assigned by Borrower.
No guarantor or any third party is intended as a third-party beneficiary or
has any right to rely hereon.
7. ARBITRATION: Borrower and Lender hereby agree to be bound by the terms of
the Arbitration clause attached hereto as Exhibit A.
8. EXPENSES: Borrower shall reimburse Lender for all out-of-pocket expenses
incurred in connection with this credit accommodation upon demand, whether
or not this transaction closes or is funded. Such expenses shall include,
without limitation, attorney fees, title insurance fees, travel costs,
examination expenses, and filing fees.
9. EXPIRATION DATE: This offer will expire on December 31, 1998 and the
revolving credit facility contemplated by this letter must be documented
and closed on or before January 15, 1999.
10. ACCESS LAWS: Without limiting the generality of any provision of this
agreement requiring Borrower to comply with applicable laws, rules, and
regulations, Borrower agrees that it will at all times comply with
applicable laws relating to disabled access including, but not limited to,
all applicable titles of the Americans with Disabilities Act of 1990.
This letter summarizes certain principal terms and conditions relating to the
loan and supersedes all prior oral or written negotiations, understandings,
representations and agreements with respect to the loan. However, the Loan
Documents will include additional terms, conditions, covenants, representations,
warranties and other provisions which Lender customarily includes in similar
transactions or which Lender determines to be appropriate to this transaction.
Except to the extent modified by any other agreement, all terms, condition,
covenants and other provisions of this letter shall remain in effect until the
revolving line of credit (including any renewals, extensions or modifications)
is terminated and the loan balance is paid in full, and by signing below,
Borrower agrees to comply with all such provisions.
In addition to the events of default in any Loan Document, any failure to comply
with any term, condition or obligation in this letter shall constitute an event
of default under each of the Loan Documents. The provisions of this letter shall
survive the closing of the loan and the execution and delivery of the Loan
Documents. In the event of a conflict between this letter and the Loan
Documents, the terms of the Loan Documents shall control.
UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY LENDERS
AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT
FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S
RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY THE LENDER
TO BE ENFORCEABLE.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER OREGON LAW.
17
<PAGE>
If the above terms and conditions are acceptable to you, please sign, date and
return the acknowledgment copy of this letter on or before the Expiration Date.
Sincerely,
/s/ Jeffery Swift
Jeffery Swift
Vice President
275-5175
Borrower hereby accepts Lender's offer to extend credit on terms and conditions
stated above. Borrower hereby agrees to the Arbitration clause set forth in
Exhibit A attached hereto.
PHOENIX GOLD INTERNATIONAL, INC.
- --------------------------------
By: /s/ Joseph K. O'Brien
-----------------------
Title: Chief Financial Officer
-----------------------
Date: December 29, 1998
-----------------------
18
<PAGE>
EXHIBIT A
ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this letter or the revolving line of credit or otherwise, including
without limitation contract and tort disputes, shall be arbitrated pursuant to
the Rules of the American Arbitration Association, upon request of either party.
No act to take or dispose of any collateral securing any loan shall constitute a
waiver of this arbitration agreement or be prohibited by this arbitration
agreement. This includes, without limitation, obtaining injunctive relief or a
temporary restraining order; foreclosing by notice and sale under any deed of
trust or mortgage; obtaining a writ of attachment or imposition of a receiver;
or exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to Article
9 of the Uniform Commercial Code. Any disputes, claims, or controversies
concerning the lawfulness or reasonableness or any act, or exercise of any
right, concerning any collateral securing any loan, including any claim to
rescind, reform, or otherwise modify any agreement relating to the collateral
securing any loan, shall also be arbitrated, provided however that no arbitrator
shall have the right or other power to enjoin or restrain any act of any party.
Judgment upon any award rendered by any arbitrator may be entered in any court
having jurisdiction. Nothing herein shall preclude any party from seeking
equitable relief from a court of competent jurisdiction. The statute of
limitations, estoppel, waiver, laches, and similar doctrines which would
otherwise be applicable in an action brought by a party shall be applicable in
any arbitration proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of any action for these purposes. The Federal
Arbitration Act shall apply to the construction, interpretation, and enforcement
of this arbitration provision.
19
ALTERNATIVE RATE OPTIONS
PROMISSORY NOTE
(PRIME RATE, LIBOR)
$5,500,000.00 DATED AS OF: 12-28-98
- --------------------------------------------------------- -----------
PHOENIX GOLD INTERNATIONAL, INC. ("BORROWER")
- --------------------------------------------------------------------------------
U.S. BANK NATIONAL ASSOCIATION ("LENDER")
- --------------------------------------------------------------------------------
1. TYPE OF CREDIT. This note is given to evidence Borrower's obligation to
repay all sums which Lender may from time to time advance to Borrower
("Advances") under a:
/ / single disbursement loan. Amounts loaned to Borrower hereunder will be
disbursed in a single Advance in the amount shown in Section 2.
/X/ revolving line of credit. No Advances shall be made which create a
maximum amount outstanding at any one time which exceeds the maximum
amount shown in Section 2. However, Advances hereunder may be borrowed,
repaid and reborrowed, and the aggregate Advances loaned hereunder from
time to time may exceed such maximum amount.
/ / non-revolving line of credit. Each Advance made from time to time
hereunder shall reduce the maximum amount available shown in Section 2.
Advances loaned hereunder which are repaid may not be reborrowed.
2. PRINCIPAL BALANCE. The unpaid principal balance of all Advances outstanding
under this note ("Principal Balance") at one time shall not exceed $5,500,000.00
3. PROMISE TO PAY. For value received Borrower promises to pay to Lender or
order at COMMERCIAL LOAN SERVICING WEST, the Principal Balance of this note,
with interest thereon at the rate(s) specified in Sections 4 and 11 below.
4. INTEREST RATE. The interest rate on the Principal Balance outstanding may
vary from time to time pursuant to the provisions of this note. Subject to the
provisions of this note, Borrower shall have the option from time to time of
choosing to pay interest at the rate or rates and for the applicable periods of
time based on the rate options provided herein; provided, however, that once
Borrower notifies Lender of the rate option chosen in accordance with the
provisions of this note, such notice shall be irrevocable. The rate options are
the Prime Borrowing Rate and the LIBOR Borrowing Rate, each as defined herein.
(a) DEFINITIONS. The following terms shall have the following meanings:
"Business Day" means any day other than a Saturday, Sunday, or
other day that commercial banks in Portland, Oregon or New York City are
authorized or required by law to close; provided, however that when used in
connection with a LIBOR Rate, LIBOR Amount or LIBOR Interest Period such term
shall also exclude any day on which dealings in U.S. dollar deposits are not
carried on in the London interbank market.
"LIBOR Amount" means each principal amount for which Borrower
chooses to have the LIBOR Borrowing Rate apply for any specified LIBOR Interest
Period.
"LIBOR Interest Period" means as to any LIBOR Amount, a period
of 1, 2 OR 3 months commencing on the date the LIBOR Borrowing Rate becomes
applicable thereto; PROVIDED, however, that: (i) the first day of each LIBOR
Interest Period must be a Business Day; (ii) no LIBOR Interest Period shall be
selected which would extend beyond EXPIRY ; (iii) no LIBOR Interest Period shall
extend beyond the date of any principal payment required under Section 6 of this
note, unless the sum of the Prime Rate Amount, plus LIBOR Amounts with LIBOR
Interest Periods ending on or before the scheduled date of such principal
payment, plus principal amounts remaining unborrowed under a line of credit,
equals or exceeds the amount of such principal payment; (iv) any LIBOR Interest
Period which would otherwise expire on a day which is not a Business Day, shall
be extended to the next succeeding Business Day, unless the result of such
extension would be to extend such LIBOR Interest Period into another calendar
month, in which event the LIBOR Interest Period shall end on the immediately
preceding Business Day; and (v) any LIBOR Interest Period that begins on the
last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such LIBOR
Interest Period) shall end on the last Business Day of a calendar month.
20
<PAGE>
"LIBOR Rate" means, for any LIBOR Interest Period, the rate per
annum (computed on the basis of a 360-day year and the actual number of days
elapsed and rounded upward to the nearest 1/16 of 1%) established by Lender as
its LIBOR Rate, based on Lender's determination, on the basis of such factors as
Lender deems relevant, of the rate of interest at which U.S. dollar deposits
would be offered to U.S. Bank National Association in the London interbank
market at approximately 11 a.m. London time on the date which is two Business
Days prior to the first day of such LIBOR Interest Period for delivery on the
first day of such LIBOR Interest Period for the number of months therein;
provided, however, that the LIBOR Rate shall be adjusted to take into account
the maximum reserves required to be maintained for Eurocurrency liabilities by
banks during each such LIBOR Interest Period as specified in Regulation D of the
Board of Governors of the Federal Reserve System or any successor regulation.
"Prime Rate" means the rate of interest which Lender from time
to time establishes as its prime rate and is not, for example, the lowest rate
of interest which Lender collects from any borrower or class of borrowers. When
the Prime Rate is applicable under Section 4(b) or 11(b), the interest rate
hereunder shall be adjusted without notice effective on the day the Prime Rate
changes, but in no event shall the rate of interest be higher than allowed by
law.
"Prime Rate Amount" means any portion of the Principal Balance
bearing interest at the Prime Borrowing Rate.
(b) THE PRIME BORROWING RATE.
(i) The Prime Borrowing Rate is a per annum rate equal to the Prime
Rate plus 0.00% per annum.
---------
(ii) Whenever Borrower desires to use the Prime Borrowing Rate option,
Borrower shall give Lender notice orally or in writing in accordance with
Section 15 of this note, which notice shall specify the requested effective date
(which must be a Business Day) and principal amount of the Advance or increase
in the Prime Rate Amount, and whether Borrower is requesting a new Advance under
a line of credit or conversion of a LIBOR Amount to the Prime Borrowing Rate.
(iii) Subject to Section 11 of this note, interest shall accrue on the
unpaid Principal Balance at the Prime Borrowing Rate unless and except to the
extent that the LIBOR Borrowing Rate is in effect.
(c) THE LIBOR BORROWING RATE.
(i) The LIBOR Borrowing Rate is the LIBOR Rate plus 2.50% per annum.
-----
(ii) Borrower may obtain LIBOR Borrowing Rate quotes from Lender
between 8:00 a.m. and 10:00 a.m. (Portland, Oregon time) on any Business Day.
Borrower may request an Advance, conversion of any portion of the Prime Rate
Amount to a LIBOR Amount or a new LIBOR Interest Period for an existing LIBOR
Amount, at such rate only by giving Lender notice in accordance with Section 4
(c) (iii) before 10:00 a.m. (Portland, Oregon time) on such day.
(iii) Whenever Borrower desires to use the LIBOR Borrowing Rate option,
Borrower shall give Lender irrevocable notice (either in writing or orally and
promptly confirmed in writing) between 8:00 a.m. and 10:00 a.m. (Portland,
Oregon time) two (2) Business Days prior to the desired effective date of such
rate. Any oral notice shall be given by, and any written notice or confirmation
of an oral notice shall be signed by, the person(s) authorized in Section 15 of
this note, and shall specify the requested effective date of the rate, LIBOR
Interest Period and LIBOR Amount, and whether Borrower is requesting a new
Advance at the LIBOR Borrowing Rate under a line of credit, conversion of all or
any portion of the Prime Rate Amount to a LIBOR Amount, or a new LIBOR Interest
Period for an outstanding LIBOR Amount. Notwithstanding any other term of this
note, Borrower may elect the LIBOR Borrowing Rate in the minimum principal
amount of $ 500,000.00 and in multiples of $ 100,000.00 above such amount;
PROVIDED, however, that no more than N/A separate LIBOR Interest Periods may be
in effect at any one time.
(iv) If at any time the LIBOR Rate is unascertainable or unavailable to
Lender or if LIBOR Rate loans become unlawful, the option to select the LIBOR
Borrowing Rate shall terminate immediately. If the LIBOR Borrowing Rate is then
in effect, (A) it shall terminate automatically with respect to all LIBOR
Amounts (i) on the last day of each then applicable LIBOR Interest Period, if
Lender may lawfully continue to maintain such loans, or (ii) immediately if
Lender may not lawfully continue to maintain such loans through such day, and
(B) subject to Section 11, the Prime Borrowing Rate automatically shall become
effective as to such amounts upon such termination.
21
<PAGE>
(v) If at any time after the date hereof (A) any revision in or
adoption of any applicable law, rule, or regulation or in the interpretation or
administration thereof (i) shall subject Lender or its Eurodollar lending office
to any tax, duty, or other charge, or change the basis of taxation of payments
to Lender with respect to any loans bearing interest based on the LIBOR Rate, or
(ii) shall impose or modify any reserve, insurance, special deposit, or similar
requirements against assets of, deposits with or for the account of, or credit
extended by Lender or its Eurodollar lending office, or impose on Lender or its
Eurodollar lending office any other condition affecting any such loans, and (B)
the result of any of the foregoing is (i) to increase the cost to Lender of
making or maintaining any such loans or (ii) to reduce the amount of any sum
receivable under this note by Lender or its Eurodollar lending office, Borrower
shall pay Lender within 15 days after demand by Lender such additional amount as
will compensate Lender for such increased cost or reduction. The determination
hereunder by Lender of such additional amount shall be conclusive in the absence
of manifest error. If Lender demands compensation under this Section 4(c)(v),
Borrower may upon three (3) Business Days' notice to Lender pay the accrued
interest on all LIBOR Amounts, together with any additional amounts payable
under Section 4(c)(vi). Subject to Section 11, upon Borrower's paying such
accrued interest and additional costs, the Prime Borrowing Rate immediately
shall be effective with respect to the unpaid principal balance of such LIBOR
Amounts.
(vi) Borrower shall pay to Lender, on demand, such amount as Lender
reasonably determines (determined as though 100% of the applicable LIBOR Amount
had been funded in the London interbank market) is necessary to compensate
Lender for any direct or indirect losses, expenses, liabilities, costs, expenses
or reductions in yield to Lender, whether incurred in connection with
liquidation or re-employment of funds or otherwise, incurred or sustained by
Lender as a result of: (A) Any payment or prepayment of a LIBOR Amount,
termination of the LIBOR Borrowing Rate or conversion of a LIBOR Amount to the
Prime Borrowing Rate on a day other than the last day of the applicable LIBOR
Interest Period (including as a result of acceleration or a notice pursuant to
Section 4(c)(v)); or (B) Any failure of Borrower to borrow, continue or prepay
any LIBOR Amount or to convert any portion of the Prime Rate Amount to a LIBOR
Amount after Borrower has given a notice thereof to Lender.
(vii) If Borrower chooses the LIBOR Borrowing Rate, Borrower shall pay
interest based on such rate, plus any other applicable taxes or charges
hereunder, even though Lender may have obtained the funds loaned to Borrower
from sources other than the London interbank market. Lender's determination of
the LIBOR Borrowing Rate and any such taxes or charges shall be conclusive in
the absence of manifest error.
(viii) Notwithstanding any other term of this note, Borrower may not
select the LIBOR Borrowing Rate if an event of default hereunder has occurred
and is continuing.
(ix) Nothing contained in this note, including without limitation the
determination of any LIBOR Interest Period or Lender's quotation of any LIBOR
Borrowing Rate, shall be construed to prejudice Lender's right, if any, to
decline to make any requested Advance or to require payment on demand.
5. COMPUTATION OF INTEREST. All interest under Section 4 and Section 11
will be computed at the applicable rate based on a 360-day year and applied to
the actual number of days elapsed.
6. PAYMENT SCHEDULE
(a) PRINCIPAL. Principal shall be paid:
/X/ on demand.
/ / on demand, or if no demand, on **** .
/ / on *** .
-----
/ / subject to Section 8, in installments of
/ /**** each, plus accrued interest, beginning on **** and on the
same day of each **** thereafter until *** when the entire
Principal Balance plus interest thereon shall be due and
payable.
/ / **** each, including accrued interest, beginning on **** and on
the same day of each *** thereafter until *** when the entire
Principal Balance plus interest thereon shall be due and
payable.
/ / *****.
-----
22
<PAGE>
(b) INTEREST.
(i) Interest on the Prime Rate Amount shall be paid:
/X/ on the FIRST day of JANUARY, 1999 and on the same day of
each MONTH. thereafter prior to maturity and at maturity.
/ / at maturity.
/ / at the time each principal installment is due and at
maturity.
/ / ****.
----
(ii) Interest on all LIBOR Amounts shall be paid:
/X/ on the last day of the applicable LIBOR Interest Period,
and if such LIBOR Interest Period is longer than three
months, on the last day of each three month period
occurring during such LIBOR Interest Period, and at
maturity.
/ / *** on the *** day of *** and on the same day of each ***
thereafter prior to maturity and at maturity.
/ / at maturity.
/ / at the time each principal installment is due and at
maturity.
/ / ****.
----
7. PREPAYMENT.
(a) Prepayments of all or any part of the Prime Rate Amount may be made at
any time without penalty.
(b) Except as otherwise specifically set forth herein, Borrower may not
prepay all or any part of any LIBOR Amount or terminate any LIBOR
Borrowing Rate, except on the last day of the applicable LIBOR Interest
Period.
(c) Principal prepayments will not postpone the date of or change the
amount of any regularly scheduled payment. At the time of any principal
prepayment, all accrued interest, fees, costs and expenses shall also
be paid.
8. CHANGE IN PAYMENT AMOUNT. Each time the interest rate on this note changes
the holder of this note may, from time to time, in holder's sole discretion,
increase or decrease the amount of each of the installments remaining unpaid at
the time of such change in rate to an amount holder in its sole discretion deems
necessary to continue amortizing the Principal Balance at the same rate
established by the installment amounts specified in Section 6(a), whether or not
a "balloon" payment may also be due upon maturity of this note. Holder shall
notify the undersigned of each such change in writing. Whether or not the
installment amount is increased under this Section 8, Borrower understands that,
as a result of increases in the rate of interest the final payment due, whether
or not a "balloon" payment, shall include the entire Principal Balance and
interest thereon then outstanding, and may be substantially more than the
installment specified in Section 6.
9. ALTERNATE PAYMENT DATE. Notwithstanding any other term of this note, if
in any month there is no day on which a scheduled payment would otherwise be
due (e.g. February 31), such payment shall be paid on the last banking day of
that month.
10. PAYMENT BY AUTOMATIC DEBIT.
/X/ Borrower hereby authorizes Lender to automatically deduct the amount of
all principal and interest payments from account number **** . If there are
insufficient funds in the account to pay the automatic deduction in full, Lender
may allow the account to become overdrawn, or Lender may reverse the automatic
deduction. Borrower will pay all the fees on the account which result from the
automatic deductions, including any overdraft and non-sufficient funds charges.
If for any reason Lender does not charge the account for a payment, or if an
automatic payment is reversed, the payment is still due according to this note.
If the account is a Money Market Account, the number of withdrawals from that
account is limited as set out in the account agreement. Lender may cancel the
automatic deduction at any time in its discretion.
Provided, however, if no account number is entered above, Borrower does not want
to make payments by automatic debit.
23
<PAGE>
11. DEFAULT .
(a) Without prejudice to any right of Lender to require payment on demand or to
decline to make any requested Advance, each of the following shall be an event
of default: (i) Borrower fails to make any payment when due. (ii) Borrower fails
to perform or comply with any term, covenant or obligation in this note or any
agreement related to this note, or in any other agreement or loan Borrower has
with Lender. (iii) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this note or perform
Borrower's obligations under this note or any related documents. (iv) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (v) Borrower dies, becomes insolvent, liquidates
or dissolves, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (vi) Any creditor tries to take any of Borrower's property on
or in which Lender has a lien or security interest. This includes a garnishment
of any of Borrower's accounts with Lender. (vii) Any of the events described in
this default section occurs with respect to any general partner in Borrower or
any guarantor of this note, or any guaranty of Borrower's indebtedness to Lender
ceases to be, or is asserted not to be, in full force and effect. (viii) There
is any material adverse change in the financial condition or management of
Borrower or Lender in good faith deems itself insecure with respect to the
payment or performance of Borrower's obligations to Lender. If this note is
payable on demand, the inclusion of specific events of default shall not
prejudice Lender's right to require payment on demand or to decline to make any
requested Advance.
(b) Without prejudice to any right of Lender to require payment on demand, upon
the occurrence of an event of default, Lender may declare the entire unpaid
Principal Balance on this note and all accrued unpaid interest immediately due
and payable, without notice. Upon default, including failure to pay upon final
maturity, Lender, at its option, may also, if permitted under applicable law,
increase the interest rate on this note to a rate equal to the Prime Borrowing
Rate plus 5%. The interest rate will not exceed the maximum rate permitted by
applicable law. In addition, if any payment of principal or interest is 19 or
more days past due, Borrower will be charged a late charge of 5% of the
delinquent payment.
12. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND. Holder's records shall, at
any time, be conclusive evidence of the unpaid Principal Balance and interest
owing on this note. Notwithstanding any other provisions of this note, in the
event holder makes Advances hereunder which result in an unpaid Principal
Balance on this note which at any time exceeds the maximum amount specified in
Section 2, Borrower agrees that all such Advances, with interest, shall be
payable on demand.
13. LINE OF CREDIT PROVISIONS. If the type of credit indicated in Section 1 is a
revolving line of credit or a non-revolving line of credit, Borrower agrees that
Lender is under no obligation and has not committed to make any Advances
hereunder. Each Advance hereunder shall be made at the sole option of Lender.
14. DEMAND NOTE. If this note is payable on demand, Borrower acknowledges and
agrees that (a) Lender is entitled to demand Borrower's immediate payment in
full of all amounts owing hereunder and (b) neither anything to the contrary
contained herein or in any other loan documents (including but not limited to,
provisions relating to defaults, rights of cure, default rate of interest,
installment payments, late charges, periodic review of Borrower's financial
condition, and covenants) nor any act of Lender pursuant to any such provisions
shall limit or impair Lender's right or ability to require Borrower's payment in
full of all amounts owing hereunder immediately upon Lender's demand.
15. REQUESTS FOR ADVANCES.
(a) Any Advance may be made or interest rate option selected upon the request of
Borrower (if an individual), any of the undersigned (if Borrower consists of
more than one individual), any person or persons authorized in subsection (b) of
this Section 15, and any person or persons otherwise authorized to execute and
deliver promissory notes to Lender on behalf of Borrower.
24
<PAGE>
(b) Borrower hereby authorizes any ONE of the following individuals to request
Advances and to select interest rate options: **** unless Lender is otherwise
instructed in writing.
(c) All Advances shall be disbursed by deposit directly to Borrower's account
number ****** of Lender, or by cashier's check issued to Borrower.
(d) Borrower agrees that Lender shall have no obligation to verify the identity
of any person making any request pursuant to this Section 15, and Borrower
assumes all risks of the validity and authorization of such requests. In
consideration of Lender agreeing, at its sole discretion, to make Advances upon
such requests, Borrower promises to pay holder, in accordance with the
provisions of this note, the Principal Balance together with interest thereon
and other sums due hereunder, although any Advances may have been requested by a
person or persons not authorized to do so.
16. PERIODIC REVIEW. Lender will review Borrower's credit accommodations
periodically. At the time of the review, Borrower will furnish Lender with any
additional information regarding Borrower's financial condition and business
operations that Lender requests. This information may include but is not limited
to, financial statements, tax returns, lists of assets and liabilities, agings
of receivables and payables, inventory schedules, budgets and forecasts. If upon
review, Lender, in its sole discretion, determines that there has been a
material adverse change in Borrower's financial condition, Borrower will be in
default. Upon default, Lender shall have all rights specified herein.
17. NOTICES. Any notice hereunder may be given by ordinary mail, postage paid
and addressed to Borrower at the last known address of Borrower as shown on
holder's records. If Borrower consists of more than one person, notification of
any of said persons shall be complete notification of all.
18. ATTORNEY FEES. Whether or not litigation or arbitration is commenced,
Borrower promises to pay all costs of collecting overdue amounts. Without
limiting the foregoing, in the event that holder consults an attorney regarding
the enforcement of any of its rights under this note or any document securing
the same, or if this note is placed in the hands of an attorney for collection
or if suit or litigation is brought to enforce this note or any document
securing the same, Borrower promises to pay all costs thereof including such
additional sums as the court or arbitrator(s) may adjudge reasonable as attorney
fees, including without limitation, costs and attorney fees incurred in any
appellate court, in any proceeding under the bankruptcy code, or in any
receivership and post-judgment attorney fees incurred in enforcing any judgment.
19. WAIVERS; CONSENT. Each party hereto, whether maker, co-maker, guarantor or
otherwise, waives diligence, demand, presentment for payment, notice of
non-payment, protest and notice of protest and waives all defenses based on
suretyship or impairment of collateral. Without notice to Borrower and without
diminishing or affecting Lender's rights or Borrower's obligations hereunder,
Lender may deal in any manner with any person who at any time is liable for, or
provides any real or personal property collateral for, any indebtedness of
Borrower to Lender, including the indebtedness evidenced by this note. Without
limiting the foregoing, Lender may, in its sole discretion: (a) make secured or
unsecured loans to Borrower and agree to any number of waivers, modifications,
extensions and renewals of any length of such loans, including the loan
evidenced by this note; (b) impair, release (with or without substitution of new
collateral), fail to perfect a security interest in, fail to preserve the value
of, fail to dispose of in accordance with applicable law, any collateral
provided by any person; (c) sue, fail to sue, agree not to sue, release, and
settle or compromise with, any person.
20. JOINT AND SEVERAL LIABILITY. All undertakings of the undersigned Borrowers
are joint and several and are binding upon any marital community of which any of
the undersigned are members. Holder's rights and remedies under this note shall
be cumulative.
21. SEVERABILITY. If any term or provision of this note is declared by a court
of competent jurisdiction to be illegal, invalid or unenforceable for any reason
whatsoever, such illegality, invalidity or unenforceability shall not affect the
balance of the terms and provisions hereof, which terms and provisions shall
remain binding and enforceable, and this note shall be construed as if such
illegal, invalid or unenforceable provision had not been contained herein.
22. ARBITRATION.
(a) Either Lender or Borrower may require that all disputes, claims,
counterclaims and defenses, including those based on or arising from any alleged
tort ("Claims") relating in any way to this note or any transaction of which
this note is a part (the "Loan"), be settled by binding arbitration in
25
<PAGE>
accordance with the Commercial Arbitration Rules of the American Arbitration
Association and Title 9 of the U.S. Code. All Claims will be subject to the
statutes of limitation applicable if they were litigated. This provision is void
if the Loan, at the time of the proposed submission to arbitration, is secured
by real property located outside of Oregon or Washington, or if the effect of
the arbitration procedure (as opposed to any Claims of Borrower) would be to
materially impair Lender's ability to realize on any collateral securing the
Loan.
(b) If arbitration occurs and each party's Claim is less than $100,000, one
neutral arbitrator will decide all issues; if any party's Claim is $100,000 or
more, three neutral arbitrators will decide all issues. All arbitrators will be
active Oregon State Bar members in good standing. All arbitration hearings will
be held in Portland, Oregon. In addition to all other powers, the arbitrator(s)
shall have the exclusive right to determine all issues of arbitrability.
Judgment on any arbitration award may be entered in any court with jurisdiction.
(c) If either party institutes any judicial proceeding relating to the Loan,
such action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or
non-judicial foreclosure against real or personal property collateral; and (iv)
provisional remedies, including injunction, appointment of receiver, attachment,
claim and delivery and replevin.
23. GOVERNING LAW. This note shall be governed by and construed and enforced in
accordance with the laws of the State of Oregon without regard to conflicts of
law principles; PROVIDED, however, that to the extent that Lender has greater
rights or remedies under Federal law, this provision shall not be deemed to
deprive Lender of such rights and remedies as may be available under Federal
law.
24. DISCLOSURE.
25. YEAR 2000. Borrower has reviewed and assessed its business operations and
computer systems and applications to address the "year 2000 problem" (that is,
that computer applications and equipment used by the Borrower, directly or
indirectly through third parties, may be unable to properly perform
date-sensitive functions before, during and after January 1, 2000). Borrower
reasonably believes that the year 2000 problem will not result in a material
adverse change in Borrower's business condition (financial or otherwise),
operations, properties or prospects or ability to repay Lender. Borrower agrees
that this representation will be true and correct on and shall be deemed made by
Borrower on each date Borrower requests any advance under this Note or delivers
any information to Lender. Borrower will promptly deliver to Lender such
information relating to this representation as Lender requests from time to
time.
UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY LENDERS
AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT
FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S
RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY THE LENDER
TO BE ENFORCEABLE.
EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS
DOCUMENT.
PHOENIX GOLD INTERNATIONAL, INC.
- ---------------------------------------------------------
Borrower Name (Corporation, Partnership or other Entity)
/S/ JOSEPH K. O'BRIEN CHIEF FINANCIAL OFFICER
- -------------------------------------------------------------
By Title
For valuable consideration, Lender agrees to the terms of the arbitration
provision set forth in this note.
Lender Name: U.S. Bank National Association
-------------------------------
By: /S/ JEFF WOLF
----------------
Title: ASSIST. VICE PRESIDENT & RELATIONSHIP
MANAGER
-------------------------------------
Date: 12/29/98
--------
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PHOENIX
GOLD INTERNATIONAL, INC.'S FINANCIAL STATEMENTS CONTAINED IN ITS QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDING DECEMBER 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-END> DEC-27-1998
<CASH> 2,599
<SECURITIES> 0
<RECEIVABLES> 4,594,460
<ALLOWANCES> 0
<INVENTORY> 6,321,512
<CURRENT-ASSETS> 11,607,009
<PP&E> 6,123,812
<DEPRECIATION> 3,807,064
<TOTAL-ASSETS> 14,800,644
<CURRENT-LIABILITIES> 3,565,614
<BONDS> 887,492
<COMMON> 7,192,422
0
0
<OTHER-SE> 3,155,166
<TOTAL-LIABILITY-AND-EQUITY> 14,800,644
<SALES> 6,665,935
<TOTAL-REVENUES> 6,665,935
<CGS> 4,944,883
<TOTAL-COSTS> 4,944,883
<OTHER-EXPENSES> 1,328,858
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,858
<INCOME-PRETAX> 343,336
<INCOME-TAX> 137,000
<INCOME-CONTINUING> 206,336
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 206,336
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
